Last week the European Court of Justice made a ruling which permits the sale of "second hand software" across Europe. In legal terms the Court held that the principle of "exhaustion of rights" applies to software “sales”, including the distribution via download from the internet. Restrictions on the transferability of software licences which are regarded as being “sales” of software will now be unenforceable.
We have already issued an alert on the legal issues raised in the ECJ ruling - see here.
The business implications from this decision for software licensors within Europe are significant and wide-ranging. Below are some thoughts software licensors should consider in light of the recent ruling.
Subscription based model?
Software licensors that currently license their software on perpetual, fully paid up licence terms should consider the merits of changing to a subscription based model, where the licence would be grant for a specific time period. The ECJ ruling makes clear in a number of instances that the concept of “sale” that it applied to the Oracle licensing arrangements applies as a result of Oracle granting the licence for an unlimited period at a fee designed to obtain the economic value of the copy of the software.
The judgement may well have been different and Oracle’s licensing arrangements would not have constituted a “sale” if time limited licences had been granted by Oracle on a different fee basis. The rationale of the judgement does not apply to software which is rented as the concept of exhaustion of rights only applies to software first ‘sold’ within the EU. However, a merely formal “time limitation” to an extensively long period, which is beyond any typically expected useful life of the software (e.g. a limitation to 50 or 99 years), is highly unlikely to be of any help in this context.
Moving to the cloud could help
Software licensors that are concerned about the negative business consequences of the development of a European market in second-hand software should consider migrating to cloud based service provision arrangements. A cloud service provision arrangement is unlikely to have the economic characteristics of a ‘transfer of ownership’ as defined by the ECJ and the issues caused by the ECJ ruling will then be avoided. 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.
Ruling applies to software already licensed
Software licensors need to be aware that the ECJ ruling applies to software that has already been licensed within the EU. Where perpetual licences have already been granted to users, there would seem to be little that licensors can now do to avoid the licensees having the benefit of the rights that have been identified in the ECJ ruling.
Investigate which aspects of the original licence apply
On the face of it there is nothing in the ECJ ruling that would contractually bind the lawful acquirer of the software on a second-hand basis to the terms of the original software licence. The ECJ ruling states that lawful acquirers benefit from the right of reproduction necessary for the use of the program which arises by virtue of Article 5(1) of the Software Directive (2009/24/EC). However this is unlikely to mean that all the original terms are irrelevant. The rights acquired under Article 5(1) are those necessary for the use of the program “in accordance with its intended purpose, including for error correction.” It is difficult to see how the ‘intended purpose’ of the program can be ascertained without reference to the original licence.
It may be necessary to analyse which aspects of the original licence relate to the scope of the permissions granted under copyright in the program, as opposed to purely contractual obligations imposed on the original licensee
The ECJ held that functionalities of the software corrected, altered or added on the basis of a maintenance agreement form an integral part of the original software. However the ruling made clear that software maintenance agreements which are separable from the sale are not in themselves transferred since the law on exhaustion of rights does not apply to contracts for services. The patches and upgrades released by the licensor to the date of the transfer will be covered by the ruling but not support and so third party users will not be able to obtain, for example, telephone or help desk support.
Software licensors should consider licensing their software on a volume basis through “enterprise” type licensing arrangements for blocks of users, rather than providing separate licences for each individual purchase of software. The ECJ ruling makes clear that block licences cannot be split as part of the software “sale” processes. If separate software licences are provided each time there is a software purchase it will be easier for a licensee to dispose of software that it subsequently does not need through “selling” the unused licences on the second-hand market.
Consider a Technical Solution?
Software licensors should consider making clear in their licence terms the circumstances when it will be considered that the licensor has made “his own copy unusable at the time of its resale”. The ECJ ruling states that the vendor of the software must not retain any on-going ability to use the software that it has sold on the second-hand market. Licensors may want to consider whether it would be worthwhile instigating “dongle” type arrangements which would have the technical effect of preventing the original purchaser using the software if the “dongle” is provided to a new user as part of a “sale” arrangement.
Possibilities for Licensees
For licensees there is an obvious benefit in being able to dispose of or sell software no longer needed to third parties or for the right of an administrator to sell software when selling the assets of an insolvent company. There are other benefits which perhaps will only become evident with the passing of time, for example the development of a competitive market in software licensing.
Since “used” software is identical to software supplied by the licensor (i.e. there is no degradation in use) so called “used” software may well compete on price with software supplied by the licensor. One thing this decision does for jurisdictions like the UK, where this had not been discussed previously, is to lay to rest the idea that a licensor who has granted a perpetual (or near perpetual licence) for a one-time fee can prevent the sale of second-hand software either in the form of a digital download or on disc, at least where the software was originally sold on the basis of standard terms of business. This has major implications for consumer software.
For further information on any of the above issues, please contact: