Prof. Randal C. Picker, University of Chicago Law School
July 19, 2012

On July 3, 2012, the European Court of Justice issued an important ruling on the question of the sale of used digital works.  The case raises questions at the intersection of copyright and contract, and we are seeing different approaches taken in the United States and the European Union.

We should start with a little websurfing, so go visit .  UsedSoft does exactly what that name suggests: It operates as a middleman between owners of used software and potential purchasers of that software.  Put that way, there hardly seems be anything interesting here.  My neighborhood, Hyde Park in Chicago, has long had a thriving trade in used books.  We have copyrighted works embedded in physical objects – books and a robust second-hand market.  Indeed, the emergence of online sellers has provided much greater liquidity to the used book market, much to the dismay of authors (or at least some of their representatives ).

But the nominal legal arrangements for software are quite different than those for books and that gives rise to the dispute between Oracle and usedSoft.  Oracle, of course, is the large database vendor and it purports to license its software rather than sell it to its customers.  That means that customers obtain a copy of the software subject to a license – a contract – and Oracle takes the position that the contract controls what customers can do with the software.

All of that matters for the issue of first sale, as we call it in the United States, or exhaustion as they call it in Europe.  The idea is that at some point after the copyright holder has parted with a copy of the work, she loses the right to control what happens to that copy.  That was suitably vague, as we can press on that statement and see where we have more work to do.  Is first-sale a mandatory part of copyright law or can these rights be controlled by contract?  Can the contract specify that something that might otherwise be most naturally called a sale isn’t actually a sale but is something else?  And is first sale limited to sales and inapplicable to those something elses?  What happens if the copy is never embodied in a physical object – a book or a CD say – but is instead downloaded over the Internet?  And what happens if the underlying business arrangement isn’t a product at all but is instead a service?

With the rise of digital works downloaded over the Internet, these issues have risen in importance.  It is easy to attach a license to those works, regardless of whether those works are songs from iTunes, e-books from Amazon, or high-end database software from Oracle.  In the United States, the U.S. Court of Appeals for the Ninth Circuit confronted these issues in 2010 in Vernor v. Autodesk and concluded that the software license was enforceable as such, and that meant that the U.S. version of exhaustion, first sale, didn’t apply.  (You can read my write-up for the blog here .)

The EU has now gone the other way.  There is a fair amount of underlying legal text to navigate, from the World Intellectual Property Organization’s Copyright Treaty to two critical EU directives (2001/29 on copyright and the information society and 2009/24 on the legal protection of computer programs), but we should focus on the core of the court’s analysis.  The Court of Justice’s analysis is driven by three premises.

First, the court understood Oracle’s transactions with its customers to be sales.  Part of that analysis is driven by the court’s belief that a uniform approach to sales was required throughout the EU.  The court’s approach didn’t turn on the nominal legal framing that Oracle gave it but rather on the economic substance of the transaction.  Oracle turned over a copy of the software without the expectation of return and received a price that reflected that indefinite transfer.  Oracle didn’t charge a price that looked like a short-term rental of the software.

Just focusing on time and the permanence of the transfer seems sensible enough, but there is more going on here.  The trick is that you might ask whether Oracle charged a price that reflected the fact that in making the first sale of the software Oracle was also creating a competitor down the road.  Oracle might sell two versions of the software: one that could be resold by the purchaser and a second no-resale version.  Oracle presumably would charge a higher price for the resale version precisely because Oracle would know that it was creating a later competitor.  There are some tricky underlying economic issues – if you have never encountered the Coase conjecture (not the Coase theorem but the Coase conjecture), you should Google it – but there is nothing to suggest that the Court of Justice had these in mind as it assessed the nature of the underlying transaction.  In overriding the licensing rules, Oracle is forced to offer a single version of the software – the resale version – and it needs to price accordingly.  Purchasers who would prefer a lower upfront price by foregoing the opportunity to resell will lose that option.

Second, the court saw Oracle’s license as an effort to circumvent what it saw as the core right of exhaustion.  Put differently, the court didn’t think that contracts should be allowed to trump the exhaustion right.  The court assumed that the software sellers would routinely limit exhaustion and that limitation would be problematic.  The resale discussion just given makes clear that that is actually much more complicated.  And the result is squarely in conflict with the current U.S. result in Vernor, though, to be fair to all involved, we are talking about completely different underlying legal texts and there is no good reason that those texts should command the same result in similar cases.

Third, and finally, the court embraced a version of media neutrality.  Most often, the Oracle software was downloaded from the Internet and the question then was whether different rules should apply to software embodied in physical media – CDs and DVDs – versus software that had never found its way into plastic.  The Court of Justice found in favor of one set of rules for software, whether that software was distributed via physical media or over the Internet.  That said, that doesn’t mean that software delivered as a service rather than as a product will face those rules.  The European Commission itself argued that software services should be treated differently than software products and the Court of Justice left that unresolved, though presumably a service doesn’t involve the same indefinite transfer or pricing that we see with products.

There is more going on here.  The opinion seems to suggest that usedSoft was unbundling Oracle licenses.  So Oracle would “sell” a company the right to use up to 25 copies of the software.  The company then uses only 10: Can it sell the other 15 in the secondary software market?  UsedSoft may have been facilitating that practice, but the court seems to forbid that sort of division.  And, in response to Oracle’s concern that software resale facilitates piracy, the court looked to a technical solution, where Oracle would issue digital keys to the software and where presumably the software could be turned off if Oracle discovered that the same software was being used by different users.  Do note the information infrastructure that contemplates the software phoning home to Oracle occasionally so that Oracle can verify the legitimacy of its use.