In the last couple blog posts, we talked about best practices to ensure that your website Terms of Use are enforceable as a contract with your customers.  We talked about the different kinds of “wrap” agreements – “clickwrap,” “browsewrap,” and the far more familiar “shrinkwrap” agreement that is attached to every piece of software you buy off the shelf.  “Wrap” agreements of any kind that are attached to software generally will say that your right to use the copy of the software you just acquired is by license only.  For reasons explained below, it is highly unlikely that you have actually “purchased” software any time in recent history.

And now it appears that we need to take a much closer look at the whole concept of transferring the right to use software under a license, whether it’s “shrinkwrap” or otherwise, at least in Europe.

Image courtesy of Giovanni Sades / FreeDigitalPhotos.net

Rightsholders’ industries are faced with a bit of a nuisance in terms of transferring products to consumers that contain copyrighted material.  When I buy Tom Kimmel’s gospel CD (I use this example because it was the last CD I bought.  I also think you should pick it up too) I am perfectly entitled to sell my copy of the CD to my neighbor after I’ve listened to it a bunch of times and can carry the tunes around in my head.  This is the doctrine of “first sale,” and it is codified in the Copyright Act at 17 U.S. Sec. 109.  This first sale doctrine is what allows MacKay’s and the Great Escape and Ebay to be in the business of selling used CDs, books, and video games.  The first sale doctrine is what allows me to “dispose of the possession” of a particular copy of a work without permission from the owner of the copyrighted content that exists on that copy.  The whole system exists not without some annoyance to record labels, book publishers, game producers, and the like.  It would be much better for them, of course, if everyone who wanted a copy of Tom Kimmel’s CD had to buy it from Kimmel’s record label for $18.99 per CD, instead of having the option to go into MacKay’s and pick it up for five bucks.  But there is some level of comfort for rightsholders – I can not upload that Tom Kimmel CD onto my computer hard drive before I sell it to my neighbor.  I have to completely “dispose of the possession” of that copy.   Book publishers can presumably maintain some level of comfort that copies of their works are not being made for the consumer to hold onto before the consumer delivers the work to the secondary marketplace. Rightsholders whose content is distributed on CD or DVD are probably a lot less sure these days. (Remember ReDigi?)  And there is no question that the problem is particularly acute for owners of software, whose works must be copied onto a computer before they can ever be used.  How likely is it that we all strip Microsoft Office off of our hard drives before we transfer the CD-Rom we picked up at Best Buy to our co-worker?

So rightsholders, and in particular software companies, started to figure out ways to deal with the “first sale” problem.  Essentially, they just quit “selling.”  No first sale, then no second sale.  Presto!  Instead of selling a copy of Office, Microsoft would simply license it to you under a perpetual but non-transferrable license with a bunch of other restrictions about not modifying or reverse engineering the software.  This is what that license that comes with every box of software you buy off the shelf or program you download is all about.  You are agreeing to the terms of the license when you “break the shrinkwrap,” open the box, click to download, or whatever.  This regime of contracting around the first sale doctrine is what prevented Mr. Vernor from reselling on Ebay the copy of Autodesk that he had purchased at a garage sale.  (Under the licensing regime, the garage sale wasn’t an authorized transfer of the software either, but the procedural history of the case meant that the garage sale operator didn’t get sued.  Lucky guy.)  In that case, the Ninth Circuit Court of Appeals laid out some factors for determining whether the initial transfer of software was a sale or a license.  Under Vernor, if a rightsholder calls it a license, restricts the user’s ability to transfer the software, and imposes use restrictions, then the transfer is probably a license and hence not subject to the first sale doctrine.

That’s the situation in the United States, and was more or less the presumed regime in Europe as well, at least until this summer.  But in July of this year, Oracle sued a company called UsedSoft GmbH in Germany.  UsedSoft is essentially a clearinghouse for selling previously used software that is under license, including various Oracle programs.  Oracle sued in Germany, and when the case went up to the German Federal Court of Justice, that court asked the European Court of Justice (ECJ) for some clarification on a few issues, namely, whether the equivalent first sale language in the EU Directives applied to a license of software.  The ECJ took a wholly different position then did the Ninth Circuit in Vernor.  As of July, in the EU, “the right of distribution of a copy of a computer program is exhausted” if the copyright holder has transferred, for fair market value, “a right to use that copy for an unlimited period.”  Perpetual licenses are subject to first sale in the EU no matter how loud the rightsholder screams that the transfer is a license, and that the copy being licensed is non-transferrable to a third party.  (You can read the whole opinion in English here).

So that license wrapped around the box of Microsoft Office bought in a store in Paris?  Well, the terms in that license that say that the customer can’t reverse engineer or modify the software are (for now) still enforceable.  But the part that says she can’t sell it?  Il est sans mérite (as long as the subsequent sale is to another EU citizen).

The ECJ did thwart outright pandemonium in the offices of the major software companies by at least stating that such licenses are not divisible when transferred by a consumer to a third party.  In other words, if I have 50 seats for an Oracle program, I have to transfer all 50 seats at once.  I can’t divide the license.  (The court makes no mention of the EU Directive from whence this particular caveat comes, but the rightsholders don’t seem to be asking for clarification).  And we can rest assured that the software companies whose transfer of products to customers and subsequent control of downstream commerce depends on the “shrinkwrap” regime are all acutely aware of this case in Europe.

For now, though, for our users in the U.S., Vernor is still the law.  You still can’t put your used copy of Microsoft Office or Autodesk up on Ebay.

Vivre l’Europe!