The recent case of Usedsoft v Oracle is important for software developers, who may as a consequence no longer be able to restrict their customers from selling their software on to a third party as “used software”.

The market for “used” software licences may rapidly develop as the continued uncertain economic climate forces businesses to seek alternative methods of reducing their overheads.

The case, which concluded last year, concerned the principle of exhaustion of rights, which prevents the original rights holder from controlling the future distribution of its product, once an authentic product has been placed on the market. The aim of the principle is to prevent rights holders securing a monopoly to restrict the free movement of goods.

Like most software houses, Oracle makes its software available for download electronically under perpetual, non-transferable licences for a one-off licence fee. Usedsoft established a business in Germany buying and selling “used” software, including Oracle software. Oracle argued that by buying used Oracle software from Oracle’s customers and then selling that software on to third parties, Usedsoft, together with Oracle’s customers, had breached the terms of Oracle’s software licence.

Oracle argued that its software was not sold but instead licensed to its customers, who did not have the right to resell Oracle’s software on to Usedsoft. However, the European Court decided that a perpetual licence which is made available in consideration of a one-off payment is equivalent to a sale, not a licence, regardless of the medium by which the software is supplied. In its view, Oracle’s rights were “exhausted” by the first sale of the software to Oracle’s customer, in the same way as the rights of publishers of books and DVD’s are exhausted once the first product has been placed on the market. Therefore, any subsequent acquisitions of the software are lawful and subsequent acquirers have the right to resell the software.

The Court distinguished a sale from a rental arrangement; the latter being where the software is granted to the recipient temporarily in return for a periodic fee and the supplier retains ownership of the software. In contrast to a sale, the developer of rented software retains the right to control further and future rentals. However, the term ‘sale’, within the meaning of the EU Directive, should be given a broad interpretation.

The Court also held that updates and upgrades to software which the original customer may have received under a maintenance agreement with Oracle could be included in the customer’s sale of the software to Usedsoft. The Court did make it clear that the customer’s right to sell its copy of the software did not extend to any contracts for services, such as a maintenance agreement, the transfer of which would require the consent of the supplier.

However, the Court did qualify its decision by imposing the following two limitations:

  1. If the licence acquired by the customer (or the first acquirer) relates to a greater number of users than it needs, that customer is not authorised to divide the licence and resell only part of the licence; and
  2. If the original customer decides to sell its copy of the software, it must, at the time of resale make its own copy unusable by either erasing it or ensuring that it is unavailable for further use.

While the ruling related to use of software in Germany, it is highly likely that it also covers the UK. The ruling was based on an EU Directive, which each EU country is required to implement
It is therefore likely that all software that has been sold (as opposed to licensed) for a lump sum payment under a corresponding perpetual licence is now eligible for resale as second hand software.

If you are in the business of providing software on a perpetual basis for a one-off licence fee and seek to generate revenues by concluding maintenance agreements under which your licensees must pay annual fees, you may like to review the terms of your software licence(s), as retaining non-transfer provisions in those agreements may be unenforceable and also breach EU competition law.

You may also like to consider adopting different business practices such as:

  1. Using dongle “keys” to restrict the use of your software;
  2. Providing your software as a service or “SaaS” basis remotely via the Cloud. This would allow you to provide your software as a service to the user’s terminal on a pay-per-use basis over a network from processors hosted remotely, as distinct from the more traditional software licence, which relies on the software being installed on the user’s server; and
  3. Using shorter periods for licences relating to your software to make the software available on a temporary basis only and subject to regular licence payments

Grant Esterhuizen at law firm Lester Aldridge LLP