Published in: European Property Law Journal, 2012, Volume 1, Issue 2, Pages 317–329
With its judgment of 3 July 2012 in UsedSoft v Oracle the Court of Justice of the European Union (“ECJ”) made it clear that exhaustion of intellectual property rights also applies to the sale of intangible goods like a copy of a computer program. However, to achieve the end of the free movement of intangible goods, the Court had to come up with an inventive means: an autonomous European property right in “bits & bytes”. This may be justified to create a market for second hand software licences, but in doing so the Court manifests itself as the proverbial bull in a china shop, if it comes to respecting established principles of national property laws of the Member States. Every reason, therefore to take inventory of what the Court actually did do in UsedSoft v Oracle in respect of a property right in intangible goods.
The free movement of goods
The free movement of goods is one of the pillars of the single European market and is responsible for an impressive line of precedents of the ECJ, such as Grundig v Consten(1966), Deutsche Grammophon Gesellschaft v Metro (1971), Silhouette v Hartlauer(1998) and Davidoff (2001). These precedents constitute the building blocks of a piece of European law that is carved in stone: after the first sale of a good by or with the consent of the holder of an intellectual property right (“IP owner”) within Europe any subsequent sales of that good can no longer be blocked. That first sale has exhausted the IP rights and therefore any subsequent sales of that good within Europe do not infringe these IP rights. The result is that Levi’s-jeans or Diesel-shoes can be freely sold and shipped within the European market, provided that one can prove that the goods were first sold on that European market by or with the consent of the brand owner.
This free movement of goods is an absolute necessity for the proper functioning of the European Union’s internal market. The ultimate goal of that European single market is to make sure that the lowest prices within that market are potentially available for the average European consumer and the free distribution of goods within that market is supposed to help in making that a reality. Without a free movement of goods and the exhaustion of IP rights a single European internal market can simply not exist.
UsedSoft v Oracle: the facts
In UsedSoft v Oracle the question was whether this line of precedents that was build on cases dealing with the distribution of tangible goods can be extended to the distribution of an intangible good, such as a copy of a computer program.
The case concerned Oracle database software, which software is in 85% of cases distributed via downloading from the internet, instead of being supplied on a CD-ROM or DVD. The legal instrument used by Oracle to distribute the software is that of a licence. That licence gives the right to store a copy of the program on a server and to allow a certain number of users to access it by transferring the software to the main memory of their work-station computer. The agreement expressly provides that the right to use is for an unlimited period. In addition, that licence also expressly provides that these rights are non-transferable. UsedSoft acquired such user licences from Oracle customers and marketed these used software licences to third parties. After acquiring such a “second hand licence”, customers of UsedSoft who were not yet in possession of the Oracle software concerned tried to download a copy thereof directly from Oracle’s website.
According to the Bundesgerichtshof, the actions of UsedSoft and its customers infringed Oracle’s exclusive rights with respect to permanent or temporary reproduction of computer programs within the meaning of Article 4(1)(a) of the Software Directive (2009/24). However, Article 5(1) of the Software Directive provides that – shortly put – the “lawful acquirer” of a computer program does not need the authorisation of the right holder for the acts of reproduction as referred to in Article 4(1)(a) where they are necessary for the use of the computer program in accordance with its intended purpose.
Therefore, the first question was whether these customers of UsedSoft can qualify as a “lawful acquirer” of a copy of the computer program, even though they cannot rely on a valid transfer of a user right in the computer program granted by Oracle, since the licence agreements provided that they were “non-transferable”.
The next question the Bundesgerichtshof raised was whether – assuming that a UsedSoft customer can be a “lawful acquirer” – the exhaustion provision of Article 4(2) of the Software Directive applies: “The first sale in the Community of a copy of a program by the right holder 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.”
The ruling of the ECJ
The ECJ first addressed the second question and summarized that the referring court essentially seeks to know whether and under what conditions the downloading from the internet of a copy of a computer program, authorised by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the European Union within the meaning of Article 4(2) of Software Directive.
The Court answers that question in the affirmative (under 72) and – simply put – ruled that the distribution right of a copy of a computer program is exhausted if the copyright holder has authorised the downloading of that copy from the internet onto a data carrier and has also granted, in return for an economically reasonable fee, the right to use that copy for an unlimited time. The fact that the distribution right is thus exhausted makes it possible to create a market for second hand software licences, and such may even encompass that a buyer who did not obtain a copy of the software may download a copy from the website.
This ruling as such certainly has far reaching consequences and is of great importance for the development of a second hand market for software. Equally important though, seems what the Court considers under 35 through 71 of the judgment with regard to the existence and possible transfer of a right of ownership in an item of intangible property, such as a copy of a computer program. In doing so, the ECJ certainly shakes the foundations of Dutch property law and effectively introduces a brand new property right and a European property right at that. Given that until now property law is still purely a matter of the national laws of the Member States since it has not been harmonised by European Union law, this certainly seems a ground-breaking event, which should not go unnoticed. To fully appreciate what the impact of the Court’s findings may be, we need to take a closer look at what the Court actually considers.
Definition of “sale”
The Court starts (under 36) by recalling that pursuant to Article 4(2) of the Software Directive exhaustion of the distribution right requires “the first sale in the European Union of a copy of a computer program [...].” This leads to the question (under 38) whether the contractual relation between Oracle and its customer, that allows that customer to download a copy of the program in question, may be regarded as a “first sale ... of a copy of a program” within the meaning of Article 4(2) of the Software Directive.
The Court underscores that (i) the need for a uniform application of European Union law and (ii) the principle of equality, require that the terms of a provision of European Union law which makes no express reference to the law of the Member States must be given an independent and uniform interpretation throughout the European Union. Given that the Directive does not make any reference to national laws as to the meaning to be given to the term “sale” that term must be regarded as designating an autonomous concept of European Union law, which must be interpreted in a uniform manner throughout the territory of the European (under 40). In short, a “sale” within the meaning of the Software Directive is a matter of European Union law only and not subject to the national laws of the Member States.
The Court then puts forward (under 42) what it calls “a commonly accepted definition” of a “sale”, being: “an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him.” According to the Court it follows from this definition that the commercial transaction that, in accordance with Article 4(2) of the Software Directive, gives rise to the exhaustion of a distribution right with regard to a copy of a computer program “must involve a transfer of the right of ownership in that copy”. One can note, that what the Court calls a commonly accepted definition of a “sale”, already triggers a few questions and observations from a property law perspective.
Property rights in intangible objects?
The most important implicit observation seems to be that the Court assumes – and also thereafter confirms in its judgment – that there is such as thing as a property right in an intangible object, like a copy of a computer program.
I fail to see the foundation for such a property right in intangible objects, and as a matter of Dutch property law, such a property right is unknown and one can seriously question whether such a property right can be acknowledged by a Court, if this was a matter of Dutch law only. I also seriously doubt whether such a property right in intangible objects is indeed in existence under the national laws of one or more other Member States. Anyway, the Court does not make any mention thereof. Therefore, it seems that the conclusion has to be that the Court effectively introduces a new – sui generis – property right in intangible items as an autonomous concept of European Union law. However, contrary to what the Court does with regard to the interpretation of the term “sale”, the Court does not expressly make it clear that it is indeed introducing such a new property right in “bits & bytes” and that this new sui generis property right must – as is the case for the term “sale” – also be interpreted in a uniform manner throughout the territory of the European Union. Irrespective of whether the Court should have said what it was actually doing, one has to note that such a pan-European property right is, in any case, a completely novel legal instrument in the area of property law within Europe.
Given the lack of European harmonisation in this area of the law, this certainly seems a revolutionary step to take. We are already familiar with the concept of a unitary pan-European intellectual property right – such as a Community trademark right, a Community design right, and a Community plant variety right – but these European intellectual property rights have their foundation in three distinct EU regulations. To come up with a new property right as a matter of case law and without the comfort of a European regulation that governs all the nitty-gritty details that come with dealing with such a property right and the transfer thereof, seems quite a bold step.
As we shall see below, the Court, however, effectively had no choice but to come up with such a property right in “bits & bytes”, since the Court was apparently determined to keep the possibility of exhaustion of distribution rights in copies of computer programs alive.
In the meantime, the Court creates quite some turmoil in, for instance, established Dutch law concepts of property law. The definition of “property” in Article 5:1 of the Dutch Civil Code (“DCC”) is limited to “tangible objects” as defined in Article 3:2 DCC. Consequently, a property right in an intangible item is simply not possible within the framework of the Dutch Civil Code.
One can also not save the situation by assuming that the Court of Justice did not mean a regular “property right” but perhaps referred to “intellectual property rights” when speaking of “rights of ownership in an item of [...] intangible property” and the “transfer of the right of ownership in” a copy of a computer program (under 42). Given that the questions that the Court is addressing arise within the context of the possible exhaustion of Oracle’s copyright, the possible transfer of that copyright is not an issue. Any transfer of rights that is referred to in the case was limited to a possible transfer of the contractually granted licence to use a copy of a computer program. In addition to such a transfer of the licence, the possible transfer of a copy of a computer program (i.e., “bits & bytes”) was an issue in the case, but this also does not imply any transfer of intellectual property rights. Copyright does encompass the exclusive right to make a copy of a computer program – the reproduction right of Article 4(1)(a) of the Software Directive – but that does not result in a subsequent property right – either intellectual or not – of the holder of the copyright in any unauthorised copy made in violation of that reproduction right.
Therefore, the only possible conclusion seems to be that the ECJ has indeed introduced a new property right in immaterial objects as an autonomous European legal instrument, and that the national laws of the Member States simply will have to find ways to deal with, and facilitate that new European property right.
That does not necessarily come easy, however, given that it is for instance a strongly held belief among Dutch property law scholars that property law has a “closed system” or “numerus clausus”, so that no new property rights are possible outside the statutory framework of the Dutch Civil Code. This doctrine is also not limited to Dutch civil law but is a pillar of property law in most Member States. The UsedSoft-decision thus implies that this Dutch doctrine of a “numerus clausus” of absolute rights will have to be amended and that the same is likely to be true for the Dutch Civil Code that at present does not contain any sections that actually do facilitate such a new property right in intangible objects.
A transferable property right in immaterial objects?
The Court of Justice not only finds that a property right in an intangible object is possible, it also assumes that such a property right can be transferred.
To be able to conclude that a distribution right is exhausted in accordance with Article 4(2) of the Software Directive, it is necessary that there is a “sale”. As indicated above, the Court states under 42 that it follows from the “commonly accepted definition” that the commercial transaction giving rise to exhaustion of the distribution right of a copy of a computer program “must involve a transfer of the right of ownership in that copy.” To be able to conclude that there is exhaustion a “transfer of the right of ownership” in the copy of the computer program must therefore be possible. The Court also discovers such a transfer. Under 44 the Court observes “that the downloading of a copy of a computer program and the conclusion of a user licence agreement for that copy form an indivisible whole.” The Court comes to that position because it finds that “downloading a copy of a computer program is pointless if the copy cannot be used by its possessor.” Therefore those two operations – (i) downloading and (ii) concluding a user licence – must be examined as “an indivisible whole” for purposes of their legal classification. Under 47 the Court then finds that these two acts, in the case of the making available of a copy of a computer program by means of a material medium such as a CD-ROM or DVD, “involve [...] the transfer of the right of ownership of that copy”. Against that background the Court concludes that “the transfer by the copyright holder to a customer of a copy of a computer program, accompanied by the conclusion between the same parties of a user licence agreement, constitutes a ‘first sale … of a copy of a program’ within the meaning of Article 4(2)” of the Software Directive and that therefore the copyright is exhausted.
In the Court’s line of reasoning – that makes exhaustion of the distribution right possible – it is not only critical (i) that a property right in an intangible object does exist, but also (ii) that this property right can be transferred. The Court also finds that both these requirements can be fulfilled.
However, as a matter of Dutch law, any such property right in an intangible object would not be transferable at all. Article 3:83(1) DCC limits the general transferability of rights to “property, rights in rem and claims”, while section 3 states that “all other rights” can only be transferred if there is an explicit statutory provision to that effect. The “property” that is stated to be transferable in Article 3:83(1) DCC is the property right of Article 5:1 DCC, which provision is limited to material objects as defined in Article 3:2 DCC. Therefore, as a matter of Dutch law, any property rights in an intangible object cannot be transferred, given that there is no statutory provision to that effect. One should also note that as a matter of Dutch law – and in line with the Dutch legal doctrine of a closed system of absolute rights – it only the legislator, and not a court, that has the jurisdiction to make any such “other right” transferable. Therefore, the transferability of a property right in an intangible object – which was apparently not seen as an issue by the Court of Justice – is not possible under Dutch law. From a Dutch law perspective, one therefore has to conclude that not only the existence of a property right in an intangible object but also its transferability must be seen as autonomous concepts of European Union law, because otherwise the findings of the Court of Justice in UsedSoft v Oracle would not hold in The Netherlands.
An implied transfer of property right in a copy of a computer program?
Assuming that Dutch law manages to cope with both the existence of this new property right in intangible objects as well as its transferability, the next question is then how exactly such a property right is to be actually transferred.
As a matter of Dutch law, a valid transfer of any “good” – the general term for all rights in the Dutch Civil Code – requires an actual “act of transfer”(“levering”), as Article 84(1) DCC makes clear. The Dutch Civil Code recognizes specific “acts of transfer” for the transfer of (a) real property and (b) moveable property. Real property is transferred by means of (i) a notarial deed and (ii) the registration thereof (Article 3:89 DCC). Moveable property is actually transferred by handing over “possession” (Article 3:90 DCC). However, these manners of transfer are limited to the transfer of a property right in a tangible object within the meaning of Article 3:2 DCC and therefore do not apply to property rights in intangible objects. Article 3:95 DCC then functions as a catch-all provision for any remaining rights and provides that the actual transfer thereof requires a written deed.
It will by now not surprise the reader that the Court of Justice also paid little respect to these subtleties of Dutch civil law. The Court simply assumes that the actual transfer of a property right can be implied by certain acts. Under 46, the Court simply concludes that the indivisible act of (a) downloading a copy of a computer program and (b) concluding a user licence agreement for that copy taken “as a whole, involve the transfer of the right of ownership of the copy of the computer program in question.” In other words, the actual transfer is implied by these two acts (that have to be seen as indivisible). Under 45, the Court also refers to the “making available by Oracle of a copy of its computer program”, but any such “making available” is as a matter of Dutch law only a valid transfer in case of moveable tangible property – where transferring possession is sufficient for a transfer of property rights – but not with regard to any other property. Any other form of property – i.e., rights – requires a deed as provided for in article 3:95 DCC for ownership to change hands.
It may be clear from the above that also the actual transfer of this property right in intangible objects must be regarded to be a matter of European Union law as well, because otherwise any such actual transfer as assumed or found by the Court would also not be valid or possible under Dutch law.
The damage so far
If we take inventory of the damage that the UsedSoft-judgment has created in the china shop of Dutch civil law and its closed system with regard to property rights, then one cannot but conclude that it is quite a mess. It has to be feared that UsedSoft not only pulled down (a) the closed system of property rights, but also did put aside (b) the requirement of a statutory provision which allows for the transferability of any “other right” of Article 3:83 DCC, and laid to waste (c) the closed system of how to actually transfer a right as provided for in Book 3 of the Dutch Civil Code. If we then take into consideration, that this Dutch Civil Code is only 20 years old – it came into effect on the 1st of January of 1992 – then it may be appreciated that all of these findings that the Court of Justice so easily proclaims may come as quite shock to the faint hearted Dutch civil law practitioner.
The sight of this wreckage makes one wonder why the Court of Justice was so determined to take this course and whether the Court could not have chosen a different route and could have paid more deference to established civil law principles of The Netherlands (which will also exists under the national laws of other Member States). How come that the Court had such an uncontrollable urge to acknowledge a property right in an intangible object, i.e., a copy of a computer program?
The WIPO Copyright Treaty
It turns out the real cause for this wreckage is not so much the ECJ, but the WIPO Copyright Treaty of 1996.
Article 6 of the Copyright Treaty deals with the right of distribution. This right is also found in Article 4 of the European Copyright Directive of 2001 (2001/29). Article 4(1) of the Copyright Directive speaks of this exclusive right as: “any form of distribution to the public by sale or otherwise [...].” As is also the case in Article 4 of the Software Directive, reference is only made of “sale or otherwise”, without using the term “transfer of ownership”. However, that is what happens in Article 4(2) of the Copyright Directive where it is stated that the right of distribution in respect of the original or copies of a work shall not be exhausted within the Community, except in case of a “first sale or other transfer of ownership [...] made by the right holder or with his consent.” “Sale” is therefore actually tied to – and seen as a form of – transfer of ownership. The reason for doing that can be traced back to the WIPO Copyright Treaty, which is implemented into European law with the Copyright Directive of 2001. In this context, the Court of Justice has ruled in its judgments in Peek & Cloppenburg of 2008 and Donner of 2012 that these provisions of European Union law have to be interpreted in line with international treaties that the Union is a party to, such as the WIPO Copyright Treaty.
It is an Article 6 of the WIPO Copyright Treaty that “transfer of ownership” is to be found as the crucial concept for the exclusive right of distribution. Article 6(1) defines that distribution right as “the exclusive right of authorising the making available to the public of the original and copies of their works through sale or other transfer of ownership.” In section 2, where exhaustion of this distribution right is provided for, “transfer of ownership” is necessarily again used to indicate when exhaustion can be determined to exist: “after the first sale or other transfer of ownership of the original or a copy of the work with the authorisation of the author.”
In view of these express provisions of Article 6 of the WIPO Copyright Treaty, one necessarily has to find that there is a “transfer of ownership” of a copy, if one wants to make exhaustion of copyright in that copy of a computer program possible. Therefore it is either one or the other. If one does not acknowledge a property right in a copy of a computer program or if one does not find that this property right can be actually transferred, exhaustion of a copyright in respect of that copy is impossible. If one does not like that outcome, then the only option available is to indeed acknowledge such a property right in that copy – the “bits & bytes” – and also to determine that it can actually be transferred. The latter is exactly what the Court did in UsedSoft.
Free movement of copies of software as an end.
The UsedSoft-judgement clearly demonstrates that the Court of Justice is a strong supporter of the free movement of goods, also if it comes to intangible objects such as copies of computer programs. The judgment also illustrates that if exhaustion of the exclusive distribution right of software is concerned, the Court does not want to make a distinction between the distribution of software (a) on a physical carrier or (b) via downloading from a website. It is mentioned as a fact in the judgment that 85% of the programs concerned was distributed via downloading from a website. Therefore, making a distinction between the two would make it very easy for the software industry to circumvent the free movement of software copies by simply cancelling distribution via physical carriers.
It is for the same reason that the Court did not follow the argument put forward by Oracle and the European Commission that the making available of a copy of a computer program on the copyright holder’s website does not qualify as distribution but instead as “making available to the public”, which – as Article 3(3) of the directive makes clear – cannot give rise to exhaustion of the distribution right.
It is also against the same background that the Court argued under 49 that the term “sale” within the meaning of Article 4(2) of the Software Directive should be given a broad interpretation so as to encompass all similar forms of product marketing, to make sure that one cannot easily circumvent the exhaustion-rule by labelling a contract as a “licence” instead of a “sale”. Therefore, a “sale” is defined by the Court as to encompasses “all forms of product marketing characterised by the grant of a right to use a copy of a computer program, for an unlimited period, in return for payment of a fee designed to enable the copyright holder to obtain a remuneration corresponding to the economic value of the copy of the work of which he is the proprietor.”
In light of these considerations there can be no doubt that Court was determined to strongly support the principle of exhaustion of copyright with respect to computer programs, as codified in the Software Directive. As a consequence thereof, the Court had no alternative but (a) to acknowledge a property right in intangible objects (“bits & bytes”), (b) to assume that this newly found property right is transferable, and (c) to decide that it can be transferred by means of the indivisible act of (i) downloading a copy of the computer program and (ii) concluding a user licence.
That this approach amounts to the equivalent of releasing a bull in the china shops of national property laws of Member States, simply has to be accepted as “collateral damage” (if the Court gave any consideration to this impact of its judgment at all). The end that the Court did set out to achieve was upholding a single European internal market that also includes software copies, and the means to get there was to reveal a property right in intangible objects. Given the lack of harmonisation of European property rights this certainly is a bold move that may leave national property laws of the Member States in a state of despair and struggling to cope with their efforts to encapsulate this newly found property right into their national property law.
The UsedSoft-decision not only breaks open a second hand market for licenses of computer programs, but also creates a revolution in the area of property law by creating a European, sui generis property right in intangible objects. First of all, such a historic event should not go by unnoticed.
Second, the UsedSoft-decision also makes it clear that national property laws of Member States will probably have to be amended to accommodate this newly discovered property right in “bits & bytes”, because a European codification of such a property right can probably not be expected to materialize in the foreseeable future.
In view of the ever increasing importance of new technological developments for economic markets and given the rapid pace at which these developments occur, the Used Soft-decision does seem to signal that the years ahead may turn out to become quite lively in the domain of property law.
One question that comes to mind is, for instance, what this property right in intangible “bits & bytes” may be worth in the hands of a receiver in a bankruptcy of a company that turns out to be the proprietor of such copies of computer programs. That receiver may just have discovered a whole new class of assets that he can make money from and that will help the receiver in increasing the overall value of the bankruptcy estate tot the benefit of the combined creditors. At the same time, the software industry may seriously have to reconsider some of its business models, in particular those where a licence to use is granted for an unlimited time. Such licences should, from the industry’s perspective, be avoided, if and when possible.
In the end, UsedSoft v Oracle is a good example of the fact there still are and probably will remain for quite some time substantial legal hurdles that need to be overcome and gaps that need to be filled to get to a situation in which the law can accommodate the “new economy” at the same level of sophistication and legal certainty as has been achieved with regard the old economy that primarily deals with pushing boxes and transferring ownership in material objects.
Utrecht, The Netherlands, October 2012
 In this context: the European Union (“EU”) and the European Economic Area (“EEA”).
 See: S.J.H.M. van Erp, From “classical” to modern European property law? In:Essays in honour of Konstantinos D. Kerameus, A. Sakkoulas/Bruylant, ed., Vol. I, pp. 1517-1533, 2009.
 Zie: Stolker, T&C Vermogensrecht, 2011, artikel 5:1 BW, aant. 1: “Aldus wordt [...] duidelijk dat eigendom alleen op zaken mogelijk is [...].” Asser/Mijnssen, Van Velten & Bartels, 5*, 2008, nr. 5, nr. 7 en nr. 17: “Het in art. 5:1 BW bepaalde brengt voorts tot uitdrukking dat eigendom alleen mogelijk is, met betrekking tot zaken, stoffelijke objecten dus, zie art. 3:2 BW [...].”
 See: Asser/Mijnssen, Van Velten & Bartels, 5*, 2008, nr. 2.
 See: S.J.H.M. Van Erp, European and National Property Law: Osmosis or Growing Antagonism?, Sixth Walter van Gerven Lecture, Leuven Centre for a Common Law of Europe, Ius Commune Research School, 2006, p. 14; B. Akkermans, The principle of numerus clausus in European Property Law, Antwerp, Intersentia, 2008, p. 657. E.C. Ritaine, Common Frame of Reference and Property Law: A General Introduction, in: The Future of European Property Law, Sellier, 2011 at page 15.