European Court of Justice holds that the doctrine of exhaustion applies to downloaded software (UsedSoft v. Oracle)

On 3 July 2012, the European Court of Justice issued a groundbreaking judgment regarding the resale of used software licenses in the European Union.

Oracle develops and markets computer software, including software available through a downloading process, offered in connection with a package of up to 25 licenses. UsedSoft is a German company, marketing used software licenses, including Oracle “used” licenses, which it acquires from original Oracle licensees. Concerned about the emergence of a second-hand market for its software, Oracle sought a preliminary injunction against UsedSoft seeking to enjoin its practice of selling Oracle’s “used” licenses, based on its exclusive right of reproduction within the meaning of Article 4(1)(a) of Directive 2009/24 (the Software Directive) and on its standard non-transferable license agreement terms.

After holding that this practice indeed infringed Oracle’s exclusive right of reproduction within the meaning of the Software Directive, the German Federal Court of Justice (Bundesgerichtshof), referred the case to the ECJ on the question of whether UsedSoft could, relying on the doctrine of exhaustion, argue that by granting an unlimited license over a specific copy of its software, Oracle had exhausted its rights to control the further distribution of such a copy of its software (first sale doctrine).

To hold that the doctrine of exhaustion applied in such case, the court had to determine whether the granting of an unlimited license over a downloadable software program was tantamount to the sale of a physical copy (e.g. DVD, CD-ROM) of such software.

The ECJ held that the rule of exhaustion did indeed apply in this case and that under certain conditions, the resale of software licenses should be allowed, despite contractual provisions to the contrary.

The court observed that by granting an unlimited license for a one-time fee (representing the economic value of the software), Oracle had transferred its right of ownership to the copy in question and could not rely on its own contractual provision to circumvent the exhaustion doctrine.

On the other hand, the ECJ made clear that for the exhaustion rule to apply, the original licensee/reseller had to stop using the software itself (e.g. by disabling or destroying its own copies) and pointed out that the right holder may therefore seek to enforce this rule by using technical tools such as product keys, registration codes and audits.

The implication of this decision for software developers is significant. In particular, it may well lead to a transformation of their distribution and business models, with an increase use of cloud computing (over which right holders retain greater control) and of integrated packages where software programs will be offered as part of a service (e.g. maintenance), since services are not affected by the exhaustion rule. [Béatrice Martinet Farano]