Is it meaningful, in law, to refer to owning a software licence? Is a licence “property”? These questions have been highlighted by a recent decision of the Court of Justice of the European Union (CJEU) in the case of UsedSoft GmbH v Oracle International Corp.
This blog article focuses on one narrow point from the judgment, and is not intended to analyse the case generally. The case is summarised on the IPKat blog here. However, a brief summary is useful here by way of background. UsedSoft offered for sale “used” licences to Oracle software that were current but no longer needed by the original licensee. The software was downloaded from a website, and no physical copy of the software, eg on a disc, was provided. The licence agreement which accompanied the software stated that the licence was “nontransferable”.
Oracle brought proceedings in the German courts for a declaration that UsedSoft should cease this practice, as it involved an infringement of Oracle’s IP rights in the software. UsedSoft argued that the original licensee had the right to sell on his “copy” of the software, together with the licence to use the software, under EU software copyright law; Oracle’s rights to exercise its IP rights to prevent distribution had been “exhausted” at the time of the original grant of the licence. The German courts decided in Oracle’s favour, but referred the question of exhaustion to the CJEU for a ruling.
Since 1991, EU software copyright law has included a provision stating that the owner of copyright in software has the exclusive right to distribute the software, but that this right is exhausted, in respect of a copy of the software, once the copyright owner has sold that copy to a customer. The legislation is now to be found in EU Directive 2009/24. Article 4(2) of that Directive provides as follows:
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.
The first purchaser is therefore free to sell the copy on to another person, and that other person cannot be sued for infringement by the copyright owner. This provision was incorporated into EU software copyright law at a time when software was often sold on discs in shops, and could be viewed as a sale of goods. While IP Draughts always thought it was odd to include this competition law provision in IP legislation (rather than dealing with it separately), it was understandable in a way. The EU institutions have a deep-rooted suspicion of IP and the possibility that the exercise of IP rights may interfere with fundamental EU objectives, including the free movement of goods throughout the EU. So it is perhaps to be expected that competition law issues surface from time to time in EU IP legislation, to a greater extent than might typically be seen in national IP legislation.
One of the questions before the CJEU in the present case was whether the above-quoted provision (or rather, an equivalent provision in the German legislation that implemented the EU Directive) applied where the software was not supplied on a disc in a shop but was instead downloaded from a website as part of a maintenance agreement. The court decided that, yes, the provision does apply to distribution by way of internet download.
IP Draughts is usually in favour of IP laws being adapted and interpreted so as to take account of new technologies as they arise. Looked at from afar, it seems illogical to apply the above exhaustion principle to software supplied via one medium, and not to software supplied via another medium. IP Draughts’ personal view is that the exhaustion principle should not apply to any software supply, and that a licensor should be entitled to limit licences to the original “purchaser”, just as a seller of a ticket for a football match can make it personal to the purchaser and declare the ticket invalid if sold on to someone else (eg a ticket tout).
Be that as it may, Article 4(2) of the Directive is embedded in EU software copyright law and is unlikely to be changed, and therefore probably has to be extended to internet downloads for the sake of consistency between delivery routes.
IP Draughts’ concern is not with the decision (given the provisions of Article 4(2)) but with the reasoning of the court. Some aspects of that reasoning are suprising, not to say breathtaking, in IP Draughts’ view.
Article 4(2) refers to the “sale” of a “copy” of the software. Rather than examine German law on the meaning of the term “sale”, the court preferred the view that this term should be treated as “an autonymous concept of European Union law, which must be interpreted in a uniform manner throughout the territory of the European Union”. The court then decided that by a “commonly accepted definition” (what does that mean? are we crowd-sourcing our property concepts now?):
…a ‘sale’ is an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him.
This definition begs the question of whether a licence to use software amounts to an item of property. Although not specifically stated by the court, perhaps it considers that this, too, is an autonymous question of EU law. If so, IP Draughts wonders what the “commonly accepted” view of this point would be.
According to section 1(1) of the UK Copyright, Designs and Patents Act 1988, “copyright is a property right…”. However, the general view under English law is that a licence under copyright is merely a contractual right, and is not a property right (eg see the 2005 case of Ultraframe v Northstar, particularly at paragraph 1385 of the BAILII version of the judgment linked here).
Another possibility is that the CJEU was not considering whether the licence was an item of (intangible) property, but whether the software itself (ie the copy which was downloaded) was an item of intangible property. This is even more mind-boggling. When the software is downloaded via the internet, and is to be found only as a set of electrical signals in the memory of a computer, it is difficult to view this as a meaningful type of property, distinct from the contractual rights granted by the licence agreement. However, there is some support for this approach in the judgment, particularly the following comments:
As regards the question whether, in a situation such as that at issue in the main proceedings, the commercial transactions concerned involve a transfer of the right of ownership of the copy of the computer program, it must be stated that, according to the order for reference, a customer of Oracle who downloads the copy of the program and concludes with that company a user licence agreement relating to that copy receives, in return for payment of a fee, a right to use that copy for an unlimited period. The making available by Oracle of a copy of its computer program and the conclusion of a user licence agreement for that copy are thus intended to make the copy usable by the customer, permanently, in return for payment of a fee designed to enable the copyright holder to obtain a remuneration corresponding to the economic value of the copy of the work of which it is the proprietor.
In those circumstances, the operations mentioned in paragraph 44 above, examined as a whole, involve the transfer of the right of ownership of the copy of the computer program in question.
If we are to have a concept of property under EU law, separate from that in the member states of the EU, what are the principles that this property law follows? For example, what are the rights of joint owners? Can the owner sue people who trespass on his property? What happens to the ownership rights on the death of an owner? It has taken many years, if not centuries, for property laws to develop in EU member states, and it seems odd, to say the least, that we are now to have a separate system of EU-wide property law whose scope and limits are presently unknown.
By contrast, European patent laws recognise their limitations, and do not generally seek to address questions of national property law. Thus, Article 74 of the European Patent Convention provides:
Unless this Convention provides otherwise, the European patent application as an object of property shall, in each designated Contracting State and with effect for such State, be subject to the law applicable in that State to national patent applications.
Similarly, Article 10(1) of the draft legislation for the establishment of the European unitary patent provides as follows:
A European patent with unitary effect as an object of property shall be treated in its entirety and in all the participating Member States as a national patent of the participating Member State in which, according to the European Patent Register:
(a) the patent proprietor had his/her residence or principal place of business on the date of filing of the application for the patent; or
(b) where subparagraph (a) does not apply, the proprietor had a place of business on that date.
In IP Draughts’ view, the CJEU was misguided in seeking to create a Euro-definition of ownership, and IP Draughts would have preferred the court to have avoided dabbling in questions of property law. It was led down this path by the confusing concept of “sale …of a copy of a program” in Article 4(2) quoted above. Even if software is supplied by the traditional method of sale of a disc, rather than by the more familiar route nowadays of internet download, the property being sold is the disc, not the program itself. Yet the value lies not in the disc but in the functionality of the program.
These confusions will continue for as long as the legislature and the courts persist in trying to apply concepts from the sale of goods into the very different factual situation of software supply. By all means have exhaustion of rights principles in relation to software supply (if you must). But don’t do it by mis-describing the supply of software as a sale of property.