Resale second-hand software

24 May 2006

Alexander Duisberg, Henriette Picot

In a decision that will have significant implications for software producers and distributors, the District Court of Munich (Landgericht München I; "LG Munich") has recently held that reselling a second-hand software license via download is incompatible with German copyright law. In Germany, trading in used software that has been used previously, as well as in unused parts of license packages (together "Second Hand Software") has become a market of considerable economic importance (primarily in B2B settings). For software producers and distributors, this decision raises serious economic concerns, in particular as regards pricing and distribution strategies.

In the LG Munich case, software producer Oracle ("Claimant") obtained an injunction against an online dealer for Second Hand Software ("Defendant"). The Defendant's end-customers ("Clients") obtained the Second Hand Software either by download from the Claimant's homepage or (for Clients already using the Second Hand Software, but wishing to extend their license) by copying the Second Hand Software internally and installing it on further computers. Since the licenses which the Claimant had granted to its original "first–hand" licensees ("Original Licensees") were non-transferable, the LG Munich held that the Clients could not obtain any rights regarding the Second Hand Software by way of a copyright assignment. In view of the non-transferability of the original licenses, the only way the Defendant could legitimatise its Clients' use of the Second Hand Software was to assert that the doctrine of exhaustion under German law should apply to the Second Hand Software.

The LG Munich case therefore centres on the extent to which the doctrine of exhaustion applies to Second Hand Software. The underlying concept for the doctrine of exhaustion provides that the copyright owner, every time he places a copy of a copyright protected work on the market, irretrievably and entirely looses his right to further distribute such concrete copy. Since the Original Licensees had obtained the Second Hand Software via download from the internet, the LG Munich had to decide whether the distribution of software by download could trigger exhaustion – or whether exhaustion necessarily required the "traditional" distribution by physical means (e.g. CD-Rom).

Being the first German court to ever decide on this question, the LG Munich strictly stuck to the wording of the relevant provision (Section 69 s.1 no. 3 s.2 German Copyright Act) and opted for the latter. The Defendant has appealed this decision and the case might be referred to the Federal Supreme Court.

The doctrine of exhaustion (as applied by the European Court of Justice and as reflected in the relevant Art. 4c EU Directive on the legal protection of computer programs, 250/91/EEC) proposes free marketability of copyright protected objects once the copyright owner has consented to place such objects on the market. It is based on the assumption that the copyright owner will give such consent only against a remuneration which appropriately compensates the loss of his exclusive right of distribution. From an economic and practical point of view, however, it is highly questionable whether it should make any difference to the copyright owner whether he distributes software by physical means or by electronic means through the internet. Legal writers have criticised this court ruling and argue that the doctrine of exhaustion should apply regardless of the form of distribution, provided that the first user / licensee deletes all copies as a condition for a second user / licensee to take his place to become a second-hand user of the respective software. It remains to be seen whether German courts will be able to uphold this distinction on the grounds of the doctrine of exhaustion and thereby hinder the further expansion of the second-hand software market.