In a surprising judgment, on 3 July the European Court decided that end users of Oracle software could resell their software licences without Oracle’s consent and that licence terms that prevented them from doing so were unenforceable. We examine the case and what it means for the software industry in Europe.
Like many software houses, Oracle makes software available for download electronically under perpetual, non-transferable licences that prevent them from being sold to anyone else without Oracle’s consent.
UsedSoft set up a business in Germany buying and selling “used” software licences, including some of these Oracle licences. Not surprisingly, Oracle sued UsedSoft as the sales clearly breached Oracle’s licence terms.
Once a copy of a software program has been sold in the European Union, European law1 does not generally allow anyone to prevent that copy being resold. However, Oracle argued, in line with most commentators, that:
- Oracle software is licensed and not sold and in any event the law would only apply to copies on a physical carrier such as CD-ROM and not to downloads; and
- Even if Oracle could not stop copies being resold once it had supplied them, anyone who acquired them would not be able to use them as they would not have the necessary licence to do so.
The court decided that:
- A perpetual licence is equivalent to the sale of a copy of the software and it does not matter whether the copy is supplied on a disk or by electronic download; and
- A purchaser of such a “used” software copy could use it as the law gives them the right to make the copies they need for its use regardless of whether Oracle’s licence terms were transferable to them or not.
The Ruling Related to Use in Germany, So Does It Extend to the UK?
Probably. The ruling was based on a European Union directive (Directive 2009/24) which each European Union country is required to implement, so it should apply across the EEA.
Although the UK government did not directly implement some elements of the directive (particularly the express statement that a software owner’s distribution right is exhausted on first sale), this appears to be because the government considered that they were already reflected in English law. English copyright law does appear to permit restrictions on assignment of licences of electronic works2, but it is likely that a court would interpret these in a way that complies with this ruling.
Does This Ruling Apply to All Types of Software Licences?
No, the ruling currently only applies to perpetual licences. It does not cover licences granted for a limited term. One option for software houses who want to retain control over licence transfers may therefore be to move to a term licence model.
Does the Ruling Apply to Software As A Service?
No, the ruling would not cover true Software As A Service offerings as these are treated as the supply of services rather than the licensing of software. However, software houses need to be careful to ensure that their terms properly reflect this and are not drafted as a perpetual licence coupled with some form of hosting arrangement.
If You Have a Licence for 50 Concurrent Users Could You Sell Only 25?
No. The court made it clear that you cannot split licences. Software houses may therefore want to draft their licences so that if additional concurrent users are purchased they are treated as part of the existing licence rather than as a separate stand-alone licence.
Can the Original Licensee Retain a Copy of the Software After It Transfers Its Licence?
No, it must delete all copies of it. However, software houses may want to include terms to expressly deal with this and to give them the right to audit compliance.
How Does the Ruling Deal With Support and Maintenance Contracts?
The ruling does not apply to support and maintenance contracts and so software houses can still require these to be non-transferable. However, a purchaser of a "used" software licence is entitled to the benefit of any patches, updates etc. released before the transfer. It is not clear what would happen after the transfer if the support and maintenance contract is not terminated. Therefore, this is something that software houses might want to deal with expressly.
What Should Software Houses Do Now?
Review their licence terms and consider the changes they may need to make to deal with transfers that they are now obliged to permit and minimise the associated risks. This is particularly important as retaining nontransfer clauses may not just be unenforceable but could also breach EU competition law.
For information on how we could help with any software licensing questions, please contact one of the Squire Sanders lawyers with whom you routinely work.
1 Directive 2009/24 which each EEA member state is required to implement in their own national laws
2 The Copyright, Designs and Patents Act 1988 s50C and s56