Digitally Exhausted

Can you sell your second-hand software, ebooks, computer games, digital music and other downloaded content?

Given the explosion in the sale of digital content in the last few years (e.g. ebooks, music and game downloads etc.) it is not surprising that litigation relating to digital content has also increased. One key battlefield currently is over digital exhaustion which is the concept that once a copy of a digital item has been sold, by or with the copyright owner’s consent, to a purchaser then the copyright owner’s right to prevent that copy being sold is exhausted enabling the purchaser to sell their copy of the digital item on a second-hand market.

Clearly there are some technological issues to overcome before copyright owners are likely to warm to the idea of digital exhaustion in practice. One key issue is how you ensure that there is only ever one copy of the digital content in existence. The original purchaser may purport to sell their digital content to a third party but actually retain a copy on their digital devices.

Leaving aside such technological arguments we have focussed below on what can be summarised from case law as to the circumstances in which legal digital exhaustion may or may not apply. This is by no means an area where the law is settled but we hope this article sheds some light on current thinking on the subject.

ReDigi Inc (USA)

Although not directly applicable from a jurisdictional standpoint, it is worth noting briefly the USA’s approach to this issue. ReDigi Inc described itself as a “virtual” marketplace for “pre-owned” digital music. The exhaustion principle in the USA is known as the “first sale defense” and the court found that it “…cannot of its own accord condone the wholesale application of the first sale defense to the digital sphere…” finding that ReDigi had directly infringed copyright owned by Capitol Records LLC.

It is interesting to note that during the process of selling and transferring a “second-hand” digital copy of music ReDigi’s system detected copies of the original digital music on the seller’s computer and attached devices to prompt the user to delete them but it could not detect copies stored in other locations and it did not automatically delete the files.

UsedSoft (3 July 2012)

UsedSoft traded in used software licences and Oracle sought to prevent onward sales by their customers, who had previously downloaded Oracle software. The Court of Justice of the European Union (“CJEU”) was asked various questions by the German Federal Court relating to the Software Directive and the application of exhaustion principle set out in Article 4(2) of that directive to downloaded software.

The CJEU decided that a copy of software would be “sold” for the purposes of Article 4(2) “if the copyright holder who has authorised, even free of charge, the downloading of that copy … has also conferred, in return for payment of a fee intended to enable him to obtain a remuneration corresponding to the economic value of the copy of the work … a right to use that copy for an unlimited period”. It followed therefore that the copyright holder’s rights are exhausted at the point of sale and it would not be able to prevent the onward sale of a licence to that a third party. The CJEU did note however that if the original acquirer is permitted to allow a certain number of users to use the software which is more than his requirements then he is not permitted under the exhaustion principle to divide the licence so as to sell the right to use the software in respect of the extra user rights that he does not need.

In a nutshell: Software sold on a physical medium or downloaded, where the original purchaser is granted the right to use the software for an unlimited period for consideration, may well be subject to the exhaustion principle.

Nintendo (23 January 2014)

This case did not directly deal with the exhaustion principle but it did clarify the CJEU’s view on the nature of the Software Directive and whether the conclusions reached in UsedSoft can be applied to works covered by the Information Society Directive (“the InfoSoc Directive”).

The CJEU held that the Software Directive “constitutes a lex specialis” and that “the protection offered by [the Software Directive] is limited to computer programs. As is apparent from the order for reference, videogames, such as those at issue in the main proceedings, constitute complex matter comprising not only a computer program but also graphic and sound elements, which, although encrypted in computer language, have a unique creative value which cannot be reduced to that encryption. Insofar as the parts of a videogame, in this case, the graphic and sound elements, are part of its originality, they are protected, together with the entire work, by copyright in the context of the system established by [the InfoSoc Directive].”

Given what the CJEU held above it is clear that they did not consider themselves bound by the conclusions reached in UsedSoft when dealing with exhaustion of digital works other than pure computer programs.

In a nutshell: The conclusions reached in UsedSoft (that the exhaustion principle may apply to software in certain circumstances under the Software Directive) may well be inapplicable to similar questions asked in relation to other copyright works covered by the InfoSoc Directive (i.e. works other than pure computer programs).

Art & Allposters (22 January 2015)

Again this case does not deal directly with digital exhaustion but it does provide some clarity on current CJEU thinking in this area. This case related to a company that bought posters of copyright-protected paintings (put on the market with the copyright owner’s consent) which then used a chemical process to transfer the ink from the paper poster onto canvas. The company then sold the canvas reproductions.

The CJEU was asked for clarification on certain aspects of the InfoSoc Directive including whether the exhaustion principle applies where a reproduction of a protected work, after having been marketed in the EU with the copyright holder’s consent, has undergone an alteration of its medium. What is interesting in relation to digital exhaustion is that the CJEU referred to the fact that Article 4(2) of the InfoSoc Directive refers to “that object” and that Recital 28 of that directive refers to a “tangible article” and they held that “Accordingly, it should be found that exhaustion of the distribution right applies to the tangible object into which a protected work or its copy is incorporated…”.

In a nutshell: The above suggests that the exhaustion principle as set out in the InfoSoc Directive only applies to the tangible/physical form of a work and therefore digital exhaustion in general is unlikely to apply outside of the pure software sphere in UsedSoft and the Software Directive.

Conclusion

The CJEU will continue to grapple with these issues for some time to come but currently, the exhaustion principle in the digital sphere is limited to pure computer programs in specific circumstances, and the second hand market for other downloaded items still has some way to go both legally and technologically.

If you wish to discuss any of the issues raised in this article please contact Simon Miles, Charlie White or any member of the Edwin Coe Intellectual Property team.

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