In a landmark decision, the European Union Court of Justice ruled in favor of UsedSoft (UsedSoft GmbH v Oracle International Corp.), that an author of software cannot oppose the resale of its “used” licenses allowing the use of its programs downloaded from the internet. According to the Court of Justice, “the exclusive right of distribution of a copy of a computer program covered by such a license is exhausted on its first sale.” This ruling is based on an interpretation of Directive 2009/24/EC of the European Parliament and of the Council, dated 23 April 23 2009. This directive describes the legal protections for computer programs within the EU.

Oracle develops and distributes, in particular by downloading from the internet, computer programs functioning as “client-server software.”  A customer downloads a copy of the program and is granted by a non-transferable license agreement the right to store a copy of the program permanently on a server for an unlimited period, exclusively for its internal business purposes.  The license is tied to a maintenance agreement and Oracle downloads updates and patches from its website.

UsedSoft markets licenses acquired from customers of Oracle.  Customers of UsedSoft that are not yet in possession of the software, download it directly from Oracle’s website after acquiring a “used” license.  Oracle brought proceedings against UsedSoft in the German courts, seeking an order for it to cease those practices.

It was therefore left to the Court to interpret the directive on the legal protection of computer programs.  Under that directive, “the first sale in the EU of a copy of a computer program by the copyright holder or with his consent exhausts the right of distribution of that copy in the EU.  A rightholder who has marketed a copy in the territory of a Member State of the EU thus loses the right to rely on his monopoly of exploitation in order to oppose the resale of that copy.”  In the present case, “Oracle claims that the principle of exhaustion laid down by the directive does not apply to user licenses for computer programs downloaded from the internet.”

The court went on to say that “where a copyright holder makes available to his customer a copy – tangible or intangible – and at the same time concludes, in return form payment of a fee, a license agreement granting the customer the right to use that copy for an unlimited period, that rightholder sells the copy to the customer and thus exhausts his exclusive distribution right.  Such a transaction involves a transfer of the right of ownership of the copy.”

This ruling applies to both physical media as well as electronic download.  The court stated that “the principle of exhaustion of the distribution right applies not only where the copyright holder markets copies of his software on a material medium (CD-ROM or DVD) but also where he distributes them by means of downloads from his website.”  Oracle attempted to separate the download of a copy of the software as free, but only used legally with a licence agreement that is non-transferable. The court did not agree with this separation and defined what constitutes a first sale. “Even if the rightholder formally separates the customer’s right to use the copy of the program supplied from the operation of transferring the copy of the program to the customer on a material medium, the operation of downloading from that medium a copy of the computer program and that of concluding a licence agreement remain inseparable from the point of view of the acquirer.”

With this ruling, companies like Germany-based UsedSoft have been validated in their resale of licences, legitimising the niche market for resellers. Although the EU Directive does not reference the laws of individual countries, the concept of licence resale is not new in the EU. For instance, a loophole in the UK’s insolvency laws combined with specific language in a Microsoft licence created a boom in the existing resale market in 2005.

Publishers did however receive some consideration in the ruling. Before a copy can be sold by a reseller, the original downloads and/or installations have to be removed. Also, licence agreements cannot be separated. The Directive cites the example of an Oracle licence package that is sold in groups of 25 users. If a buyer has 27 users, they must buy two bundles and may not resell the unused users in the agreement. This still provides Oracle with some leverage and a way to monitor the used licence reseller market through CD key registration.

For now it appears that the owner of a software copyright can no longer oppose the resale of its software in any medium, even if there is a license agreement prohibiting a further transfer.  The European Union Court of Justice’s decision has essentially tarnished the protection that inures to independent creation of intellectual property by blurring the distinction between the sale of a “license to use” and the “sale of a product.”   The implications on international trade, intellectual property enforcement and IT asset management are potentially enormous, but that impact is subject to further discussions and agreements. In the short term, the resale of software market in the European Union is likely to grow as a cost-savings measure for European organisations.

Glenn Wilson is Chief Legal Officer and Executive Vice President of the International Association of IT Asset Managers, Inc. (IAITAM). This article was co-authored by Dr. Barbara Rembiesa, Chief Executive Officer and President of IAITAM.