Are second hand software sales legal?

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The second hand sale of software excites lots of emotive debate: is it a good thing for consumers by giving them choices at more flexible price points, or is it killing publishers? Both?  While that debate continues to rage, a couple of recent legal cases have got me thinking: are second hand software sales actually legal?  Interestingly, one is a US case and the other is a European Union case, so here’s the Transatlantic perspective…
What the EU thinks so far: second hand sales are legal BUT can be banned.
 
A very interesting German case about second hand software sales is currently before the European Court of Justice and is going to shed some light on the issue.  Quick facts: a company called usedSoft sells second hand digital licences to software, including Oracle software, which licences the consumers then use to download the software from the publisher directly.  Oracle didn’t like this – they sued usedSoft in Germany arguing that that the sale of its used licences for software is illegal.  The German courts referred the matter to the ECJ, asking it rule on whether as a matter of EU law a company can sell second hand digital licences for third party software to consumers.
The ECJ has yet to issue its formal judgment but, as is standard practice in ECJ cases, there has been an opinion very recently issued on the case by the allocated Advocate General -you can read it here.  Usually AG opinions are a good (but not necessarily conclusive) steer on which direction the ECJ will head in.   Here’s my summary of the legal points discussed in his opinion:
  • The EU Computer Program Directive gives a publisher copyright protection in “the expression in any form of a computer program“.  Typically, this includes the exclusive right to distribute the software (specifically “any form of distribution to the public, including the rental, of the original computer program or of copies thereof“).  BUT, generally that right of distribution is ‘exhausted’ following the ‘first sale’ of the software in the EU “with the exception of the right to control further rental of the program or a copy thereof“.
  • In other words, if you make software then you have exclusive rights over how it is distributed in the EU up until it actually enters the EU market.  Once there has been a ‘first sale’ of the software in the EU, you can’t then have exclusive control over the distribution: otherwise you’d have a monopoly of distribution forever and, the EU says, that would be against its principles of free movement of goods and services.
  • So, does that mean that once Oracle or any other publisher has released its software in the EU, it cannot then keep controlling how it is distributed – meaning it cannot stop the sale of digital licences over its software?
  • Advocate General Bot (and this is a very potted summary, folks) held that publishers can lose the right to stop second hand sales, but essentially it depends on what the licence terms say. If the licence terms grant the original software purchaser the right to redistribute or reproduce the licence, then it can sell the software second-hand.  BUT, if the licence terms reserve the right of redistribution or reproduction to the software publisher, then the original software purchaser can’t sell the software second-hand.
  • I’ll just say that again for clarity’s sake: if the licence terms say that the publisher retains the right to reproduce the software, then you cannot sell it to a third party.
  • (For those interested, this is what the Advocate General said specifically on these points: “While the simultaneous resale of the downloaded copy by the first acquirer, together with its use, falls within the ambit of the right of distribution, the assignment of a user licence such as that issued by Oracle to its customers involves the exercise of the exclusive right of reproduction, since it allows a new copy of the program to be made by download from the internet or by reproduction from a copy already held by the use…It follows…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”.)
  • The Advocate General knew that this ruling would heavily curtail what can and can’t be done with second hand software, but decided (apparently with some reluctance) that the wording of the EU legislation doesn’t leave any leeway here.  If there is to be second hand sales of software, it has to be either due to market forces (publishers changing their licence terms) or due to new legislation.
It’s just the Advocate General who has issued an opinion on this, as I said, so we’ll have to wait for the ECJ full judgment to be sure of the legal position.  More on what this means in a moment, but let’s have a look at the US position first.
What the US thinks so far: some of us think it’s illegal, but some of us haven’t made our minds up yet.
 
As I understand it (though I’m not a US lawyer, so feel free to correct me my American friends), there isn’t yet a consensus on how second hand software sales should be treated across the USA: different courts have come to different views and there hasn’t yet been a proper, unifying decision from the US Supreme Court.  A couple of developments we’ve seen recently though:
  • In late 2010, the US case of Vernor v Autodesk (more on that here) came to essentially the same practical result that usedSoft v Oracle seems likely to reach in the EU: i.e. if the publisher’s licence terms prohibit reproduction/redistribution, then second hand sales are prohibited.  That case involved a businessman selling used copies of AutoCAD online, which Autodesk weren’t very happy about.  Again, the court there recognised the difficulties that the ruling imposed, but found that they didn’t have any leeway unless Congress steps in.
    UPDATE: my friends at Developing Concerns have reminded me that if software is outright purchased by someone (and therefore with no EULA attached to it), then they can sell it on.  If there is a licence attached to the software, then it gets a bit more complicated as I said above.  For more info, they’ve referred me to this useful article: http://www.lacba.org/Files/LAL/Vol34No6/2843.pdf.  The problem as I see it is that pretty much all modern software is ‘sold’ to consumers and businesses under a EULA and therefore these first sale issues arise. 
  • More recently, the US Supreme Court is set to hear an appeal which will give them the opportunity to reassess the ‘First Sale’ doctrine in the modern age.  The case involves a US citizen importing textbooks from abroad for resale in the US, which the publisher argues constitutes copyright infringement.  So again, it sounds like this will set up a legal fight about the central tension in second hand sales cases: the freedom of businesspeople to resell products once they’ve already been put on the market, against the rights of publishers to control how their products are used – including the right to control (or at least be paid) for future resales of the product.
This means second hand sales might be illegal, right?  So what?
 
We still have a way to go before we know the full legal position here: we need to see the full ECJ and Supreme Court decisions.  Even once those decisions have been made, there are a whole range of complicating factors that could get involved: what local law says in the US States or EU Member States; the potential for lawsuits in different directions to implement or challenge any decisions that are made; and, above all, what the markets and consumers actually think about this.
But let’s assume that both the ECJ and the Supreme Court follow the tracks that have already been put in front of them and rule that publishers have the right to control second hand sales via their licence terms. What  would that mean for software (and games) second hand sales?  There’s two answers:
  • Legally: as long as a publisher drafts its End User Licence Agreement carefully, it could prohibit second hand sales.  This will heap greater pressure on lawyers to ensure that EULAs are properly written, since a great deal of money could rest on whether their wording actually stops second hand sales.
  • In reality: it’s too early to tell whether a ruling against second hand sales really would make any difference.  Technically, publishers of all kinds could try using this kind of legal precedent to go after major distributors of second hand software (e.g. auction sites or retail chains like GameStop) to force them to stop.  But that would involve expensive litigation and time to achieve results.  Even if those lawsuits are won, will it really help?  Proponents of second hand sales would argue that actually the economic arguments are much more nuanced than “second hand sales = I lose my preferred sale price = I lose out“.
  • Besides, if people want to sell their games second hand, arguably they’ll find a way in practice no matter what happens – and they’ll be angry you tried to stop them.  In the most extreme case, the only way to stop second hand sales is to pursue the consumers themselves directly – which could raise a whole host of practical and legal issues.
So it’s more complicated than just the lawThere you have it.  Based on the developing caselaw on both sides of the Pond, there is an argument that publishers can stop second hand sales of their software – and that law will be clarified in the course of the next year or so.  But equally, it’s open to debate whether that really will help in the long-run, given the hold that second hand sales of all kinds of software, from enterprise software to console and PC games, have already got on consumers and businesses.

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5 Responses to “Are second hand software sales legal?”

  1. Artfunkel

    It seems to me that the EU opinion relates specifically to selling access to a service from which you can download a copy of some software. It wouldn't apply to reselling the copy that resulted.

    So a ruling along those lines would not apply to reselling a game on a disc, but it would apply to reselling access to a service like Steam.

    Separately, I don't think that any developer or publisher is particularly interested in litigating against individuals who pass their old games on to their friends. We'll be satisfied once it stops being an all-pervasive business practice.

    Reply
  2. Jas Purewal

    @Artfunkel – thanks for your comment. I'm not sure I agree with you though: potentially the ruling applies to both the physical storage medium and the software itself (though I think the argument is definitely weaker for the physical storage medium). Anyway, in practice it wouldn't matter: what's the point in selling a DVD if you can't access its contents?

    Reply
  3. philipwhiuk

    My biggest argument against EULAS is: if EULAs can be used to prohibit second software sales, what's to stop anyone from printing an EULA on loaf of bread or any other physical object. This would make the whole second-sale thing pointless period.

    The argument about the enforceability of an EULA has always been about whether you can read it (and hence accept it) before you purchase the product. If you don't use a CD/DVD before you re-sell it you don't have to read the EULA so I don't feel it would be legally binding.

    It's interesting that German courts chose to directly refer to the ECJ – my knowledge is that in the UK the court would make a judgement and an appeal would be necessary to reach the ECJ. Presumably it is different in other countries (or am I wrong?)

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  4. Ste Pickford

    I think Artfunkel is right in his last sentence.

    I imagine that games publishers might consider litigation against retailers, as the perceived problem isn't second hand sales of games per se, it's second hand sales being so prominently promoted by the major retailers, to the point where ordinary customers walking into a high street shop to buy a copy of a new game are walking out with a 'pre-owned' copy (often bought at close to full price).

    This doesn't happen in books, music, etc., where the second hand shops are back-street specialists, not the main high street retailers.

    I suspect stopping Game and HMV selling second hand games would be considered a big success by the major publishers, even if gamers could happily continue buying and selling their old games via CEX, eBay, etc.

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  5. Kenneth Pierce

    I’ve always thought of this matter in the most simplistic terms.

    When publishers/gaming companies/software companies advertise their ware’s they do not say “lease” this game.

    BUY NOW! Whether it be software you purchase @ your local game store or online at POS there is no big poster saying “Hey, btw, you do not own this thing we are letting you buy”.

    So, if you are buying a license that is the way the advertising needs to read. Not Buy now, Not on sale but lease this license.

    Just my 2c.

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