Used Software Sales and Copyright Exhaustion in Europe

On July 3, 2012, the Court of Justice of the European Union (“EU Court of Justice”) in Luxembourg held that a software copyright owner cannot prevent the resale of software copies that are downloaded with the copyright owner’s consent over the Internet, even if the initial acquirer agrees with the software copyright owner that the software copies are licensed only to the initial acquirer and shall not be resold. ¹ Judgment of the Court (Grand Chamber) of 3 July 2012 (reference for a preliminary ruling from the Bundesgerichtshof — Germany) — UsedSoft GmbH v Oracle International Corp. (Case C-128/11) (1), Official Journal 2012/C 287/16. For a summary of the decision, see the ECJ’s press release No. 94/12, http://curia.europa/eu/jcms/upload/docs/application/pdf/2012-07/cp120094en.pdf (accessed November 3, 2012).

The Dispute Between Oracle and UsedSoft

Oracle makes and distributes software for enterprises, including computer programs that reside on a customer’s server and can be accessed from individual workstations. Oracle authorizes the workstation copies in license agreements and prices its software licenses in increments of 25, so that an enterprise customer with 77 employees, for example, needs to buy a hundred licenses. A German company, UsedSoft GmbH, bought software copies and licenses from Oracle customers, which had acquired the copies from Oracle’s website and either sold on surplus copies or copies it no longer required. For example, a customer with 77 employees might purchase 100 licenses from Oracle and then resell 23 to UsedSoft, which in turn resells the licenses to other enterprises.

Enterprise customers download software copies directly onto their servers from Oracle’s website. They accept a license agreement in the process, which includes a non-transferable right to store a copy of the program permanently on a server and to allow up to X times 25 users to access it by downloading it to the main memory of their work-station computers, exclusively for internal business purposes. The license agreement makes the point that the software is licensed, not sold, and prohibits the resale of software copies or licenses. If the customer also subscribes to maintenance services, subject to a maintenance agreement, customers can also download updated versions of the software (updates) and programs for correcting faults (patches) from Oracle’s website.

UsedSoft markets “second hand” software copies and licenses to enterprise customers that already have the Oracle software copies installed and need additional licenses for workstations. UsedSoft also allowed enterprise customers to download the software copies directly from Oracle’s website after acquiring a ‘used’ license.

Background

Oracle sued UsedSoft in German courts, seeking injunctions. The German federal supreme court ²Bundesgerichtshof (Federal Court of Justice, Germany). referred three questions of legal interpretation to the Court of Justice of the European Union. The EU Court is the ultimate legal authority on the interpretation of EU law to ensure that courts in all 30 member states of the European Economic Area (“EEA”) apply EU law consistently. Similar disputes had evolved in other European countries. ³See, Christopher Stothers, When is Copyright Exhausted by a Software License? Usesoft v. Oracle, European Intellectual Property Review, 2012, 787, 788 et seq. Diverging decisions in different EEA member states can create territorial market barriers, which the European Court of Justice is tasked with eradicating.

The Court’s legal interpretation has binding effect for the German court and all courts in the EEA. The Court is often considered the European Union’s “engine of integration” and through its interpretation of the law strives to strengthen European economic unification.

Given that copyright remains essentially a national right in each of the 30 EEA states, without full harmonization, copyright laws have a tendency to obstruct (or allow companies to obstruct), rather than support borderless trade in Europe. Consequently, the EU Court can be expected to stand up for defenses and exceptions under copyright law, rather than intellectual property protection as such, until such day when copyrights are fully harmonized across the Common Market and EEA member states. Notwithstanding such general expectations of anti-copyright tendencies, the EU Court went far even by its own standards.

The reference to the EU Court of Justice centered on whether the right of distribution of a copy of the software has been exhausted by the original license granted by Oracle, and accordingly what rights a copyright owner has to prevent subsequent purported “sales” of a license to third parties. In its judgment the EU Court states that a transferee of “second hand” software (or the right to download such software) does not infringe software copyright.

This ruling marks a significant change. Under Directive 2009/24 (the “Software Directive”) the first sale of software in the EEA “exhausted” the vendor’s right to control distribution (Article 4(2)). Hence a brisk second hand trade in the physical medium containing the software could exist without any right of the vendor to claim such resale or later transfers infringe copyright. But a vendor’s right to prohibit “reproduction” of the software is never exhausted (Article 4(1)(a)).

Or so it was thought.

New Digital First Sale Doctrine

The Court did not follow the route suggested by its Advocate General. The Advocate General suggested that the principle of exhaustion applied to downloaded copies, but did not permit reproduction given the relatively clear and settled language in the applicable Directives and the need for legal certainty. ⁴A.G. Opinion April 24 2012 (C-128/11), at [99]. The Court ultimately held that even reproduction for the purposes of resale must be permissible as a matter of EU law and that resale rights could not be limited contractually.

The EU Court decided that:

• The first sale doctrine—in EU speak “exhaustion” doctrine—applies whenever the copyright owner charges a fixed fee for a perpetual license (without regard to the parties’ individual agreement or license terms to the contrary).
• The lawful acquirer of a software copy may not only resell and transfer the copy, but also reproduce and sell a new copy if the original copy is then destroyed.
• The copyright owner may not prevent the resale of copies, on copyright or contract grounds.

The court did however set some limits on its judgment by not permitting UsedSoft’s splitting up of license bundles into individual licenses. ⁵Section 69 of the judgment: “It should be pointed out, however, that if the licence acquired by the first acquirer relates to a greater number of users than he needs, as stated in paragraphs 22 and 24 above, the acquirer is not authorised by the effect of the exhaustion of the distribution right under Article 4(2) of Directive 2009/24 to divide the licence and resell only the user right for the computer program concerned corresponding to a number of users determined by him.”

Traditional First Sale Doctrine Principles

The first sale doctrine emerged more than a hundred years ago when the U.S. Supreme Court made new law and ruled that a book publisher could not enforce minimum resale price covenants against secondary book purchasers based on copyrights, because the copyright owner’s right to control distribution was exhausted after the first sale of each book. ⁶Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908).

The first sale doctrine was subsequently adopted into legislation and treaties around the world and many aspects of the first sale doctrine are relatively uncontroversial today. For books and many other products, the copyright owner exhausts her exclusive distribution right with the first sale of a copy. After selling a copy or consenting to a sale, the copyright owner is compensated and cannot use copyright s to control further distribution.

First Sale Doctrine and Software

With respect to software, the traditional first sale doctrine alone cannot have the same effect that it has with respect to books. The reason is that software end-users typically need to create additional copies in order to enjoy the use of a software copy, typically one permanent copy in the process of installing the software on the hard drive of a computer and further temporary copies in RAM and CPU cache in the process of executing the program. Neither the first sale doctrine nor the first purchaser of a software copy could confer such a right on a secondary purchaser. This problem has been dealt with by legislation with software-specific provisions to complement the first sale doctrine, which allow any lawful owner of a software copy to make the copies necessary to use the software. ⁷Section 117(a)(1) to the Copyright Act provides that [I]t is not an infringement for the owner of a copy of a computer program to make or authorize the making of another copy or adaptation of that computer program provided: (1) that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner.”

Software companies have tried to avoid the implications of such laws by labeling transactions as “license agreements” and stating in the agreements that software is licensed only, never sold, and that they never transfer ownership to their software copies. ⁸Novell v. Unicom Sales, 2004 WL 1839117 at p. 7 (N.D. Cal. 2004) (not reported in F. Supp. 2d); Softman Prods. Co., LLC v. Adobe Systems Inc., 171 F. Supp. 2d 1075, 1084 (C.D. Cal. 2001) (hereafter “Softman Prods”); Novell v. CPU Distributing, Inc., 2000 U.S. Dist. Lexis 9975, p. 17-8 (S.D. Texas 2000) (not reported in F. Supp. 2d); DSC Communications Corp. v. Pulse Communications Inc., 170 F.3d 1354, 1360 (Fed. Cir. 1999); Novell v. Network Trade Ctr., 25 F. Supp. 2d 1218, 1230 (D. Utah 1997); Davidson v. Internet Gateway, 334 F. Supp. 2d 1164, 1177 (E.D. Miss. 2004) (hereafter “Davidson”); ISC-Bunker Ramo v. Altech, Inc., 765 F. Supp. 1310, 1314 (N.D. Ill. 1990); Data Products v. Reppart, 18 U.S.P.Q.2d 1058, 1601 (D. Kan. 1990); Microsoft Corp. v. Harmony Computers & Electronics, 846 F. Supp. 208, 212-213 (E.D.N.Y. 1994). For the large part, the software industry has been able to prevail with their position in U.S. courts. ⁹Most recently Autodesk vs. Vernor, 621 F.3d 1102 (9th Cir. 2010), U.S. Supreme certiorari denied, Vernor v. Autodesk, Inc., 2011 U.S. LEXIS 6875 (U.S., Oct. 3, 2011). German courts, on the other hand, have routinely ignored the labels as well as most of the content of software license agreements and qualified perpetual software transfers for fixed fees as sales, no matter what the copyright owners agreed with distributors or end user customers. ¹⁰See, Lothar Determann and Aaron X. Fellmeth, Don’t Judge A Sale by its License: Software Transfers under the First Sale Doctrine in the United States and the European Community, 36 U.S.F. L. Rev. 1 (2001). This had the effect that the German version of the first sale doctrine often applied to the distribution of physical software copies and put software companies in a difficult spot if they had designed their distribution models and pricing based on the assumption that they could prevent resales. ¹¹See generally, Chris Nadan, Software Licensing in the 21st Century: Are Software “Licenses” Really Sales, and How Will the Software Industry Respond?, 32 AIPLA Q. J. 555 (2004).

The difference in legal standards seemed most pronounced between the United States and Germany. For all other jurisdictions, there was a working assumption that the U.S. approach of characterizing transactions as “non-sales” in the applicable agreements would succeed in practice. Until recently, little case law has been reported from other jurisdictions on this point. ¹²But see, Christopher Stothers, When is Copyright Exhausted by a Software License? Usedsoft v. Oracle, European Intellectual Property Review, 2012, 787, 788 et seq.

The first sale doctrine and how it applies to software had so far been tested in court usually with respect to copies on physical media. Applying the doctrine to downloaded copies seemed logical, ¹³See already Determann/Fellmeth, Id., at page 26. but with limited practical consequences, because such copies could only be resold on a medium where they exist, i.e., typically a PC, laptop or similarly valuable device. It was clearly stated in statutes and seemed widely accepted that the acquirer of a software copy could not make and sell an additional copy, because the first sale doctrine exhausts only the distribution right, not the reproduction right. ¹⁴Determann/Fellmeth, Id., page 89.

Moreover, cases and commentators tended to limit the application of the first sale doctrine to sales-like transactions, but not allowing a transfer of the licenses themselves.

New Views and Implications

The EU Court’s judgment could change the landscape in Europe considerably: ¹⁵If courts in Europe do not only follow the narrow answers given to the German court’s specific questions, which is by no means certain, but also to the underlying reasoning, which is even less certain.

First of all, the EU Court adopts the view—previously taken by German courts—that any perpetual transfer of possession for a lump sum fee constitutes a sale and triggers the exhaustion principle. This affects companies that distribute software on devices, CDs, or other physical media.

Second, the Court expands this view to software downloads. This affects all software companies that make copies available on a perpetual basis, but not those that offer software-as-a-service or on other time-limited bases.

Third, the Court indicates that someone who acquires a software copy lawfully (from the copyright owner, with the copyright owner’s consent or from a secondary distributor after exhaustion kicks in) may make and sell an additional copy so long as it deletes the original copy. This view departs significantly from the legislation and the traditional legal position and is difficult to reconcile with current copyright law. It was also arguably not necessary for the case at hand, because UsedSoft’s customers apparently downloaded software copies straight from Oracle’s website. If this view were to be applied, together with the two previous points above, it may mean copies will be resold much more easily if they can be freely separated from media or devices where they are originally installed. Also, this view would mean a serious set-back for the software industry’s—and most developed countries'—fight against software piracy. Pirates will claim that they were merely reselling legitimate copies of software and the copyright owners may have to prove that the original copies weren’t deleted fast enough, leading to increased uncertainty and practical difficulties.

Fourth, the EU Court seems to indicate that after copyright exhaustion kicks in, secondary purchasers may also transfer licenses relating to software copies that are transferred in sales-like transactions. The legal basis for this assertion remains unclear, but the EU Court seems to view such an expansion of the first sale doctrine as beneficial from a policy perspective, to ensure the doctrine has more force. This would mean that the application would remain limited to transactions that are ancillary to sales-like software distributions—and not apply in a stand-alone subscription context, such as in ‘software-as-a-service’ models.

Fifth, the EU Court seems to assume that any contractual agreements to the contrary would be invalid.

International Implications

Copyrights are largely territorial and every country decides for itself whether it will consider sales outside its borders as exhausting copyrights within its borders.

An exception applies under EU law: To preserve the unity of the Common Market, a first sale in one EAA Member State must exhaust the copyright owner’s distribution rights in all EEA Member States. ¹⁶See, for example, relating to trademark law, CJEU Case C-355/96, Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbH (1998). A first sale outside the EEA does not exhaust distribution rights within the EEA and the copyright owner can assert its exclusive distribution rights to prevent “gray imports” from outside the EEA into the EEA. ¹⁷The CJEU took this position relating to trademark law in 1998 in Case C-355/96, Silhouette International Schmied GmbH & Co. KG v Hartlauer Handelsgesellschaft mbH.

The U.S. Supreme Court is about to decide again on the exact international scope of the first sale doctrine after applying it in a fairly limited manner in the past to copies made and first sold in the U.S. that come back through “gray importation.” ¹⁸Kirtsaeng d/b/a Bluechristine99 v. John Wiley & Sons Inc., U.S., No. 11-697, oral arguments 10/29/12, see BNA 85 PTCJ 4 (2012). See also Quality King Distributors Inc. v. l’Anza Research International Inc., 523 U.S. 135, 45 USPQ2d 1961 (1998) (55 PTCJ, 386, 400, 3/12/98). But, even if the U.S. Supreme Court were to broaden the international reach of the first sale doctrine, U.S. courts should apply principles of U.S. copyright law to the question whether a first sale did in fact apply—regardless of how the foreign jurisdiction where a first sale allegedly occurred ¹⁹For the question where a transaction occurs for copyright purposes, see also Gary Sprague & Lothar Determann, Source of Royalty Income and Place of Use of Intangible Property, 36 Tax Management International Journal 8 (2007). would view such transaction. Thus, the expanded views taken by the EU Court of Justice should not create a right for European companies to resell software copies on United States markets.

What Now?

It remains to be seen if and to what extent these quite far-reaching positions can be supported by or reconciled with applicable law and how the national courts in the EU member states and other countries will adopt these views.

However, software companies can take a number of steps to prevent uncontrolled resales which affect their business models to an unacceptable degree (e.g., because of piracy threats, inability to maintain a price-value benefit depending on the size of the licensee organization, etc.). ²⁰For economic reasons favoring resale restrictions, see Chris Nadan, Software Licensing in the 21st Century: Are Software “Licenses” Really Sales, and How Will the Software Industry Respond?, 32 AIPLA Q. J. 555 (2004).

Cast Transactions and Licenses as ‘Unlike-Sales’ as Possible

It may not suffice for European jurisdictions anymore, but the first and basic line of defense for resale restrictions should not be forgotten or fall by the wayside. In all licenses and distribution contracts, software companies should consistently use terminology to clarify that they are selling licenses, services or access to software—if that is in fact what the commercial reality is. Referring to channel partners as “resellers” or in shipment terms to “all sales FOB” may undermine the copyright owner’s position. Also, beyond terminology, including “unlike-sales” commercial terms can help copyright owners make their case against a first sale, for example, “field of use”-restrictions, a contractual obligation to return old software copies at the time of upgrades, access limitations (authorized or concurrent users), etc.

Based on various statements in the UsedSoft case, the EU Court or appropriate national court would probably disregard most or all of the aforesaid measures and consider nothing short of a serious time limitation would render the transaction more rental- than sales-like. Software companies that follow a subscription model more generally may be open to a shorter and more meaningful time limits, but many software companies have been traditionally inflexible in this respect because their stock market performance has depended on upfront recognition of license fees for revenue accounting purposes.

Apply Technological Restrictions

Software that is frequently updated, upgraded and changed, without reverse version interoperability, is more difficult to resell—but may also be less attractive to users. Dongles and expiring activation codes can also be used to control changes on the end-user side, regarding hosting equipment, authorized users and other details—but such restrictions are not favored by end users or data privacy laws. Whether technological restrictions are viable depends on each software company’s situation.

Regulating or Charging for Resales in EULAs

If you can’t beat them—join them. One possible reaction to the potential changes in law could be to embrace and try to regulate the change contractually. Any attempt to regulate resales, however, would have to pass muster under EU competition laws, which as a starting point outlaw vertical resale restrictions as per se illegal. ²¹See, L. Determann / B. Batchelor, Revised Competition Rules for Online and Offline Distribution in Europe, 15 BNA Electronic Commerce Law Report 39 (2010), and Competitor Collaboration — New European Union Regulations and Guidelines, 15 BNA Electronic Commerce Law Report 39 (3/2011). Generally resale restrictions are considered “hard core” infringements of EU competition law. ²²See Article 4(b) of the Vertical Agreement Block Exemption No 330/2010 Prior to UsedSoft, software vendors could take comfort from the Software Directive that the restriction on transfer did no more than protect the core of their intellectual property rights and this effectively trumped any competition law concerns. ²³Case T-198/98 Micro Leader Business v. Commission [1999] ECR II-3989 This argument may no longer be available following the judgment. Accordingly EULA restrictions must be drafted so as to comply with EU competition law. As we discuss below, this does not mean all transfer restrictions are invalid. There are a number of alternative structures which would have the effect of restricting transfer (in many instances) without breaching competition law.

One option for software vendors is to permit the transfer but only where the end user meets certain prescribed conditions. An example of how such a clause would look:

End User may transfer all End User’s rights to use the Software to another individual or legal entity provided that: (a) End User also transfers (i) this agreement (ii) the serial number(s), the Software and all other software or hardware packaged or pre-installed with the Software, including all copies, upgrades, updates and prior versions and (iii) all copies of software converted into other formats to such individual or entity; (b) End User retains no upgrades, updates or copies, including backups and copies stored on a computer; and (c) the receiving party accepts the terms and conditions of this agreement and any other terms and conditions under which End User purchased a valid license to the Software. Prior to a transfer Licensor may require that End User and the receiving party confirm in writing compliance with this agreement, provide Licensor with information about End User and receiving party and register as end users of the Software.

Choosing this option may mean that few end users are able to comply with the transfer conditions. Where the software in question is distributed widely within a corporate organization between the server, desktop and remote users it may be particularly difficult to ensure no copies remain.

A selective distribution system is a distribution system whereby the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorized distributors. ²⁴Article 1(e) of the Vertical Agreement Block Exemption No 330/2010 By implementing such a system a software vendor can ensure its products can only be bought and resold by officially appointed distributors and retailers. A non-appointed distributor cannot obtain the software vendor products, and an appointed dealer can only resell to other members of the system or to the final consumer. This means that the software vendor can prevent its products being sold by anyone except authorized resellers meeting criteria such as investments in engineers, pre and post-sales service, facilities and demonstration products.

In the context of a selective distribution system, there are good arguments that the software vendor should be entitled to prevent end users acting as unauthorized resellers of its software, especially where the software is complex, requires specialist advice to select, install or support and/or there are reputational risks for the software vendor in end users using its software without proper assistance or support. ²⁵These arguments are based on the Vertical Agreement Block Exemption No 330/2010 Articles 1(e) and 4(b)(iii))

The motor vehicles sector provides a useful analogy. Vehicle manufacturers restrict their distributors reselling cars to independent leasing companies who buy large volumes—usually against a substantial discount—and then resell them as new. ²⁶“The fourth prohibition decision in the area of car distribution in four years: This time it’s Mercedes’ turn” by Hubert Gambs and Konrad Schumm DG Competition 2002 Such a restriction is legal if the leasing company is not acting as an end user (that is to say leasing the vehicles to third parties) ²⁷Paragraph 51 of the “Supplementary guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and for the distribution of spare parts for motor vehicles” 2010 but as an unauthorized reseller (reselling new cars). ²⁸Question 46 of the Explanatory Brochure “On the Application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicles sector” 2002

Applying the analogy to the software sector, end users would then be prohibited from reselling software while “new” (perhaps 6-12 months) unless they are appointed as an authorized reseller. It should be noted however that a selective distribution system will only work where software is considered new. Beyond the 6-12 month period, then some other mechanism would be required to restrict transfer. ²⁹Paragraphs 78 & 79 of C-128/11 UsedSoft v Oracle

The other potential attraction of using a selective distribution system is that EU case law states that it may be considered trade mark infringement for an unauthorized reseller to sell products outside of a selective distribution system. The rationale for this is that for luxury goods sale outside the authorized network prejudices the reputation of the mark. ³⁰Paragraph 31 of C-59/08 Dior v Copad The case has never been applied to the IT sector, and there would be an argument to be had whether an IT product can be damaged in the same way as luxury goods. Nonetheless the case may offer vendors additional intellectual property arguments around unauthorized resale.

Charging More for Personal Licenses Than Transferable Licenses

Charging end users more for a transferable license than a non-transferable license also presents competition law risks. Article 101(1) TFEU prohibits restrictions on resale whether these are absolute restrictions on incentives/penalties restricting resale. This includes charging a differential price on products resold. ³¹General Motors Nederland BV and Opel Nederland BV v Commission [2003] ECR II-4491 The withdrawal of a discount on resale to a particular customer or territory group has previously been held to be unlawful resale restriction. ³²Case 30/78 Distillers v Commission [1980] ECR 2229 Were a software vendor to base its prices on whether a license is transferable, such a measure is likely to be viewed as trying to prevent transfers by the backdoor and be prohibited as a passive sales restriction under Article 101(1).

Withholding Support on Transferred Licenses

The EU Court of Justice ruled that software corrected, altered or added under a maintenance agreement is part of the software transferred to the second user. ³³Paragraph 21 & 79 of C-128/11 UsedSoft v Oracle On the other hand software maintenance agreements do not transfer. Therefore a software vendor is not obliged to provide on-going support to those end users who do not purchase directly from a software vendor.

Article 101 TFEU.

A software vendor is permitted as part of a selective distribution system to refuse aftersales support on products sold by an unauthorized reseller. ³⁴Case C-376/92 Metro v Cartier [1994] ECR I-15

Even outside a selective distribution system, unless a software vendor has a dominant market position, then it is free to choose the customers to which it provides support. Although in theory this would make it legal to refuse to supply second hand acquirers, a practical compliance risk arises in practice if this unilateral policy not to support second hand acquirers is considered, by a course of dealings or policy statements, to be part of an agreement with the first acquirer to restrict transfer. This would potentially be unlawful under Article 101(1) TFEU.

Article 102 TFEU.

In limited circumstances, a company with a dominant market position may be required to supply its products, namely where: (i) the product is essential to compete; (ii) refusal eliminates effective competition; (iii) the refusal causes “consumer harm” in the sense that innovation is retarded ³⁵Case T-201/04 Microsoft Corp. v Commission of the European Communities [2007] ECR 11-0000 or new products do not come to market ³⁶Case C-418/01 IMS Health [2004] E.C.R. I-5039,; and (iv) there is no objective justification.

It should be noted that although a software vendor may not have a dominant market position in its primary product lines, it may be considered to be dominant in secondary markets, such as support for their own products, by virtue of the fact that no other company has access to the proprietary resources (source code, knowhow) which allows them to create software updates and bug fixes. Accordingly a vendor may be dominant (or a monopolist) in support for its own software, even if it has a low share in the primary software product market.

However given that the IT sector is characterized by sophisticated business acquirers of software who will factor in both purchase price and support prices (the “total cost of ownership”) in their purchasing decisions, many software vendors are likely to have arguments countering market power in a secondary market. A software vendor’s ability to raise prices (or otherwise act anti-competitively) in relation to support is constrained by the threat of lost sales in the primary market for its software. ³⁷Infolab/Ricoh [1999] XXIX Competition Policy Report, paragraphs 169–170 (Ricoh not dominant in relation to photocopier consumables by virtue of whole life costing by purchasers and competitive nature of photocopier market) and ICL/Synstar (OFT decision of July 20, 2001), paras 24–37 (ICL not dominant in mainframe maintenance by virtue of whole life costing of sophisticated purchasers of mainframe computers, the transparency of maintenance prices, the likelihood of mainframe purchasers switching to the many rival mainframe

In any event, even if considered dominant, the test for unlawful refusal supply is unlikely to be satisfied in a typical software agreement. End users are unlikely to be a source of competition for most software vendors or a major source of innovation or new products competitive with a software vendor. Hence, the third limb of the refusal to supply test (stifling new products or products with innovative features) is unlikely to be met.

Charge More for Support Services on Transferred Licenses

Rather than withholding support services, a further option for a software vendor would be to charge more for its support services where they are not being supplied to a direct customer but are instead requested from a second hand user with whom a software vendor does not have a contractual relationship.

Support pricing is typically commonly based on a percentage of the net license fee paid by the original licensor. Other factors will impact the price such as multiyear discounts, volume purchases, and the negotiating power of the customer or anticipated client support needs. As the factors reflected in the price will be very different from customer to customer, there is no reason for the second acquirer’s support price to be the same as the original buyer.

Article 101 TFEU.

In theory a software vendor is able to charge different prices for support as it wishes (absent a dominant market position) to second hand acquirers of its software. In practice, there is the risk that a by means of a course of dealings such differential pricing becomes an “agreement” with the first acquirer to restrict resale. This would be unlawful under Article 101(1).

A better approach may be to require second acquirers to pay a (reasonable) inspection and/or administration fee for support reflecting the fact that a software vendor will wish to check the provenance of the second hand software (i.e. what updates it has, what product mix it is installed on) before placing it under support. Alternatively if the supplier has a range of objective factors - other than trying to restrain second hand sales - it takes into account (volume, usage intensity, multiyear deals) when pricing support, it should be legitimate to charge the second acquirer a different price to the first based on those factors. This would provide a good defense to accusations that the parties’ course of dealings in fact betrays a resale restriction.

Article 102 TFEU.

Discriminatory pricing can be an abuse of a dominant position under Article 102 TFEU. Though the most recent case law suggests that price cutting, even by a dominant company, is lawful provided that it is above the relevant measure of cost. ³⁸C-209/10 Post Danmark A/S v KonkurrencerÄdet, In any event, a price reflecting an inspection or administration fee as described above is likely to be justifiable under EU competition law.

Enterprise Licensing.

The EU Court ruling makes clear that block licenses cannot be split as part of the software “sale” processes. If separate software licenses are provided each time there is a software purchase it will be easier for a licensee to dispose of software that it subsequently does not need through “selling” the unused licenses on the second-hand market.

A software vendor may wish to consider licensing its software on a volume basis through “enterprise” type licensing arrangements for blocks of users, rather than providing separate licenses for each individual purchase of software.

Setting Up a Transfer Validation Registry

The UsedSoft judgment at paragraph 79 notes that “it is permissible for the distributor – whether ‘classic’ or ‘digital’—to make use of technical protective measures such as product keys”. As such a software vendor can employ technical measures to make it virtually impossible to re-sell software on without its approval although in practice this may be more appropriate for hardware rather than software.

One way a software vendor could achieve this is by a software vendor setting up a transfer registry to ensure recipients of the software have to obtain a valid registration key or the software will not work. A similar means of preventing transfers was recently approved in Germany, ³⁹BGH decision of 11 February 2010, I ZR 178/08 – Half-Life 2 where it was held that exhaustion allowing resale does not occur in the event that the software only runs when connected to the software provider’s servers and registration with those servers is only possible once, which effectively made it impossible for anyone but the first to register with those servers.

Whether this is a viable option depends on a software vendor’s willingness to put the technology in place and approve each individual transfer which may become rather time consuming and expensive. For software that is distributed widely within a corporate organization between the server, the software vendor’s customers may regard the registration process as an unnecessary inconvenience and choose a rival software supplier instead.

Wait and See

Whether the European Court of Justice’s reasoning will really drive significant change in copyright law and software licensing practice remains to be seen. Depending how much precaution and steps a particular software company already takes in light of pre-existing uncertainties, it may be comfortable just waiting to see what will happen. Yet, the decision provides an incentive to revisit and optimize current licensing and commercialization practices for all companies.