Second-hand software – a legitimate aftermarket and the SAAS bandwagon

7 August 2012

A recent ruling by the European Court of Justice has changed the landscape for software suppliers and users.

In general terms, it now seems that if you grant a perpetual licence to a licensee either by installation or download, the licensee will be free to transfer the licence to a third party buyer even if the licence was clearly expressed to be “non-transferable”.

This issue was addressed in the case of UsedSoft GmbH v Oracle International Corp.  Previously it had been widely thought that the doctrine of “exhaustion of rights”, under which the owner of an article cannot control a downstream after-market in the article, did not apply to software licensed on the basis above.

However, this judgment establishes that under Article 4(2) of the Software Directive, the right to distribute a copy of a computer program is exhausted if the rights holder permitted a right to use that copy for an unlimited period of time. It is unlikely that a grant for an exceedingly long period, out of kilter with the expected useful lifetime of the software, would successfully circumvent that position.

This means that a legitimate “purchaser” of a software licence could, in various situations, compete with the manufacturer or supplier in the second-hand market. Of course, unlike various tangible items, the condition and functionality of second-hand software is unlikely to be inferior in any respect to the brand new item.

Anxious licensors have various possible escape hatches. One is to grant “enterprise” licences on a volume basis so that there are blocks of licences rather than individual licences corresponding to each individual purchase of software. The ECJ made it clear that its ruling did not apply to that scenario.

Also, the provision of software on a rental or subscription basis, most notably SAAS, would not be covered as the subscriber does not acquire any rights in the nature of property which it can transfer.

This ruling is likely to provide further momentum in the move from traditional software licensing towards cloud-based SAAS models.

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