31. 01. 2020

Resale of Second-Hand Software

Introduction

All of us know that, when we acquire commercial software from a software vendor that what is being obtained is just a non-exclusive license to use: the vendor retains copyright ownership in the code; they permit a transfer or download of the code to the buyer; and, in exchange for a fee, the buyer takes a license subject to often extensive terms and conditions.

Although therefore business people and indeed lawyers talk about software being bought or sold, the legal basis is (at least for commercial applications) invariably with no transfer of ownership: only a limited right to use is being acquired.

Second-hand software market

resale of software licenses

However, a new market in ‘used’ business software has developed since the Court Of Justice ruling in the UsedSoft[1] case.

Software is a major expense for many organisations; pressures on them derive not only from immediate business needs but also a continuing anxiety that they might be under-licensed and thereby possibly infringing copyright.

Many bodies will have:

  • Redundant or shelved software – software packages which were once used but no longer or where user numbers have decreased;
  • Unused software: packages bought on a precautionary basis or for a project that never materialised;
  • Surplus software: software still in use but where processor or user numbers have decreased;
  • Software acquired as part of a settlement following a software audit where there was no need for the software but the vendor pressed for a settlement (for other under-licensing) on the basis of new software purchases.

Receivers of insolvent businesses, in particular, can readily divest themselves of their enterprise software under these rules: often it is clear that all software use has been ceased and so this scenario is particularly germane to resale of the software, obtaining considerable and unexpected recoveries for the receivers or administrators.

The legal issues regarding the resale of software

Historically, such licenses have not been transferable. The reason for this is that, save where there is specially-commissioned software where the developer agrees to assign copyright, enterprise software is licensed not sold.

The terms and conditions of such licenses are extensive but always contain restrictions in that the software usage is:

  • personal to the named customer;
  • for use by them alone, save where there is a group company addendum permitting other members of the same group to use the software;
  • non-assignable; and
  • with no right to sub-licence.

The license may also be limited by territory and occasionally limited in other ways eg for use by educational or not-for-profit bodies only.

It follows therefore that, on its face, the vendors’ standard license terms mean that:

  • any attempted resale by purporting to assign the relevant license may be of no effect;
  • it may render the existing license void;
  • any subsequent use by the new ‘buyer’ will be of software for which they have no license (storage and running are restricted acts) and the buyer will be infringing copyright; and
  • The seller too will possibly be liable to the vendor for authorising another to carry out those restricted acts, without permission.

The UsedSoft case

The UsedSoft case is a judgment of the Grand Chamber of the Court of Justice handed down on 3 July 2012. It effectively subverts the standard license provisions and, subject to certain conditions, invalidates the non-assignment terms. In short, it makes the license transferable irrespective of the contract wording.

Conditions for transfer under the UsedSoft case:

  1. Sale relates to a ‘computer program’                            
  2. The first sale took place within the European Union
  3. License originally granted for an unlimited period      
  4. License grant was in return for payment of commercial fee   
  5. The copy still in the hands of the reseller is made unusable;   and
  6. The licence has not been divided
resale of software usedsoft case

Further case law

There has been some cases heard at which the UsedSoft principles have been further examined. None of these however affect the key rulings in UsedSoft.

In Ranks and Vasiļevičs: (C166/15 12 October 2016), for instance, the Court of Justice restated the legality of the resale of software in Europe in this judgment but confirmed that the principle does not extend to software transferred on back-up discs. The case concerned a Latvian reseller of Microsoft Windows and Office software sold on eBay using fake certificates of authenticity and duplicate discs copied over from original OEM discs supplied with PCs.

Position outside Europe

Neither the UsedSoft case nor the applicable directives have any application outside the EU. The case concerned only the interpretation of the EU Software Directive.

Accordingly, no weight can be given from these principles in any litigation or transaction involving software usage outside the EU. Indeed, within the USA, the United States District Court for the Southern District of New York has expressly rejected the possibility of exhaustion for digital products (in this case, music downloads) under the Re-Digi case[2].

Potential buyers, within the EU, should have some regard to the fact that jurisdictions outside Europe have not followed the UsedSoft case in cases where:

  • On-premise software is to be hosted by or for the buyer on servers outside the EU;
  • Users may be based outside the EU, but accessing the software remotely; and/or
  • Back-up or disaster recovery is outside the EU.

These last two elements may not be fatal but place of actual deployment of software (particularly across networks) will need to be examined for any territorial ramifications.

How have software vendors reacted resale of software in practice?

It appears that they have not reacted explicitly to the new second-hand software market. They remain principally concerned at counterfeit and pirated software and their preferred focus is in this area rather than lawful sales which follow the UsedSoft case.

Impact of Brexit

Still, the continuing applicability of jurisprudence from the Court of Justice has not been settled. However, it seems certain that the key EU rules here will continue at least for the transitional period until May 2021[3] and probably beyond.

Conclusion

Resale of software can unlock very considerable value to an organisation and there is no reason why this cannot occur with appropriate diligence and support.

Despite software license agreements declaring that they are personal to the user, the UsedSoft case rules that, subject to conditions, such a prohibition is ineffective.

This is still a nascent area and expert specialist advice would be needed. There have been some cases which have litigated (even for UsedSoft itself) but these have largely been against careless intermediaries or obvious pirates.  The commercial market is still developing and, even in the UK, is unlikely to be affected by Brexit. Certainly major corporates and insolvency firms should always consider the value that can be unlocked in this space.

Robin Fry

Director of Cerno Professional Services Ltd


[1] https://www.reuters.com/article/us-britain-eu-ecj/uk-will-be-subject-to-ecj-rulings-under-brexit-transition-deal-minister-idUSKBN1FD15N

[2] https://h2o.law.harvard.edu/collages/34138

[3] UsedSoft GmbH v Oracle International Corp. C-128/11 of 3 July 2012



To get in contact with our team you can either Call us on 0207 421 7360 or email us at info@cerno-ps.com

Related articles

CAN YOU RESELL ONLY PART OF A BUNDLED SOFTWARE LICENCE?

READ MORE

AWS and SQL Server fail-over ¦ PART 5

READ MORE
Website Security Test