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Resale of Digital Commodities and the Doctrine of Exhaustion – Software and Video games

Updated: Oct 4, 2020

Few would disagree that software and game developers should be able to protect the use and monetisation of their work and yet computer programs are rarely what come to mind when we think ‘copyright’. Most might think of books, art, or music but software can be understood in a similar way… like a book written using a different kind of language. As such computer programs are considered ‘literary works’ for the purpose of copyright law. Of course, there are complexities regarding the nature and extent of the copyright but once established the owner will be entitled to protect their software from infringing acts such as copying or selling it without consent. The two rights explored here in relation to the resale of digital commodities are the owner’s right to distribute their software and their right to communicate it to the public.

Distribution is characterised by the transfer of ownership of the work, usually through a sale.

Communication to the public enables access to the work but does not transfer ownership.

With developments in distribution platforms and online streaming services the lines between these seemingly distinct rights are becoming increasingly blurred. However, the difference in exercising these rights is significant in determining who owns the work and what they can do with it… namely, whether the right of distribution has been exhausted.

The Doctrine of Exhaustion

Once the owner of a copyrighted work has placed a copy into circulation, through a sale for example, a member of the public may then acquire and own that copy. Although the copyright owner still has certain rights over the work, for example the right to prohibit reproduction, the acquirer now has exclusive ownership of the copy/object itself. The copyright owner can no longer exercise any precedence over the acquirer in respect of their ownership of that specific copy of the work and, as such, they may keep or resell it as they wish. In this way, the original copyright owner’s right of distribution is considered ‘exhausted’. However, this doctrine of exhaustion does not apply where the work is only communicated to the public and there has been no transfer of ownership. Although this can be quite easily understood with physical objects/works it is perhaps more difficult to conceptualise where the distribution or communication is made online. In fact, even EU legislation itself contains some ambiguity.

Copyright Directive

The highest authority for the doctrine of exhaustion is Article 6 of the WIPO Copyright Treaty. This has been adopted by numerous jurisdictions including the US at section 109(a) of the Copyright Act 1976 and the EU at Article 4(2) of the Copyright Directive 2001. Although similar the US’s ‘first sale doctrine’ applies internationally while the EU’s ‘doctrine of exhaustion’ online applies within the EU. For the purposes of this article we will focus on the EU’s construction.

Although the Copyright Directive seems clear in Article 4(2), by expressly including ‘tangible’ distributions at recital 28 it creates ambiguity as to whether or not the doctrine of exhaustion applies to online/ ‘intangible’ distributions of copyrighted works. The intention here is therefore brought into question… does recital 28 ‘include’ tangible distributions but also other forms as suggested by Advocate General Bot in the case of UsedSoft (2012) or are online distributions to be considered more in-line with ‘online services’ as suggested by the definition in the E-Commerce Directive, also of 2001, and which do not result in exhaustion.

Intangible Distributions continued…

Some scholars have interpreted the judgement in Allposters (2015) to confirm that the doctrine of exhaustion under Article 4(2) of the Copyright Directive, as interpreted by recital 28, only applies to tangible articles/objects. However, the author suggests that the debate in Allposters was between the distribution of the object itself or the attached copyright and the use of the word ‘tangible’ was, at most, used to either (1) emphasise/ assist those reading the judgement to appreciate - the difference between a copy/ object and accompanying, intangible IP; or (2) simply mirror the wording of the Copyright Directive. Otherwise it is argued that the tangibility of the objects in this case was irrelevant and, therefore, the application of exhaustion to intangible distributions remains unclear.

Additionally, in the recent Tom Kabinet case (2019) Advocate General Szpunar opined that the supply of ebooks was a communication to the public and not a distribution in the way a sale of a physical copy would be. Although not binding, and heavily reliant on policy considerations rather than legal precedent, Szpunar’s opinion grants an insight into how the CJEU wish to regulate the distribution of dematerialised goods.

Software Directive

With the introduction of Article 4(2) of the EU’s Software Directive 2009 any ambiguity seemed resolved in relation to the distribution of software. Under the principle of Lex specialis derogat legi generali the more specific provisions of the Software Directive should supersede the more general provisions of the Copyright Directive in matters of software rights. As such the doctrine of exhaustion, as formulated in the Software Directive, will apply to computer programs whether they are distributed in tangible or intangible form. This position was confirmed by the Court of Justice of the European Union (CJEU) in the 2012 case of UsedSoft allowing purchasers to resell copies of downloaded software so long as certain fundamental criteria are met:

1. There has been a “first sale” transferring ownership of a copy of software within the EEA;

2. That sale is not limited, for example by a subscription or time-limit;

3. Appropriate economic remuneration was achieved by the right holder;

4. The first acquirer has made all their copies unusable.

Video games and Hybrid Copyright Works

So, the case is closed because video games are software, right? Well… kind of. For those who have read the preceding post ‘What are Video games?’, you now know that video games are a complex hybrid of software and other copyright works all bundled together. In that post we discussed how different jurisdictions have attempted to deal with this. Some regulate video games as whole software entities, in which case the EU Software Directive would say – Yes, they can be resold so long as they are distributed and resold in accordance with the UsedSoft criteria. Some jurisdictions treat video games as a collection of separate copyright works and so, presumably, the software elements would be regulated by the Software Directive and the other works by the Copyright Directive. For those readers questioning the practicalities of reselling a video game’s software but not the graphics or music… you are absolutely right to do so and case law has so far accepted video games as whole entities for the purposes of addressing resale.

However, we also mentioned that the CJEU have their own unique opinion, which they put forward in Nintendo v PC Box (2014). This was that video games should be treated under the more general terms of the Copyright Directive rather than the Software Directive, which should instead be reserved for purely software works. As mentioned above, should the Copyright directive be applied by domestic courts it is still a matter of interpretation whether the online sale of a video game can be considered a distribution or a communication to the public.

Nintendo v PC Box provides the most authoritative precedent on video game resale regulation at the EU level but in the judgement it was left silent whether the precedent would apply beyond the case’s context of technological protection measures, or ‘TPMs’. This was compounded by the broad application of policy factors within the judgement and the efforts to reach a just outcome on the specific facts of the case. It is arguable that Nintendo v PC Box is only persuasive, therefore, when considering the nature of video games outside the context of TPMs and instead in relation to online distribution platforms.

Online Game Distribution

So far, the resale of video games purchased through an online distribution platform has been addressed in both German and French domestic courts but there has been no ruling from the CJEU which would set a precedent across the EU. Emboldened by the finding in UsedSoft, the German consumer rights organisation Verbraucherzentrale Bundesverband brought a claim against Valve in 2014 attempting to remove the resale prohibitions from Valve’s distribution platform – Steam. The Claim failed with the German court understanding Steam in terms of a subscription platform where ownership of the Steam games is not fully transferred. Steam games were, therefore, found to be communications to the public instead of distributions and not eligible for resale.

It is arguable that this judgement did not take into consideration the wide interpretation of ‘distributions’ encouraged by UsedSoft. Although Steam offers accompanying services the platform does not require a subscription fee for access and does not require the Steam account to survive in order to play previously purchased games. Purchases of Steam games are therefore not quite as limited under the UsedSoft criteria as the court may have thought. On the contrary, games bought from Steam are purchased at full price and ownership is transferred in perpetuity, likely constituting a distribution albeit an online, intangible one. Steam’s support team even provides a handy ‘how-to’ guide for uninstalling the platform without losing previously downloaded games.

The more recent case against Valve, brought by the French consumer rights association UFC-Que Choisir in September 2019, recognised the sale of games through Steam as distributions. The Tribunal de Grande in Paris found that the doctrine of exhaustion therefore applied as it did not consider there to be any difference between a physical and digital distribution of a video game. It is worth noting that without any explicit and binding EU jurisprudence on this matter the French court were perfectly within their powers to come to this conclusion. Having said that, Valve have appealed the decision, staying its implementation for the time being, and it is likely that this matter will reach the CJEU in one way or another. At which point the CJEU will have the opportunity to finally provide some much-needed clarity on this issue and it is anticipated they will be far more sympathetic to Valve’s position.

Watch this space for updates on this topic and an upcoming reflection on commercial and policy considerations raised by the possibility of video game resales.

Adam McGlynn.

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