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Future looks bright for market in second hand software

Posted
April 25, 2013
Business Law

The Court of Justice of the European Union(CJEU)

decision in UsedSoft GmbH v Oracle International Corp (C-128/11) has significant implications for software and other digital industries.The CJEU held that once software was downloaded under a perpetual licence for a one-off fee, licensees are entitled to resell their software licences. Any prohibition on such resale is ineffective. The facts and decision of the case Oracle owns software called Databank. The software is downloaded from Oracle’s website and is licensed on a perpetual basis under a non-exclusive, non-transferable user right which permits the licensee to store a copy of the program permanently on a server. UsedSoft sells ‘second-hand’ software licences, including Databank. The matter was referred to the CJEU after Oracle issued proceedings in Germany to prevent the re-sale of its licences. An established principle of EU law (the exhaustion principle) states that once a product is first placed or first sold on the market, the licensor loses his power to control the distribution or sale of the product. The court held that:

  • A perpetual licence amounts to a ‘sale’ and it is irrelevant whether the copy is supplied in tangible form (e.g. a disk) or intangible form (e.g. electronic download); and
  • Subsequent purchasers are ‘lawful acquirers’ and therefore do not need the licensor's consent to make copies (which includes downloading software), if copies are necessary for its use. It is irrelevant whether the software licence is subject to contractual provisions to the contrary, such as terms stating that the licence is ‘non-transferable’;

Is it as straightforward as that?  The short answer is no as there are two limitations. Firstly, the court made it clear that multi-user licences cannot be divided or split and the unused user licences sold to third parties. Secondly, on re-sale of its licence, the first acquirer must render its version of the program unusable. How is this relevant to you and what can you do about it? If you licence out software you may wish to consider the following in light of the recent ruling:

  • Limited term licences - The CJEU placed a lot of emphasis on the fact that the Oracle licences were not limited in time, and this amounted to a sale of a copy. You should consider the merits of changing to a subscription based model, where the licence is granted for a specific period of time. However, any such time limits are likely to have to be real and enforced, and not merely in place to avoid a ‘sale’.
  • Cloud computing - A cloud service provision arrangement is unlikely to have the characteristics of a ‘transfer of ownership’ necessary for a ‘sale’. This may even apply where a cloud services solution requires the download of some software to the desktop, so long as the commercial terms are those of rental or a genuine service rather than fully paid up permanent use.
  • Multi-user licences - The principle of exhaustion does not allow licensees to divide and sell parts of multi-user licences. You may wish to avoid ‘selling’ software under block licences for small numbers of (or even individual) users, which would presumably be more readily tradable on the secondary market. Furthermore, if additional concurrent users are purchased you may wish to ensure that they are treated as part of the existing licence rather than as separate stand-alone licences.
  • Technical protective measures A licensee who resells its licence must make his own copy unusable prior to the resale. You may wish to investigate the technical protective measures (e.g. product keys or “dongle” type arrangements) available to monitor usage in this regard to avoid a free-for-all in respect of your software.

If you need advice on your current or future software licences or would like further information on anything contained in this article, please contact a member of our commercial team for more details.

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