Quick Guide to Second-Hand Software (Part 3 of 3)

Best practice

Quick Guide to Second-Hand Software (Part 3 of 3)

18 June 2012

12 minute read

"...the spread of ‘fear, uncertainty and doubt’ (FUD) is still the preferred choice of weapon by major software vendors"

This article has been contributed by Noel Unwin of Discount-Licensing.com

Part 3 of 3: The Legalities

Whilst all secondary suppliers (in any marketplace) should always aim to operate in a legal manner, most second hand markets will always be labelled as ‘grey’ solely due to their unofficial status and the fact that these markets would not have been the originally intended first channel of sale of the manufacturer.

When it comes to recycling software, it is therefore imperative that the different software vendors’ transfer terms are understood. Where a business model relies upon local/regional governing laws, we need to understand the precedents that are in place, specifically with regards to the Exhaustion Principle (First Sale Doctrine), the Software Directive and Competition law.

The industry’s more dominant software vendors will often make good use of any ‘grey’ characteristics that the secondary technology markets may have i.e. the spread of ‘fear, uncertainty and doubt’ (FUD) is still the preferred choice of weapon by major software vendors although some have chosen direct court action (rightly or wrongly), which as the following will attempt to summarise, appears to focus on the business model or processes adopted by the secondary supplier.

A Software Vendor’s Licence Agreement (LA) / T&C’s

With regards to volume, software vendors such as Oracle have always been very prohibitive towards resale, whilst the Microsoft and SAP contracts still contain restrictive transfer provisions that have tightened up since the birth of the secondary markets. As the changes have been restrictive rather than prohibitive, the net effect is on the process, by which the secondary market suppliers facilitate the sale and transfer of a pre-owned software licences. The second hand OEM and FPP markets are clearer in so far as a physical software boxed product/CD is capable of being bought and sold without a breach of the software manufacturer’s T&C’s, although one concern will always be the potential for re-produced, counterfeit or stolen product.

NOTE: “Changes have been restrictive rather than prohibitive, the net effect is on the process, by which the secondary market suppliers facilitate the sale and transfer of a pre-owned software licences.”

Different software vendors activities and changing LA’s make it impossible to make an in depth comment about each; however, the clauses concerning the ability to resell and to do so across regional boundaries require some air time:

(a) Cross Regional — The legitimacy of buying a second hand Volume, OEM or FPP software licence from a different region (sometimes defined by continent) is another area that representatives of software vendors often circulate incorrectly. Despite statements to the contrary, not all software vendors and their respective LA’s contain clauses that prevent cross regional sales and transfers. If a business is ever exposed to such a statement, it is always worth asking the software vendor representative to send evidence of such a clause within the respective LA, under which the licences were originally purchased.

(b) Resale — Regarding the Volume LA’s, the transfer provisions and notifications documents do permit transfers to affiliated and unaffiliated 3^rd parties in connection with reasons such as divestiture or merger. In most circumstances, the transfer still does not require the software vendor’s consent and only notifications need to be sent to software vendor to process internally – even if the T&C’s do not require notification, it is always good practice to do so for transparency with the software vendor and customers. One consistent restriction across the LA’s and the notification documents is that the actual software licence must be transferred directly between the original customer and the end customer. This is logical as the intermediaries / brokers / resellers are not installing or using the product and so software vendors will most likely want to minimise the chance of a breach of copyright taking place (prevent multiple copies of a single licence potentially being in use).

Contradictory Clauses

Whilst it would however be inconceivable for a motor company to print ‘not for resale’ on its cars, software vendors have tried to dissuade clients away from the secondary software markets by putting contradictory clauses into the LA’s. It is worth noting though that if any prohibitive changes were ever made by a software vendor to its transfer provision, such changes could not retrospectively affect the trade of software licences purchased under the previous LA’s transfer provision. Local and regional competition laws also make it highly unlikely that a software vendor will insert prohibitive clauses that could be legally enforced, which we will look at later in Part 3.

Exhaustion Principle & Software Directive

In the context of software, a software vendor’s right to control the resale of its software is said to be exhausted once legal ownership has passed to the customer – the customer then has the right to resell the software to a 3^rd party so long as there is no breach of copyright. In regards to the basic principle of software, where the distribution of computer software is by way of a sale, this is provided for in the EU Software Directive 2009/24/EC.

Article 4(2) states: “the first sale in the Community of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the Community of that copy, with the exception of the right to control further rental of the program or a copy thereof”.

Admittedly, the strength of the Principle of Exhaustion (otherwise known as the ‘First Sale Doctrine’ across the pond) may impact differently upon the secondary software markets, dependant on the product tangibility and the business model(s) being adopted by the secondary software suppliers.

For instance, a second hand software supplier whose business model operates outside of the software vendor’s transfer provision will need to rely upon the Principle of Exhaustion to legalise its trade. However, the Exhaustion Principle, as implemented via the EU Software Directive, was originally written for a tangible OEM and FPP era.

For example, in order to comply with Microsoft’s T&C’s, OEM versions would only be allowed to be sold along with a hardware item even though in many cases this item could be a simple inexpensive mouse etc. In a landmark ruling, the Bundesgerichtshof (BGH) (German court) decided in July 2001 that it was legal for the operating system to be sold separately from the computer / hardware, from which it was originally installed. This ruling helped opened the floodgates for the secondary OEM markets – see: Case No.: I ZR 244 / 97 – OEM decision – judgment GRUR 2001, 153.

Non-tangible trials and tribulations

With the emergence of non-tangible digital era over the past decade, secondary ‘Volume’ software licence suppliers may have felt the need to place more emphasis on operating within the software vendor’s transfer provisions; otherwise, the secondary software supplier and its customers could be at risk because it was not clear how enforceable the principle of Exhaustion is within the context of the current version of the EU Software Directive (2009/24/EC).

As to the current strengths of the Exhaustion Principle and the Software Directive within the secondary Volume software licence markets, the most closely related case would be that of Oracle & the Administrators of Usedsoft. Here, the Court of Justice General Advocate, Mr Yves Bot, has very recently submitted his opinion to the European Court of Justice (ECJ), which the ECJ is likely to uphold in its final judgement of the case.

The case firstly questioned the subject of whether an intangible software licence was even sold or, as Oracle argued, that it was simply licensing the right to use the Oracle software. The second key point related to the ability to reproduce and distribute the software.

On the first point, Bot stated that “The rightholder [Oracle] draws a somewhat artificial distinction between the making available of the copy of the computer programme and the grant of the right to use it; the assignment of a right of use over a copy of a computer program does indeed constitute a sale within the meaning of Article 4(2) of Directive 2009/24,”.

In other words, the principle of Exhaustion applies to both the sale of tangible software as well as intangible software. This makes sense as the software vendors themselves make clear distinctions by offering both ‘perpetual’ and ‘subscription’ licence programmes. On the second point, ‘Bot’ further concludes that “the principle of exhaustion relates exclusively to the distribution of a copy of the computer program and cannot adversely affect the right of reproduction, which cannot be impaired without adversely affecting the very substance of the copyright”.

NOTE: “…whilst the secondary software supplier can resell either a tangible or intangible software product, this does not necessarily give the secondary supplier or ‘new’ end customer the right to make and resell illegal copies (deemed a breach of copyright laws).”

In summary, whilst the secondary software supplier can resell either a tangible or intangible software product, this does not necessarily give the secondary supplier or ‘new’ end customer the right to make and resell illegal copies (deemed a breach of copyright laws). Whilst some of Bot’s opinion may have been welcome news for the ex-Directors of Usedsoft, the final outcome of this case should not have an effect on the other secondary sub-markets whereby unlike Oracle, transfer provisions exist e.g.: Microsoft and SAP. What this case has demonstrated is that the current EU Software Directive (2009/24/EC) may not adequately address today’s intangible digital software environment and this may need to be considered in the next version.

Competition Law

Adding either restrictive or even prohibitive clauses within the transfer provision, coupled with the spread of misleading statements by the software vendors, could be considered to be in breach of both European and local governing competition laws. In the context of the underlying law found in the Software Directive 2009/24/EC, such actions by the software vendors could be deemed to be in breach of Articles 101 and 102 of the Treaty on the Functioning of the European Union (‘TFEU’) and in Chapter I (in particular, Section 2) and chapter II (in particular, Section 18) of the UK Competition Act 1998.

In an attempt to eliminate the competition, the software vendor would appear to strengthen its own already dominant position in the market, thereby ensuring that consumers have no other option than to buy ‘new’ Volume, OEM or FPP software through the conventional software vendor’s network of resellers.

This is plainly to the detriment of businesses and consumers whom are then deprived of choice and the discounts available through the pre-owned software licence markets. Business and consumers would also be deprived of the option to divest unwanted software licences and obtain a residual value for this asset. The consequence of this type of conduct simply results in the size of second hand software market being suppressed; however, whilst the past actions of some of the software vendors may be considered an abuse of a dominant position, the ‘FUD’ tactics adopted by some software vendors go largely unchallenged, at least in the public domain.

Summary (Parts 1, 2 & 3)

Despite the independency between the different secondary software markets, the legalities of the entire second hand software licence industry can be brought into question as a result of an isolated action within one of the markets. This may be justified if a secondary supplier is found guilty of illegal practices but we also have to be aware of the ‘FUD’ tactics adopted by the software vendors and the inaccuracy of generic articles that form unnecessary clouds over the second hand software industry.

Whether you are buying from or selling to a tier within the second hand Volume, OEM or FPP markets, the key will always be transparency, both in terms of legal ownership and the software vendor’s transfer provision. The responsibility does falls upon the secondary supplier as well as the end customer to ensure that it is purchasing from a reliable source and that it can demonstrate the legal ownership all the way back to the original customer.

This particular step will at least keep your business within the local and regional governing laws but it is of equal importance to purchase from a secondary supplier that strives to operate within the vendor’s transfer provision because the EU Software Directive 2009/24/EC may require a few tweaks in order to fully incorporate the modern digital software age.

This article has been contributed by Noel Unwin of Discount-Licensing.com

Quick Guide to Second-Hand Software (Part 3 of 3)