Opinion 193
OPINION
Resale of Digital
Content: Usedsoft v
Redigi
Ken Moon
A J Park Law, Auckland
Comparative law; Distribution right; EU law;
Exhaustion of rights; Internet; Musical works; Resale;
Software; United States
When the US Court of Appeals for the Ninth Circuit
decided in 2010 that Eminem’s recording contract with
Universal Records meant that downloads of Eminem
songs from iTunes did not count as sales of CDs and
was actually a licensing of their songs for a different
medium (attracting higher royalties for Eminem) many
commentators wrongly thought the court had decided
that the transaction between iTunes downloaders and
Apple was a licence.1 That question remains to be
decided, but the speculation gave rise to fears among
some that songs from iTunes could not be resold without
breaching Apple’s contractual terms and even more
dramatically that they could not be passed on to
beneficiaries on death. It was even alleged (wrongly) in
some media that Bruce Willis was so upset that his iTune
collection could not be passed on to his three daughters
that he was going to sue Apple.
The issue was progressed in part in March of this year
by the US District Court for the Southern District of
New York in Capitol Records v ReDigi where online sales
of iTunes files were found not to trigger the US first sale
doctrine to exhaust Capitol’s distribution right.2 Thus
users’ subsequent resales of iTunes files through ReDigi’s
online marketplace for used digital music constituted
infringements of Capitol’s copyright. The court said that
the s.109(a) first sale defence in the US Copyright Act
was unambiguous in confining first sale exhaustion to
distribution of physical objects. Thus in the United States
it is clear cut that with the Act as it stands resale of
digitised content online will be unlawful, irrespective of
any licence terms to the same effect. All parties
proceeded on the basis that the transactions were sales
and not licences so the court did not have to decide
between these two forms of contract. Until that issue is
determined in relation to content, as opposed to
software, it would seem that Bruce Willis can pass his
iTunes library to his daughters on death since that
transfer would not be a distribution “to the public” and
therefore not an infringement of the distribution right
conferred by the Copyright Act for copies or sound
recordings.
What does European law have to say about all this?
In the only decision of the Court of Justice on internet
downloads (UsedSoft v Oracle) the subject matter was
computer software. Does that decision apply to digitised
content such as eBooks, sound recordings, films and
video games?
In UsedSoft v Oracle,3 the CJEU held (i) Oracle’s
software licence was a contract of sale, (ii) the
downloading of the software from Oracle’s website by
the licensee (now considered a purchaser) exhausted
Oracle’s right of distribution in relation to the copy that
came into the possession of the licensee and (iii) it was
therefore not an infringement of Oracle’s copyright in
the software for the licensee to resell his licence thereby
making the trading of second hand licences and/or copies
of the software lawful.
The judgment of the CJEU is open to criticism on a
number of grounds. First, the test used by the court to
determine the licence was a contract of sale was grossly
simplistic and should not represent EU law. Secondly, a
proper factual analysis would have revealed that delivery
of software by a download process involves (i) a
communication to the user, and (ii) the user’s computer
making a new copy of the software. Resales by him of
his licence result in the second user making a second
copy on his computer. The fact that it is not the same
copy propagating down the chain of buyers takes this
scenario outside the scope of art.4(2) of the Software
Directive 2009/24—which provides for exhaustion of
the distribution right in a copy of a program upon first
sale of that copy.4 Thirdly, using the excuse of lex specialis
the Court refused to take into account the Information
Society Directive 2001/295 which in art.4(1) implemented
a new “communication right” which according to art.4(2),
unlike the distribution right, cannot be exhausted by any
prior act of communication of the work in question.
1
FBT Productions v Aftermath Records 621 F.3d 958 (2010)
Capitol Records v ReDigi 2013 WL 1286134 (S.D.N.Y. Mar 30, 2013).
3
UsedSoft GmbH v Oracle International Corp (C-128/11) [2012] All E.R. (EC) 1220.
4
Directive 2009/24 on the legal protection of computer programs [2009] OJ L111/16,
5
Directive 2001/29 on the harmonisation of certain aspects of copyright and related rights in the information society [2001] OJ L167/10.
2
[2013] 24 Ent. L.R., Issue 6 © 2013 Thomson Reuters (Professional) UK Limited and Contributors
194 Entertainment Law Review
One might also severely criticise the drafters of the
2009 Software Directive, whose job it was to “codify”
and update the original Software Directive 1991,6 for
failing to observe the WIPO Copyright Treaty 1996
(“WCT”) which required a communication right (and its
non-exhaustion) for software just as much as for any
other work. It will be recalled that an important part of
WCT’s “digital agenda” was to formally recognise the
impact of the internet on copyright.
What impact does the decision in UsedSoft have on
online distribution of content? Does it mean that resales
of downloaded content are legitimate and do not infringe
the copyright owner’s rights because his exclusive right
to distribute has been exhausted on the first download
of that copy? The copyright work in UsedSoft was
software and the CJEU determined that the Software
Directive was the only applicable EU law. But the court
several times seemed to think it was a matter of policy
that exhaustion of the rightholder’s distribution right by
first sale must apply equally to intangible as well as
tangible copies as from an economic point of view they
thought there was no difference.
More significantly, so far as non-software works are
concerned, in [52] of its judgment the court agreed with
the Advocate-General who said in his Opinion that
interpreting the InfoSoc Directive 2001 in accordance
with the WCT meant:
“the existence of a transfer of ownership changes
an ‘act of communication to the public’ … into an
act of distribution … which, if the conditions in
Article 4(2) of that Directive are satisfied can …
give rise to exhaustion of the distribution right.”
With respect, this seems to be nonsense. There is
nothing in the WCT or Agreed Statements or its
preparatory work to suggest this was intended. Indeed
it was the EU delegation who led a move for a separate
and distinct right of communication in the WCT, while
it was the Americans who initially were content to
subsume “communication” within “distribution”. The
WCT Agreed Statement in relation to arts 6 and 7 (rights
of distribution and rental respectively) states:
“the expressions ‘copies’ and ‘original and copies’
being subject to the right of distribution … refer
exclusively to fixed copies that can be put into
circulation as tangible objects.”
Contrary to the assertion of the CJEU, if the WCT is
used as a guide to interpreting the InfoSoc Directive (as
the CJEU itself said was settled interpretation law in Peek
& Cloppenburg v Cassina7) then it is impossible to convert
a communication right, which can only apply to copies
of works in intangible form, into a distribution right
because the latter right only applies to fixed copies in
the form of tangible objects.
6
7
Even if the CJEU’s obiter dicta on the InfoSoc
Directive was to be followed by another court, and
online transmission of copies of non-software works are
deemed to be distributions attracting the possibility of
exhaustion of the distribution right on first sale, as the
CJEU said, the terms of art.4(2) still must be satisfied.
Article 4(2) states:
“The distribution right shall not be exhausted within
the Community in respect of the original or copies
of the work, except where the first sale or other
transfer of ownership in the Community of that
object is made by the rightholder or with his
consent.”
This is not the same language as is used in the Software
Directive art.4(2). Instead, it seems to an attempt to
combine the language of WCT art.6 which refers to
“original and copies” with the language of the associated
Agreed Statement which as mentioned above refers to
“tangible objects”.
The use of the word “object” seems to indicate
art.4(2) only applies to works in the form of physical
things or on physical media. A digital file delivered online
is neither. That alone would mean the rightholder’s
distribution right for intangible digital files would not be
exhausted under art.4(2). Also the use of the words “that
object”, assuming for a moment that intangible “objects”
can exist, must mean that it is in respect of the exact
object that the rightholder has sold that exhaustion
occurs—not the subsequent copy of that object which
the technology actually creates when downloading a
digital file.
In contrast to the CJEU’s virtually non-existent analysis
of the technical process involved in downloading Sullivan
J. in ReDigi did a better job and this was why he ultimately
found that, unlike the sale of physical objects, Apple’s
online iTunes sales could not trigger the US first sale
doctrine and therefore left Capitol’s distribution right
intact.
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 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 under consideration
by the court. Again, if the result that would have been
produced on a proper consideration of the facts and an
ordinary reading of the law was considered contrary to
policy then it is for the lawmakers to change the law,
not the Court.
Directive 91/250 on the legal protection of computer programs [1991] OJ L122/42.
Peek & Cloppenburg KG v Cassina SpA (C-456/06) [2009] Bus. L.R. 149; [2008] E.C.R. I-2731.
[2013] 24 Ent. L.R., Issue 6 © 2013 Thomson Reuters (Professional) UK Limited and Contributors
Opinion 195
The question nobody in either the United States or
Europe 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 in obiter by the Sullivan J. in ReDigi it may not
be so clear cut. 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 and
distance was irrelevant.
Whatever the outcome of such policy arguments,
there is still the critical legal issue of whether the
contract between the copyright owner and the first
acquirer of a digital copy is a sale or a licence. In the
UsedSoft case the Oracle contract was expressly drafted
as a licence with all the typical terms of a software 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
8
9
unlimited period—is rather unimpressive legal logic,
especially as the software was not mass produced for
consumer use. Contrary to the CJEU approach, in Vernor
v Autodesk,8 the US Court of Appeals for the 9th Circuit
in 2010 a software licence was not a sale because 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 in
2011 the UK High Court in Southwark LBC v IBM UK Ltd,9
only one year before UsedSoft, quite logically took into
account all relevant terms and conditions in the licence
before deciding there was no sale.
It has been reported in the IPKat Blog (May 1, 2013)
that a European court has now considered whether the
UsedSoft reasoning applies to content such as eBooks
and audiobooks. In a case brought by the Federation of
German Consumer Associations the German Regional
Court in Bielefeld is reported to have said UsedSoft is
limited to software and there was no exhaustion under
the InfoSoc Directive 2001, thus making online resale of
digitised copies of literary works an infringement.
Standard statutory and contractual interpretation
would suggest that other national courts in Europe would
come to the same result until if and when lawmakers
perceive that on balance policy arguments dictate a
change.
Vernor v Autodesk 621 F.3d 1102 (9th Cir Sept 10, 2010).
Southwark LBC v IBM UK Ltd [2011] EWCH 549 (TCC).
[2013] 24 Ent. L.R., Issue 6 © 2013 Thomson Reuters (Professional) UK Limited and Contributors