Computer Software: The Transfer of Licenses Sale of Back-up Copies in the European Economic Area

Posted by Cyberbear on April 25, 2017 in Computer Software, Copyright Law, Intellectual Property |

Posted By: Timothy T. Emmart

The European Court of Justice (ECJ) recently held that it is an infringement of copyright to sell or transfer a physical back-up copy of a software program, when the original physical copy has been damaged, lost or destroyed. This ruling came after another ruling by the same court that created criteria for the lawful transfer of software licenses to third parties. The later ruling is in the same vein as U.S. copyright law, which allows the owner of a copy of a computer program to make another copy of that program for archival purposes and to sell or transfer that copy, along with the copy from which such archival copies were prepared.

UsedSoft v. Oracle

The dispute in UsedSoft involved the question whether used software licenses may be sold to third parties. In particular, many of the licenses pertained to downloaded software programs, in this case Oracle’s software. UsedSoft provided its third party purchasers with notarial certificates, which contained verification that 1) the license was genuine, 2) that the initial licensee would not continue to use the software after it had been sold, and 3) the initial licensee had paid the initial purchase cost in full. Ultimately, Oracle sought a permanent injunction in a German court against UsedSoft from selling the used software licenses of Oracle’s products. The case eventually made its way through the German legal system, and to the ECJ.

The ECJ was asked to provide a binding rule on whether the rule of exhaustion, which is essentially the European version of the first-sale-doctrine, applied to software programs. The ECJ advised that the resale of used software licenses are permitted when 1) the license was sold in the European Economic Area (EEA) with the consent of the copyright holder, 2) the copyright holder granted a perpetual license, 3) the copyright holder was reasonably remunerated, and 4) the individual who later sells the used license destroys any remaining copies. Further, the seller of the used copies has the burden of proving the conditions are met. In the end, UsedSoft backed out of the case when it agreed to cease and desist its activity. However, this case provides a framework for how second-hand transactions of software licenses may have to be conducted within the EEA. (For more see http://uk.practicallaw.com/w-003-9067-null; see also https://www.twobirds.com/en/news/articles/2013/ecj-usedsoft-ruling; see also http://www.osborneclarke.com/insights/the-end-of-the-usedsoft-case-and-its-implications-for-used-software-licences/)

Ranks

Building on UsedSoft, the facts in Ranks required a Latvian court, also within the EEA, to consider whether a copy may be sold when the original material medium of the copy (such as a disc) has been damaged, destroyed, or otherwise lost. In Rank, a couple of individuals were attempting to rely on exhaustion of the distribution right when they were convicted of selling thousands of copies of various Microsoft software programs online. In its decision, the court described that the question is not one of tangible versus intangible mediums, because exhaustion is concerned with the software program itself and the license that comes with it. More, the court noted that making backup copies to the extent that they meet the sole needs of the individual with the right to use is lawful conduct. However, making multiple copies exceed what would be considered necessary for individual use.

Here, the court ruled that backup copies may not be sold without infringing. The logic in the ruling is that backup copies may be made for the use of an individual with the right to use and only to the extent necessary for that use. Thus, the nature of lawfully created backup copies is that they are not intended for sale. Therefore, even if an original copy is damaged, destroyed, or lost a backup copy may not be sold. (For more see https://www.twobirds.com/en/news/articles/2016/uk/ip-and-it-law-bytes-december/copyright-resale-of-physical-back-up-copy-of-software-program)

Summary

It is clear from the UsedSoft case that, in the EEA, software programs may be resold granted that certain conditions are met. In addition, it seems to be settled, for now, that backup copies may not be sold. It could be assumed that a case brought in the U.S. involving the sale of a backup copy of software would conclude similarly to that in Rank. U.S. and European law seem to be similar with regard to the nature of a backup copy, which may be made by one with a right to use and which is used by the one with the right to use. It is not surprising that a court would rule that the tangibility of a medium on which a program is contained is immaterial to the issue, because software program licenses are licenses to use the software, not the medium on which it is contained. They are not licenses to use the disc (or other medium) whereon the software is contained.

Nevertheless, a good argument could be made that an individual with a valid right to use, who made a lawful backup copy, but who now possesses a damaged, destroyed, or lost original should retain the right to sell his copy. After all, that individual does have a right to use, and they have a copy that is identical to the original. Why should that individual not be able to sell his backup copy? The decision in Rank did not address the issue raised here. Instead, in Rank the issue was over individuals selling thousands of copied copies of software over the Internet and without proper license. As the saying goes, bad facts make bad law. It is easy to see how the court was able to reach the decision that it did in Rank in light of the facts of that case. But, should the outcome be the same for an individual who purchased software lawfully, who made a backup lawfully, but who has since lost his original? Perhaps an exception should be created for this scenario.

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