Software licencing was put into controversy by the 2012 case UsedSoft GmbH v Oracle International Corp (C-128/11) (UsedSoft). The case questioned the instances in which a licensee would be able to re-sell purchased software. With the rise of cloud computing and Software-as-a-Service (SaaS) consequently becoming a more attractive option for developers and consumers, the significance of the ruling has decreased. Brexit has also had an impact. We felt it was time to review the impact UsedSoft has had in the technology sector, noting that its growing irrelevance is very much a sign of the times and future.

Exhaustion Principle

It seems common sense, especially when physical objects are in mind, that once a person has purchased an item, such purchaser has gained the right to sell that item on. Second hand cars, second hand books, second hand furniture – where would my mid-twenties self be without such amenities. The logic therefore follows that such an ability should extend to digital goods. E-books say (as explored in Nederlands Uitgeversverbond and Groep Algemene Uitgevers v Tom Kabinet Internet BV and Others (C-263/18)) or, as in UsedSoft, software.

This ability is covered in Article 4 of Directive 2009/24/EC (Software Directive) which details legal protection of computer programs and software licencing in EU law. The legislation goes as follows:

  1. A computer program rightsholder has the exclusive right to do or authorise:

“(a) the permanent or temporary reproduction of a computer program by any means and in any form, in part or in whole; in so far as loading, displaying, running, transmission or storage of the computer program necessitate such reproduction, such acts shall be subject to authorisation by the rightsholder;

(b) the translation, adaptation, arrangement and any other alteration of a computer program and the reproduction of the results thereof, without prejudice to the rights of the person who alters the program;

(c) any form of distribution to the public, including the rental, of the original computer program or of copies thereof.

  1. The first sale in the Community of a copy of a program by the rightsholder 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.”

A slightly headache inducing bit of legislation on first read, it essentially means that, in certain circumstances, (Article 4(2)) when you sell a copy of a program, or piece of software, you exhaust the right to distribute that sold copy. The legislation therefore needed case law to define exactly what ‘selling’ meant in this context. That’s where UsedSoft came in to define it within the context of software licencing.

UsedSoft ruling

The European Court of Justice (ECJ) ruled in UsedSoft that under Article 4(2) the right to distribute a copy of a computer program was exhausted if the rightsholder permitting the download of the copy from the internet to a licensee had also granted a right to use that copy for an unlimited period of time. It was also required that a lump sum be paid for the licence. It therefore follows that the purchaser could sell a computer program (piece of software) licenced under these conditions on to someone else.

Arguably the biggest consequence was that software developers/vendors could not rely on contractual provisions in these circumstances when trying to protect against transfer or assignment following a purchase. If software is licenced for an unlimited period for a lump sum, the exhaustion principle will apply, regardless of the terms of a relevant contract.

UsedSoft’s limitations

The ECJ did qualify its ruling on software licencing with the following points:

  • The exhaustion principle would not apply to maintenance agreements related to the software licence i.e. whoever the purchaser would sell the software on to could not receive the benefit of any maintenance agreement in place between the original licensee and seller.
  • The purchaser of the software who wishes to sell it on cannot divide up the licence i.e. you must sell the software as a single package in the way you originally bought it.
  • When the resale occurs, the original purchaser of the software who is performing the resale must render its version/copy of the software unusable.

Software-as-a-Service

Increases in cloud computing capabilities has rendered software licencing under the UsedSoft model, i.e. for a one-off fee for an unlimited period of time, increasingly rare. Cloud computing has meant that software developers/vendors can make software available over the cloud on a subscription basis. This means they can run the program on their own servers and update it without having to send anything physical to customers (as used to be the case with CD-ROMs etc.).

The SaaS model essentially means that no software licence exists and that the software is really being provided as a contractual service. Such developments away from unlimited licencing to subscription based servicing has made the ruling in UsedSoft less and less relevant. UsedSoft will only apply to unlimited time period software licenced for a lump sum.

For more information on SaaS and software licencing read our blogs: SaaS Contracts – Things To Look Out For; Software as a Service (SaaS) – Some Key Aspects and Software Licences – Different Legal Structures.

Brexit

On 31 January 2020, the UK left the EU and the UK-EU withdrawal agreement entered into force. Following the end of the transition period on 31 December 2020, retained EU Law was created, the remaining withdrawal agreement provisions came into operation, and the future relationship agreements (including the UK-EU trade and co-operation agreement (TCA)) started to apply on a provisional basis.

All EU case law, including UsedSoft, that was current at the end of the transition period was retained as part of UK law. However, the UK courts may depart from that case law, subject to certain limitations set out in the UK-EU agreement.

The TCA replaces the EU rules on freedom of movement of goods with a more limited free trade area regime and going forward effectively brings to an end in the UK the EU rules on freedom of movement of services. This applies to intellectual property rights and therefore to software licencing. As shown by Part Two, Heading One, Title V (Intellectual Property) of the TCA which simply states that the TCA:

“does not affect the freedom of the parties to determine whether and under what conditions the exhaustion of intellectual property rights applies”.

The position on exhaustion of rights in the UK is now covered by the Intellectual Property (Exhaustion of Rights) (EU Exit) Regulations 2019 and for the moment favours EU developers/vendors. This legislation makes the relevant changes:

  • Any software put on the market before 2021 in the UK or EU, and to which the exhaustion principle applies, will continue to be deemed exhausted for distribution rights as per the Software Directive and ruling in UsedSoft.
  • For software placed on the market in the EU after 2020, exhaustion will apply in the UK. Therefore a UK software developer/vendor cannot stop an EU purchaser of their software selling it back into the UK once it has been exhausted.
  • For software placed on the market in the UK after 2020, exhaustion will not apply in the EU. Therefore a EU software developer/vendor can stop a UK purchaser of their software selling it back into the EU once it has been exhausted.

Sign of the times

UsedSoft’s effectiveness provides a useful microcosmic example of the development of software licencing. Firstly its relevance has been diminished by increases in the capability of cloud computing and the Software-as-a-Service model. Such a trend seemingly irreversible. This has changed the nature of agreements between software developers/vendors and customers. Secondly, Brexit has tipped the balance in favour of EU software developers/vendors for the time being. Giving them the right to bar imports of their software sold in the UK under certain circumstances. How these two changes will continue to develop UK/EU software licencing law will be interesting to observe.

It is important to note that the UsedSoft ruling only applied to software and not to all digital goods. This was explored in the 2019 case, Tom Kabinet, mentioned above. In this instance it was ruled that the exhaustion principle did not apply to downloading an e-book for permanent use because that activity was covered by the communication to the public right which is not exhaustible. Whereas the distribution right in UsedSoft for software developers could be exhausted. It is unclear where a right becomes one to the public or one to distributers, but Tom Kabinet seems to show that it is in some way based upon the nature of the digital good.

EM law specialises in technology law. Get in touch if you need advice on software licensing, SaaS and Brexit or have any questions on the above.