A software licence is a contract, isn't it? A bad transfer of analogic law to the digital environment by the CJEU

The CJEU has issued its Judgment of 3 July 2012 in case C-128/11 UsedSoft GmbH v Oracle International Corp, regarding the exhaustion of the exclusive right of distribution of a copy of a computer program by the author of the software in cases where it does not produce and distribute physical copies of the programs, but sells licences for the programs to be downloaded from a centralised server directly by the user.

The CJEU has found 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. Where the 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 licence 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" (press release: http://tinyurl.com/UsedSoft).

In those general terms, the Judgment may be well received, since it represents the standard view in the analogical world and does not seem to depart from the expectations of the parties when they entered into the licence contract--particularly those of the software company.

However, the CJEU goes further and expressly indicates that "even if the licence agreement prohibits a further transfer, the rightholder can no longer oppose the resale of that copy [... since that] would allow the copyright holder to control the resale of copies downloaded from the internet and to demand further remuneration on the occasion of each new sale, even though the first sale of the copy had already enabled the rightholder to obtain appropriate remuneration" (C-128/11 at para 63, emphasis added).

Even if the CJEU later goes on to restrict the potential implications of this finding by preventing the division of multiple licence agreements to resell only a limited number of licences, and expressly requires that the reseller stops using the program downloaded upon the first purchase of the licence; the Judgment generates major implications and significant complications for the drafting of licence agreements, their monitoring and enforcement.

In my opinion, the CJEU has not taken due account of the fact that licences are priced ex ante by software companies, on the basis of the intended uses by the client. Where resale is expressly prohibited by the contract, that is something that the software company has surely taken into consideration in the setting of the price for the licence, particularly when the licence is for an unlimited time and includes improvements and new versions of the program.  Changing the potential uses ex post, particularly allowing for a contractually accepted resale prohibition, seems to clearly unbalance the economics of the bargain and to restrict the ability of software companies to price effectively their products. And all of this in a sector where exclusive rights and the ensuing revenues tend to compensate for R&D costs and where companies face significant risks and threats (such as counterfeiting and piracy).

Therefore, the finding of the CJEU in UsedSoft may have tremendous implications in the software sector and in the ability of software developers to continue raising revenues through the sale of licenses of already existing programs--for which an effective 'second hand' market has just been created by the CJEU, even in the digital environment, where companies had been very careful in limiting the resale of existing licences.

Probably it will be easy to negotiate around this finding, and to change licensing policies (e.g. from unlimited to time-limited licences) to prevent resale or minimise its effects. However, this will come at a significant cost for software companies and their clients alike, and may further complicate deals in this industry. In my view, this is a bad extension of analogic law to the digital environment by the CJEU.