Judgment in second-hand software dispute

The Competition Appeal Tribunal (CAT) has handed down a judgment on two preliminary issues relating to the reselling of software licences and the extent of the exhaustion of distribution and reproduction rights in software and its constituent elements upon first sale.

The dispute

The overarching dispute involves a claim brought by JJH Enterprises Limited (trading as ValueLicensing) (VL), a seller of pre-owned Microsoft software licenses. VL contends that Microsoft Corporation (and related entities) (Microsoft) engaged in anti-competitive conduct, contrary to Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU), by introducing a number of "Impugned Terms" in its agreements with licensees that stifled the supply of pre-owned licenses on the market. 

A core element of VL’s business involved the acquisition of perpetual licences, including Microsoft licences, from organisations or businesses that no longer required them either due to insolvency, modifications to the software estate or due to the original licensee moving to a subscription based model.

VL asserts that the Impugned Terms were contained within subscription-service agreements which Microsoft entered into with customers migrating from perpetual licence models to subscription-based services. It is alleged that, in exchange for discounts granted by Microsoft, customers were required to surrender or agree not to sell any perpetual licenses they no longer required. VL claims damages for lost sales that allegedly resulted from these breaches of competition law.

The CAT was asked to consider two main preliminary issues, namely:

1. Preliminary Issue 1: whether the distribution or reproduction right of a copyright owner could prevent the sub-division and resale of licences acquired in bulk under an Enterprise Agreement, without the permission of the copyright owner? By way of example, a reseller may have acquired a bulk grant of licences (such as 1000 Microsoft Office licences) from the administrator of an insolvent company. Was the reseller entitled to resell those licences as individual licences or was it required only to sell as a lot in the same bulk quantity subject to the same terms as applied to the original acquisition?; and
2. Preliminary Issue 2: whether the presence of protectable non-program works (such as graphical user interfaces, fonts, and clip art) within the software prevents the exhaustion of copyright under EU law (Preliminary Issue 2).

The CAT ruled in favour of VL on both issues, determining that contractual terms do not restrict exhaustion and that the non-program elements relied upon by Microsoft were ancillary or incidental to the primary computer program, thus not preventing the exhaustion of rights in all elements of the software upon first sale.

Preliminary Issue 1

Microsoft argued, relying on the CJEU decision in UsedSoft, that the subdivision of bulk licences was not permitted and that subsequent acquirers could not obtain rights broader than the original customer, relying on the original Enterprise Agreements between it and its customers. The Enterprise Agreements typically had provisions which:

1. placed minimum order numbers of licences to be purchased as a part of an initial order;

2. provided that licences only became perpetual after 3 years if all payments due under the agreement had been made; 

3. permitted copies to be made of the “Products”, but only from master copies obtained from Microsoft; and

4. permitted transfer of licences by way of the use of a Perpetual Licence Transfer Form and only with Microsoft’s consent.

Microsoft’s position was that this contractual scheme amounted to the grant of a single licence providing rights to multiple users to access copies of the software on the Microsoft server. In contrast, VL’s position was that the agreement granted a bundle of licences (up to the licensed amount) to download, copy and use the products from the Microsoft server.

The CAT preferred VL’s construction, noting that the Enterprise Agreement refers to “licenses” (the plural rather than the singular) in numerous places, and the operation of the Enterprise Agreement envisaged the potential purchase of further “licences” as part of a true up process. As such the drafting supported an interpretation that multiple licences are purchased rather than a single licence for multiple users/devices. 

As to Microsoft’s argument that UsedSoft prohibited subdivision and only permitted a second acquirer to “step into the shoes of the first acquirer” in relation to rights/obligations of the second acquirer, the CAT held that once a licence amounts to a “sale” under Article 4 of the Software Directive the terms of the licence between Microsoft and its enterprise customers do not limit the effect of exhaustion which operates by law. Therefore, Microsoft’s distribution and reproduction rights in the software did not prevent the subdivision and resale of the use rights obtained by the first acquirer of the products.

It should also be noted that the CAT held that, to the extent the first acquirer of the licenses had not rendered their copies of the software unusable prior to sale (as required pursuant to the UsedSoft decision), any liability to Microsoft would fall on the first acquirer and not VL or any subsequent licensee. 

Preliminary Issue 2

Microsoft also asserted that, even if its distribution and reproduction rights under the Software Directive are exhausted in respect of the computer programs comprising the products there can be no exhaustion of the rights in the “non-program works”. That is, that it should be able to continue to control the distribution and reproduction of non-program works even where its rights in the underlying computer program have been exhausted by first sale. Microsoft relied on evidence from 14 witnesses to describe the work involved in the creation of the non-program works which were said to comprise the user interfaces (for Windows and Word), resource files/assets, icons, clipart, fonts and help files.

The CAT found that the non-program works were ancillary or incidental to their attendant programs in that they exist to enable a user to run or to use fully the programs so that those programs may fulfil their function. In coming to this conclusion the CAT noted that none of the Microsoft contractual documentation made any differentiation between program and non-program works. Indeed, to the contrary, the terms made clear that, after 3 years, the purchaser obtained the right to use the products in perpetuity. The CAT also considered the implications if Microsoft’s arguments were to succeed:

1. it would negate a purpose of the Software Directive in that it would divorce the principle of exhaustion from the reality of how software is sold and used. The CAT held that “assessing exhaustion by dividing up a product into different copyright works and then applying different rules of exhaustion to each part, ignores what has actually been put on the market in the EU with the rights holder’s consent”; and
2. in any case where the computer program has a user interface or contains any non-program works in which copyright subsists, the resale market for the computer program itself could be controlled. The CAT noted that it would be an odd result if “a user interface added to help a purchaser use the program, would actually act to prevent effective exhaustion in the program upon sale”.

As a result the CAT determined that the first sale of a software product exhausts the distribution and/or reproduction right under Article 4(2) of the Software Directive “in all of the works that are supplied and inevitably downloaded by a purchaser as part of Windows and Office, to the extent those works are distributed, downloaded and copied in accordance with the intended purpose for which Windows and Office were first sold.”