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Exhaustion of rights and digital content

Where physical goods are concerned, there have long been limits on the extent to which the owner of the intellectual property rights in a product can use those rights to control how and where that product is distributed. 

November 2013

Should the same principle apply to digital "goods", and if so how?  Courts have recently been grappling with this with important consequences for the development of digital distribution models and cloud computing.

play buttonThis principle is a feature of IP law in many territories, including the EU where it is known as "exhaustion of rights", and the USA where the "first sale doctrine" comes into play.  Once the article in question has been put onto the market with the rights-owner's consent – the "first sale" – the right to control distribution is generally exhausted and the buyer can sell on without the rights-owner's consent.  But there are limits on how far the principle applies, and two important ones have been examined by the Courts recently: 

  • The principle limits the right to control distribution, but not the owner’s other rights such as the reproduction right. So someone may be free to sell on an item without the rights-owner’s consent but not to make further copies of it.
  • Traders will often try to take advantage of differences in prices for the same goods in different territories, giving rise to parallel imports, or the “grey market”. Under EU law, the exhaustion principle will protect such activities where the goods are first put onto the market in the European Economic Area, but rights-owners can stop imports from outside the EEA. There is not yet a globally applicable exhaustion principle.

What is exhausted?

It is not obvious that exhaustion should apply to digital rights at all. When a physical product is sold, the seller no longer has any control over it. This applies as much to CDs and DVDs as it does to shoes and sunglasses. But when a digital copy is “sold”, there is not so much a transfer of an asset as the making of another copy and the “seller” may have the copy it originally acquired. Permitting copying under the banner of exhaustion would, rights-owners argue, be to extend the principle to the reproduction right. In addition, most digital products are not “sold” in the conventional sense but licensed, and in many situations the end-user does not obtain a copy but is granted permission to access certain content online.

CDThe rights-owners' position is supported by a recital of the Information Society Directive (Recital 29) which states that "[t]he question of exhaustion does not arise in the case of ...on-line services".  Since the CJEU's decision in UsedSoft v Oracle1, how far this should be applied is open to question.  The Court's  2012 decision was greeted by some as redrawing the landscape for digital rights, and extending the exhaustion principle to all forms of digital content and rights.  It held that a perpetual software licence could be resold without the software house's consent as long as certain conditions were complied with. 

But the UsedSoft decision may be of narrower application.  It was a case about software rather than creative content and was heard not under the Information Society Directive but under the Software Directive, which may be regarded as a one-off law.  A German court (the Bielefeld Landgericht) has already held2 that the UsedSoft decision did not apply beyond software (in a case concerning e-books).    

What are the conditions for exhaustion?

Even if a version of the exhaustion principle might apply to the copyright in digital works, a party seeking to take advantage of it will probably need to satisfy certain technological requirements.  In UsedSoft, the Court held that the original copy had to be disabled by the seller, and the purchaser had to comply with the terms of the licence.   In the US, ReDigi is being sued by Capitol Records who claim that its service which enables users to resell music purchased on iTunes cannot shelter under the first sale doctrine.  ReDigi argues that because its technology deletes the old copy once access is granted to the new "owner" of the work, there is effectively no reproduction.  So far, however, the Court has held that this does not mean reproduction does not take place or that the first sale doctrine is triggered.  If exhaustion is ever unambiguously to apply, it seems very likely that a compete disablement of the transferor's copy will be required.   The Courts are reluctant to trust that technology can yet guarantee it, but once there is a technical solution the position might well become more liberal.

Where is it exhausted?

USA flagThe United States Supreme Court has recently made an important intervention into the debate, in the case of Kirtsaeng v Wiley.  The case concerned the import into the US of textbooks which the copyright owner had put onto the market in Thailand, where the sales price was much lower.  As one of the Justices pointed out, US policy-makers have argued against any principle of international exhaustion, for example in trade talks.  Nevertheless, the Court held that US copyright law did not state that there was an exception to the first sale doctrine for international sales so once the copies of books had been sold by the publisher, it lost control of subsequently dealings in those copies.   This decision is important for two reasons.  It means that rights-owners worldwide may not now be able to control the parallel import of their content into the United States.  It also marks a clear difference in approach to the EU, where the position is still as stated by the CJEU in Laserdisken3 in 2006, namely that international exhaustion does not apply to the distribution right in the EU.

Developments in the future

While the current situation is one of considerable fluidity, it is not yet the case that digital rights-owners have lost control after the first sale, and it is unclear how far the UsedSoft approach will be applied to products other than software.  But there is a host of related issues waiting in the wings which will impact on exhaustion of digital rights, including how far private copying exceptions should go, and whether technical protection measures which permit control over content some way down the distribution chain are permissible.  

If you have any questions on this article please contact us.

1C-128/11

2Case No 4 O 191/11, Landgericht (German Regional Court) Bielefeld, 5 March 2013

3C-479/04

Lens
Mark Owen


Mark Owen looks at the extent to which rights owners can control the second hand market in digital products.

"While the current situation is one of considerable fluidity, it is not yet the case that digital rights-owners have lost control after the first sale, and it is unclear how far the UsedSoft approach will be applied to products other than software."