EU allows resale of downloaded software

This has historically been the case in relation to copies that are sold on a physical medium, such as a DVD or CD-ROM, but the Court for the first time confirms that the exhaustion principle also applies in the case of digital downloads.  It said that limiting the application of the exhaustion principle solely to copies that are sold on a physical medium would allow the copyright holder to control the resale of copies downloaded from the internet and to demand further remuneration on each new sale, even though the first sale of the copy had already provided the right holder with an appropriate remuneration. Such a restriction of the resale of copies of computer programs downloaded from the internet would go beyond what is necessary to safeguard the specific subject-matter of the IP concerned.

In these circumstances the copyright holder could not rely on a contractual prohibition on transfer in a licence agreement to oppose the resale of that copy.   

Exhaustion applied even where there was a maintenance agreement between the first acquirer and the copyright holder.   This, said the Court, was because exhaustion extends to the copy of the computer program sold as corrected and updated by the copyright holder. Even if the maintenance agreement is for a limited period, the functionalities altered or added form an integral part of the copy originally downloaded and can be used by the acquirer of the copy for an unlimited period.

However, the Court also made two important qualifications to the exhaustion principle in relation to digital downloads:

• The principle would not enable the original acquirer to divide its licence and resell only part of it; and
    
• The original acquirer who resells a tangible or intangible copy must make his own copy unusable at the time of resale.  This is in order to avoid infringing the copyright holder's exclusive right of reproduction which is not exhausted by the first sale.
  
  

It follows that, since the copyright holder cannot object to the resale of a copy of a computer program for which that right holder’s distribution right is exhausted, any subsequent acquirer of that copy constitutes a 'lawful acquirer' under Article 5(1) of the Computer Programs Directive.  He can therefore download onto his computer the copy sold to him by the first acquirer. Such a download must be regarded as a reproduction of a computer program that is necessary to enable the new acquirer to use the program in accordance with its intended purpose.

The ruling is of potentially huge significance not just to the software industry but to any digital business that makes copyright material available for download such as music, e-books, or games.   It means that whenever a copy of a copyright work is sold by way of digital download to an end-user in the EU for a fee, that end user will in principle be able to resell that copy to any third party anywhere in the EU without infringing the rights of the copyright owner, irrespective of the terms of any user licence prohibiting transfer or resale.

It is therefore a significant step towards a single EU market in digitally available content. 

However, the ruling does not herald a free-for-all.  The Court recognised that the original licensee must make his copy unusable at the time of resale.  A copyright holder is entitled, in the event of such resale, to use technical protective measures such as product keys to ensure that the copy is made unusable. This preserves the right of reproduction which is not and never has been exhausted on first sale.  

It is also to be noted that the ruling applies only to downloaded material; online services, to which the distribution right and exhaustion do not apply, are unaffected.  This therefore raises the question of whether we will see still faster migration of software licensing models to 'the cloud', since software owners in Europe are not exposed to the exhaustion doctrine in relation to online services / software 'rental' models.  There is also scope, of course, for copyright owners to explore other licensing models that do not involve the 'sale' of software copies, whether online or on physical media.

Another question left by the ruling is whether it remains open to copyright holders to use digital rights management techniques to physically prevent the resale of software or other copyright material.  Given that the Court's ruling specifically authorises the purchaser of "used" licence to download a new copy from the copyright holder's website, provided that the original copy has been made unusable, it would appear that such techniques may become difficult to sustain.

In summary, this is a significant decision.  Copyright owners should review their licensing models and the technological and contractual protections they have in place if they wish to minimise their exposure to this ruling.  Similarly, those who wish to build resale businesses may find that there are now materially better opportunities to do so.  In either case, the ruling is likely to have a material impact for all players in the European software industry and everyone should now be considering their next moves with great care.

For further information, please contact David Naylor, Philipp Plog or Nick Pimlott