Intangibles and exhaustion: ReDigi and UsedSoft revisited

Last November, New Zealand intellectual property enthusiast and legal consultant Ken Moon (AJ Park Law) wrote a controversial little piece which this blog hosted on Case 128/11 Oracle v UsedSoft.  Today the 1709 Blog is pleased to welcome him back. The following piece, which is well described by its title, contrasts critically the legal substance and practical consequences of the rulings in ReDigi in the United States and UsedSoft in Europe. Writes Ken:

Excepting Intangibles from Exhaustion of Distribution Right on First Sale: ReDigi versus UsedSoft

As noted by Ben Challis in the 1709 Blog and by Eleonora Rosati on the IPKat, many commentators believe it wrong that a court could decide that first sale exhaustion of the distribution right only applies to copyright works embodied in physical media.  Thus they disagree with the March decision of the US District Court in Capitol Records v ReDigi where online sales of iTunes files were found not to trigger the first sale doctrine and that subsequent resales were infringements of Capitol’s copyright.  They unfavourably contrast that outcome with that in Kirtsaeng v John Wiley & Sons where the Supreme Court held the first sale doctrine did apply to copies of textbooks (paper) even when they had been made (lawfully) abroad and suggest this is evidence of copyright law not keeping up with technology.  In addition, at least from some European commentators holding this view, there is support for the decision of the CJEU in UsedSoft v Oracle which held that multi-seat enterprise software acquired under licence and delivered by download constituted a sale and fell within the scope of the provision for exhaustion of the distribution right in the EU Software Directive 2009. 

In contrast, the present commentator says the analysis of the facts and law by Judge Sullivan in ReDigi was perfectly correct and that the analysis of the facts and law by the CJEU in UsedSoft was totally wrong.  In ReDigi the judge was doing what courts should do and that is apply the law as drafted, which he held to be unambiguous.  If people consider the result to be wrong on policy or any other grounds then the answer is to persuade the lawmakers to change the law. 

On the other hand the CJEU was doing what courts should not do – rewriting the law to align it with what they believed to be EU policy.  They did so even in the face of contrary submissions made by the European Commission, the body responsible for drafting the Directives which were considered by the Court.  Again, if the result that would have been produced on a more literal interpretation of the law was considered contrary to policy then it is for the lawmakers to change the law, not the Court.  Of course, Jeremy has already commented on the IPKat, in his Sandie Shaw post, on the “apparently irreversible shift of legislative power away from the European Council, Commission and Parliament and towards the Court of justice of the European Union”. 

The question nobody seems to be asking is whether it is indisputably correct to assert that exhaustion of the distribution right should apply irrespective of whether works are delivered online or on physical media?  The CJEU took this as a given and did not cite economic analyses, but as mentioned obiter by Judge Sullivan in ReDigi it may not be so clear cut and there are policy arguments that may justify a distinction between tangible and intangible distribution.  He referred to the US Copyright Office’s 2001 report on the Digital Millennium Copyright Act, which said the impact of the first sale doctrine to copyright owners distributing works in physical form was limited, but applying the doctrine to online distribution would have a bigger and unequal impact.  It was noted that physical copies degrade and are less desirable than new ones, unlike “used” copies of digital works which suffer no degradation.  The need to transport physical copies acted as a natural brake which did not exist in the online world where geography was irrelevant.     

Whatever the outcome of such policy arguments may in due course be, legal issues remain to be considered which go to the core of doctrines of exhaustion by first sale. 

The first is the nature of the contract between the copyright owner and the first user of a copy of the copyright work in digital form.  Is it in fact a sale?  In UsedSoft the Oracle contract was drafted as a licence and for the CJEU to find it to be a sale by considering only one term of the contract – the licence was for an unlimited period – is rather unimpressive legal logic, especially as the software was not mass produced for consumer use.  In the well-known 2010 US case Vernor v Autodesk, which involved computer software, the Court of Appeals for the 9^th Circuit applied a three limb test to find a licence was not a sale.  The reasoning was that the contract (i) expressly granted the user a licence, (ii) it restricted the user’s right to transfer the software and (iii) imposed notable use restrictions .  Back in Europe the High Court for England and Wales in London Borough of Southwark v IBM UK Ltd (2011), only one year before UsedSoft, arguably went further than Vernor and quite logically took into account all relevant provisions in the licence before deciding there was no sale.  

Surprisingly this licence-versus-sale issue was not considered in ReDigi, where the case was run on the basis that the iTunes transaction between Apple and the downloader was a sale even though Apple’s agreement doesn’t read like a normal sale contract and that Capitol’s own agreement with Apple was a licence. 

Whatever the legal situation may be for “content” (such as eBooks, sound recordings and films) why should computer software be treated in the same way?  On 2 May the IPKat reported the German Regional Court in Berlin had held that UsedSoft reasoning does not apply to content such as eBooks and audiobooks because the CJEU had anchored their decision on the Software Directive 2009 invoking lex specialis to ignore the InfoSoc Directive 2001 (and the WCT 1996) which clearly was the applicable law for copyright content and does not allow the resale of intangibles . 

But there is more to this issue than the CJEU being hoisted by its own petard.  It has long ago been argued that software is different from literary, artistic and musical works.  It is not for the entertainment or education of humans.  It has a silicon readership rather than a human one.  Software is not just information, not just functional instructions, but instructions for machines and not humans. 

Computer software, unlike content, is digital from creation and is not something analogue in nature which might subsequently be digitised for transport.  Further, it is “read” (by computer hardware) in the same digital form without the need for conversion from digital to analogue format for watching, listening or viewing (by humans).  The software itself is just as intangible when delivered on a physical medium.  The media is not the message.  Further, software has always been distributed under a licence contract, unlike content, which always involved a sale until modes of digital distribution were evolved. 

Should computer software therefore, whether distributed online or on physical media (it always has digital format), ever be subject to first sale exhaustion doctrines?  There seems to be more logic in removing exhaustion of the distribution right for software while retaining it for content than the somewhat bizarre reverse of this which now exists in Germany as a combined result of the CJEU’s decision and the Regional Court’s decision – exhaustion for licence of software; no exhaustion for licence of content.   

Maybe those people who in the 1970s opposed copyright protection for software and favoured sui generis protection such as that proposed in the 1978 WIPO model law (and more recently the 1709 Blog: see Iona Harding's post of 18 March) had a valid point after all.