Resale Of “Used Bitstreams” By End-Consumers: A Comparative Reflection

-- By PeterLing - 16 Oct 2012

Introduction

In the world before what is sometimes called the “digital revolution” (http://en.wikipedia.org/wiki/Digital_Revolution), most goods for everyday use could be divided into two categories: “new” items and “used” items. Those words still refer to easily understandable concepts when designating elements of a physical world. If the adjective “new” is defined as “having been made or come into being only a short time ago; recent” (see http://www.thefreedictionary.com/new), the adjective “used” will stand for its opposite, i.e. “not new” or “secondhand” (http://www.thefreedictionary.com/used). A “new” car, fridge, piece of furniture or hard drive has some inherent advantages over a “used” item of the same category. Being “used” may change fundamental or non-fundamental characteristics of material objects, deteriorate their functions or worsen their efficacy. The quality is lower and the life expectancy is almost inevitably shorter than that of a new item.

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Nonphysical goods, such as bit streams, data or software do not deteriorate through use. Although nonphysical goods sometimes become obsolete and may thus lose worth over time (as better solutions emerge or flaws are discovered), their sole “use” will not lead to deterioration or loss of quality. Playing the original 1968 vinyl record of the Beatles’ White Album thousands of times on a record player will cause audible degradation of the initial sound. Playing the mp3 file containing the White Album will not. Hence the concepts of “new” and “used” cannot be transposed into the digital world. There is no such thing as “used bitstreams”.

Notwithstanding this imperfect designation, the issue of end-users reselling software or mp3 files they had previously acquired – and actually “used” – has been a controversial question under copyright legislation. New business models have come to existence based on the resale of “used” software (such as UsedSoft? , see www.usedsoft.com/en/) or music (such as ReDigi? , see www.redigi.com). Although the copyright statutes of the European Union, Switzerland and the United States are very different on their faces, the central legal issues involved are surprisingly similar: the potential violation of the “license agreement” between the end-user and the software manufacturer on the one hand and the infringement of the manufacturer’s copyright by the resale of the bitstream to a third party on the other hand.

A. Recent Court Decisions in the EU and in Switzerland

1. Violation Of The “End-User License Agreement”

Software provided to noncommercial end-users is often accompanied by a “license agreement” between the software manufacturer and the end-user. Generally, this document contains a clause stating that the user “receive[s], exclusively for [its] internal business purposes, for an unlimited period a non-exclusive non-transferable user right free of charge” (see Judgment of the Court of Justice of the EU of July 3, 2012 (C-128/11) UsedSoft GmbH? v. Oracle International Corp, at Para. 23) for the software product.

The purpose of providing a software copy to an end-user “for an unlimited period” for a fixed consideration is, however, very different from what is commonly understood as a “license”. As a Swiss court recently pointed out in a decision regarding the the resale of “used” software, the economic purpose of such transaction is the alienation (sale) of one software copy and not a “license” into the intellectual property rights (copyright, patent rights and/or trade secret rights) underlying the software. In the case before this court, the “licensor” did not retain any control over the copy and the “licensee” did not have a duty to return it upon termination of the agreement (see the decision of the Zug Cantonal Court (Switzerland) of May 4, 2011, Docket No. ES 2010 822, in: 2012 sic! (Swiss Intellectual Property, Information and Competition Law Review) 99(5.1)). The “end-user license” was therefore considered to be a sales agreement on one copy of the software. Even if a resale restriction clause in the agreement was valid (which the court did not examine), it would only have effects between the manufacturer and the first purchaser and would not enable the manufacturer to obtain an injunction against the purchaser of the software copy. The Swiss court then turned to the doctrine of exhaustion and dismissed the copyright owner’s complaint.

2. The Exhaustion Of The Manufacturer’s Copyright

The doctrine of exhaustion was also in the center of a case recently decided by the Court of Justice of the EU. In the previously cited UsedSoft v. Oracle case, the Court of Justice considered (as its Swiss counterpart one year earlier) that the transaction between the software manufacturer and the end-user was to be considered a transfer of ownership on a software copy rather than a license. This transaction constitutes (irrespective of whether it involves or not the transfer of a physical support or merely the download of a file) a “first sale” in the sense of Article 4(2) of the EU Directive 2009/24 on the legal protection of computer programs. The copyright owner’s distribution right was therefore exhausted. As a result, the copyright owner could not undertake any legal action against the purchaser of the software copy on copyright grounds.

B. The Resale of “Used Bitstreams” under 17 USC § 109

It is unclear whether the “first sale doctrine”, as it is known under US copyright law and in particular under § 109 of the Copyright Act, would apply to the sale and subsequent resale of an electronic copy of a computer program or an mp3 file. Here too, the central question is whether an end-user who has formally entered into a “license agreement” with the copyright owner can argue being the “owner of a particular copy” and, as a result, whether the doctrine is applicable to downloads (rather than files on a physical support). The Copyright office took the view that a “first sale” must always involve a “physical artifact” (www.copyright.gov/reports/studies/dmca/dmca_executive.html) and most court rulings on this question to date involved some transfer of a physical support (see UMG Recordings, Inc. v. Augusto, 628 F.3d 1175, 1179 (9th Cir. 2011) and Adobe Sys., Inc. v. Stargate Software Inc., 216 F. Supp. 2d 1051, 1055 (N.D. Cal. 2002)).

In the first place, within the formalist structure of the essay, you have been more aware of first sale as a common law doctrine, therfore not subject to the sort of statutory analysis with which you are more familiar in the mechanical jurisprudence of the "civilian" jurisdictions.

In the second place, why would we care? Networks exist to share bitstreams. What can be copied will be copied, and what can be shared will be shared. Are we talking about the rules that govern resale of large volumes of commercially acquired software? Copyright is irrelevant: the terms are contractual, contained in the custom-negotiated contracts between sophisticated buyers and sophisticated sellers. Resale rights, where the seller thinks they matter, are dealt with just as indemnities are dealt with: by hard bargaining.

So this is about individual consumer transactions, for mere entertainment bitstreams more than for anything with high capital value, like software. Here law hasn't the slightest power to control anything anymore, as any kid will tell you. Why should people bother reselling bits when they can acquire anything they want at price zero, and so can everyone else? Sharing as a mode of distribution is optimally efficient, and it is universally in use regardless of the empty formalisms still being bandied about by educated fools. All efforts industrially are on the attempt to control the endpoint devices and the intermediate common carriage networks, not for social control by means of law directed at the behavior of users of bitstreams. Technical protection schemes rise and fall in one area of technology after another, vanquished by their complexity, inefficiency, and ultimate tendency to annoy the only source of wealth, the human end user.

Copyright is dying not because we want it to, or because it's wrong, though these things are true. Copyright is dying because it doesn't work anymore, a system of coercive distribution of knowledge and culture. "You can't have this unless you pay me" doesn't work in the 21st century, so forms of activity that were briefly organized that way between Thomas Edison and yesterday are ceasing to be relevant. As scanning and sharing printed books becomes trivial over the next few years, the older system of copyright on printed books will also break down, and the book trade as we understand it will be reduced to a tiny fraction of its current importance, while digital typesetting will be more important than ever. (It's no accident that the most important and powerful digital typesetting tools have been free software for more than a generation now.)

So you need to get your view up out of the parochial misunderstandings of a few practitioners bothering themselves about minor technical issues. There are always crabbed technicians practicing trivialities in every legal system, marking time until their profitable little ritual is disestablished, and they can sink, complaining, into obscure if well-upholstered graves. If you asked them at gunpoint to offer an idea about the social organization of the human future they couldn't make an intelligible return to save their lives. The prevalence of this sort of graceless plodder among the jurisprudes and law professors in the long history of the Roman law is a subject on which Gibbon is particularly lucid in the 44th chapter of his Decline and Fall. (The situation unfortunately little better elsewhere, though legal realism is at least an antidote against the worst of the popular soporifics and their insistent evangelists.)

Our shared hope is that you will become instead a lawyer. This is a person skilled in the multidimensional understanding of social processes, capable both of analytical decomposition of social phenomena into their component aspects (biological, intrapsychological, social psychological, sociological, economic, anthropological, historical, philosophic), and of synthetic reimagining, in the forms of perceptive, effective strategy and deft tactics.

A lawyer, aware that entire industries are being transformed completely as a result of social changes triggered by the largest technological advance in human communication in the last nine thousand years, probably wants to consider problems at a level of generality slightly higher than a comparison of treatments in a couple of countries of speculations about possible decisions in tiny numbers of cases involving resale of small numbers of non-functional, unimportant bitstreams. As a test of social awareness, the inadequacy of such an inquiry should indeed be immediately apparent, and would be outside the laborious unimaginative technical structure of legal doctrine inhabited by archetype workers such as those Gibbon describes.

[SECOND VERSION]

Undoing the Digital Revolution

How the Doctrine of “Used Bitstreams” Replaces Physical Barriers by Legal Boundaries

In the world before the Digital Relvolution, most goods for everyday use could be divided into two categories: “new” items and “used” items. Those words still refer to easily understandable concepts when they designate elements of a physical world. If the adjective new is defined as “having been made or come into being only a short time ago; recent”, the adjective used will stand for its opposite, i.e. “not new” or “secondhand”. A “new” car, fridge, piece of furniture or hard drive has some inherent advantages over a “used” item of the same category. Being “used” may change fundamental or non-fundamental characteristics of material objects, deteriorate their functions, worsen their efficacy. The quality is lower and the life expectancy is almost inevitably shorter than that of a new item.

Nonphysical goods, such as bit streams, data or software do not deteriorate through use. Although nonphysical goods sometimes become obsolete and may thus lose worth over time (as better solutions emerge or flaws are discovered), their sole “use” will not lead to deterioration or loss of quality. Playing the original 1968 vinyl record of the Beatles’ White Album thousands of times on a record player will cause audible degradation of the initial sound. Playing the mp3 file containing the White Album will not. Hence the concepts of “new” and “used” cannot be transposed into the digital world. There is no such thing as “used bitstreams”.

Lots of legal questions nevertheless arise in the context of “used bitstreams”, virtually all related to the possibility of their being “resold”: can a consumer “resell” the music files he or she “used”? Can a company “resell” its copies of an office software (that is formally “licensed” to it) when it decides to use software of another provider? As evidenced by these examples, courts are in fact confronted to a world in which not only the term “used goods”, but also the term “resale” does not necessarily mean what it has meant for the last few centuries. The sale of property implies termination of the seller’s ownership and creation of the buyer’s ownership as a result of a transfer. In the digital world, bits cannot be “sold”. The process that perhaps closest resembles a “sale of bits” would involve the creation of a copy on the buyer’s hardware and the subsequent deletion of the file on the seller’s hardware. There is no such thing as “resale of bitstreams” either.

Notwithstanding the intrinsic defectiveness of the very concepts, courts have been recently dealing with issues related to the “resale of used bitstreams” (see in particular UsedSoft? GmbH? v. Oracle International Corp, European Court of Justice, July 3, 2012 (C-128/11)). In order for its decision to fit reality, the UsedSoft? court used the above mentioned analogy (the seller deleting its own bitstreams) and in fact encouraged software manufacturers to use technical protection measures to prevent several persons from using the same “copy” of the software in parallel. As evidenced by the UsedSoft? decision of the ECJ, courts continue to apply legal concepts originally developed for a world of physical goods to the digital economy, without analyzing the new meaning of some of the words they use – such as “used” and “resale”. In principle, interpreting the law in an evolving society is precisely what courts are supposed to do. However, the danger of being entrapped in concepts that are not only inaccurate, but often useless in the digital age, is increasingly looming. The UsedSoft? court will undoubtedly not be the only one to make this mistake.

From a legal point of view, words are only the imperfect vehicles of ideas. What a lawyer (of any legal education) is interested in, are the concepts behind the words, not the words themselves. If a court is using the terms “resale of used goods” and applies the legal rules conceived for the “resale of used goods” to facts that contain neither an actual “resale” nor any “used goods”, the decision will be quixotic at best, plainly wrong at worst.

European copyright statutes insist on the distinction between the intellectual property (e.g. the musical work “Back in the USSR”) and the chattels that contain it (e.g. my personal copy of the White Album LP). US copyright law has insisted on the distinction since Forward v. Thorogood (985 F.2d 604 (1st Cir. 1993)) at the latest. The distinction was highly important for decades – it appears to be moot in the digital age. The misunderstanding around the “resale of used bitstreams” arguably arises from the dematerialization of the digital economy. If works can be transferred without transferring chattels containing reproductions of the works, intellectual property law cannot – and should not – apprehend the transfer of chattels. Trying to create artificial and unworldly facts (such as the definite and irreversible deletion of the seller’s file after the creation of a copy on the purchaser’s hardware) or encouraging self-help (such as technical protection measures intended to prevent the “seller” from continuing to use his copy of the software after the transaction) to make the deal resemble – as good as it gets – to the sale of chattels cannot be said to be an interpretation or an adaptation of the original rule to a new technology. The very concept of “used” and “resale” in the digital world should be abandoned.

The “entrapment” of intellectual property on physical supports resulted in a factual (and not legal) barrier of the multiplying and distributing both copyrighted and uncopyrighted works for centuries. The factual barrier being gone, the question remains how the law should apprehend the new situation. The main options are clear. What the ECJ (and undoubtedly most copyright owners) seems to desire is the transformation of a factual barrier into a legal one, by requiring technical protection measures, intended to remove the main advantage of bitstreams over chattels: easy, uncontrolled and free copying. What the fast and sound development of a digital economy would require is probably different.

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