Legally Flawed but Politically Sound. Digital Exhaustion of Copyright in Europe after UsedSoft

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ROGNSTAD O-A, Legally Flawed but Politically Sound? Digital Exhaustion of Copyright in Europe after UsedSoft, Oslo Law Review, V. 1, i. 1, 2014, 1

Type Article
Abstract The principle of exhaustion, or the first sale doctrine (US), in copyright means that once a copy of a work is put on the market with the consent of the right holder he or she will not be entitled to control the further distribution of the copy. It is well settled that the exhaustion rule applies to the distribution of tangible copies (books, CDs, DVDs etc), but its application to the online context is controversial. In the UsedSoft case (case C-128/11) the Court of Justice of the European Union nevertheless applied the exhaustion rule of the Computer Software Directive to a situation where ‘used licenses’ of computer software were passed on to third parties enabling them to download the software from the right holder’s website. The article discusses the legal premises and the policy implications of the decision, contrasting it also to the ReDigi decision of the US District Court of the Southern District of New York.
Link https://www.journals.uio.no/index.php/oslawreview/article/view/977
Topics Competition, Intellectual Property

Notes

ROGNSTAD, in this paper, deals with Oracle v. UsedSoft case, which has applied the exhaustion rule of art 4(2) of the DIRECTIVE 2009/24/EC on the legal protection of computer programs to digital downloads.

UsedSoft case's formal legal arguments

In his opinion, the CJEU's arguments fail in legitimizing the holding of the case.

In fact, to apply the distribution right's exhaustion principle to digital downloads, it is not only necessary to state that art. 4(2) - which deals with this principle - can apply to downloaded copies, but also that art. 4(1)(c) can apply to downloaded copies, and the CJEU forgets to do that.

ROGNSTAD therefore decides to verify by himself if the distribution right can apply to downloaded copies under European law. His answer is negative. Let's recapitulate his reasoning:

  • the Wipo Copyright Treaty states that the distribution right only applies to tangible copies (Agreed Statement to WCT Article 6) and that the communication right covers any act of communication to the public by wire and wireless means (WCT Article 8""), therefore also any act of online transmission;
  • even if the WCT does not prevent contracting parties from implementing the obligations under the treaties through a different scheme, as long as the EU has adopted the WCT rights scheme (which is confirmed by the CJEU both in UsedSoft and in Peek & Cloppenburg cases, and which emerges also from DIRECTIVE 2001/29/EC on the harmonisation of certain aspects of copyright and related rights in the information society, Recitals 28 and 29), this scheme should be followed;
  • therefore, under EU law, the distribution right only applies to tangible copies of the work (and therefore the fact that DIRECTIVE 2009/24/EC on the legal protection of computer programs seems to contain a broader definition of the distribution right - encompassing "any form of distribution to the public [...] of the original computer program or copies thereof"- doesn't matter);
  • this means that the download of a copy can't be seen as an act of distribution, and therefore article 4(2) can't apply to this situation; neither can article 5(1), because, if exhaustion principle doesn't apply, the second acquirer can't be seen as a lawful acquirer under art. 5(1).

We may reply to ROGNSTAD's argument underlining the legal value of Agreed Statements to WCT and suggesting a different interpretation of Agreed Statement to WCT Article 6.

UsedSoft case's policy arguments

The basic rationale behind the exhaustion rule is the respect of Articles 34 and 36 TFEU about the free movement of goods.

When dealing with services, the CJEU doesn't expressly refer to the principle of exhaustion, but the rationale behind its rulings follows that of exhaustion (in fact, Articles 56 and 57 TFEU deal with the free movement of services).

In fact, in both situations, "an important factor in distinguishing exhaustion and non-exhaustion in EU law seems to be whether or not the right holder is in a position to calculate the remuneration on the basis of the first act of exploitation" (p. 14, emphasis added).


Therefore, we can understand why DIRECTIVE 2009/24/EC on the legal protection of computer programs establishes an exhaustion participle only for the distribution right, and not also for the reproduction and communication rights.

However, in a situation like the one at stake in the UsedSoft case, we have - in ROGNSTAD's opinion - an act of communication to the public and an act of reproduction in which however it may be possible for the copyright holder to calculate the remuneration on the first act of exploitation.

Thus, even if the exhaustion principle is not still possible, because it applies only to the distribution right, the rationale behind it could be applied to sustain that the restrictions to the free movement of services - which would have followed the impossibility of re-transfer of the downloaded copies at stake in the UsedSoft case - would have overcome what is necessary to safeguard the specific subject matter of the intellectual property.

If the CJEU had applied the Treaty rules about the free movement of services instead of the principle of exhaustion of distribution right, "[t]he rights scheme of the Directives would [have been] supplemented under this approach by the free movement rules, but not be diluted by the application of the same rules" (p. 15).

" If [...] the legal grounds for digital exhaustion were switched from exhaustion of the distribution right to the treaty rules on free movement of services, exhaustion of the communication right and the reproduction right would occur to the extent that the rationale fro exhaustion provides for it, irrespective of the kind of work or protected subject matter involved" (p. 18).


ROGNSTAD however also questions if - when dealing with downloaded copies - the copyright holder is actually able to calculate the remuneration on the basis of the first act of exploitation, i.e. if a commercialization of digital copies through the Net can actually be assimilated to an act of distribution on material carriers.

The main difference is that intangible copies don't show a used appearance. Therefore "there is no real secondary market for "used" digital files since the quality of the product is the same" (p. 17). "Accordingly, it is possible to claim that allowing a market for "used digital (and intangible) copies" will undercut the position derived from the right holder's exclusive right. Hence, the calculated fee will no be "appropriate"" (p. 17).

"A possible response from the right holder can be to offer additional services that differentiate the "original product" from the "used product"" (p. 17).


Therefore - if we follow ROGNSTAD's reasoning - when we deal with IoT products' components (obviously if covered by copyright protection) which are provided through the Net, to understand if they can be transferred from the first acquirer to a second acquirer, first of all we must wonder if the copyright holder could calculate the remuneration on the basis of the first act of exploitation: this happens, for example, when the component at stake is not multiplied, but used by one person at time, provided that it doesn't require the right holder's recurring or continuing intervention in order to be routinely used by the customer.

We must nonetheless remember that the exhaustion principle doesn't apply to contracts for services (ROGNSTAD, p. 17, and Oracle v. UsedSoft, § 60): therefore, we must verify if the contract between the right holder and the customer can be qualified as a sale, applying the definition of sale provided by the UsedSoft case.

If these two conditions are satisfied, the copyright holder can't forbid the subsequent circulation of the component.

This should apply a fortiori when the component at stake is not covered by copyright protection, even if in this case we must verify what definition of "sale" can apply.


It may seem weird that it exists a principle of free circulation of services which allows to apply the rationale behind the exhaustion principle also to services, but the same principle can't apply to contracts for services.

To understand this apparent incompatibility, we must differentiate the notion of "service" from the notion of "service contract".

  • "Service contracts" are all contracts that can't be qualified as sales contracts. Sales contracts are contracts which involve the transfer of ownership of goods in exchange for the payment of a price. See for example DIRECTIVE 2011/83/EU on consumer rights, Articles 2(5) and 2(6).
  • "Services", according to the TFEU, art. 57, are : "Services shall be considered to be ‘services’ within the meaning of the Treaties where they are normally provided for remuneration, in so far as they are not governed by the provisions relating to freedom of movement for goods, capital and persons". Therefore, considering only the ratio between services and goods, services are all entities that can't be considered as goods.

For example, if a videocassette is rented, the contract is a service contract, because there is no transfer of ownership, but the provisions of the TFEU concerning the free movement of goods would apply, because videocassettes are goods, not services (see for example the CJEU judgement Warner/Christiansen of 1988).

ROGNSTAD's reasoning implies that the online service which allows the creation of the downloaded software copies is a service: in fact, the first acquirer obtains them through an act of reproduction and an act of communication to the public, and also the second acquirer obtains a copy through these two acts. But the product of these services is a copy (therefore, a good) whose ownership is transferred from the right holder to the first acquirer, therefore we can say that it is a sales contract.

In my opinion, it would have been more easy, and correct, to say that the downloaded copies aren't tangible goods, so the exhaustion principle can't apply. However, they are still goods, so the principle of the free movement of goods can apply, and - if a transfer of ownership takes place - we can speak about a sales contract.

It is true that, according to DIRECTIVE 2011/83/EU on consumer rights, Recital 19, "contracts for digital content which is not supplied on a tangible medium should be classified, for the purpose of this Directive, neither as sales contracts nor as service contract". However, an affirmation of that kind doesn't deny that intangible content could be the object of a transfer of ownership, and therefore further circulation should be possible when this transfer of ownership takes place.