MICROSOFT AND THE LIKES’ HEADACHE: IN THE WAKE OF THE SURPRISING JUDGMENT OF THE COURT OF JUSTICE OF THE EU IN ITS 5TH ANNIVERSARY

By: Michal Chudzik*

I. Introduction

When the European Parliament and the Council of the European Union pushed through the Directive 2009/24/EC of 23 April 2009 on the Legal Protection of Computer Programs (Directive 2009/24),[1] everybody thought that the real purpose of the Act was the protection of the computer programs, and by implication, protection of the right holders.  Only a few, if anyone, could predict otherwise.  The surprise this time, as many times in the past, came from the chambers—this time mighty Grand Chamber—of the Court of Justice of the European Union (henceforth the “CJEU” or the “Court”), who, among other things, overlooked the rule of primacy of international agreements and managed to define “nothing” as a “copy.”

July 3rd, 2017 marked the fifth anniversary of the issuance of the judgment of the CJEU in case C-128/11 (henceforth the “Judgment”)[2] that defies logic and for many right holders, especially Microsoft, has been a nightmare ever since.  All this commotion started at the German courts in the litigation of the two companies: Oracle International Corp., which develops and markets computer software, and UsedSoft, which markets “used” computer programs.

Oracle distributes the software mainly by having the customer download a copy of the computer program directly to his/her computer from Oracle’s website in exchange for one-off payment, getting the non-transferable right to use the software for an indefinite period.

Oracle brought proceedings in the Landgericht München, seeking an order that UsedSoft cease its practices of selling “used” software—regarding the former’s computer programs.  The court allowed Oracle’s application.  UsedSoft’s appeal against the decision was dismissed; therefore, they appealed to the Bundesgerichtshof, the Federal Court of Justice.

The Bundesgerichtshof decided to stay the proceedings and referred the following questions to the Court, for a preliminary ruling under Article 267 TFEU[3] (for the convenience of reference, the order of questions differs from that in the Judgment):

1.  Is the right to distribute a copy of a computer program exhausted in accordance with the first half-sentence of Article 4(2) of Directive 2009/24 when the acquirer has made the copy with the right holder’s consent by downloading the program from the Internet onto a data carrier?

2. Is the person who can rely on exhaustion of the right to distribute a copy of a computer program a “lawful acquirer” within the meaning of Article 5(1) of Directive 2009/24?

3. Can a person who has acquired a “used” software license for generating a program copy as a “lawful acquirer” under Article 5(1) and the first half-sentence of Article 4(2) of Directive 2009/24 also rely on exhaustion of the right to distribute a copy of the computer program made by the first acquirer with the right holder’s consent by downloading the program from the Internet onto a data carrier if the first acquirer has erased his program copy or no longer uses it?

II. Exhaustion of the Right to Distribute the Copy of the Computer Program

In accordance with Article 4(2) of Directive 2009/24, the first sale in the Community of a copy of a program by the right holder or with his consent shall exhaust the distribution right within the Community of that copy, with the exception of the right to control further rental of the program or copy thereof.[4]

Before this Directive became law, there was no doubt that the exhaustion of the distribution right of a copy of computer program referred only to transfers of software incorporated in a tangible medium, whether it be a CD-R, a DVD, or the whole computer with a program installed on it.  Recital 28 in the preamble to Directive 2001/29 of the European Parliament and of the Council of 22 May 2001 on the Harmonization of Certain Aspects of Copyright and Related Rights in the Information Society (henceforth “Directive 2001/29”),[5] which preceded the current Directive and was intended to be codified by it, stated that the copyright protection under Directive 2001/29 included the exclusive right to control distribution of a work incorporated in a tangible article.[6]

What prompted the Court then to turn upside down the existing practice, which is also the national systems of the Member States concerning the exhaustion of the distribution right?  First of all, the CJEU used a tool called the “independent interpretation” of the EU law.  According to this rule, the terms of a provision of EU law which make no express reference to the law of the Member States for the purpose of determining its meaning and scope must normally be given an independent and uniform interpretation throughout the European Union.[7]  This also closed the door to the possibility of taking the common denominator from the legislations of the EU Member States regarding the exhaustion of the distribution right as applying only to the computer programs fixed in a tangible medium and defining the copy of the computer program under Article 4(2) of Directive 2009/24 in line with this practice.

Moreover, the Court added that since it does not appear from Article 4(2) of Directive 2009/24 that the exhaustion of the distribution right of copies of computer programs mentioned in that provision is limited only to copies of programs on a material medium, without further specification to the “sale of a copy of program,” the said article makes no distinction relating to a tangible or intangible form of the copy.  Therefore, in the Court’s opinion, it justifies the statement that the distribution right is also exhausted when the intangible copy is downloaded from the right holder’s server by the client.[8]

III. The Primacy of International Agreements

What about the rule that the international agreements are binding on the institutions of the European Union (previously the European Community), and are hierarchically higher than the secondary EU legislation?  The Court explicitly mentioned that on behalf of the Community, the WIPO Copyright Treaty was approved by Council Decision 2000/278/EC of 16 March 2000,[9] subsequently admitting that the Agreed Statements Concerning Articles 6 and 7 thereto (being part of the WIPO Copyright Treaty) declare that “as used in these Articles, the expressions ‘copies’ and ‘originals and copies’ being subject to the right of distribution . . . refer exclusively to the fixed copies that can be put into circulation as tangible objects.”[10]

At this point, it must be highlighted that Article 300 (7) of the Treaty establishing the European Community, that was still in force when the WIPO Copyright Treaty was approved by Council Decision 2000/278/EC, which stated that “international agreements shall be binding on the institutions of the Community and on Member States.”[11]  The same has been reiterated under Article 216(2) of the Treaty on the Functioning of the European Union, which reads that “international agreements concluded by the European Union are binding upon the institutions of the Union and on its Member States.”[12]

The international agreements entered into by the EU form an integral part of the EU law,[13] but what is even more important is that they have primacy over secondary EU legislation.  Thus, the validity of a measure of secondary EU legislation may be affected by the fact that it is incompatible with such rules of international law.[14]

Since the directives constitute the secondary EU legislation, they should be read in keeping with the international agreements, including the WIPO Copyright Treaty.[15]  The aforementioned Directive 2009/24 and—especially Article 4(2)—must be interpreted in line with the Agreed Statements Concerning Articles 6 and 7 of the WIPO Copyright Treaty, stating that the expressions “copies” and “originals and copies” being subject to the right of distribution refer exclusively to the fixed copies that can be put into circulation as tangible objects.[16]

The Court in its Judgment did mention that:

[C]oncepts used in Directives 2001/29 and 2009/24 must in principle have the same meaning . . . even supposing that Article 4(2) of Directive 2001/29 interpreted in the light of recitals 28 and 29 in its preamble and in the light of the [WIPO] Copyright Treaty, which Directive 2001/29 aims to implement, indicated that, for the works covered by that directive, the exhaustion of the distribution right concerned only tangible objects.[17]

Further though, the CJEU surprisingly and unfathomably added that it would not be capable of affecting the interpretation of Article 4(2) of Directive 2009/24 in regard to the different intention expressed by the European Union legislature in the specific context of the directive.[18]

At this point, one must wonder what the “different intention” is that the Court speaks about.  Unfortunately, the Court does not explain it further, so we can only surmise what the CJEU meant.  In Professor Paul L.C. Torremans’ opinion, by “different intention,” one may assume the dominance of the free movement in all areas, including copyright, adding that “in such a logic that starts from the free movement, exhaustion is the norm.”[19]

Searching for a “different intention” is a wild goose chase.  All the aforementioned legal acts embraced the copyright protection goal, including the computer programs,[20] so the limitation of reasons in the Judgment regarding the deviation in understanding Article 4(2) of Directive 2009/24 from the earlier legal acts to just one statement,[21] must be seen as a stark oversimplification, if not a plain omission, given that the said directives should be compatible with the WIPO Copyright Treaty.

Therefore, the primacy of the WIPO Copyright Treaty should have been the main point of argumentation on the part of Oracle, but was somehow overlooked by not having been put into the brighter light, as expected.

IV. A Resale of the Copy

The question may arise whether there was a “resale” of the computer program taking place—a sale between UsedSoft and its clients is vital in the context of the reproduction right of the computer program by the lawful acquirer resulting from a given sale.

Simply put, if there is no resale, there is no legal second acquirer, and by implication, there can be no purported right to reproduction of the computer program because unilateral contracts transferring the ownership will not be taken into consideration in this Article for exceeding its scope.

The Court holds that according to Article 5(1) of Directive 2009/24, in the event of the resale of the copy by the first acquirer, the new acquirer will be able to download on his computer a copy sold to him by the first acquirer.[22]

The CJEU defined a “sale” as an agreement by which a person, in return for a payment, transfers his rights of ownership in an item of tangible or intangible property belonging to him to another person by referring to a commonly accepted definition.[23]  We can conclude from this that in order for a sale to be effective, there must be an intention of the parties to transfer a right of ownership and possession of an item in the property.[24]

From a practical perspective, the purported sale in the case of UsedSoft as a seller looks like this:

1.  The seller offers to sell “a copy,” which in fact he will not sell;

2. The purchaser enters into the agreement with a seller;

3. Following the agreement, the seller transfers a product key to the buyer, never even intending to transfer a possession of the copy;

4. The purchaser then downloads a new copy from the right holder’s website and uses the transferred product key to run it.

Even the Court had noticed that there is no intention of shifting a possession of the copy between the parties of the transaction, instructing that “an original acquirer who resells . . . a copy. . . in order to avoid infringing the exclusive right of reproduction of a computer program which belongs to its author . . . must make his own copy unusable at the time of its resale.”[25]

Besides from Article 4(2) of Directive 2009/24, it might follow that the original acquirer must sell the exact same copy of the computer program that he himself obtained, as it reads that “the first sale in the Community of a copy of a program . . . shall exhaust the distribution right . . . of that copy.”

To simplify and summarize, a sale of keys does not necessarily equal the sale of a house, and even if the keys might fit into the locks of other houses in the neighborhood, the subject matter of the agreement must be the exact house of the previous owner.  Thus, the seller cannot just tell the buyer that because he has obtained the keys, he can walk through the neighborhood and check which lock the keys fit and get the right to the ownership of that house.

V. The Reproduction Right
Irrespective of whether there was a resale, there is still a matter of the reproduction right of a copy to which the exhaustion rule does not apply.

To reiterate, Oracle distributes the software mainly by downloading from the Internet—the customer downloads a copy of the computer program directly to his computer from Oracle’s website, in exchange for one-off payment.  For an Oracle customer to run a software purchased from Oracle, he must reproduce a copy of the program by downloading it from Oracle’s server, which Oracle allows based on the user license.

Under Article 5(1) of Directive 2009/24, in line with its Recital 13, the exclusive rights of the author to prevent the unauthorized reproduction of his work are subject to limitation in the case of computer programs, which allows the lawful acquirer’s reproduction of (technically necessary) use of the program.[26]  This is what the Court is referring to by acknowledging the right of the “second lawful acquirer” to reproduce the software by downloading a copy thereof from Oracle’s website, claiming that it is necessary for him to run the program, but in fact, it is necessary for him to make that so-called “sale” effective.  In other words, there was no intention of the first acquirer to transfer his copy to the purchaser.  The copy had to be taken from Oracle’s website, constituting a reproduction, not out of technical necessity to use the program but from a pure necessity to get into possession of it.  In this Author’s opinion, this is covered neither by Article 5(1) nor by Recital 13 of Directive 2009/24.

The above was rightly mentioned by the Advocate General in his opinion concerning this case, where he claimed that the principle of exhaustion relates only to the right to distribute a copy of the computer program and cannot affect the right of reproduction, rightly adding that the purpose of Article 5(1) of Directive 2009/24 is confined to enabling a person who already possesses a copy of the computer program to make a reproduction of that copy.  Consequently, the Advocate General concluded that a person who does not possess a copy of a program is not authorized to reproduce it, not in order to use it in accordance with its intended purpose, but simply in order to use it.[27]

VI. Consequences of the Judgment for the Microsoft and the Likes

The Judgment must have been a bitter pill to swallow for the IT companies, which build and license computer programs within the EU, even though it has been already five years since the Court issued its decision.

Auction websites that facilitate online sales are packed with offers with “used licenses,” which are oftentimes less expensive than those from the official distributors; Microsoft Office packages are the best example.  Many companies are even winning public contracts within the realm of public procurement on offering to deliver the computers with Microsoft Office, where the lower price is the key factor.  They are doing that just by installing a “second-hand” software, which legally allows them to set the lowest price.

For companies like Microsoft, it was a hard blow, forcing them to change their marketing strategy in delivery of their programs by gradually introducing annual fees instead of a lump sum for the computer programs.  They tried to do this to escape the definition of “sale” outlined both by the Court[28] and the Attorney General.[29]  With the monthly or annual fees, there comes the limited licensing period with a view to erasing all the traces of a “sale” of a computer program in its broad definition, and drawing it closer to the rental contract.  This seems to be the way to stay afloat.


[*] Michal Chudzik is an attorney at law practicing in Poland. He graduated from the Faculty of Law, Administration and Economy at the Wroclaw University (Poland) and subsequently, also from the School of American Law at the Chicago-Kent College of Law as a joint project with the Wroclaw University.  In order to contact him, please write to him at info@adwokatchudzik.pl.

[1] Directive 2009/24/EC of the European Parliament and of the Council on the Legal Protection of Computer Programs, 2009 O.J. L 111/16 [hereinafter Parliament and Council Directive on the Legal Protection of Computer Programs or Directive 2009/24], available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009L0024&from=EN.

[2] UsedSoft GmbH v Oracle International Corp, Case C-128/11, 2012, available at http://curia.europa.eu/juris/liste.jsf?language=en&num=C-128/11.

[3] Consolidated Version of the Treaty on the Functioning of the European Union art. 267, 2008 O.J. C 115/47 [hereinafter Treaty on the Functioning of the European Union or TFEU], available at http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1505841712173&uri=CELEX:12008E/TXT.

[4] Parliament and Council Directive on the Legal Protection of Computer Programs, supra note 1.

[5] Directive 2001/29/EC of the European Parliament and of the Council on the Harmonization of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. L 167/10 [hereinafter Directive 2001/29], Recital 28, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32001L0029.

[6] The same can be found in the laws of the Member States of the European Union regarding the copyright protection, i.e., Ustawa z dnia 4 lutego 1994 r. o prawie autorskim i prawach pokrewnych [Act on Copyright and Related Rights](Dz. U. 1994, vol. 24, item 83, with amendments), article 51(3).

[7] UsedSoft GmbH, C-128/11, ¶ 39, and references made in it to the earlier CJEU cases.

[8] Id. at¶¶50, 59.

[9] Council Decision 2000/278/EC on the Approval, on Behalf of the European Community, of the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty, 2000 O.J. L 89/6, available at http://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX:32000D0278.

[10] UsedSoft GmbH, C-128/11, ¶¶3, 7.

[11] Consolidation Version of the Treaty Establishing the European Community art. 300 (7), 1997 O.J. C 340/173, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.C_.1997.340.01.0173.01.ENG& toc=OJ:C:1997:340:TOC.

[12] Treaty on the Functioning of the European Union, supra note 3, article 216 (2), available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT.

[13] R. & V. Haegeman v. Belgian State, 181/73 [1974] E.C.R. 449, ¶¶5–6.

[14] The Queen, on the application of International Association of Independent Tanker Owners (Intertanko) and Others v. Secretary of State for Transport, Case C- 308/06 [2008] E.C.R. I-04057, ¶¶42–43.

[15] WIPO Copyright Treaty, adopted December 20, 1996, WIPO Doc. CRNR/DC/94 [hereinafter the WIPO Copyright Treaty].

[16] World Intellectual Property Organization, Agreed Statements Concerning the WIPO Copyright Treaty (Dec. 20, 1996), , http://www.wipo.int/treaties/en/text.jsp?file_id=295456.

[17] UsedSoft GmbH, C-128/11, ¶60.

[18] The “intention” of the said Directive, first and foremost, should be the legal protection of computer programs, as the title goes.  The provisions thereof should be interpreted mostly in line with it, unless otherwise expressly stated.  Id.

[19] Paul L.C Torremans, The Future Implications of the Usedsoft Decision, CREATe Working Paper (2014), http://www.create.ac.uk/publications/.

[20] Parliament and Council Directive on the Legal Protection of Computer Programs, supra note 1 (referring exclusively to computer programs).

[21] UsedSoft GmbH, C-128/11, ¶60.

[22] Id., ¶ 81.

[23] Id., ¶ 42.

[24] Henry Campbell Black, Black’s Law Dictionary 1503 (4th ed. 1968), (putting forward the universal definition of this legal term).

[25] UsedSoft GmbH, C-128/11, ¶70 (emphasis added).

[26] Parliament and Council Directive on the Legal Protection of Computer Programs, supra note 1.

[27] Opinion of Advocate General Bot, UsedSoft GmbH v. Oracle International Corp , Case C-128/11, 2012,  ¶97–98, available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62011CC0128&from=EN.

[28] UsedSoft GmbH, C-128/11, ¶ 49.

[29] Opinion of Advocate General Bot, UsedSoft GmbH, C-128/11, ¶ 59.