Ranks and Vasiļevičs (Case C-166/15) is a preliminary ruling of the Court of Justice of the European Union (CJEU), delivered on 12 October 2016. It concerns the resale of used copies of Microsoft programs stored on non-original media. The Court confirmed that the first acquirer of a copy of a computer program sold with an unlimited licence may resell that copy and its licence, despite contract terms prohibiting transfer. It held, however, that where the original medium has been damaged, destroyed or lost, the acquirer may not provide its back-up copy to the new acquirer without the rightholder’s authorisation.[1]
The ruling applies and limits the Court’s 2012 judgment in UsedSoft v Oracle, which dealt with programs downloaded from the internet.[2]
Background
The reference came from criminal proceedings in Latvia. As described in the order for reference, Mr Ranks and Mr Vasiļevičs were charged with having sold, through an online marketplace between 28 December 2001 and 22 December 2004, copyright-protected programs published by Microsoft Corp., including versions of Windows and the Office suite. The charges covered unlawful sale, as part of a criminal organisation, of objects protected by copyright, intentional unlawful use of another person’s trade mark, and unregistered economic activity.[1] The number of copies sold was estimated at more than 3,000 but could not be precisely determined. On the basis of sums credited to the defendants’ PayPal accounts, the damage to Microsoft was evaluated at USD 293,548.40.[1]
The Latvian courts had reached different results before the reference. At first instance, on 3 January 2012, the two men were found guilty of the copyright and trade mark offences and ordered to pay partial compensation to Microsoft. The Riga Regional Court set aside the copyright conviction on appeal on 22 March 2013. The Senate of the Supreme Court then set aside that appeal judgment in its entirety on 13 October 2013 and sent the case back for re-examination.[1] During the re-examination, at the defendants’ request, the Riga Regional Court referred questions to the CJEU.[1]
Because the conduct predated Directive 2009/24/EC, the Court answered the questions under the equivalent provisions of the earlier Directive 91/250/EEC.[1]
The dispute
The referring court asked, in essence, whether someone who acquired a program with a “used” licence on a non-original disk may rely on exhaustion of the distribution right. The situation it described was one where the first purchaser bought the program on an original disk that was later damaged, and then erased its own copy and stopped using it. The court also asked whether such a person may resell the program on a non-original disk to a third party.[1]
The positions recorded in the judgment were as follows:
- Microsoft, Italy, Poland and the European Commission submitted that exhaustion applies only to the original material medium (floppy disc, CD-ROM or DVD-ROM) sold to the first acquirer, not to a non-original medium.[1]
- The defendants and the Commission submitted that, under the UsedSoft conditions, a copy on a non-original medium may be resold if the original medium was damaged. On that view, making the copy would be covered by the exceptions in Article 5(1) and (2).[1]
- The Latvian Government questioned admissibility. It argued that the referring court appeared to treat the programs as lawfully acquired although, according to the order for reference, they were counterfeits. The Court held the questions admissible.[1]
Decision
Exhaustion attaches to the copy and licence, not the medium
The Court rejected the argument that exhaustion is limited to the original medium “as such”. It held that exhaustion “concerns the copy of the computer program itself and the accompanying user licence, and not the material medium” on which the copy was first sold.[1] It restated from UsedSoft that a rightholder who has sold a copy in the EU with an unlimited licence “can no longer oppose the resale of that copy… notwithstanding the existence of contractual terms prohibiting any further transfer”.[1]
Back-up copies cannot be resold
The Court then turned to the reproduction right. The back-up copy exception in Article 5(2) must be read strictly. It permits a back-up copy only when made by a person with a right to use the program and only where necessary for that use. A back-up copy therefore serves only the needs of the person entitled to use the program. That person “cannot… use that copy in order to resell that program to a third party”, even if the original medium has been damaged, destroyed or lost.[1]
Download by the new acquirer
The Court compared the lawful acquirer whose original medium is lost with the lawful acquirer of a downloaded copy. Such an acquirer cannot be deprived of any possibility of reselling “for that reason alone”. The judgment records that Microsoft acknowledged, in its written reply to the Court, that the lawful acquirer of an unlimited licence for a used copy must be able to download the program from the copyright holder’s website.[1] The Court restated that the initial acquirer must make any copy in its possession unusable at the time of resale. It also said that an acquirer who relies on exhaustion and downloads the program must establish, “by any available evidence”, that it acquired the licence lawfully.[1]
Operative part and the national proceedings
The Court ruled that “although the initial acquirer of a copy of a computer program accompanied by an unlimited user licence is entitled to resell that copy and his licence to a new acquirer, he may not, however, in the case where the original material medium of the copy that was initially delivered to him has been damaged, destroyed or lost, provide his back-up copy of that program to that new acquirer without the authorisation of the rightholder.”[1]
The order for reference did not say who had made the copies the defendants resold. The Court therefore left it to the referring court to decide, for each copy, whether it was an infringing copy under Article 7(1) of Directive 91/250 and to draw the necessary conclusions.[1] The CJEU made no finding of guilt. The outcome of the Latvian proceedings after the ruling is not stated in the sources cited here.
Significance for software licensing and SAM practice
- Resale is permitted, back-up copies are not a vehicle for it. Under the ruling, a perpetual licence first sold in the EU on physical media can be resold together with the copy. The seller cannot substitute a self-made back-up for a lost or damaged original without the rightholder’s consent.[1]
- Proof of lawful acquisition sits with the acquirer. The Court placed on the acquirer who relies on exhaustion the task of proving, by any available evidence, that it acquired the licence lawfully.[1] In the UK ValueLicensing litigation the Court of Appeal read this as requiring the reseller to show it “acquired the software in a lawful manner”.[3] For a buyer of second-hand licences, purchase records and the chain of transfer are the evidence that establishes the entitlement.
- Media versus rights. Because exhaustion attaches to the copy and licence rather than the disk, an entitlement record for a boxed or media-based perpetual licence should track the licence and its proof of purchase, not only the physical media.[1]
- Infringing copies remain infringing. The Court kept the remedies in Article 7(1) against putting into circulation, or possessing for commercial purposes, copies known or believed to be infringing.[1] Exhaustion does not legitimise such copies.
Lessons learned
- Keep evidence of lawful acquisition. The Court placed on the acquirer who relies on exhaustion the task of proving, by any available evidence, that it acquired the licence lawfully.[1] The Court of Appeal of England and Wales read this as requiring the reseller to show it acquired the software in a lawful manner, so purchase records and the chain of transfer should be retained.[3]
- Track the licence, not only the disk. Exhaustion attaches to the copy and its licence rather than to the physical medium.[1] Entitlement records for boxed or media-based perpetual licences should hold the licence and its proof of purchase.
- Back-up copies are not for resale. The back-up exception serves only the person entitled to use the program, who cannot use that copy to resell the program without the rightholder’s consent.[1] Second-hand licences offered on non-original media need particular scrutiny.