Rethinking software licensing

Author: Eddie Powell

This article was first published by Solicitors Journal on 07 August 2012, and is reproduced by kind permission.

The recent Oracle judgment could trigger a radical change of approach to the resale and licensing of computer software, with implications going beyond narrow technology circles.

If you are not intimately acquainted with copyright law and competition law, then it is possible that you may have missed the decision of the European Court of Justice in case C-128/11 UsedSoft v Oracle. The ECJ ruled that, despite the fact that a user had agreed terms which prohibited the transfer of a software licence relating to software that he had downloaded from the internet, Oracle were not entitled to rely on those licence terms to prevent him from selling that software to a third party, so long as he had properly uninstalled that software from his computer first.

The key point was that the user of the software had paid Oracle a one-off fee for the licence, although a related maintenance contract which supplied updates and patches, required ongoing fees to continue the service. The one-off element meant, according to the ECJ, that the software was “sold” outright as if it were goods, meaning that the licensor had exhausted his rights to control the sale and distribution of that particular product.

Exhaustion principle

The exhaustion principle is specifically set out in directive 2009/24/EC on the legal protection of computer programs, which enshrines the principles of copyright protection for computer software.

The case should not be seen as one that is only relevant for techie law geeks. It does raise issues which could apply, for example, on the sale of a business. Where the target business has a key software, the licence terms of which prohibit transfer to third parties, the buyer may have less to worry about if a simple sale and transfer of “physical” possession of the code can be enough. In the UsedSoft case, the second-hand buyer would not even get a copy of the code in the sale, just the licence code which enabled it to use software it could download from the Oracle website for free.

But the case has potentially wider implications for online content. The directive, and the case expressly relates to “computer programs” and the UsedSoft case concerned an Oracle databank product that clearly was computer software, so there was no question about defining the scope of the rule. The same rule must therefore apply to someone buying any one-off purchase software, and what better example is there of such software than an iPhone app? It follows that a purchaser of an iPhone app should be able to transfer his app to a third party subject to the obligation to delete it first. So what is stopping everyone? Well, it is against the Apple App Store terms and conditions, for a start. The latest version of Apple’s Licensed Application End User Licence Agreement (18 July 2012) provides:

“You may not rent, lease, lend, sell, transfer, redistribute, or sublicense the Licensed Application and, if you sell your Mac Computer or iOS Device to a third party, you must remove the Licensed Application from the Mac Computer or iOS Device before doing so.”

Following the logic in the UsedSoft case, those terms are pretty much unenforceable. The problem is a technical one – there is no easy way of moving apps from one product to another. But that is a techie problem to which very quickly, I suspect, there will be a techie solution, and if it’s legal, it may well be an easy consumer-friendly one.

No definition

But there is another problem. Nowhere in the directive (or indeed in our domestic legislation) is “computer program” defined. So what about other online content? There must be a technical argument that downloaded code which renders content on the user’s device more than simply content falls within the definition of a computer program. If that is the case, then suddenly the possibility of a legitimate second-hand market for downloaded music, films or books looms onto the horizon.

The creative industries have endured enough over the years with illegal downloads without having to suffer the indignity of a second-hand market undercutting new product sales. However, I fear (from their perspective) that this is likely to happen.

The obvious way around this is for software and content providers to restructure their licences as time-limited. But the shorter you make the licence (to avoid it being a sale) the unhappier customers are likely to be forking out full price for the product, and whether a time limited licence would be enough to satisfy the ECJ that this was not actually a “sale” remains to be seen. Of course if we move away from sales to subscription cloud-based products, where it is difficult to argue that there is any outright sale, the issue will not arise. But many consumers still want to own what they buy.

Facing up to these kinds of issues is important for the technology and creative industries to make sure that the development of the law does not, just for once, get ahead of them.

Eddie Powell, Partner, Fladgate LLP (

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