Used Software Scores A Legal Victory In Europe

Published: July 16, 2012

by Alex Woodie

Do you have the right to resell your "used" software to other people? If you live in the European Union, you do, thanks to a court ruling earlier this month in the case of UsedSoft v. Oracle. If you live in the United States, the law still favors software makers. However, the EU ruling could pave the way for changes in the U.S.

UsedSoft is a German company that buys excess licenses from people or organizations that don't need them, and resells them to those who do, at prices up to 50 percent lower than "new" licenses from the vendors themselves. Oracle wasn't the only company that was losing business to UsedSoft, which also sells used software from Attachmate, AutoDesk, OpenText (Hummingbird), IBM, Microsoft, Novell, SAP, and Software AG, according to its website.

On July 3, the Court of Justice of the European Union handed down its ruling in the case of UsedSoft GmbH v. Oracle International Corp. The court expanded on previous EU rulings regarding the principle of "exhaustion," which holds that the developer's copyright expires (or is exhausted) at the time of the original sale.

The exhaustion rule had previously been upheld when it was applied to software distributed on physical media. In the current case, the court expanded the exhaustion ruling to apply to cases where licenses are transmitted online. According to the ruling, second-hand buyers are legally permitted to download the software from the original manufacturer.

"An author of software cannot oppose the resale of his 'used' licenses allowing the use of his programs downloaded from the internet," the court wrote. "The principle of exhaustion of the distribution right applies not only where the copyright holder markets copies of his software on a material medium (CD-ROM or DVD) but also where he distributes them by means of downloads from his website."

Oracle, like all commercial software companies, forces customers to sign license agreements that strictly prohibit this kind of activity. If you used the software, you are implicitly agreeing not to engage in a marketplace for used software. However, according to the Court of Justice of the EU, those parts of the license agreements are not valid--at least in the 27 countries that make up the European Union.

There was one small caveat to the ruling that benefited Oracle. The court ruled that licenses can't be broken up and sold individually. In the UsedSoft case, the customer had acquired a license for 25 seats of Oracle's database. The bunch must be sold as is, the court ruled.

UsedSoft immediately extrapolated the ruling to apply to its other dealings. "The striking thing about all of the court's statements is that these do not relate explicitly to Oracle, meaning that they also apply to computer programs of other manufacturers such as Microsoft or Adobe," UsedSoft said in a statement.

The court's ruling also applies to IBM and its operating system software, such as the IBM i operating system and older releases of i5/OS and OS/400, not to mention DB2/400 and everything else that Rochester and Dublin has shipped on Power Systems, System i, iSeries, and AS/400 boxes (even the machine interface if you can find it).

The European high court's ruling will probably have an impact on IBM's European business, but it's tough to say how big the impact will be. While it's true that Big Blue will no longer be legally permitted to restrict private-party sales of its software and license keys in the EU, it's doubtful that IBM will make it easy for customers who want to push the issue.

Resellers have been peddling used IBM gear for many years. In the U.S., it's not difficult to find a used Power5 iSeries or Power6 System i server. The challenge, of course, is getting the OS activated. Used equipment dealers will work with customers and IBM to activate the OS on a piece of used gear, but it's not always an easy thing to do. The machine is supposed to be current on maintenance, or the customer must pay a re-activation fee.

Transferring i5/OS software licenses was fairly easy a decade ago. With the launch of OS/400 V4R1, IBM made changes to its licensing terms to enable the private transfer of AS/400 system software between companies. But with the launch of i5/OS V5R3 in 2004, IBM changed its licensing terms and clamped down on used software in the iSeries community. Today, customers can only transfer i5/OS and IBM i licenses within the same company.

IBM i shops are still able to trade in software for i5/OS V5R2 and earlier, but those opportunities are few and far between, says Mike Hardy, who runs Software Clearinghouse, a company that buys and sells IBM i and i5/OS software. "The reality is, there are very few systems out there at V5R2 and before that you can actually get licenses for," he says. "Rochester will still validate it. There's just not a lot of it."

The i5/OS software aftermarket died with the changes IBM made with V5R3, and Hardy doesn't see it being resurrected any time soon. "I still think it was wrong by the user community to not fight IBM at the time. They went essentially from having an asset to having that asset taken away from them," he says. "But when you are a small company, trying to make it out there, it's awfully hard to go up against somebody like IBM."

Without a lawsuit that challenges the legality of the end user license agreements (EULAs) in the U.S., the status quo will continue in the 50 states. But even if IBM or another major system vendor lost such a case in the U.S., they would make it up some other way, Hardy says. "There are all kinds of fees. Software license fees, maintenance fees, activation fees. …There's a lot of room out there if they lose on one front," he says.

There's a legitimate debate whether it should be legal for people to buy and sell software just as they do hardware. When somebody acquires a software product, do they own the software, which would imply that they can do whatever they like with it? Or have they just purchased the right to use the software--renting it, in effect?

Whichever side of that argument ultimately wins, the point will be moot in a cloud world, where the rental model is clearly in effect. If the U.S. follows the EU in opening up the market for used software, you would undoubtedly see system vendors make a bigger push into the cloud. "A lot of vendors recognize that and want to take advantage of closed-based pricing," says Hardy, who is now the executive vice president at IBM i and open systems cloud provider SIS.

While the recent court ruling in the EU legitimizes the market for used software in Europe, the issue is far from clear in the U.S. It will take a legal victory by a patient, well-funded, torte-loving individual to challenge the status quo and create the legal foundation for a used software marketplace in the U.S., and we just haven't seen that individual yet.

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