Does Oracle ruling breach WIPO Copyright Treaty?

Case C-128/11 Oracle v UsedSoft has attracted a good deal of attention and analysis from within Europe, much of it sharply critical -- but it has also been noted by both academics and practitioners from further afield. One such distant source is a respected and seasoned New Zealand lawyer, Ken Moon (AJ Park Law), who has expressed himself as being troubled by it.  His perspective on the case is reproduced here:

"Europe in breach of international copyright treaty 

A recent decision of the European Court of Justice (CJEU) on the licensing model for software transactions, has inadvertently breached the WIPO Copyright Treaty of 1996. There are numerous international treaties governing copyright law, but the treaty which brought copyright law up to date with the internet was the 1996 World Intellectual Property Organisation (WIPO) Copyright Treaty (WCT).

It now appears that a decision from the European Union's highest court, the CJEU, means that the countries of Europe, despite ratifying the WCT in 2001, are now breaching it, although the court itself seems not have realised this.

The Oracle v UsedSoft decision

In July, the CJEU in the case Oracle v UsedSoft decided two things. First, that a software licence was actually a sale and second, that the downloading of the Oracle software over the internet to the licensee "exhausted" a component of Oracle's copyright in the software, namely its exclusive "right to communicate" that copy of the software. This article focuses on the second issue.

UsedSoft GmbH was a German company which marketed "used" software licences and for this purpose purchased licences from Oracle's licensees (including Oracle client-server databank licences) for the purposes of resale on the second hand market.

The CJEU was referred this case by Germany's Federal Supreme Court (BGH) after two prior appeals by UsedSoft, and the CJEU's decision is final and non-appealable.

Finding that a licence is a sale is in conflict with US and Commonwealth decisions, and is controversial in itself, but it is the decision on the exhaustion of copyright issue which offends the WIPO Copyright Treaty.

WIPO Copyright Treaty 1996

Among other things the WCT required member states to incorporate in their copyright law a more comprehensive "right of communication" for copyright owners than had been required previously under the Berne Copyright Convention. This right, contained in Article 8 of WCT, is the "right of communication to the public" and it gives copyright owners the exclusive right to communicate their copyright works to the public. "Communicate" here means communication "by wire or wireless means". It covers "transmission" and, as it was intended to do, covers transmissions of digital and digitised works over the internet. Under Article 22 of WCT no member state could implement Article 8 (or any other Articles) in a manner which amounted to a variation of the Treaty text. The online aspect of this communication right was said to be one of the greatest achievements of the WCT.

In case there was any doubt as to the copyright status of a computer program, Article 4, in line with what was then the law of most countries, expressly confirmed that "computer programs are protected as literary works", "whatever may be the mode or their form of expression" and the right to transfer computer programs was made exclusive to their copyright owner. The Treaty also confirmed in Article 6 an exclusive "right of distribution" which relates to "copies that can be put into circulation as tangible objects". A number of countries had long had a principle of "exhaustion" of the right to distribute copies after their first sale (first sale doctrine). For example, the purchaser of a book would be free to resell the book without breaching the copyright owner's distribution right. The WCT expressly allowed exhaustion of right of distribution (of tangible physical copies) in Article 6(2), but not for the Article 8 right of communication of intangible digital files.

The European Union was one of the sponsors of the right to communicate in the WCT negotiations and ratified the WCT in 2001 by way of the Information Society Directive 2001/29/EC. This obligated the members of the EU to ensure their national copyright law implemented the provisions of the WCT.

Confusing the right to communicate with the right to distribute

The CJEU in the Oracle case, despite the fact that the Oracle software was only transferred to licensees in digital form over the internet, decided that this amounted to distribution and that being the case that the copyright owner's distribution right in each downloaded copy was exhausted. This meant that those copies could be freely "sold" on despite the Oracle licence agreement saying that they could not.

Oracle, the European Commission itself and some EU governments, unsuccessfully argued that the appropriate right that should be considered by the court was the WCT Article 8 communication right and not the Article 6 distribution right which should only apply to physical things. The CJEU relied on the later EU Software Directive 2009/24/EC, which in Article 4(2) confirmed first sale of software exhausted the distribution right and which whether deliberately or by oversight made no reference to the status of the right to communicate after first sale. The ECJ said this software specific law overrode the 2001 general copyright law.

But it is stretching legal logic somewhat to say that because the Software Directive does not refer to the right to communicate then this right is somehow subsumed within the right to distribute to thereby allow the first sale doctrine to apply.

Breach of the WIPO Copyright Treaty

Even if the CJEU reasoning is correct for current EU law, its decision in the Oracle case means that European copyright law does not comply with the WCT Article 8 which does not authorise any exhaustion of the copyright owner's right of communication on first sale, let alone what in reality was a licence and not a sale.

Article 8 of WCT requires that member states of WCT must give to copyright owners the exclusive right to communicate their works to the public by wire or wireless means. Article 4 WCT confirms a computer program is a copyright work. Oracle communicated its software to its licensees. Under the WCT, licensees do not acquire any right to "re-communicate" their Oracle software to third parties. The WCT Article 8 does not allow any member state to make laws which exhaust Oracle's exclusive right to communicate its software. The CJEU has interpreted European Union law to do just that. Such an interpretation means European law is in breach of the WIPO Copyright Treaty.

Impact of the CJEU decision on software licensing

The Oracle decision will severely impact software developers who trade in Europe, especially as all existing licences in Europe will be now classed as sales. For the future the traditional software licensing model will have to be modified (annual royalty fees perhaps?) or replaced with a software as a service model (SAS) with the software resident in the cloud and not with the end user. However while this may mean Europe's breach of the WCT becomes less exposed it cannot cure it. A cure will have to come through a new EU Directive amending the 2009 Software Directive to expressly recite the WCT right to communicate and the denial of any exhaustion of this right by first "sale".

Fortunately, because the CJEU relied on an interpretation of the Software Directive 2009 to override EU copyright law it is hard to see how the Oracle decision could be interpreted to extend to other licensed digital products communicated online such as films and sound recordings. The licensing model for online dissemination of these products should remain viable".

Is Ken right? And has he overstated the significance of this case, or understated it? Do let us --and him -- know what you think.