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In this issue of IT Write:
UsedSoft, paving the way for second hand software licences? What does this mean for your licensing model?
The European Court of Justice (the ECJ) has made a landmark decision in the case of UsedSoft v Oracle, which paves the way for a market in second hand software licences. The case illustrates how careful software owners must be when granting perpetual licences.
Much of Oracle’s software is downloaded by customers direct from Oracle’s website. Customers have the right to store the software permanently on a server and to allow a number of users to access it by downloading the software to their workstations. Updates and patches to the software are also provided via downloads from Oracle’s website, subject to the customer having a maintenance agreement in place with Oracle.
Terms of the software licence
Oracle’s licencing terms granted customers an “exclusive for (their own) internal business purposes and for an unlimited period, non-exclusive, nontransferable user right, free of charge, in respect of everything which Oracle develops and makes available to you on the basis of this agreement”.
UsedSoft traded in “used” software licences. It provided “already used” Oracle licences (given there was a ‘live’ maintenance agreement between the customer and Oracle, the software was therefore classed as “current”, i.e. up-to-date because it had the benefit of updates and patches). Although UsedSoft’s customers (upon purchasing the particular licences) were not in possession of Oracle’s software, they downloaded this direct from Oracle’s website after purchasing the “already used” software licence.
Oracle sought an injunction to stop this practice claiming the resale of non-transferable licences breached Oracle’s copyright. UsedSoft argued that Oracle’s distribution right in respect of the software had been exhausted and therefore Oracle could not prevent the distribution of the software.
The law of exhaustion of rights
The principle of “exhaustion of rights” is that:
where a person puts their goods or consents to their goods being put into the market in a member state of the European Union, then they cannot assert their proprietary rights to prevent the importation of their goods into another member state as to do so would restrict the free movement of goods within the European Union.
UsedSoft appealed the decision to grant the injunction and the German Federal Court referred a number of questions on interpretation of Directive 2009/24/EC on the legal protection of computer programs which codifies Directive 91/250/EEC (the Software Directive) to the ECJ.
The relevant provisions of the Software Directive are:
“the computer program rightholder has the exclusive right to do or authorise:
(a) the permanent or temporary reproduction of the program;
(b) the translation, adaptation or alteration of the program;
(c) the distribution (in any form) of the program”.
“the first sale in the EU of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the EU of that copy, with the exception of the rightholder to control further rental of the program or copy thereof”.
“subject to the contract stating otherwise, the acts set out in Article 4 (1) (a) and (b) do not require authorisation by the rightholder where they are necessary for the use of the computer program by a lawful acquirer in accordance with its intended purpose”.
The questions referred to the ECJ
1. Whether the right to distribute a copy of a computer program was exhausted (within the meaning of Article 4(2)) where the acquirer has made a copy with the rightholder’s consent by downloading the software from the internet onto a data carrier?
2. Is the acquirer of a licence a “lawful acquirer” within Article 5 and able to rely on the exhaustion rule under Article 4(2) to make a new copy of the program if the first acquirer has deleted their copy or no longer uses it?
The ECJ distinguished between circumstances where software is simply rented/made available for use for a limited period of time (i.e. a subscription type licensing model) and an outright sale in which the software is made available for an unspecified period of time for payment of a one-off fee. The ECJ confirmed that
where services are to be provided on a repeated basis for payment, this does not extinguish the rightholder’s interest in the same.
The ECJ interpreted Article 4(2) as meaning that the right to distribute copies of a computer program is exhausted where the rightholder allows programs to be made available in the EU (in any form and by any means) for the purpose of being used for an unlimited period in return for a lump sum payment. The ECJ took a wide view on what amounted to a sale. The fact that the software was downloaded from Oracle’s website rather than supplied in a physical form did not alter the ECJ’s opinion that there had been a sale. When determining whether there has been a sale or rental, the format of the delivery of the program is not the deciding factor. The ECJ thought that to state that downloads were outside the application of the exhaustion rule would restrict the free movement of software, particularly as downloading is used extensively to distribute computer programs.
Again the ECJ was clear in its decision that, where a licence is granted for a number of users to access and use the software (as opposed to separate licences being granted for each individual user), this licence cannot be broken down into “sub-licences or single licences” and resold.
The ECJ also held that the second acquirer is a lawful acquirer of the program; however, the first acquirer will need to make their copy of the program unusable. If they did not, and continued to use the same, they would infringe the rightholder’s right to the exclusive reproduction of the same. Therefore, unlike the exclusive distribution rights, the exclusive right of reproduction cannot be exhausted by the first sale.
Implications for software licensors
Software developers and licensors may now be worried about the implications this landmark decision has on their licensing structure and potential to generate revenue from the licensing of their software. The crux of the case is the basis on which the program was licensed in the first place, i.e. for an unlimited period of time for a one of payment. Therefore it stands that developers and licensors should consider the following options:
1. Subscription-based licensing
Rather than licensing on the basis of a perpetual licence, a licence which is granted for a specific period of time for a reoccurring licence fee should be considered. The ECJ was clear in its reasoning that a sale occurred because Oracle granted a licence for an unlimited period of time and that the “renting” of software does not exhaust a developer/licensor’s rights in relation to distribution of the same.
2. Put it in the Cloud
Software hosted on a server and accessed on a temporary basis subject to regular payments being received, bears all the hallmarks of a rental arrangement rather than an outright sale and transfer of ownership.
3. Multi-user Licensing
Interestingly, however, the ECJ held that where a licence for multiple users is acquired by the acquirer, the exhaustion rule could not be used by the acquirer to divide the licence and resell it in part for a number of users (where you are not operating the program for the number of users that you have purchased the licence for).
There is a real issue for developers/licensors with existing software licences. The ECJ’s ruling will apply to software that has already been licensed. Therefore if such licences have been drafted on the basis of a perpetual licence, the door is now open for such software to be sold on the second-hand market. However, it is at odds with the rationale behind the ECJ’s decision that the acquirer of second-hand software is free of any restrictions on its use of the same that are set out in the original licence between the first acquirer and the rightholder.
Although the ECJ did not go into further details on what basis the new acquirer is able to operate the software, it is unlikely that the acquirer will be permitted to use the program outside the scope of the original licence terms.
A freer market
The up-side of the decision for licensees is that they may be able to purchase second hand software at more competitive prices. Also at a time where insolvency and administration are on the increase, insolvency practitioners may find that they now have additional assets that they can realise to generate funds and customers may just be able to bag bargain second-hand software licences.
Copyright in Software – SAS Institute Inc v World Programming Limited
The European Court of Justice (the ECJ) has given an important ruling in the case of SAS Institute Inc v World Programming Limited. The ECJ has confirmed that copyright law cannot protect the functionality of a software programme, the programming language or the format of data fields.
SAS was a developer of analytical software systems. WPL studied SAS’s user manuals, examined the functionality of SAS’s software and created its own software that could execute the programs written by SAS. It’s important to note that in this case, WPL did so without actually having access to or use of SAS’s source code.
SAS issued proceedings against WPL for copyright infringement. WPL claimed that:
- WPL had copied parts of SAS’s user manuals to create its software and therefore infringed SAS’s copyright in the same;
- By copying the manuals, WPL indirectly copied SAS’s software and infringed the software copyright.
The ECJ Ruling
It was ruled that:
- the Software Directive does not provide copyright protection for the functionality of a computer programme, the programming language or the format of data file
- a licensee of software can study, observe and test its operation/functionality without any further authority from the copyright owner where such acts are permitted in the licence or are necessary for the use of the programme. This is the case as long as the copyright owner’s exclusive rights are not infringed.
- the reproduction of certain elements of a user manual may breach the authors copyright in the manual if such copied parts constitute the intellectual creation of the author. It is for national courts to decide whether this has occurred on a case by case basis.
The ECJ’s ruling is in accordance with its previous decisions and therefore it is simply further confirmation that the functionality of software (in itself) is not
capable of copyright protection. Although this will not be welcome news for some software developers/licensors, others may use this as an opportunity to digest their rivals products and improve on their own software functionality. However what is clear from the ECJ’s ruling is that any such acts will only be permitted if they do not infringe the licensor’s exclusive rights.
It is also worth noting that the decision does not give a carte blanche to copy and reproduce user manuals in whole (or even a substantive part) where such reproduction/copying is of another’s “intellectual creation”.
The matter was referred back to the High Court for its final decision (which was given in January this year). The High Court carefully considered and followed the ECJ’s ruling. It is now clear that copyright in software will not be infringed where the functionality of the software is reproduced without reference to source code or design. Software developers cannot in the terms of their licenses, prevent licensees from observing, studying or testing the software for this purpose.
IT/IP Round Up
IP Small Claims Track
The new small claims track for intellectual property claims came into effect in October last year and is one way the Patent County Court is aiming to increase access to justice for SME’s. The new track should provide intellectual property rights holders with a facility for cheaper and quicker resolutions to their basic IP disputes concerning copyright, trade marks, design rights and database rights.
Previously the costs involved in bringing such a claim have often been prohibitive. No costs will be recoverable from the losing side save for the cost of issuing the claim form. The Patents County Court will automatically allocate a case involving intellectual property rights to the small claims track where its value is below £5,000, the claimant has requested this and the defendant does not object. If the defendant objects or the claimant does not request such an allocation but the defendant does, the court will ultimately decide on what track to allocate to the claim.
Emails – No proprietary rights
The High Court has ruled in the case of Fairstar Heavy Transport N V v Adkins that the contents of an email do not create a proprietary right. The judge’s view was that there was no practical basis for holding that there should be property in the content of an email and that protection for the content of an email is already provided for under English law by confidentiality and copyright law.
Company Director jointly liable for copyright infringement
The Scottish Court of Session has held a company director liable for his own actions and those of the company in the case of Naxos Rights International Ltd v Project Management (Borders) Ltd and Salmon. The case is of particular interest as is concerns the online operations of a company.
Naxosowned the copyright to various sound recordings which it sold on cd’s and as downloads via its website. Project Management (Borders) Ltd copied and issued copies of the same for sale on its website.Naxos’ rights were infringed by these actions. Mr Salmon was the sole director and shareholder of Project Management (Borders) Ltd and thereforeNaxosclaimed that he authorised and procured the infringing acts. The court confirmed that when establishing whether an individual is liable (together with a company) for infringement, the court will look at whether the individual intended, procured and shared a common design with the company that the infringement occurred and in these circumstances, Mr Salmon (who had registered the company website in his own name), was personally liable.
He was not just acting as the company director but also in his personal capacity by setting up the website and making the infringing material available for sale and therefore liable for his own acts and those of the company.