Europe’s highest court has ruled that software owners have potentially greater rights to prevent the resale of back-up copies of their works than may exist in relation to the original licensed programs.

The Court of Justice of the European Union (CJEU) has ruled that software back-up copies cannot be resold without the rights-holder’s permission even where the original purchased copy of the software has been damaged, destroyed or lost. The court differentiated between non-original back-up copies and originally purchased copies of software programs.

Not only original tangible but also intangible copies of software programs are subject to the EU doctrine of exhaustion (in the United States known as the “first sale” doctrine) and therefore, where originally sold subject to a perpetual user license, can be resold by the licensee without infringing the original copyright. The question arose (via a case before the courts in Latvia) whether the same rules applied to the resale of back-up copies of software programs.  And, to the delight of software rights-holders, the CJEU took a more restrictive path, interpreting narrowly the right under EU law to make back-up copies for legitimate use and refusing to legitimise the onward sale of back-up copies without the rights-holders’ consent.

The Distribution and Reproduction Rights of the Copyright Holder

A copyright holder has an exclusive right to distribute or to authorise any form of distribution of original computer programs or the programs’ copies to the public. If a tangible or intangible copy of a computer program is sold in the EU or European Economic Area (EEA) by the rights-holder’s permission with unlimited usage rights, the rights-holder’s distribution right is exhausted, provided that certain preconditions are fulfilled (e.g., the reseller must not retain any usable copy of the resold software), meaning that the rights-holder can no longer prevent the resale of legitimately acquired copies of the program. Software copies licensed for use for a limited term only (so called subscription models) are not subject to exhaustion and cannot be resold without the rights-holder’s consent. For full explanation of the current EU interpretation of the principle of exhaustion of the distribution right, view our previous Alert here.

In addition to this exclusive right to distribution, the Computer Programs Directive (Directive 2009/24/EC, herein after the “Directive”) provides the rights-holder with an exclusive right to authorise (or not) the permanent or temporary reproduction of a computer program unless the reproduction of such media is allowed under exceptions listed in the Directive.

In October 2016, in the case of Aleksandrs Ranks and Jurijs Vasiļevičs, the CJEU considered conditions relating to reproduction of non-original back-up copies of computer programs and whether the rule of exhaustion applies to such back-up copies.

The Case

In Latvia, Mr. Ranks and Mr. Vasiļevičs were charged with unlawful sale of copyright-protected Microsoft software and intentional unlawful use of Microsoft’s trade mark.

The pair sold several thousand non-original tangible copies of computer programs through an online market place without the consent of Microsoft. Microsoft’s exclusive right to distribution would be infringed by the sale of the non-original tangible copies unless the resale was deemed to be legitimate under the rule of exhaustion. Microsoft also has the exclusive right to reproduction and can prohibit making of back-up copies of its software unless the making of a copy falls under the Directive’s exceptions.

The Criminal Law Division of the Riga Regional Court asked the CJEU whether, under Articles 4 and 5 of the Directive, a person who acquired a used back-up copy of a computer program that was stored on non-original material medium (like a CD-ROM or DVD-ROM) can benefit from the exhaustion of the right to distribute a copy of that computer program and resell such copy to a third party in circumstances where the original material medium of that program, purchased by the initial acquirer, has been damaged if the initial acquirer has erased his copy or ceased to use it.

The Judgment

The CJEU ruled that the holder of the copyright in a computer program who sold a copy of the program on a material medium in the EU with an unlimited user licence cannot object to subsequent resale of that copy even if its contractual terms prohibit such resale.

Furthermore, the CJEU confirmed the principle from the UsedSoft decision that the rule of exhaustion contained in Article 4(2) of the Directive applies to both tangible as well as intangible software copies, including the right of the new ‘lawful acquirer of an unlimited licence for the use of a used copy of a software to download that software from the copyright-holder’s website’.

However, the present questions put to the CJEU by the Latvian court focused on the resale of a used copy of a computer program that was not made or distributed on an original medium with the rights-holder’s consent, like in UsedSoft.

Articles 5(1) and 5(2) of the Directive specify exceptions to copyright holder’s exclusive right of reproduction. One of the exceptions in Article 5(2) relates to reproduction of back-up copies. Back-up copies can be made without the copyright holder’s authorisation if, firstly, they are made by a person who has a right to use the computer program and, secondly, such copies are necessary for the authorised person’s licensed use of such program.

CJEU stressed that the exception in Article 5(2) has to be interpreted strictly. Therefore, a back-up copy reproduced for resale purposes is not considered to be made ‘only to meet the sole needs of the person having the right to use that program’. For this reason, even in circumstances where the original material medium is damaged, destroyed or lost, the acquirer of the back-up copy cannot resell it to a third party.

Comment

Businesses as well as individuals that legitimately obtain their software copies cannot be prevented from making back-up copies if they require it for their own necessary use. If the original seller imposes contractual provisions prohibiting the making of software back-up copies, such provisions will be null and void.

If a person unlawfully acquires a copy of the software, they will not be able to make a back-up copy, and, consequently, the back-up copy cannot be lawfully resold. Effectively, the Aleksandrs Ranks and Jurijs Vasiļevičs decision limits the application of the exhaustion rule to back-up copies. Back-up copies cannot be resold even in instances where a person acquired the original copy lawfully because the process of making such back-up copy for commercial resale would infringe the strict conditions under which back-up copies can be made, namely the second condition of making a copy for the sole use of the authorised person.

The main distinguishing feature between the Aleksandrs Ranks and Jurijs Vasiļevičs case and the UsedSoft case was the presence of a ‘non-original material medium’. In fact, there was nothing to suggest that Mr. Ranks and Mr. Vasiļevičs lawfully acquired their software copies from Microsoft’s website or with Microsoft’s permission. With this decision, CJEU ensures that software copies obtained illegally cannot be resold by claiming that the distributor did not know where the back-up copies came from. Therefore, making the distinction between different types of media seems to be policy-driven.

It should be also noted that the CJEU spent several paragraphs of this decision justifying its much criticised UsedSoft decision. The CJEU expressly (i) upholds its view that the principle of exhaustion of the distribution right to an intangible copy that is sold in the EU with the copyright holder’s consent granting the first acquirer a perpetual licence also applies if not such original copy of the software is resold and actually transferred to the new acquirer but, in fact, the perpetual licence to use such software is re-sold, and (ii) therefore, considers the new acquirer being entitled to download a new copy of the software from the copyright holder’s website under the exception set out in Article 5(1) of the Directive.

The CJEU is increasingly imposing pragmatic policy-driven limits to its principles, which could have been observed a month ago in the case of GS Media, where the definition of what amounts to a “communication to the public” has been construed outside of the boundaries of the Copyright Directive. With continuous technological developments, the CJEU seems to be going down the path of readjusting the rule of exhaustion to each separate medium, which will lead to greater amounts of uncertainty in the future for distributors and an enormous workload for the European court. The various possibilities of applying copyright exhaustion have not been exhausted yet.

Conclusion

Original software copies can be resold under the rule of exhaustion where the original distribution as done on an unlimited-licence basis.  However, software back-up copies can be used in the EU only for the necessary use of the legitimate acquirer and not for resale without the permission of the copyright holder.

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