Reselling “used” software licences – what does the Oracle decision allow you to do?

Last week, the European Court of Justice (ECJ) published its decision in a long-running German case between a company called UsedSoft and the US software giant Oracle.

The case hit the headlines because the ECJ held that a software company such as Oracle could not stop a licensee from reselling his “used” licences for software distributed by means of a download from a website.

If you have already read a summary of the decision, or aren’t interested in the background facts, then skip down to the key points below.

The background
Under the directive on the legal protection of computer programs, the licensor of a computer program loses his right to control onward distribution of a copy of that program when that copy is first sold in the EU. This is known as the principle of exhaustion.

So, if I go to PC World and buy a copy of a Microsoft product on a CD, then Microsoft cannot stop me subsequently selling that copy on to someone else. This has led to a bouyant market for, amongst other things, second hand computer games, where national retailers sell second hand games alongside “new” games.

UsedSoft’s business provided a means of users selling unused licences for Oracle software.

Under the licence granted by Oracle for its client server software, licensees download the computer prgram from the Oracle website. The user is then licensed to store that program permanently on a server and allow up to 25 users to access it, downloading it onto their workstations.

Oracle argued that UsedSoft’s business breached the terms of its licence, as the licence contractually restricts the licensee from transferring its rights to a third party, and that the provisions in the EU software directive did not apply to downloads.

The ECJ’s decision
The ECJ disagreed with Oracle’s argument, holding that the principle of exhaustion applies regardless of the means by which software is distributed.

In other words, the licensor of a computer program (whether on CD or a download) cannot stop a user in the EU from “selling” on his licenced copy to a third party, and any licence term purporting to vary that right is invalid.

The principle behind the decision is good news for those that buy computer programs online (pretty much anyone these days). Remember – this applies not just to enterprise software like Oracle, but also to games, consumer software and mobile apps.

Key points to note
There are some key points to note from this decision:

  • The decision only applies to software that is licensed on a perpetual basis – this point appears to have been overlooked in many commentaries. In other words it applies only to licences that are not limited in duration. So this decision does not apply to any software that is, say, subject to renewal by payment of an annual licence fee.
  • This means that many organisations’ Microsoft licences may fall outside its scope – for example, where those products are licensed under Microsoft’s Software Assurance model, as the licence under SA only becomes a perpetual licence at the end of the SA contract and upon satisfaction of certain conditions.
  • The principle established by the court applies to the copy of the program “as corrected and updated”. So the copy that may be transferred is the version as updated under any maintenance agreement, even if that agreement has now expired.
  • The principle does not extend so as to allow a licence for multiple users to be subdivide a licence (such as the block of 25 licences sold by Oracle) and resell only part of it, but depending on how the licence is structured you may be able to sell a number of seats where the software is licensed on a per seat basis.
  • Once you have sold your licence for a downloaded program to a third party, you have to delete it from your device and stop using it. This should go without saying (and applies equally to software that has been installed from a CD that is subsequently resold), but it’s worth re-emphasing the point. It may be easier said than done. How will software companies manage the risk that licensees just skip this step and sell on the licence regardless?
  • This decision has no impact on applications provided on a SaaS or cloud basis, even where the user has locked into that cloud vendor's service for a fixed period of time.

Will software companies change their licensing/distribution models?
The move to providing software through website downloads allowed vendors to try and avoid some of the legal issues associated with distributing a copy of their software in a tangible form, such as a CD or DVD. Restricting the ability of users to sell on licences for downloaded software has provided vendors with another revenue stream.

With this ruling, it will be interesting to see whether software vendors once again restructure their distribution models to try and regain control over the rights of users to dispose of surplus licences.

For that reason, I wouldn’t be surprised if perpetual licences for enterprise software become a thing of the past for some vendors, with a move towards combined licence and maintenance agreements that are subject to ongoing payments.

Will the decision affect the price of software?
It will also be interesting to see what impact this has on the price of both “new” and “second-hand” licences.

I remember attending a talk a few years ago by the chief economist at the PRS, who highlighted the impact that Amazon’s marketplace had on the price of new CDs on Amazon, as the (cheaper) price of the second-hand CD was displayed alongside the cost of buying the CD new. From a user’s perspective, there is no degradation in quality, so why buy the more expensive “new” copy? Conversely, the cost of the new CD included the artist’s royalties, production costs and other commissions for the record label, which did not need to be factored into the cost charged by the seller of a second-hand CD.

Could similar economics impact upon the cost of software?

5 Responses to “Reselling “used” software licences – what does the Oracle decision allow you to do?”

  1. 1 Noel Unwin July 11, 2012 at 2:38 pm

    Nice to read some clarity on the licence splitting / dividing as many articles have only added to the confusion in this part of the ruling.

    Also, I would add that any further attempts by the software vendors to control subsequent resale will most certainly be deemed a breach of local and EU competition laws.

    Finally, on the subject of what the vendors will do regarding perpetual licensing, note that the software vendors have been trying to move businesses to subscription and cloud for past decade. This ruling is not about to act as a catalyst to what we are already seeing. I recall Microsoft’s marketing machine working tirelessly to move businesses to a subscription model and it failed because even a monopolist such as Microsoft could not change the buying behaviour across the numerous complex global cultures at the blink of an eye. The majority of businesses that come to my secondary licensing company prefer to own their software licence assets for two main reasons: (1) It is cheaper in the long run than subscription (renting) & (2) The company owns the product and therefore, it holds a residual value on the balance sheet (and potential resale value). SaaS / Cloud has also been around for over a decade and is now on its 3rd generation wave; however, the entire software licence industry is not about to be forced to move to SaaS/Cloud just because of this ruling, albeit we are seeing a rebalancing of the market share between the different software licence programs on offer. Perpetual, Subscription, Open source, SaaS etc software each have their place in this industry.

    • 2 martinsloan July 11, 2012 at 3:00 pm

      @Noel – thanks for your comment. Interesting to hear the views of someone involved in the resale market.

      I agree with your comments that a number of vendors have been pushing the subscription model for the past few years – in particular Microsoft. As I note, the Software Assurance model works on this basis which, whilst giving the licensee some additional benefits and flexibility (the “sell”), is very restrictive in terms of licence transfers prior to completion of all payments. If the licensee wishes to transfer any of the licences during the term (for example, upon a divestment), then it needs to get Microsoft’s approval and pay off the SA contract early. This approach won’t be affected by the ruling, as the licence doesn’t become perpetual until the end of the SA contract.

      The balance sheet point is also an interesting issue. I wonder whether accountants will be more creative with the value of enterprise software licences?

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