EU law forbids the resale of non-original tangible copies of computer programmes

Southampton law student
Stephen Barratt

Last month the Court of Justice of the European Union (CJEU) issued its decision in Microsoft, a reference for a preliminary ruling from Latvia concerning the principle of digital exhaustion as applied to computer programmes. 

At the time of the decision, this blog did not comment on it. Thankfully, one of my talented students at the University of Southampton, Stephen Barratt, has come to rescue.

Here's what Stephen writes:

"In its decision on 12 October 2016, the Court of Justice of the European Union (CJEU) held that the derogations to the right of reproduction outlined in Article 5(1) and (2) of Council Directive 91/250/EEC cannot be interpreted so as to allow the resale of a back-up copy created in the event that the original material medium of the copy has been damaged, destroyed or lost. The exhaustion of the distribution right only permits the resale of the original material medium on which the programme was first acquired, and not also subsequent copies made.

Legal Context

This reference for a preliminary ruling concerned whether a person could rely on the exhaustion of the distribution right under Article 4(2) of Directive 2009/24/EC to sell lawfully a back-copy, where the original disk has been damaged (the production and use of which is permitted under Articles 5(1) & 5(2) of that directive). Because Directive 2009/24 came into force on 25 May 2009, and the alleged offences of the defendants had occurred place before this, the CJEU considered the application of the corresponding provisions of the now repealed Directive 91/250.

Facts

Between December 2001 and December 2004 the defendants sold more than 300 copies of computer programmes via online auction website www.ebay.com. These copies, including those of computer programmes whose copyright is owned by Microsoft, were not on the original disks. 

Criminal charges were brought against the defendants for, inter alia, the unlawful sale as part of a criminal organisation of objects protected by copyright which were reproduced or used in any other way that infringes copyright (Article 149(3) of the Latvian Criminal Law Code, in the version in force on 17 October 2002). 

The defendants were found guilty at first instance, but in appeal the relevant judgment was partly set aside. The case subsequently reached the Senate of the Latvian Supreme Court, which annulled the judgment and sent the case back to the appeal court for re-examination. 

Having doubts regarding the application to the case at hand of the CJEU judgment in UsedSoft [Katposts here], stayed the proceedings and sought guidance from the CJEU as to the application of the exhaustion doctrine to the sale of non-original tangible copies of computer programmes where the original disk can no longer be used because it is damaged, and the original acquirer has erased or ceased to use his copy. 

Analysis

The court began by exploring the concept of exhaustion of rights under Article 4(c) of Directive 91/250, in particular the meaning of ‘sale’ which had been central to, and given broad interpretation to, in UsedSoft. In the case the CJEU held that the grant of an unlimited licence together with the possibility to download a copy of a computer programme is tantamount to a first sale, which – as such – exhausts the right of distribution under Article 4(c) so that a further resale of that copy cannot be opposed by the rightholder.

The court explained why, in light of the judgment in UsedSoft, it could not simply be stated that the exhaustion of the distribution right applies only to the original material medium on which the computer programme was sold. This is because the court in UsedSoft had interpreted Directive 2009/24 Article 4(2) as making no distinction between tangible and intangible form. 

The court outlined the right of reproduction granted in Directive 91/250 and the exceptions in Article 5 of that directive. The ‘necessary use’ exception which corresponds to Directive 2009/24 Article 5(1) was applied by the court in UsedSoft to permit the resale of software constituting the purchase of a used licence of unlimited duration and the download from the rightholder’s website of a copy of the original software.

Decisively, the court arrived at a strict interpretation of Article 5(2), which permits the creation of a back-up copy. This exception could not be used to allow the sale of used computer programme via a backup disk. It existed only to allow the lawful acquirer to continue to use the programme in the event that the original medium was damaged. 

The court concluded that Article 4(a) and (c) and Article 5(1) and (2) of Directive 91/250/EEC must be interpreted as meaning that, although the initial acquirer of a copy of a computer program accompanied by an unlimited user licence is entitled to resell that copy and his licence to a new acquirer, he may not, however, in the case where the original material medium of the copy that was initially delivered to him has been damaged, destroyed or lost, provide his back-up copy of that program to that new acquirer without the authorisation of the rightholder.

A surprised Billy sees a CD-ROM drive
for the first time

Practical Significance

It is difficult to reconcile the flexible, purposive application of Article 5(1) in UsedSoft with the restrictive reading of Article 5(2) in the present case. 

Technology has progressed more quickly than the law in this area, and the CJEU in UsedSoft relied on a purposive approach to ensure that exhaustion subsisted in relation to types of transactions not envisaged by EU legislature. Central to that judgment was that protection is afforded to the intangible form of a computer programme and not the medium which carries it. In light of that, it is difficult to see how the strict interpretation of Article 5(2) in the present case is coherent. 

The court ought to have recognised that the material medium on which a computer programme is transmitted is no longer relevant post-UsedSoft. It should have seen the transaction in the same terms as that judgment, i.e. the transfer of a used unlimited licence plus the intangible form of the programme. The tangible form being irrelevant, so is Article 5 (2), and therefore the court could have relied on Article 5 (1) ’necessary use’ exception to allow the acquisition of a copy of the programme from the non-original disk.

Perhaps the court was minded not to hand criminals an easy means of infringing rights. It would certainly be hard to establish whether a non-original copy was legitimately obtained from a purchaser who had made sure he no longer had access to the programme, or that it was not one of many copies made from a single original. However, in UsedSoft the court was happy to place the onus of preventing fraud on the rightholder, an approach it could have taken here.

The wider significance of this case is limited. 

Its application is confined to the relatively narrow factual situation of the production of copies of computer programmes on non-original medium. The offences in question took place over a decade ago. Many new computers no longer have CD-ROM drives, because programmes and other digital content are downloaded directly from the internet. With this in mind, UsedSoft has far wider application because it addresses more current practices. However, the growth of Software as a Service and cloud-based computing are moving us away from that judgment too. It is possible that, in the near future, the concept of exhaustion will become essentially inapplicable in the digital sphere. 

The provisions of Directive 2009/24, named lex specialis and freed from the shackles of Directive 2001/29/EC, were able to sustain the progressive, purposive interpretation of the court in UsedSoft. However, a return to orthodoxy via a strict interpretation of Article 5(2) in the present case is problematic in that it misunderstands, or chooses to ignore, the intangible nature of software. The CJEU could only afford such a backwards step because the facts of the case are quickly fading into irrelevance."

Thanks so much for your analysis Stephen!