Software publishers can prevent resale of bare licences and back-up copies of used software

27 October 2009

Jörg-Alexander Paul

Three German Courts of Appeal have held that the distribution of used software is only permitted if the copyright holder consents or if the software is distributed in the same physical form (i.e. on the media) on which it was initially put on the market.

Used software is software which has been distributed to a first user for his own use and which the first user has sold or intends to sell to someone else (often a distributor of used software). Used software is therefore often, but not necessarily always, software which has been installed and/or used by the first user.

Under German law the rightsholder cannot prevent the resale of used software on the physical media on which it was supplied (principle of exhaustion of rights).  In these cases the Munich, Frankfurt and Düsseldorf Courts of Appeal had to decide whether this also applied to the resale of bare software licences and back-up copies.

Facts

The factual background of the three cases can be summarised as follows: 

Munich: The first user acquired client-server volume licences. According to the agreement with the copyright-holder the licences were non-transferable. The first user concluded an agreement to transfer a number of those licences to a distributor of used software. The distributor was of the opinion that the transfer of the licence to him and the distribution of these licences by him to third parties would be effective, notwithstanding the restriction on transferability present in the initial licence agreement. In order to use the software, a download of the software from the copyright holder would have been necessary.

Frankfurt: The distributor offered Certificates of Authority (COA) which enabled the purchaser one activation of software downloaded from the copyright holders. The COAs were initially distributed by the copyright holder as part of a volume licence which permitted the licensee to copy the software and distribute the copy together with a COA.

Düsseldorf: The copyright holder sold its software pre-installed on computer systems. The first user stopped using the software, erased the software from all of its machines and sold the back-up copy of the software to a distributor who then offered the back-up copy to third parties.

Although the distribution methods are different, each of the defendants similarly claimed that their actions were lawful due to the fact that the relevant rights held by the copyright holder were exhausted, following the initial placement of the software on the market.

According to the principle of exhaustion, upon exhaustion, the copyright holder will lose his right to distribute a copy of his work which was put on the market either by himself or with his consent. Article 4(c) of the Computer Programs Directive (91/250/EEC) confirms this principle by providing that:


"The first sale in the Community of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the Community of that copy, with the exception of the right to control further rental of the program or a copy thereof."


Legal situation

The Courts of Appeal found that in each of the three cases, despite the difference in facts, exhaustion had not taken place. Despite the unanimous decision, in comparison to the cases in Munich and Frankfurt the facts in the Düsseldorf case gave rise to a more debatable decision.

Munich and Frankfurt: The defendants offered or sold the software in an intangible form (a licence or COA). They did not provide or offer a physical copy but if anything provided only the opportunity to download the software. There was therefore no dispute that they were not reselling the very copy put on the market by the copyright holder. However, the defendants took the position that their case is comparable to the situation of the sale of a physical copy initially put on the market by the copyright holder. They argued that the passing on of a licence or a COA would economically have the same effect as the resale of a copy, the software would only work for one installation and the number of users of the software would not increase. They therefore argued that the principle of exhaustion should be applied by analogy. A number of prominent copyright lawyers supported this view. 

Düsseldorf: In contrast, the defendant in this case offered the software in a physical form and offered the back-up copy, which he was entitled to create or which the copyright holder had provided. The defendant claimed that it did not make a difference whether the original copy or a lawfully created copy is the subject of the resale if, in the latter case, the original is destroyed and the back-up copy replaces the original. The defendant therefore argued that the principle of exhaustion should be applied at least by analogy.

The Courts of Appeal held that in none of the cases could they apply the principle of exhaustion by analogy. Application by analogy inter alia would have required an unintended incompleteness of the law, which the courts rejected.  Exhaustion, as provided by the law, is expressly limited to the right of distribution. However, if the purchaser of a licence or a COA was allowed to create his own copy or to rededicate the purpose of a copy (back-up/regular use) without the copyright holder's consent, the copyright holder's right of reproduction would be affected. The law regulates the right of reproduction separately from the right of distribution and does not provide for the exhaustion of the right of reproduction, although it expressly provides for exhaustion regarding the right of distribution. No reason exists to believe that the legislator unintentionally did not extend exhaustion to the right of reproduction and therefore the principle of exhaustion could not be applied in this instance. Furthermore, the European legislator expressly considered exhaustion in the context of online services and decided not to provide for exhaustion if software is distributed using online means (s. Recital 29 Council Directive 91/250/EEC). 

The defendants put forward various further arguments as to why the principle of exhaustion should be applied by analogy, none of which were accepted by the Court. 

Outlook

If one reviews the arguments not only from a legal but also from an economic perspective, one argument stands out: Economically, it is said not to make a difference whether a copy is shipped physically or created by download. If this were true, the distinction between online and offline distribution would not really be justified. However, this is not only a factual question but also a political question and any answer to it should not be implemented into the law by case law alone. It rather requires a deliberate decision by the legislator, probably not only on a national level but also on a European level. 

Finally, it is interesting to note that at least one aspect of the sale of used software has not been the subject of a decision by a Court of Appeal: The sale of a physical copy, which was created by the licensee from a master copy under a volume licence. Although the copyright holder does not put such a copy on the market, the distinction as to whether the copyright holder produced the copy himself or allowed the first user/licensee to produce the required copy is particularly thin, and possibly arbitrary. In this situation, therefore, it is feasible that the application of the principle of exhaustion by analogy will seem justified and, contrary to the cases discussed above, the right of reproduction would not be affected since the copyright holder expressly permitted the reproduction of the master copy. 

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