Imagine going into a car showroom, signing the paperwork to buy a car and driving away, with neither you nor the dealer being exactly sure what the deal was. You thought you had bought the car and were therefore free to either keep it or sell it. The dealer, on the other hand, thought that you didn’t own the car outright and couldn’t sell it on without his permission.
This never happens – right? Well, in “the real” world probably not, but in the world of creative content and software, it does happen.
Take the recent controversy surrounding Bruce Willis where he was allegedly upset that he was unable to bequeath his iTunes library to his children. Although press reports of Bruce’s threats to exercise serious courtroom muscle against Apple turned out to be unfounded, the story did highlight a very important issue – when it comes to purchases in the digital world, be it software, mp3s, e-books or anything else, are we all making purchases without knowing exactly what the deal is?
3 key lessons
A recent ruling by the European Court of Justice (ECJ) involving software publisher Oracle and UsedSoft, a vendor of pre-owned software licences, has highlighted that in the case of software downloads there really is widespread confusion on both sides of these transactions regarding what rights a buyer walks away with after purchasing software. As we’ll see, the case demonstrates three things. First, if the economic substance of the transaction is a sale, then this doesn’t change if the language talks about a limited licence, meaning that the buyer is generally free to re-sell. Second, even if it is a sale, there is a big caveat: the owner can still control rental of the software. Put another way, business models (e.g. ‘software as a service’) built on rental do not result in loss of control over re-distribution of the software. Third, although the case related to computer software, there are some important lessons for other forms of creative content.
It’s all about control
So what was the case all about? Oracle claimed that UsedSoft had infringed its copyright in the software on the basis that Oracle’s customers (and subsequently any reseller such as UsedSoft) had no right to distribute purchased copies of its software by re-selling them. UsedSoft’s position was that, as with cars and other “real world” purchases, once a customer buys software for lifetime use, including via download, they have the right to sell it on without requiring any permission from the seller.
Oracle disagreed. It pointed to its licence terms, particularly the words “non-transferable”, to argue that real world rules did not apply to software downloads. As far as it was concerned, the software had been ‘licensed’, not ‘sold’, so it could still control what the buyer could do with its software, even after sale.
The case was referred by the German courts to the ECJ for clarification on certain aspects of the Copyright and Software EU Directives. We’ll examine the case in a moment and see whether it applies to other forms of digital content and not just software. But what is the nub of the problem? For the software and creative content industries, new business models are built on licences but, as these cases show, there is a lack of clarity about exactly what constitutes a “licence”.
So what exactly is a “licence”? What does the consumer or business customer get? A typical provision in a consumer service talks about a: “….limited, non-exclusive, non-transferable, non-sublicensable license to access and make personal and non-commercial use of the [content]”. This isn’t an academic legal debate buried in impenetrable online terms and conditions. If a licence is in fact, a sale, then the consumer is free to give away or sell the content like 2nd hand goods on eBay. Similarly, if the licensee is a trade customer, it can re-sell or deal with the digital content without requiring any further permission from, or payment to, the content provider.
The real moral of the story is that the creative content industries should not leave it to the courts to “retro-design” business models. If the substance of the transaction is a sale then that‘s how it should be described based on the economic business model. If, on the other hand, it’s a form of exploitation such as rental then that should be reflected clearly as well. That was the lesson in the UsedSoft v. Oracle case where the bottom line of the ruling was that if a business charges a licensing fee for software that represents the entire economic value of that copy’s useful life, whether downloaded or sold on physical media, the transaction will be treated as a “sale” even if the licence terms state that the licence is “non-transferable”. It can therefore be lawfully resold in the same way that a car or any physical product containing copyright material can be resold as long as the seller first deletes or makes his copy unusable.
The ECJ ruling in UsedSoft v. Oracle clarified two main points on the interpretation of the Software Directive, namely that:
- under Article 4(2) of the EU Software Directive Oracle couldn’t prevent subsequent sales of a copy of its downloadable software, including any updates, after it had charged a fee “corresponding to the economic value of the copy of the work” on its first sale. The ECJ ruled that by charging fee reflective of the economic value of the software Oracle had effectively transferred the ownership of its rights in that copy to the purchaser and therefore had ‘exhausted’ its rights to further distribute, and be further remunerated for, that copy. So the ECJ agreed with UsedSoft that the ‘exhaustion of rights’ principle applied. Similar to the ‘first sale’ doctrine in the US, this principle in EU law restricts the ability of a rightsholder to control a physical copy of an item containing their work, say a book, by causing that control to be ‘exhausted’ after the first sale of that copy. It is by virtue of this principle that a number of traders have lawfully created a secondary market for a variety of second hand goods, including books, CDs, computer games, computer software, DVDs etc. However, the court held that the seller must render his copy of the software unusable (e.g. by deleting that copy) for the resale to be lawful. Referring back to our example, it would hardly be fair to the car manufacturer if you could sell your car and somehow retained the benefit of it.
- Oracle couldn’t prevent a purchaser to whom a copy had been resold (such as UsedSoft or its customers) from copying the software in order to use that copy because, although the exhaustion principle does not apply to Oracle’s reproduction right, under Article 5(1) of the Software Directive a “lawful acquirer” can reproduce the software to make use of it for its “intended purpose”.
The court did however point out a caveat: volume licences must be sold as a whole as the partial resale of a multi-user licence would involve the seller continuing to use a usable copy.
The ECJ ruling marks a considerable shift as to where the courts draw the distinction between a “licence” and a “sale” by applying an “economic value” test. By doing so the case clarifies, at least where software is concerned, that a transaction where a customer is charged a ‘one time’ fee which represents the economic value of the software will be treated like a real world sale and not a time-limited licence or rental. And just as with the sale of a car, this means a buyer is free to sell the software on to whomever he or she chooses.
But the impact of this ruling may not only be limited to software publishers. Publishers of music, e-books or any other digital content sold by download should also take note: although the ruling specifically concerned the resale of software under the Software Directive, the reasoning applied by the court to the exhaustion of rights principle is likely to apply in the same way under the Copyright Directive. Whilst there is no equivalent reproduction exception for such works as there is for software under Article 5(1) of the Software Directive, the Copyright Directive does allow for temporary copying, which would allow for lawful uses of many formats of work e.g. mp3, e-book etc. once such files were resold. For more information on this, barrister Tom St Quintin of IP specialists Hogarth Chambers discusses the various legal issues involved in his post here.
- All businesses in the creative industries should carefully consider how the test used by the court might affect their pricing and business models.
- In particular they should think about whether the ‘one-time’ licence fees they currently charge reflect the value of, in effect, what are now transferable licences, at least in the case of software. If not, they may wish to explore rental, hire-purchase models or models based on offering “Software as a Service” (SaaS), to which the exhaustion of rights principle does not apply.This ruling will have an immediate impact on businesses that sell perpetual licenses for a one-time fee, especially to the consumer market where single-user licences are common. Such software publishers, are likely to have new competition from the used software market which can now expand to include used licences for digital downloads comprising up-to-date, fully patched versions of their software products.
If you’d like any help in applying these lessons to your own business models, we’d be delighted to help. And, just to encourage you, for a limited time only we’re offering 30 minutes free phone consultation.
Have a great weekLaurie