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When is a sale not a sale and vice versa? :: Laurence Kaye

When is a sale not a sale and vice versa? :: Laurence Kaye

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Published by: adorkable81 on Oct 01, 2012
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 Authorised and Regulated by the Solicitors Regulation Authority. Vat no: 796 6546 62SRA No. 364720
WHEN IS A SALE NOT A SALE, AND VICE VERSA?
Imagine going into a car showroom, signing the paperwork to buy a car and driving away, with neither you northe dealer being exactly sure what the deal was. You thought you had bought the car and were therefore free toeither keep it or sell
it. The dealer, on the other hand, thought that you didn’t own the car outright and couldn’t
sell it on without his permission.This never happens
 –
 
right? Well, in “the real” world probably not, but in the world of cre
ative content andsoftware, it does happen.Take the recent controversy surrounding Bruce Willis where he was allegedly upset that he was unable tobequeath his iTunes library
to his children. Although press reports of Bruce’s threats to exercise serious
 courtroom muscle against Apple turned out to be unfounded, the story did highlight a very important issue
 –
 when it comes to purchases in the digital world, be it software, mp3s, e-books or anything else, are we allmaking purchases without knowing exactly what the deal is?
3 key lessons 
 A  recent ruling by the European Court of Justice (ECJ) involving software publisher Oracle and UsedSoft, a vendor of pre-owned software licences, has highlighted that in the case of software downloads there really iswidespread confusion on both sides of these transactions regarding what rights a buyer walks away with after
purchasing software. As we’ll see, the case demonstrates three things. First, if the economic substance of thetransaction is a sale, then this doesn’t change if the language talks about a limited licence, meaning that the
buyer is generally free to re-sell. Second, even if it is a sale, there is a big caveat: the owner can still control
rental of the software. Put another way, business models (e.g. ‘software as a service’) built on rental do not
result in loss of control over re-distribution of the software. Third, although the case related to computersoftware, there are some important lessons for other forms of creative content.
It’s all about control 
 
So what was the case all about? Oracle claimed that UsedSoft had infringed its copyright in the software on the
basis that Oracle’s customers (and subsequently any reseller such as UsedSoft) had no right to distribute
purchased copies of its software by re-
selling them. UsedSoft’s position was that, as with cars and other “realworld” purchases, once a
customer buys software for lifetime use, including via download, they have the right tosell it on without requiring any permission from the seller.
Oracle disagreed. It pointed to its licence terms, particularly the words “non
-
transferable”, to argue t
hat real
world rules did not apply to software downloads. As far as it was concerned, the software had been ‘licensed’,not ‘sold’, so it could still control what the buyer could do with its software, even after sale.
The case was referred by the German courts to the ECJ for clarification on certain aspects of the Copyright andSoftware EU Directives. We
’ll
examine the case in a moment and see whether it applies to other forms of digitalcontent and not just software. But what is the nub of the problem? For the software and creative contentindustries, new business models are built on licences but, as these cases show, there is a lack of clarity about
exactly what constitutes a “licence”.So what exactly is a “licence”? What does the consumer or busin
ess customer get? A typical provision in aconsumer service talks about a:
“….limited, non 
-exclusive, non-transferable, non-sublicensable license to access and make personal and non- 
commercial use of the [content]”.
 
This isn’t an academic legal debate bur
ied inimpenetrable online terms and conditions. If a licence is in fact, a sale, then the consumer is free to give away orsell the content like 2
nd
hand goods on eBay. Similarly, if the licensee is a trade customer, it can re-sell or dealwith the digital content without requiring any further permission from, or payment to, the content provider.
 
 Page 21 October 2012The real
moral of the story is that the creative content industries should not leave it to the courts to “retro
-
design” business models. If the substance of the transaction is a sale then that‘s how it should be described
 based on the economic business model. If, on the other hand,
it’s a form of exploitation such as rental then that
should be reflected clearly as well. That was the lesson in the
UsedSoft v. Oracle 
case where the bottom line of the ruling was that if a business charges a licensing fee for software that represents the entire economic value of 
that copy’s useful life, whether downloaded or sold on physical media, the transaction will be treated as a “sale” even if the licence terms state that the licence is “non
-
transferable”. It can therefore be lawfully resold in the
same way that a car or any physical product containing copyright material can be resold as long as the seller firstdeletes or makes his copy unusable.
Case background 
The ECJ ruling in 
 clarified two main points on the interpretation of the Software Directive,namely that:1.
 
u
nder Article 4(2) of the EU Software Directive Oracle couldn’t prevent subsequent sales of a copy of its
downloadable software, including any updates, after it had charged a fee
“corresponding t 
o the economic value of the copy of the work 
” on its first sale.
The ECJ ruled that by charging fee reflective of the economic value of the software Oracle had effectively transferred the ownership of its rights in thatcopy to the purchaser and therefore
had ‘exhausted’ its rights to further distribute, and be
furtherremunerated for, that copy. So the ECJ
agreed with UsedSoft that the ‘exhaustion of rights’ principle
applied. S
imilar to the ‘first sale’ doctrine in the US
, this principle in EU law restricts the ability of arightsholder to control a physical copy of an item containing their work, say a book, by causing that
control to be ‘exhausted’ after the first sale of that copy. It is by virtue of this principle that a number of 
traders have lawfully created a secondary market for a variety of second hand goods, including books,CDs, computer games, computer software, DVDs etc. However, the court held that the seller mustrender his copy of the software unusable (e.g. by deleting that copy) for the resale to be lawful.Referring back to our example, it would hardly be fair to the car manufacturer if you could sell your carand somehow retained the benefit of it.2.
 
Oracle couldn’t prevent
a purchaser to whom a copy had been resold (such as UsedSoft or its customers)from copying the software in order to use that copy because, although the exhaustion principle does not
apply to Oracle’s reproduction right, u
nder Article 5(1) of the Software Directive
a “lawful acquirer” can
reproduce the software to m
ake use of it for its “intended purpose”.
 The court did however point out a caveat: volume licences must be sold as a whole as the partial resale of amulti-user licence would involve the seller continuing to use a usable copy.
Case Analysis 
The ECJ rulin
g marks a considerable shift as to where the courts draw the distinction between a “licence” and a “sale” by applying an “economic value” test. By doing so the case clarifies, at least where software is concerned,
that a transaction where a customer is ch
arged a ‘one time’ fee which represents the economic value of the
software will be treated like a real world sale and not a time-limited licence or rental. And just as with the sale of a car, this means a buyer is free to sell the software on to whomever he or she chooses.

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