Information Technology – Germany.

In two recent cases the German courts issued judgments on the transferability of software licences. The cases are of major practical significance, particularly regarding the transferability of software licences within an outsourcing transaction, as discussed in "When Copyright Becomes a Cost Driver in the Outsourcing Process". The cases were decided by courts in Hamburg and Munich, which arrived at opposing conclusions. In light of these decisions, it remains unclear whether the sale and transfer of 'used software' is possible. Notwithstanding this uncertainty, many major corporations are still buying and selling used software licences in order to cut costs.

Resale of Software Stored on Data Medium

The resale of a software copy stored on a CD, DVD or other data carrier (including the licence pertaining thereto) is legally permitted without the consent of the software manufacturer (or its authorized dealer), according to the principle of exhaustion. If the contract between the software manufacturer and the purchaser of the software contains a contractual prohibition of resale, this clause is valid only if it was negotiated individually on a case-by-case basis. Any prohibition included in the standard terms is void. Even where an individually negotiated contractual prohibition of resale exists, the owner of the copy can still validly transfer the software licence to, for example, an outsourcing service provider. However, in such case the owner of the copy is in breach of the contract with the software manufacturer and is liable for damages.

The different results with regards to the transferability of licences and the contractual breach arise from the principle of the abstract nature of rights in rem, a fundamental principle of German law. According to this principle, contractual issues must be strictly separated from property issues. In principle, the violation of a contract does not affect the transfer of rights itself.

Resale of Software Licences

The principle of exhaustion does not apply directly to software licences which are procured other than by purchasing a data carrier containing a copy of the software - for example, in the case of group licences which entitle the purchaser to download the software or make the number of copies needed to provide its employees with workstation licences. In such cases the statutory law does not provide for a clear rule. This situation is reflected by the divergent judgments issued by the courts of Hamburg and Munich. A Federal Supreme Court of Justice decision on the same legal issue is also pending, although this does not relate to software, but concerns copyright in relation to furniture.

usedSoft, the defendant in both the Hamburg and Munich cases, buys free software licences from companies which no longer require them. These licences were acquired as part of a volume licence contract and are transferred to usedSoft, which in turn transfers them to the ultimate purchaser, which either downloads the software or already holds a master copy under its own licence agreement. The company selling the licences to usedSoft must delete the corresponding software copies and provide a notarized statement to this effect. The plaintiffs (in Hamburg, a Microsoft dealer; in Munich, Oracle) sued usedSoft for a violation of copyright. They argued that the principle of exhaustion did not apply because usedSoft did not provide a physically stored copy of the software, but merely the licence itself. UsedSoft replied that the distinction between the sale of physical copies and software licences was unreasonable, in particular because the companies that sold the licences to usedSoft had fully paid for those licences and undertook to cease all use thereof. Therefore, the transfer of licences should be treated in the same way as the resale of a physical copy.

The Regional Court of Munich(1) decided that the principle of exhaustion does not apply to the sale of software licences. As a result, the sale and transfer of licences without the owner's consent is legally impossible. In contrast, the Regional Court of Hamburg(2) held that this principle also applies to the sale of licences because of the similarities with the sale of a physical software copy. As a consequence, the transfer itself is legally valid and a contractual prohibition in standard terms is void. Only where a prohibition of resale has been individually negotiated will the seller be in breach of contract and thus obliged to pay damages to the seller of the software (ie, the software manufacturer or its authorized dealer).

Implications

This unclear legal situation has various practical implications, in particular the following:

• If the transfer of the licences from the reseller to the ultimate purchaser is void (as held by the Higher Regional Court of Munich), the ultimate purchaser must expect claims for termination of use and damages from the owner of the proprietary software rights (ie, the software manufacturer or its authorized dealer). However, if the ruling of the Regional Court of Hamburg prevails, there will be no basis whatsoever for claims of the owner of the software against the ultimate purchaser.
• On the basis of the Higher Regional Court Munich judgment, the reseller (in this instance, usedSoft) may face claims for damages from the software manufacturer (or its authorized dealer) for selling and transferring the software licences to the ultimate purchaser without being entitled to do so.
• The company that sells the used software licences to the reseller is the only company with a direct contractual relation to the software manufacturer or its authorized dealer. It may thus face damages for breach of contract if the contract contains a valid prohibition against transfer of the software licences. According to the Higher Regional Court of Munich, such a prohibition does not violate the principle of exhaustion. Therefore, the risk that such a clause is considered void is small. However, even according to the Regional Court of Hamburg, claims for damages against the company that sells the licences to the reseller are still possible, since even if the transfer as such is valid because the principle of exhaustion applies, the parties can nevertheless contractually agree that such a transfer will not occur (provided that antitrust law allows such a clause). However, in any event such contractual clause must be negotiated individually (rather than included in standard terms).

Similar consequences apply in the outsourcing context. A company wishing to outsource part of its business must transfer the relevant licences to the services provider. Hence, licence allotments will be sold and transferred. Such a transfer may be void (as per the Higher Regional Court of Munich decision) and may trigger both (i) contractual claims of the software manufacturer or its authorized dealer against the outsourcing company, and (ii) proprietary claims for termination of use and damages against the service provider that is using the software.

Outlook

A new approach to this issue may arise from an anticipated preliminary ruling to the European Court of Justice (ECJ). In relation to a query submitted by the German Federal Court,(3) the ECJ will decide whether Article 4(1) of the EU Information Society Directive (2001/29/EC), which implements the principle of exhaustion, also applies to the transfer of merely the right to use a copyright-protected item without transfer of the protected physical item. The decisive question is whether such transfer of a right to use qualifies as a 'distribution' as defined by the directive. If this question is answered in the affirmative, it can be argued that the transfer of software licences without transferring a physical copy is permissible according to the principle of exhaustion. In such case the opinion of the Regional Court of Hamburg would most likely prevail.

"International Law Office"