Limiting the principle of exhaustion? CJEU prohibits the resale of back-up copies of computer programs

Roosa Tarkiainen

Last month the Court of Justice of the European Union (CJEU) issued its decision in Microsoft, a reference for a preliminary ruling from Latvia concerning the principle of digital exhaustion as applied to computer programmes. 

At the time of the decision, this blog did not comment on it. Thankfully, one of my talented students at the University of Southampton, Roosa Tarkiainen, has come to rescue.

Here's what Roosa writes:

“In its decision on 12 October 2016 the Court of Justice of the European Union (CJEU) held that the acquirer of a copy of a computer program accompanied by an unlimited user licence is not entitled to provide a back-up copy of that program to a new acquirer without the authorisation of the rightholder under Article 4(a) and (c), and Article 5(1) and (2) of Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs. 

This reference for a preliminary ruling from the Criminal Law Division of the Riga Regional Court concerned the interpretation of Article 4(2), and Article 5(1) and (2) of Directive 2009/24 (‘the Software Directive’). Article 10 of the Software Directive repealed the earlier Directive 91/250/EEC of May 1991 on the legal protection of computer programs. The dispute in the main proceedings concerns offences allegedly committed between 28 December 2001 and 22 December 2004. As the Software Directive entered into force five years after the latest date of the offences, the Court in its ruling considered the equivalent provisions of Directive 91/250/EEC instead. 

Background

This reference arose in the context of a dispute between two Latvian nationals, Mr Ranks and Mr Vasiļevičs (‘the defendants’), and Microsoft. The defendants were charged with having sold thousands of copies of various copyright-protected computer software and programs published by Microsoft between 2001 and 2004. The copies had been allegedly bought by the defendants from individuals as used copies, then incorporated into a material medium other than the original material medium, and finally sold through online marketplace www.eBay.com.

The defendants were charged for the unlawful sale, as part of a criminal organisation, of objects protected by copyright. They were found guilty at first instance of all relevant offences under Latvian criminal law and ordered to pay partial compensation.

All parties to the proceedings appealed to the Criminal Law Division of the Riga Regional Court, which set aside the first instance judgment on finding the defendants guilty of the unlawful sale of objects protected by copyright.

The decision was appealed to the Supreme Court which set aside the judgment of the preceding court and referred the case back to that court for re-examination. In the course of the re-examination, the defendants asked the Riga Regional Court to refer questions to the CJEU on the interpretation of Article 4(2), and Article 5(1) and (2) of the Software Directive in the context of the unlawful sale of objects protected by copyright.

The Riga Regional Court asked whether under Articles 5(1) and 4(2) an individual can rely upon the exhaustion of the right to distribute a copy of the program where he has acquired that program with a used licence on a non-original risk where the original disk is damaged and the first purchaser no longer uses it. If the answer to the first question is in the affirmative, then whether that individual has, in reliance of the exhaustion of the distribution right, the right to resell that computer program on a non-original disk to a third person under Article 4(2) and 5(2). 

AG Saugmandsgaard Øe

What the court said

Following the Opinion of Advocate General Saugmandsgaard Øe, the Court began by confirming that the dispute is covered by Directive 91/250 and not by Directive 2009/24. Article 4(c) of Directive 2009/24 contains the rule of exhaustion of the distribution right which provides that the resale of a copy of a program by an initial acquirer on a material medium, accompanied by an unlimited licence for the use of that program, cannot be opposed by the holder of the copyright who sold it in the European Union.

The Court upheld the rule under Article 4(c) following UsedSoft, but quickly dismissed Microsoft’s submission, referred to as the “strict” approach by the Advocate General Saugmandsgaard Øe, ie that the provision applies only to the original material. This is because the rule of exhaustion of distribution concerns the program itself, and makes no distinction between tangible and intangible forms of the copy.

The Court then reasserted the right of reproduction contained in Article 4(a) of the directive, confirming that a lawful acquirer may resell a copy of a computer program provided that it does not adversely affect the reproduction right in the underlying work. This means that the resale has to be authorised by the holder of the copyright, or fall under the exceptions in Articles 5 and 6 of the directive. Under what the Advocate General categorised as the “liberal” approach, the defendants submitted that the rule of exhaustion allows the resale of a copy of a computer program on a non-original material medium if the original medium has been damaged. This is given that that the conditions in UsedSoft, namely that there is an unlimited licence for the use of that program and any other copies are made unusable at the time of resale, are satisfied.

The Court confirmed that in that case, the making of a copy of a computer program on a non-original medium would fall under the exceptions in Articles 5(1) and (2) and would therefore be authorised. Of these exceptions, Article 5(1) provides that a rightholder’s authorisation is not required where any reproduction of the program is necessary for its use, and article 5(2) allows for the making of back-up copies provided that the copy is made by a person that has a right to use that program, and provided that the back-up copy is necessary for that use.

With regard to Article 5(1), the Court distinguished UsedSoft from the present case on factual grounds in that there is nothing to suggest that the defendants initially purchased and downloaded copies of the programs from the rightholder’s website which would have satisfied a reproduction necessary for the use of the program. Nonetheless, the Court went on the affirm that the initial acquirer of a copy of a computer program – where the copyright holder’s distribution right is exhausted under Article 4(c) – is authorised to resell a copy but must make any copy in his possession unusable at the time of its resale. 

More importantly, however, the Court, referring (without much further elaboration) to Painer that Article 5(2) on the other hand must be given a strict interpretation. Having said that, it confirmed that the back-up copy can be only used to meet the sole needs of the person with the right to use that program. This meant that a back-up copy of the program cannot be resold to a third party even if the original one is lost or damaged.  

Following from the above analysis, the Court finally concluded that, under Articles 4(a) and (c), and 5(1) and (2) of Directive 91/250, an initial acquirer is permitted to resell a copy of a computer program because of the principle of exhaustion of the exclusive distribution right of the rightholder. However, that initial acquirer is not permitted to make a back-up copy and sell that back-up copy, even if the original copy initially delivered to him has been lost or destroyed. 

Non-digital exhaustion

Implications of the decision

The decision in the present case raises the question as to whether allowing the resale of the original copy and prohibiting the sale of a back-up copy undermines the principle of exhaustion in relation to computer programs and software. In theory, the substance of a back-up copy is identical to that of the original. 

Therefore by selling a back-up copy, the acquirer is in essence selling the exact same product as he would be if he was selling the original. By creating the barrier to the secondary market for back-ups, it could be thus argued that the exhaustion of the right of distribution becomes redundant. 

However the decision of the Court is justified exactly because of this indistinguishable nature of the back-up programs. Following the Advocate General’s view, the inability to distinguish different types of copies makes it more difficult to combat counterfeits on secondary markets. Prohibiting the sale of back-up copies could thus limit the quantity of unlawful substance on the market, although it may not have been the most technologically efficient method of doing so. Furthermore, the Court was not in the position to depart from the requirement of strict interpretation of the exception in Article 5(2). 

Nonetheless, the decision is significant in that it confirmed the rule in UsedSoft that distribution rights in computer programs are extinguished upon sale, allowing for the creation of a secondary market for these programs under Article 4(c) of the Software Directive. Although questionable on technical grounds, the Court was ultimately carrying out the difficult balancing act between giving effect to free movement in the internal market through the principle of exhaustion, and protecting the rightholder – in this case from being undercut by criminal activities.” 

Thanks so much Roosa!