Reselling digital content. Are you exhausted yet?

Digital exhaustion 

A good example is the discussion about the application of the principle of copyright exhaustion to downloaded digital works.

The doctrine of copyright exhaustion or – in the US – the “first sale doctrine” limits the scope of the distribution right to the first sale of a copy of a work. Section 109 (a) of the US Copyright Act provides that “the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord”.  Its European counterpart, article 4 (2) of the InfoSoc Directive[1] provides that the distribution right shall not be exhausted “except where the first sale or other transfer of ownership in the Community of that object is made by the rightholder or with his consent.”

The question whether or not this doctrine should apply to the resale by download of used digital works is still very much open to debate. Supporters argue that application of exhaustion to digital works would lead to more affordable and available copyrighted works, market efficiency and would protect consumer privacy.[2] Opponents point toward the difference between physical works and digital works. Digital works do not degrade and therefore do not lose their value, meaning that there is no advantage in buying a “new” copy of a work over a “used” copy. Also, digital copies can be distributed around the world much faster and easier than tangible objects. Sale of used works may therefore lead to a decline in sales in a market that is already struggling with piracy.

This is not theoretical: there have already been initiatives to enable users to resell their digital content. US based Redigi is a cloud-based online marketplace for pre-owned iTunes files, the Dutch Tom Kabinet is offering an online marketplace for secondhand e-books, Amazon has obtained a US patent for “an electronic marketplace for used digital objects”[3] and Apple has filed for a patent for the managing of access to resold digital content items.[4] The premise of these services is staying as close to the sale of secondhand physical copies as possible by making sure (or at least claiming to do so) that the original copy of a work is automatically deleted after the work has been downloaded by the new owner.

If looked at from a legal point of view, the sides to the discussion could be very broadly described as legalist vs. offline-online equivalence.[5] The US District Court of the Southern District of New York followed the legalist approach in the Redigi judgment, while the European Court of Justice followed an offline-online equivalence approach in the much debated Usedsoft case.

Redigi 

Redigi is an online marketplace for reselling music purchased from iTunes. Users can upload music in the cloud, where it can be downloaded by other uses. The service verifies whether the music has been obtained from iTunes. Redigi also scans the uploaders device to ensure that the uploader has not retained music that has been sold or uploaded for sale. Capitol Records sued Redigi for (direct and secondary) copyright infringement. Redigi argued that digital music purchases are eligible for resale under the first sale doctrine.[6]

District Judge Sullivan starts off his decision in this case by mentioning that ”this is a court of law and not a congressional subcommittee or technology blog”, and that “the issues are narrow, technical, and purely legal”. This does not bode well for Redigi and indeed the Court finds that the first sale doctrine does not apply to downloads. The Court finds that in order to transfer a digital music file over the internet, a new reproduction of that file needs to be made. This new reproduction is sold. Even if the original file was made with the rightholders consent, the reproduction is not. This means the first sale doctrine does not apply. The Court clarifies that: “the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce.” The Court rejects Redigi’s offline-online equivalence argument by holding that the Copyright Act clearly states that the first sale doctrine only applies to the original owner’s “particular” phonorecord and that an amendment to the Copyright Act “is a legislative prerogative that courts are unauthorized and ill suited to attempt”. In an obiter dictum Sullivan mentions that the application of offline legislation to online situations may not be desirable and refers to a report from the US Copyright Office stating that the impact of the first sale doctrine on works that are distributed online would be much greater than in the analogue world.[7]

Usedsoft  

A couple of months before the Redigi judgment, the European Court of Justice took an entirely different approach and applied the principle of exhaustion to downloads of digital software.[8] The case was about the company Usedsoft, which was operating a marketplace for secondhand computer licenses. Oracle brought proceedings in Germany and the Bundesgerichtshof referred preliminary questions to the European Court of Justice. The ECJ essentially held that there should be no difference between the way the law is applied in the offline and in the online world. It first concluded that an online transfer of a copy of a computer program with a perpetual license for the use of the program is a first sale within the meaning of Article 4 (2) of the Software Directive[9] (the language of which is similar to Article 4 (2) of the Infosoc Directive). According to the Court, it makes no difference whether a copy of a computer program is acquired on a tangible object such as a CD or USB stick or through a download. The making available of such a copy through download “becomes” an act of distribution, which means the distribution right may be exhausted.[10] The Court adds that a different application would enable the rightholder “to demand further remuneration on the occasion of each new sale, even though the first sale of the copy had already enabled the rightholder to obtain an appropriate remuneration”.[11]

As emphasized in the Redigi case, reselling a digital work online requires a new digital copy to be made to the device of the acquirer, which requires an act of reproduction. The ECJ solves this by pointing toward the specific exception of article 5 (1) of the Software Directive, which according to the ECJ is a lex specialis to the InfoSoc Directive. Article 5 (1) provides that acts of reproduction do not need the consent of the rightholder if they are necessary for the use of the computer program by the legal acquirer. In the event of a resale, the copy made by the acquirer to download the computer program is a reproduction that is necessary for the use of the program.[12] However, the original acquirer must make the copy on its own device unusable at the time of the resale in order to avoid infringing the reproduction right. The ECJ acknowledges that it may prove difficult to ascertain that the first user has indeed deleted its copy, but comments that this is the same for copies first acquired on a tangible object such as a CD.[13] The Court adds that the rightholder may implement technical protective measures to solve this problem.

Application to other digital works 

The Usedsoft decision has been described as “groundbreaking”[14] and “a meteor”[15]. The most important question after Usedsoft is whether or not the findings of the ECJ in Usedsoft also apply to other works such as music, movies and e-books. At first sight, this does not seem possible. The InfoSoc Directive makes an explicit distinction between the distribution right and the right of making works available to the public (the latter is not in the Software Directive). It clearly states that the making available of a copy of a work cannot lead to exhaustion (Article 3 (3)) and specifies in Recital 29: “This also applies with regard to a material copy of a work or other subject-matter made by a user of such a service with the consent of the rightholder.” Moreover, a new copy is made when works are downloaded by the acquirer, which infringes the reproduction right of article 2 InfoSoc Directive. Because the Software Directive is a lex specialis according to the ECJ, these arguments did not stand in the way of the findings of the Court in Usedsoft, but would stand in the way of an application to works that are not computer programs.

However, some commentators have believe the ECJ did leave the door open for application to other works. Especially the consideration of the ECJ in Usedsoft that an act of making available can change into an act of reproduction if – in short – such an act looks like a sale, has led some to believe that the ECJ would rule that exhaustion applies to other digital works. Moreover, the ECJ emphasizes the equal treatment of the offline and online world throughout the Usedsoft decision (and in the subsequent VOB/Leenrecht case), which could lead to the conclusion that Usedsoft may have broader implications than it first appears.[16] Unfortunately, the European legislator does not seem to be in a hurry to resolve this issue as there is nothing on digital exhaustion in the draft Digital Single Market Directive. 

Decisions after UsedSoft 

The German Landgericht Bielefeld and the Oberlandesgericht Hamm found that Usedsoft cannot apply to e-books and audio books (without referring tot the CJEU).[17] Similar to the findings in Redigi, the Courts simply found that a new reproduction has to be made when downloading the (second hand) work, and that consent is needed for such a reproduction. Usedsoft does not apply because the decision in that case was based on the Software Directive, which is a lex specialis and only apples to computer programs.[18] The Bielefeld Court emphasizes the difference between offline and online works: there is no loss in quality with digital content and the original owner of the content can resell the work to multiple people and even retain the original copy. [19]

The Amsterdam Court of Appeal was not so sure about the extent of Usedsoft and dismissed a claim for an interim injunction against second hand marketplace Tom Kabinet to cease reselling legally obtained e-books (the injunction to cease the service regarding illegally obtained e-books was granted).[20] The Court considered that the injunction could not be granted because it is uncertain whether the Usedsoft decision will extent to the e-books market. The Court takes into account that the motivation of the ECJ in Usedsoft is based on an approach of economic equivalence between offline and online, which means it is possible that the ECJ will find the exhaustion principle applicable to other works as well.[21]

Although the ECJ did not yet answer this question, some authors believe its decision in the Allposters case indicates that the ECJ finds that exhaustion cannot apply to other digital works.[22] In Allposters, which was about the transfer of images from paper to canvas and had nothing to do with digital works, the ECJ found that the exhaustion of the distribution right applies only to the original tangible object as such.[23] This may indicate that in the online world, the exhaustion of the distribution right does not longer apply if the work is transferred to another computer or device.[24]

VOB/Leenrecht 

The ECJ had a chance to settle the discussion once and for all in the 2016 VOB/Leenrecht decision. This case was about whether digital lending of e-books by libraries falls under the lending right exception of the Rental and Lending Rights Directive.[25] The ECJ decided that e-lending indeed falls under the lending right exception. The decision again contains many offline-online equivalence arguments. The ECJ emphasizes that copyright must adapt to new forms of exploitation[26] and finds that e-lending has “essentially similar characteristics” to the lending of printed works.[27]

The exhaustion discussion came into play because the Dutch Copyright Act states that the lending right exception only applies to copies which has been put into circulation by first sale or other transfer of ownership with the consent of the right owner, and therefore also referred the question whether digital downloads fall under article 4(2) of the InfoSoc Directive. The ECJ held that the Dutch additional condition for application of the lending right is allowed. This could mean the ECJ believes downloading an e-book can constitute “a first sale or other transfer of ownership”. However, the ECJ does not make this clear and does not answer the preliminary question on this matter. Fun (or not so fun) fact: the reason the court did not find it necessary to answer this preliminary question is that the Dutch court mixed up the words “affirmative” and “negative” when drafting the preliminary questions, which made it (grammatically) unnecessary for the ECJ to answer the question. Unfortunately, the ECJ did not correct this error.

Restricted licenses 

This means that for now we still cannot be sure about the applicability of the exhaustion doctrine to other works than software. If the ECJ does decide to eventually shed light on this matter, it may very well be possible that it finds the exhaustion doctrine to be applicable. In that case, rightholders will probably look at ways to circumvent exhaustion of their digital works.

The most straightforward way to do this is to use restricting licensing terms. However, this may not always be allowed. A Hamburg court found general terms and conditions used by software manufacturer SAP which allowed the resale of licenses only with SAP’s prior consent unlawful because they were not compatible with EU-law.[28] Another option would be to change the distribution model to a periodic royalty model or restrict the term of the license to make it less similar to a sale. Although the ECJ might still find a 100-year license to constitute a sale since it would essentially have the same effect as a perpetual license, a license for five or ten years may not be seen as similar to a “sale”. Rightholders may need to resort to these measures, although they are not consumer friendly (which makes piracy even more attractive). Whether such a solution is allowed and, if so, when the term of a license is long enough to change into a sale, is unclear.

What did become clear after Usedsoft is that the exhaustion doctrine only applies to the digital copy that was made with the rightholder’s consent. In the Ranks et Vasiļevičs case, the ECJ made clear that the original acquirer may not without the rightholder’s consent resell a back-up copy of the original computer program when the original copy has been damaged.[29] By implementing technical measures (as suggested by the ECJ in Usedsoft) right holders can try to ensure that the original copy can be identified so that new copies cannot be distributed without consent.

Conclusion 

In my opinion, the Redigi Court correctly found that the law does not leave room for application of the first sale doctrine to downloads, while the ECJ went beyond applying the law by finding that an act of making available can change into an act of distribution. However, considering the offline-online equivalence approach in the VOB Leenrecht case, the probability of the ECJ deciding (in my opinion: contra legem) digital exhaustion is possible for other works such as music, movies and e-books has increased and rightholders should consider anticipating such a scenario when providing licenses to digital downloads.

Disclaimer: I was one of the lawyers representing the CMO’s Lira and Pictoright in the VOB/Leenrecht case mentioned in this article, arguing against exhaustion of digital works.

Footnotes

[1] Directive 2001/29/EC of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society[2] E.g.: Aaron Perzanowski and Jason Schultz, ‘Digital Exhaustion’, 58 UCLA LAW REVIEW 889 (2011)[3] US patent 8,364,595[4] US patent application 20130060616[5] The term “offline-online equivalence” is borrowed from Maša Savič, ‘The Legality of Resale of Digital Content after UsedSoft in Subsequent German and CJEU Case Law’,  (2015) 37 E.I.P.R., Issue 7, p. 414-429[6] 1:12-cv-00095, No. 109 Southern District of New York, 30 March 2013 (Capitol Records, LLC/ReDigi Inc).[7] U.S. Copyright Office, ‘A Report of the Register of Copyrights Pursuant to par. 104 of the Digital Millennium Copyright Act, August 2001; https://www.copyright.gov/reports/studies/dmca/sec-104-report-vol-1.pdf.[8] ECJ, 3 July 2012, C-128/11 (Usedsoft Gmbh/Oracle International Corp).[9] Directive 2009/24/EC of 23 April 2009 on the legal protection of computer programs.[10] Usedsoft, par. 52[11] Usedsoft, par. 63[12] Usedsoft, par. 81[13] Usedsoft, par. 79[14] P.B. Hugenholtz, annotation to UsedSoft/Oracle International (in Dutch), NJ 2013-11, nr. 118, p. 1337-1349[15] E. Linklater, ‘UsedSoft and the Big Bang Theory: Is the e-Exhaustion Meteor about to Strike?’ (2014) 5 J.I.P.I.T.E.C. 12, 17.[16] For a deeper analysis: E. Linklater, ‘UsedSoft and the Big Bang Theory: Is the e-Exhaustion Meteor about to Strike?’ (2014) 5 J.I.P.I.T.E.C. 12, 17.[17] Landgericht Bielefeld 5 March 2013, 4 O 191/11, available at: http://openjur.de/u/621610.html; Oberlandesgericht Hamm 15 May 2014, Urt. v. 15.05.2014, Az.: 22 U 60/13, available at: https://www.jurion.de/urteile/olg-hamm/2014-05-15/22-u-60_13.[18] Bielefeld Court, par. 83-87[19] Bielefeld Court, par. 49-50, 78[20] Hof Amsterdam, 20 januari 2015, ECLI:NL:GHAMS:2015:66, available at: http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:GHAMS:2015:66[21] Tom Kabinet, par. 3.5.3.[22] For example: M.M.M. Van Eechoud, annotation to Allposters (in Dutch), AMI 2015/6, Maša Savič, ‘The Legality of Resale of Digital Content after UsedSoft in Subsequent German and CJEU Case Law’,  (2015) 37 E.I.P.R., Issue 7, p. 428 [23] ECJ 22 January 2015, C‑419/13 (Art & Allposters/Pictoright), par. 34-40[24] A. Laakkonen, A. Driver, S. Knight, Copyright Exhaustion – what’s happened since Usedsoft?, Intellectual Property Magazine October 2015[25] Directive 2006/115/EC of 12 December 2006 on rental right and lending right and on certain rights related to copyright in the field of intellectual property[26] ECJ 10 November 2016, C‑174/15 (VOB/Leenrecht), par. 45[27] VOB/Leenrecht, par. 53[28] LG Hamburg 315 O 449/12, available at: http://openjur.de/u/654159.html[29] ECJ 12 October 2016, C-166/15