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Exhaustion of "software" patents

The ECJ's decision Usedsoft answered the controversial question whether downloaded software can freely be traded under the principles of exhaustion with a clear "Yes". But "software" can also be protected by patent law and for allegations of patent infringement the principle of exhaustion has often proved a defence of limited value.

November 2014

After the ECJ's Usedsoft decision there was an uproar in parts of the software industry – eventually it was made clear on the European level that trading with "used" software is allowed in the whole European Union. In Usedsoft the ECJ answered in a preliminary ruling procedure several questions asked by the German Supreme Court in terms of exhaustion of copyright related to trading of "used" software licenses with regard to the European "Software Directive" (2009/24/EC). The ECJ's basic ruling can be summed up as follows: even if the software developer distributes the program merely by way of download from its website and not in "physical" form e.g. by way of a copy provided on a CD, the principle of exhaustion pursuant to Article 4 paragraph 2 Software Directive nevertheless applies. In consequence, after the ECJ's decision it became a widespread perception that trading with "used" software licences is without any limits at all.

copyright logoIt should be noted, however, that the ECJ's Usedsoft decision is solely dealing with the aspect of copyright. It is, thus, not clarified to date whether the principle of exhaustion as employed in the ECJ's decision in this scenario applies the same way to other IP-rights such as patents on computer implemented inventions, which may also come into play when "used" software is traded and eventually used. The principle of exhaustion under Article 4 paragraph 2 Software Directive only relates to copyright. Recital 11 Software Directive explicitly foresees that the Software Directive only grants protection to computer programs with regard to copyright. Ideas and principles underlying any element of a particular software, however, are not subject to the Software Directive at all. In consequence, the ECJ's decision Usedsoft can only be applied to copyright as such and, in consequence, does not exclude that a particular software is encumbered with a patent right. Rather, the general principles of exhaustion of patent rights still apply. Therefore, from a viewpoint of patent law, trading with "used" software licences may still be limited.

Even if the ECJ and national courts are willing to apply the Usedsoft decision to patent rights on the basis of the general principle of patent exhaustion within the common market under Article 34 TFEU, the devil is in the details. First of all, it is the defendant's burden of proof that rights in a specific software copy are actually exhausted. This requires disclosing the original source of the software and a seamless documentation of the chain of title and all intermediate copies from the authorised original user of the software to the current owner. In the national German cases underlying the Usedsoft decision, this burden proved too high for the defendants1.

Furthermore, patents on computer related inventions are in many events not just directed to the software, but method patents or device patents. For method patents, there is no established principle of exhaustion2. Therefore, German courts relied on implied licenses to assess whether users of patented software could rely on a right of use in the absence of an explicit licence, if their software copy originated from an authorised source. Of course, as soon as the assignment or a transfer of rights is excluded in the original licence agreement between the patentee and the first owner of a software copy, the principle of implied licences is bound to fail.

mother boardMoreover, many patent claims are directed to standard hardware devices with special software implemented inventive functionality. The patent claims in these cases often mention hardware components like CPU, RAM, keyboard or monitor, which are regularly purchased from other sources than the software. Such device patents can be infringed as soon as software with the patented features is installed on the hardware device, because by installing the software a new device having all features of the invention is produced. If, however, the standard hardware components mentioned in the patent claim are not purchased or licensed from the patentee, the principle of exhaustion is not applicable according to German case law3  In the US the Supreme Court decision LG v Quanta stated that already the authorised sale of components including all essential elements of the invention can lead to exhaustion, even if additional components also mentioned in the claim are added later. However, this new doctrine from the US has not yet been reflected in German case law. A reliable defence of exhaustion is therefore only available in cases where all relevant components mentioned in the patent claim are purchased from the patentee or other sources authorised by the patentee.

At last, patent exhaustion requires a first authorised sale of the patented software or other component within the European Union or European Economic Area. This principle, which has been established under European case law for decades by the ECJ4 may seem trivial from a legal perspective. It is, however, absolutely contrary to the typical supply chains and business relations in the IT industry. Often, patented components or software are included in products, which are assembled outside Europe (e.g. in China) and the first sale of the patented component or software therefore takes place outside the European Union. If the assembled products are subsequently shipped into Europe, the importer cannot rely on the principle of exhaustion within the European Union. Rather a worldwide distribution right requires explicit or at least implied licences. Should software or component suppliers refuse to provide such worldwide licenses for the benefit of distributors and users of their product further down in the distribution chain and exclude implied licences explicitly in their agreements, the risk of patent infringement for the importer of a patented software or other component into Europe can be considerable, if the software or component was not purchased or licensed from the original manufacturer.

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1 Federal Court of Justice, GRUR 2014, 264 – "UsedSoft II", Munich Court of Appeals, MMR 2008, 601.

2 e.g. Federal Court of Justice, GRUR 1980, 38 – "Fullplastverfahren".

3 Federal Court of Justice, GRUR 2007, 773 – "Rohrschweißverfahren"; Karlsruhe Court of Appeals, GRUR 2014, 59 – "MP2-Geräte". (Quanta Computer, Inc. v LG Electronics, Inc., 553 U.S. 617 [2008])

4 See e.g. ECJ, GRUR Int. 1974, 454 – "Negram II"; ECJ GRUR Int. 1982, 47 (48) – "Moduretik".

padlocked disc
Dietrich Kamlah

Matthias Hülsewig

Dietrich and Matthias explain the rules applicable to exhaustion of software patents in the European Union.

"A reliable defence of exhaustion is only available in cases where all relevant components mentioned in the patent claim are purchased from the patentee or other sources authorised by the patentee."