Resale Of “Used Bitstreams” By End-Consumers: A Comparative Reflection

-- By PeterLing - 16 Oct 2012

Introduction

In the world before what is sometimes called the “digital revolution” (http://en.wikipedia.org/wiki/Digital_Revolution), most goods for everyday use could be divided into two categories: “new” items and “used” items. Those words still refer to easily understandable concepts when designating elements of a physical world. If the adjective “new” is defined as “having been made or come into being only a short time ago; recent” (see http://www.thefreedictionary.com/new), the adjective “used” will stand for its opposite, i.e. “not new” or “secondhand” (http://www.thefreedictionary.com/used). A “new” car, fridge, piece of furniture or hard drive has some inherent advantages over a “used” item of the same category. Being “used” may change fundamental or non-fundamental characteristics of material objects, deteriorate their functions or worsen their efficacy. The quality is lower and the life expectancy is almost inevitably shorter than that of a new item.

Nonphysical goods, such as bit streams, data or software do not deteriorate through use. Although nonphysical goods sometimes become obsolete and may thus lose worth over time (as better solutions emerge or flaws are discovered), their sole “use” will not lead to deterioration or loss of quality. Playing the original 1968 vinyl record of the Beatles’ White Album thousands of times on a record player will cause audible degradation of the initial sound. Playing the mp3 file containing the White Album will not. Hence the concepts of “new” and “used” cannot be transposed into the digital world. There is no such thing as “used bitstreams”.

Notwithstanding this imperfect designation, the issue of end-users reselling software or mp3 files they had previously acquired – and actually “used” – has been a controversial question under copyright legislation. New business models have come to existence based on the resale of “used” software (such as UsedSoft? , see www.usedsoft.com/en/) or music (such as ReDigi? , see www.redigi.com). Although the copyright statutes of the European Union, Switzerland and the United States are very different on their faces, the central legal issues involved are surprisingly similar: the potential violation of the “license agreement” between the end-user and the software manufacturer on the one hand and the infringement of the manufacturer’s copyright by the resale of the bitstream to a third party on the other hand.

A. Recent Court Decisions in the EU and in Switzerland

1. Violation Of The “End-User License Agreement”

Software provided to noncommercial end-users is often accompanied by a “license agreement” between the software manufacturer and the end-user. Generally, this document contains a clause stating that the user “receive[s], exclusively for [its] internal business purposes, for an unlimited period a non-exclusive non-transferable user right free of charge” (see Judgment of the Court of Justice of the EU of July 3, 2012 (C-128/11) UsedSoft GmbH? v. Oracle International Corp, at Para. 23) for the software product.

The purpose of providing a software copy to an end-user “for an unlimited period” for a fixed consideration is, however, very different from what is commonly understood as a “license”. As a Swiss court recently pointed out in a decision regarding the the resale of “used” software, the economic purpose of such transaction is the alienation (sale) of one software copy and not a “license” into the intellectual property rights (copyright, patent rights and/or trade secret rights) underlying the software. In the case before this court, the “licensor” did not retain any control over the copy and the “licensee” did not have a duty to return it upon termination of the agreement (see the decision of the Zug Cantonal Court (Switzerland) of May 4, 2011, Docket No. ES 2010 822, in: 2012 sic! (Swiss Intellectual Property, Information and Competition Law Review) 99(5.1)). The “end-user license” was therefore considered to be a sales agreement on one copy of the software. Even if a resale restriction clause in the agreement was valid (which the court did not examine), it would only have effects between the manufacturer and the first purchaser and would not enable the manufacturer to obtain an injunction against the purchaser of the software copy. The Swiss court then turned to the doctrine of exhaustion and dismissed the copyright owner’s complaint.

2. The Exhaustion Of The Manufacturer’s Copyright

The doctrine of exhaustion was also in the center of a case recently decided by the Court of Justice of the EU. In the previously cited UsedSoft v. Oracle case, the Court of Justice considered (as its Swiss counterpart one year earlier) that the transaction between the software manufacturer and the end-user was to be considered a transfer of ownership on a software copy rather than a license. This transaction constitutes (irrespective of whether it involves or not the transfer of a physical support or merely the download of a file) a “first sale” in the sense of Article 4(2) of the EU Directive 2009/24 on the legal protection of computer programs. The copyright owner’s distribution right was therefore exhausted. As a result, the copyright owner could not undertake any legal action against the purchaser of the software copy on copyright grounds.

B. The Resale of “Used Bitstreams” under 17 USC § 109

It is unclear whether the “first sale doctrine”, as it is known under US copyright law and in particular under § 109 of the Copyright Act, would apply to the sale and subsequent resale of an electronic copy of a computer program or an mp3 file. Here too, the central question is whether an end-user who has formally entered into a “license agreement” with the copyright owner can argue being the “owner of a particular copy” and, as a result, whether the doctrine is applicable to downloads (rather than files on a physical support). The Copyright office took the view that a “first sale” must always involve a “physical artifact” (www.copyright.gov/reports/studies/dmca/dmca_executive.html) and most court rulings on this question to date involved some transfer of a physical support (see UMG Recordings, Inc. v. Augusto, 628 F.3d 1175, 1179 (9th Cir. 2011) and Adobe Sys., Inc. v. Stargate Software Inc., 216 F. Supp. 2d 1051, 1055 (N.D. Cal. 2002)).

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