Exhausting exhaustion – the limits of the first sale doctrine in EU copyright law

ExhaustionThe exhaustion of intellectual property [IP] rights by the first sale of the protected work is a fundamental principle of IP law. Where a work or product covered by an IP right is sold by the rightholder, that IP right is exhausted in the sense that it can no longer be exercised by the rightholder to prevent the purchaser from selling or lending the work or product to a third party. For example, Article 4(2) of the Software Directive (Directive 2009/24/EC) provides

The first sale in the Community of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the Community of that copy, …

Article 4(2) of the InfoSoc Directive (Directive 2001/29/EC) is in similar terms. In Case C-166/15 Ranks and Vasilevics, the Court of Justice of the European Union [CJEU] explored the limits of this rule, and established the point at which the exhaustion doctrine is itself exhausted. As to the rule, the CJEU held:

The holder of the copyright in a computer program who has sold, in the EU, a copy of that program on a material medium (such as a CD-ROM or a DVD-ROM) with an unlimited user licence can no longer oppose the subsequent resale of that copy by the initial acquirer or subsequent acquirers of that copy, notwithstanding the existence of contractual terms prohibiting any further transfer.

To my eyes, this is the necessary corollary of the earlier CJEU decision in Case C-128/11 UsedSoft. The case is important because it was the occasion of Eleonora Rosati‘s first blogpost on IPkat, and it dealt with the same issue of exhaustion, not in the context of material media, but of downloads:

… the right of distribution of a copy of a computer program is exhausted if the copyright holder who has authorised, even free of charge, the downloading of that copy from the internet onto a data carrier has also conferred, in return for payment of a fee intended to enable him to obtain a remuneration corresponding to the economic value of the copy of the work of which he is the proprietor, a right to use that copy for an unlimited period … [and] in the event of the resale of a user licence entailing the resale of a copy of a computer program downloaded from the copyright holder’s website, that licence having originally been granted by that rightholder to the first acquirer for an unlimited period in return for payment of a fee intended to enable the rightholder to obtain a remuneration corresponding to the economic value of that copy of his work, the second acquirer of the licence, as well as any subsequent acquirer of it, will be able to rely on the exhaustion of the distribution right … and hence be regarded as lawful acquirers of a copy of a computer program … and benefit from the right of reproduction …

As to the limits of the rule, Ranks and Vasilevics concerned the resale, not of the original material medium, but of a back-up copy, and the CJEU held that the principle of exhaustion did not extend to the back-up:

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.

As Advocate General Saugmandsgaard Øe put it in his Opinion last June:

Where the original copy of a computer program, sold by the rightholder or with his consent, is incorporated in a material medium, only that original tangible copy benefits from the rule of exhaustion of the right of distribution.

The approval and application of UsedSoft by the CJEU in Ranks and Vasilevics is important, as it provides support for my argument elsewhere on this blog that the blockchain can unblock – and enable – the resale of digital goods. [updates: Over on his TechnoLlama blog, Andrés Guadamuz concludes that, “in the end, this seems like the right decision, and it will hopefully not affect exhaustion in any meaningful way”. Moreover, on the Kluwer Copyright Blog, Sanna Wolk concludes that, “with the introduction of Software as a Service (SaaS) and IT as a Service (ITaaS), which are becoming increasingly common, as well as streaming services, the sale-licence dichotomy and the creation of back-up copies will probably become irrelevant … the legal questions around exhaustion, the definition of the original tangible medium and whether a transaction is a sale or the provision of a licence will soon be irrelevant”. I entirely agree with both comments].

Furthermore, the case illustrates, once again, two important tendencies which have, of late, and more and more, been displayed by the CJEU. First, the Court is increasingly asserting that concepts in the various copyright and related Directives are autonomous concepts of EU law to be interpreted in a uniform manner across the various Directives and in all the Member States (see, eg, Case C-467/08 Padawan SL [2010] ECR I-10055 (21 October 2010) [29]-[37]; Case C-201/13 Deckmyn [2014] ECR I-nyr (Grand Chamber, 3 September 2014) [14]-[17]). Hence, here, the Court stressed the analogy ([27]) with the similar first sale provision in Article 4(2) of the InfoSoc Directive (on which see Case C-479/04 Laserdisken [2006] ECR-I 8089 (Grand Chamber, 12 September 2006) [21]; C-419/13 Art & Allposters International [2015] ECR-I nyr (22 January 2015) [31]).

Second, the Court is increasingly imposing pragmatic or policy-driven limits on such concepts, with little or no textual justification in the text of the Directives (see, eg, Case C-160/15 GS Media [2016] ECR I-nyr (8 September 2016) where the Court’s tortuous distinctions about communication to the public were made up out of whole cloth and not from the text of the InfoSoc Directive [update: a new blog, democratizelaw, makes this point: why does the CJEU keep “forcing the letter of the Directives in order … to serve to a ‘higher’ purpose? This is not a system based on precedents”. Again, I entirely agree]. Hence, here, the Court declined to apply the first sale rule to a back-up, even where the original material medium has been damaged, destroyed or lost. Whether or not this is a sensible outcome, it is not justified by the text of the Software Directive: Article 5(2) permits the making of a back-up (see also Recital 16), but there is no further reference in the Directive to back-ups, let alone to the damage, destruction or loss or of the original.

The application of the first sale doctrine in UsedSoft, and the formulation of its limits in Ranks and Vasilevics, are crucial building blocks in the accommodation of EU copyright law to digital developments. It will not be long before the resale of other digital content features once again in a judgment of the CJEU, and we shall then see whether the Ranks and Vasilevics limits are stable.