Exhaustion of rights (first sale doctrine): what are the broader implications of the CJEU's ruling in Art & Allposters?

The principle of exhaustion (also referred to as the ‘first sale’ doctrine) is a hot topic in copyright with important commercial ramifications, particularly in relation to 'online exhaustion' and the viability of a second-hand market in digital content. In this post, we will look at the broader implications of the recent CJEU ruling in Case C-419/13 Art & Allposters and assess what additional insight it can give us into the thorny topic of exhaustion.

Before delving into the detail, a brief recap to provide some context: 

• Exhaustion: what is it again? Under copyright, the exhaustion principle limits the rights-holder’s exclusive right to distribute a protected work, where the distribution right is ‘exhausted’ following the first (authorised) sale of the work, i.e. the rights-holder can no longer prevent further distribution of that work. The underlying rationale is to strike an appropriate balance between the rights-holder’s interests and the free circulation of goods.

• Why is exhaustion such a hot topic? In the EU, the CJEU's controversial ruling in Case C-128/11 UsedSoft gave rise to limited circumstances where downloaded computer software could be lawfully re-sold on the basis that the distribution right under the Software Directive had been exhausted. There is legal uncertainty on how the UsedSoft ruling applies to other types of digital content, in particular, e-books and videogames, parts of which may fall to be protected under both the Software Directive and the InfoSoc Directive. In contrast, the current position under US law following Capital Records v Redigi Inc 934 F.Supp.2d 640 is that there is no first sale defence (i.e. exhaustion) for digital files.  

• What was Art & Allposters about? The case concerns the scope of the exhaustion principle under the Information Society Directive in circumstances where a company uses a chemical process to transfer the ink from a paper poster (of a famous art work) onto canvas. The issue was whether the rights-holder’s consent was required to distribute the resulting canvas-based work created from the poster version via the ink transfer process. It is important to note that this case concerns exhaustion under the InfoSoc Directive, and not the Software Directive (which was the subject of the UsedSoft decision). 

What did the CJEU rule in Art & Allposters? 

A key aspect of the CJEU’s ruling is its view that the exhaustion of the distribution right under the InfoSoc Directive covers the tangible object into which a work (or a copy of it) is incorporated. In other words, it is inherently tied to the physical medium (e.g. paper, canvas) on which the work is expressed. On this basis, the CJEU ruled that:

• where there is a "change" to the physical medium on which the work is incorporated (e.g. from paper to canvas), the distribution right is not exhausted in respect of that second work because it is now incorporated on a different physical medium. 

• such a "change" to the physical medium may result in a new reproduction of the work which potentially infringes the author’s reproduction right, and thus requires a separate authorisation.

In justifying its approach, the CJEU asserted that its reasoning is consistent with the principal objective of the Information Society Directive to provide an adequate level of protection for copyright works and to appropriately reward authors for use of their works. Here, the economic value of the canvas-based works was significantly higher than the poster works. Thus, if the CJEU had held that consent was not required for the exploitation of the canvas-based works, this would otherwise have deprived the rights-holders from obtaining an adequate reward for the commercial exploitation of their works.

What does a 'change' to the physical medium look like? 

One question that leaps out from the ruling is what constitutes a sufficient ‘change’ to the physical medium into which a work is incorporated, such that it results in a new reproduction of the work for which the distribution right is not exhausted (and for which potential liability under the reproduction right may arise).

A key aspect in this regard is the CJEU’s observation (at [45]) that, “What is important is whether the altered object itself, taken as a whole, is, physically, the object that was placed onto the market with the consent of the rightholder.”

On the facts, the CJEU considered it irrelevant that the actual ink on the poster was transferred onto the canvas (as argued by the defendant): this did not affect the outcome that the canvas-based work, taken as a whole, was physically different to the poster work which the rights-holder had authorised to be put onto the market (and consequently, the distribution right in the canvas-based work was not exhausted by the first authorised sale of the poster-work).

On the basis of this limited guidance, we are therefore left to interpret what the CJEU meant by “taken as a whole”, and national courts will need to draw their own conclusions as to when a new reproduction occurs on the facts of each case.

I'm exhausted.

This may prove to be a perplexing exercise where the work's physical medium is maintained and combined with another, for instance, gluing a poster to a timber backing or sealing it within a block of glass. Taken as a whole, is that altered object the same object as the paper one originally placed on the market with the rights-holder’s consent? In analysing the position, does it matter if the change is permanent or temporary?

What are the broader implications of the Art & Allposters ruling? 

The CJEU's ruling will be directly relevant to stakeholders involved in the exploitation of copyright works (in particular, artistic and literary works) produced on physical, tangible objects. This could affect manufacturers, distributors and retailers of a wide range of goods sold in gift shops, galleries, home furnishing outlets etc. which incorporate copyright works.

It is reasonably clear that for artistic and literary works (protected under the Information Society Directive), the exhaustion principle is tied to the physical medium on which the work is expressed, whether that be paper, canvas, glass or a stone tablet.  Licensees will need to ensure that their intended uses of the licensed copyright works on different physical media are adequately covered in the licence terms to mitigate the risk of future challenge by the licensor (and similar considerations apply in the relation to any assignment of rights).

It is also worth noting that the issues raised in Art & Allposters have been the subject of legal proceedings elsewhere: see for example the 2002 case before the Supreme Court of Canada of Théberge v Galerie d'Art du Petit Champlain Inc 2002 SCC 34 (regarding an almost identical transfer process from a paper poster to canvas) and before the US District Court (N.D. Texas) in CM Paula Company v. Logan, 355 F. Supp. 189 (regarding the transfer of copyright designs from greeting cards and note pads onto ceramic plaques).

Does Art & Allposters affect 'online exhaustion' following UsedSoft? 

In Case C-128/11 UsedSoft, the CJEU indicated (at [60]) that its interpretation of exhaustion under Art 4(2) of the InfoSoc Directive would not be capable of affecting the interpretation of exhaustion under Art 4(2) of the Software Directive. It reasoned that a) the InfoSoc Directive leaves intact and does not affect the Software Directive which constitutes a 'lex specialis' and b) the Software Directive needs to be interpreted in light of the "different intention expressed by the European Union legislature in the specific context of that directive".

Leaving aside this Kat's personal views on the highly questionable analysis that permeates the UsedSoft ruling, this would seem to suggest that the CJEU's approach to exhaustion under the InfoSoc Directive in Art & Allposters has no direct relevance to the question of exhaustion under the Software Directive, following UsedSoft.

However, the Art & Allposters ruling does highlight the curious position in the EU, where the scope of the exhaustion principle differs depending upon whether the work falls to be protected by the Software Directive or the InfoSoc Directive:

• For works protected under the InfoSoc Directive: the exhaustion principle is inherently tied to the physical medium on which the work is expressed. There is a strong inference that exhaustion was not intended to apply to works distributed via online, intangible means, such as by download;

• For works protected under the Software Directive, the exhaustion principle can apply to computer software that is distributed via download (as well as distribution on a physical medium) provided that certain conditions are fulfilled (e.g. there is a 'sale' which is broadly interpreted to include the grant of a right to use the software for an unlimited period for a fee that corresponds to the economic value of the work; original acquirer must make his/her own copy unusable at the time of the resale)

This is an unsatisfactory position for many reasons, not least because certain types of complex works could potentially be protected by both the InfoSoc Directive and the Software Directive.

This is the result of a series of CJEU judgments (primarily: C-393/09 BSA [see here], C-406/10 SAS Institute [see here] and C-355/12 Nintendo [see here]) which cumulatively have desiccated the scope of protection under the Software Directive to the source code, object code, and any preparatory design material of a computer program. Other creative components expressed by a computer program such as the graphic user interface, sound elements, data file formats and programming languages fall to be protected under the InfoSoc Directive (provided that they constitute their author's intellectual creation).

The unsatisfactory lack of clarity can be highlighted by the example of an e-book with enhanced functionality such as embedded audio/visual media, animations, text highlighting, and other interactive elements. A lawful acquirer of the e-book then makes it available for download in a way that falls within the UsedSoft criteria.

The copyright work here is a complex, multi-layered work which is likely to fall within the protective realms of both the InfoSoc Directive (for instance, in relation to any images, text, music etc. shown on the e-reader device, tablet etc.) and the Software Directive (in relation to the underlying code that results in the end-user being able to enjoy the work via the graphic user interface on an appropriate device). 

Thus far, there is limited guidance from national courts (and none from the CJEU) on the application of the exhaustion principle to these types of complex works. However, the German Regional Court of Bielefeld's view was that UsedSoft was not applicable to downloaded e-books and audio books [see the JIPLP blog here] and the Amsterdam Court of Appeal recent shut down the e-book platform, Tom Kabinet, although it sidestepped the question of the scope of the exhaustion principle to e-books [see here and here]. It is  likely that a further reference to the CJEU will need to be made in due course to clarify the position. 

Is this how you feel right now?

For now, one thing is clear, which is that the application of the exhaustion or first sale principle to digital content will continue to be a contentious issue. The course taken by different jurisdictions is likely to be heavily policy-driven (as appears to be the case with UsedSoft). Competing interests will need to be balanced: allaying concerns about the creation of a second-hand market of perfect-quality digital copies at reduced costs to the detriment of the rights-holder whilst still facilitating the free circulation of goods. 

• Amazon Inc's US patent for a "secondary market for digital objects" including e-books: here
• For those in warmer climes than London, how to spot heat stroke in exhausted cats: here