Sale of FOSS

The assumption is made in this study that what constitutes sale of software for the purpose of copyright exhaustion, constitutes also one element of the test of exhaustion of patent rights in a copy of a FOSS program, i.e. whether the copy is "put on the market" under the European patent exhaustion doctrine and/or the "first sale" under the US patent exhaustion doctrine. In this study, transfer of ownership is considered as the decisive test for sale of software, including FOSS. National courts of EU member states have held in context of copyrights that transfer of ownership in the copy of a computer program is constituted by (1) permanent transfer (without time limitations); (2) of the copy embodied on a fixed medium; (3) against a lump sum fee.⁵⁶⁸ However, CJEU has finally confirmed that for the purpose of exhaustion under the Software Directive, sale of a copy of a computer program is constituted by any form of product marketing

565 Vernor v. Autodesk.

566 US v. Masonite.

567 TransCore v. Electronic Transaction Consultants.

568 KKO 2003:88. Bundesgerichtshof [BGH] [Federal Court of Justice] July, 6, 2000, ZR 244/97 (Ger.).

Regarding discussion on exhaustion in the Netherlands and Germany, see Guibault & van Daalen at 114-115.

characterized by the grant of a right to use a copy of a computer program for an unlimited period of time in return for a payment of a fee designed to enable the copyright holder to obtain a remuneration corresponding to the economic value of the copy. CJEU also held, unlike some earlier national courts in Europe, that also digital distribution of a copy triggers exhaustion, when the right holder authorized downloading of the copy from the Internet to a data carrier and granted, for consideration, right to use the said copy for an unlimited period of time. This means that the earlier, third criteria of a copy fixed on a tangible medium is no longer valid, and also online distribution of computer programs may result in exhaustion of the distribution right under the Europe copyright exhaustion doctrine. Upon exhaustion of the distribution right, the lawful acquirer of the copy has the right to resell the copy even if the license terms would state that the license is non-transferable. Subsequent acquirer(s) are also entitled to reproduce the copy on additional media as lawful acquirers provided that the previous owner had deleted its own copy of the program or otherwise made it unusable.⁵⁶⁹ Therefore, further distribution of the copy in digital form, for example, on the Internet should be allowed. In the US, CAFC has, however, acknowledged in DSC v. Pulse that while permanent transfer of software against single payment are indeed strong attributes of sale of software, those criteria are not dispositive of sale, if the user's rights are otherwise subject to several contract based restrictions not in line with the status of owner. Such restrictions may include, for example, prohibition to transfer the program further (in direct conflict with §109(a) of the US Copyright Act regarding exhaustion) or prohibition to use the program with other than licensor's hardware.⁵⁷⁰ Also the Ninth Circuit concurred with the said opinion in Vernor v. Autodesk, holding that the fact that the user had the right to possess the software indefinitely and without liability for recurring license payments, is not dispositive of finding a sale of software as oppose to license.⁵⁷¹

Prof. Lemley of Stanford University has suggested that the CAFC ruling in DSC v.

Pulse may have relevance also in connection with examining sale of software in the

569 UsedSoft v. Oracle at Paragraphs 49, 63, 70, 72 and 88.

570 DSC v. Pulse at 1360-1363. See also Lindberg at 99.

571 Vernor v. Autodesk at 1114.

context of patent exhaustion.⁵⁷² Therefore, despite the caveats on its application due to its copyright (not patent) background, the said test, together with further guidance from Vernor v. Autodesk regarding the concept of sale as well as Capitol Records v. ReDigi regarding exhaustion in digital context, are used in support of evaluating sale of software under the US patent exhaustion doctrine. Accordingly, the holding of CJEU in UsedSoft v. Oracle regarding both the concept of sale and exhaustion in digital context, is used in support for evaluating sale of software under the European patent exhaustion doctrine. It is acknowledged that the holding of CJEU in UsedSoft v. Oracle concerning the concept of sale of software is given for the purpose of the Software Directive.

However, as the same condition, i.e. sale of software, is relevant for both copyright and patent exhaustion, the generally accepted concept of sale, which according to CJEU, means an agreement by which a person in return for payment, transfers the right of ownership in an item of intangible or tangible property, is used here for guidance on what constitutes "sale of software" in the absence of a definitive ruling by CJEU on exhaustion of patent rights as a consequence of sale of software.

When the European and the US tests are combined, it appears that the common criteria for the concept of sale, or in essence: transfer of ownership, includes (1) permanent transfer of a copy of a computer program; and (2) absence of periodic license payments.

The US test appears to be stricter, requiring also that possibly – if the ruling in Capitol Records v. ReDigi is applied by way of analogy – (3) the copy of a computer program is embodied on a tangible media; and (4) the legal instrument does not restrict the right to transfer the copy of a computer program or include other restrictions not in line with the rights of a lawful owner of a copy under the US Copyright Act. Finally, the concept of first sale based on transfer of title in the copy of a FOSS program triggering, not only exhaustion of distribution right of the copy, but also exhaustion of patent rights in the copy, will be analyzed in light of the general guidance by CJEU and SCOTUS on conditions for transactions triggering patent exhaustion.

Now, if FOSS licenses are reflected against the above criteria constituting deemed transfer of ownership in a copy of a computer program, the following observations may

572 Cohen & Lemley at 34-35.

be noted: The first criteria of transfer of ownership in a copy of a computer program requires that the legal instrument governing use of the copy allows permanent transfer of the said copy. FOSS licenses do not impose any time limitations on use nor obligations to return or destroy copies of FOSS programs upon expiration of the license, since there is no license term limited in time. In fact, many FOSS industry licenses grant non-exclusive and perpetual license rights, which may be terminated only based on breach of the license terms and/or defensive termination due to filing a patent action.⁵⁷³ Time limitations and obligations would be in breach of both the Free Software Definition and the Open Source Definition outlined in Section 1.1.1 (Concepts) by limiting the freedoms and rights granted under FOSS licenses. While the BSD and MIT licenses remain silent on duration and termination of the license grants, the GPLv2§4 merely provides that breach of the license results in an automatic termination of the licensed rights. Therefore, the rights granted under the GPLv2§§1-3 remain in force as long as the licensee remains in compliance with the terms of the GPLv2. On the other hand, American scholars have argued that, under common law, any contracts of indefinite duration not specifically defined as "perpetual", may be terminable at will by either party.⁵⁷⁴ However, FOSS licensees should not have particular concerns that FOSS licensors would terminate their licenses due to reasons other than those defined in the respective license. Termination under other grounds would be contrary to the basic freedoms under FOSS, and termination due to breach should provide FOSS licensor's with adequate protection in most cases, including industry context. While each license subject to this study provides users with perpetual license rights terminable only by operation of (local mandatory) law and/or based on contract, this, however, does not mean that the rights under FOSS licenses would be periodic. Accordingly, FOSS licenses by definition will meet the first criteria of transfer of title, i.e. grant of permanent right to use the copy, required by exhaustion of rights in the copy of a FOSS program.

573 See for example the MPLv2§5 and the EPLv2§7. See also Nimmer LCOMTECH §10:55.

574 Nimmer LCOMTECH §10:55.

The second criteria of transfer of ownership in a copy of a computer program requires that the legal instrument governing use of the copy grants the right to use the copy against a lump-sum fee or at least without payment of period license fees. When considering exhaustion in digital context, the relevant question appears to be whether the right holder has received appropriate remuneration for use of the protected subject matter.⁵⁷⁵ Further, while CJEU refers to a fee designed to enable the right holder to obtain a remuneration corresponding to the economic value of the copy, academic scholars in Europe have argued that transfer of title in a copy free of charge may also result in exhaustion of the distribution right, although the transfer of title would not be effected by operation of a sale, but rather a gift or donation.⁵⁷⁶ Also CJEU appeared to concur with this conclusion: according to CJEU, the right of distribution of a copy of a computer program is exhausted if the right holder authorized, even free of charge, the downloading of the copy from the Internet on the data carrier and granted, in return for payment of a fee intended to enable the right holder to obtain a remuneration corresponding to the economic value of the copy, the right to use the copy for an unlimited period.⁵⁷⁷ Therefore, the key appears to be that the right to use the copy must not be subject to payment of periodic fees, not whether the transfer of title is free of charge or in consideration of a monetary payment. It must of course be noted, that this element is examined here from the perspective of what constitutes transfer of ownership of a copy of a computer program. Therefore, when the additional elements of patent exhaustion are evaluated later in this Section 4.2.1 (Preconditions of Patent Exhaustion of FOSS), it must be remembered, that under the US doctrine, the requirement of reward is an important element of patent exhaustion, as will be discussed in more detail in Section 4.2.1.5 (Reward).

The second criteria of transfer of title in a copy of a computer program, i.e. the prohibition of periodic payments, seems to be met in connection with FOSS licensing:

FOSS may be licensed either free of charge or sold for a single payment, but not subject to payment of recurring royalties. Nothing in the Free Software Definition prevents sale

575 UsedSoft v. Oracle at Paragraph 63.

576 Guibault & van Daalen at 115. Haarmann at 99. Harenko, Niiranen, et. al. at 157.

577 UsedSoft v. Oracle at Paragraph 72.

of F/OSS, provided that FOSS licensees always retain the freedoms to copy, modify and distribute FOSS programs under the respective FOSS license without additional restrictions such as royalty obligations.⁵⁷⁸ For example, the GPLv2 specifically allows distribution of copies of the program both for free and for a fee provided that the recipients of the program are given all the freedoms under the GPLv2. Thus, both copies of GPL-licensed programs as well as additional services on top of FOSS, such as warranties or maintenance, may be sold at any price to anyone.⁵⁷⁹ Further, the FSF has always maintained that sale of free software is permitted, and even encouraged, since the freedoms to copy, modify and distribute the program are the decisive attributes of free software, not the price of the distribution.⁵⁸⁰ On the other hand, the Open Source Definition differs from the Free Software Definition in this respect: Section 1 of the Open Source Definition requires free of charge distribution of open source software, while it does permit charging fee for other aspects of the distribution, such as support or warranty services.⁵⁸¹ However, the GPLv2 and also the MIT license specifically permit sale of copies of the software and the BSD license does not prohibit charging a fee for distribution of the software. Therefore, technically, those licenses are not in strict compliance with Section 1 of the Open Source Definition, as software under all of the licenses subject to this study may be sold against a lump sum fee, even if no royalties or other recurring fees may be charged for the GPL-licensed software. Open source software, such as BSD and the MIT licensed software, may also be closed, unlike free software subject to copyleft-clause, as part of proprietary software subject to proprietary license including also royalty obligations, thereby diluting the requirement of free distribution under the Open Source Definition. However, then the software is no longer FOSS, but proprietary software. Accordingly, as FOSS licenses subject to this study permit distribution of software for free or against a lump sum fee, but not subject to recurring royalties, the said FOSS licenses by definition will meet the second criteria of

578 Free Software Definition.

579 GPLv2§1 and the Preamble.

580 Free Software Foundation (FSF): Selling Free Software. Available at http://www.gnu.org/philosophy/selling.en.html. (Last visited June 9, 2015). Moglen, Ravicher, et. al. at 3-4. Haapanen 2011 at 249-250.

581 Open Source Definition Annotated. Available at http://opensource.org/osd-annotated (Last visited June 9, 2015). See also Guibault & Van Daalen at 117-120.

transfer of title, i.e. the absence of recurring license fees, required by exhaustion of rights in the copy of a FOSS program.

The third criteria of transfer of ownership in a copy of a computer program requires – possibly in the US, but not in Europe – that the copy is fixed on a tangible media in order to trigger exhaustion of the distribution right in the copy. Based on the holding of CJEU in UsedSoft v. Oracle, it is now clear in the EU that a copyright holder's exclusive distribution right under Article 4(1)(c), with the exception of the right to control further rental of the copy under Article 4(2), of the Software Directive is exhausted also when the right holder allowed the copy to be downloaded from the Internet to a data carrier and also granted, for appropriate consideration, a right to use the copy for an unlimited period of time. This results from the holding of CJEU that a sale within the meaning of Article 4(2) of the Software Directive is constituted by any form of product marketing act by which the copy is made available in the EU, in any form, and by any means, for the purpose of being used for an unlimited period and 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.⁵⁸² Accordingly, under the European copyright exhaustion doctrine, the distribution right of a copy of a FOSS program is exhausted upon first sale of the copy, i.e. when the copy of a FOSS program is first made available either (1) on tangible media; (2) by allowing the copy to be downloaded from the Internet to a data carrier; or (3) by any other means what so ever, provided in each case (1)-(3) that the copy is licensed by the right holder for an unlimited period of time and in return for free of charge or a lump-sum payment.

The assumption is made here that sale of software, including also a copy of a FOSS program, meeting the above elements laid down by CJEU constitutes also "placing the product on market" as required by the European patent exhaustion doctrine.

In a recent US case, SDNY ruled in Capitol Records v. ReDigi – for the first time ever in the US – on whether a lawfully purchased digital music file could be resold on the Internet under the first sale doctrine. The specific question was whether transfer of the said file over the Internet, where only one file exists before and after the transfer (the so

582 UsedSoft v. Oracle at Paragraph 49.

called forward plus delete – concept) constitutes reproduction within the meaning of the US Copyright Act. SDNY held that yes, it does. Therefore, distribution right of the said new, unauthorized copy of the digital file is not exhausted, either. According to the facts of the case, lawful owners of digital music files originally bought from iTunes, uploaded their files to ReDigi service for resale so that other users of the service could buy those files. When uploading the music files on ReDigi service, the files were transferred from one material object, the seller's computer, to another object, ReDigi server, and again to the buyer's computer, when s/he downloaded the file. These two stages of copying constituted unauthorized reproduction under the US Copyright Act despite that the earlier copies were deleted. SDNY held that the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. The copies of music files sold on ReDigi were not the original material items and thus did not constitute lawful copies. Accordingly, the first sale defense under the §109(a) of the US Copyright Act did not apply to distribution of those copies.⁵⁸³ This case may clarify the US doctrine also with regard to exhaustion of distribution rights in computer programs in digital context, by implying that exhaustion applies only to a lawful copy of a computer program fixed on a material medium. Already a long ago, it was held in "offline context" that what constitutes a sale for the Uniform Commercial Code (UCC), may constitute also a sale of software under the first sale doctrine.⁵⁸⁴ Under the UCC, sale is defined as transaction of goods. Goods, in turn, mean all things movable. As a copy of a computer program embodied on tangible media is a movable item, it may also amount to goods under the UCC.⁵⁸⁵ On the other hands, also counter arguments may be found on application of the holding in Capitol Records v. ReDigi to computer programs: As discussed above, courts could possibly reach also the opposite conclusion in context of computer programs and justify the digital first sale doctrine, if the other elements of sale of software are met, under the essential step defense, which allows an owner of a copy of a computer program to make a copy of the

583 Capitol Records v. ReDigi at 648, 650 and 655.

584 Novell, Inc. v. Network Trade Center, Inc., 25 F. Supp. 2d 1218 (D.Utah 1997) at 1229-1230. See also Determann & Fellmeth at 27-30.

585 § 2-105(1) of the UCC. See also Rosen at 75 arguing that software is not goods.

computer program if such new copy is created as an essential step in the utilization of the computer program with a machine.⁵⁸⁶

When the SDNY holding in Capitol Records v. ReDigi is compared to the CJEU holding in UsedSoft v. Oracle, it may be noted that they concern different stages of digital distribution: CJEU concerned the initial, authorized downloading of a copy from the Internet to a material medium, triggering exhaustion of rights in the said copy, and also allowing subsequent reproduction of the copy by the lawful acquirer in connection

When the SDNY holding in Capitol Records v. ReDigi is compared to the CJEU holding in UsedSoft v. Oracle, it may be noted that they concern different stages of digital distribution: CJEU concerned the initial, authorized downloading of a copy from the Internet to a material medium, triggering exhaustion of rights in the said copy, and also allowing subsequent reproduction of the copy by the lawful acquirer in connection