Tuesday, 28 October 2014

Dutch copyright succumbs to aging as exhaustion extends to e-books

Author: Míchel Olmedo Cuevas (Ecija Law & Technology)

Nederlands Uitgeversverbond and Groep Algemene Uitgevers v Tom Kabinet, Case C/13/567567/KG ZA 14-795 SP/MV, District Court of Amsterdam, 21 July 2014

Journal of Intellectual Property Law & Practice (2014) doi: 10.1093/jiplp/jpu200, first published online: October 26, 2014

The District Court of Amsterdam recently concluded that, from now on, ebooks are equivalent to paper books, thus becoming susceptible to resale under the exhaustion principle by application of the UsedSoft decision (C-128/11) of the Court of Justice of the European Union.

Legal context

The whole intellectual property community had to wait a long time for one of these Justin Bieber-like decisions (you love them, you hate them or you simply don′t care) following from the Court of Justice of the European Union (CJEU) in UsedSoft (C-128/11) and, it has to be said, it fully discharged its duty when it stated that the exhaustion doctrine was applicable to downloaded software which lacked tangible support. The court did this mainly by applying the exemptions to recital 29 of the Copyright Directive (Directive 2001/29) contained in recital 7 and Article 4(2) of the Software Directive (codified by Directive 2009/24).

Irrespective of personal opinions on the outcome of the UsedSoft case, the lack of a defined scope for the application of its doctrine, has left both scholars and national courts a wide margin for interpretation. For some, it was clear that this decision only affected software, while for others, it could apply to all kinds of computer files (eg music, games, video). One further group considered that its application would depend on the specific licence and its terms, depending in great measure on the use of terms like ‘sale’ or ‘purchase’.

The case discussed here thus presented itself as one of the best opportunities to find out the scope of UsedSoft according to a European national judge, especially bearing in mind that software reseller ReDigi has recently obtained a US patent for its new business process, which could see its market expanded to e-books, films and more.

Facts

In June 2014, Dutch internet service provider Tom Kabinet began operating through the website www.tomkabinet.nl, providing its customers with a marketplace where they could either sell or buy used e-books at a lower price. After taking notice of its actions, the Nederlands Uitgeversverbond (NUV), the Dutch Publishers Association and Groep Algemene Uitgevers (GAU), the General Publishers Group, sent letters to Tom Kabinet, requesting that it immediately cease and desist from such operations, imposing a deadline of 2 PM on 27 June 2014.

Tom Kabinet promptly replied, stating that it would be impossible to meet this deadline, and suggesting a meeting between the parties to try and build bridges between their opposing positions. Failing to comply with the requests from NUV and GAU, the latter decided to take the matter into court.

Analysis

The claims of NUV and GAU

The position of these associations was clear: the second-hand e-books Tom Kabinet was selling were not resaleable. They based their claim on their understanding that UsedSoft could not be applied to the scenario at hand, since the court only decided on an Open Source Software (OSS) licence, the one Oracle was using for the software that was being resold, whereas not all e-books sold in The Netherlands were subject to licences even similar to those, thus rendering the UsedSoft decision inapplicable.

Another reason why the criteria derived from UsedSoft could not be extended, according to the Dutch association, was that the CJEU relied upon recital 7 and Article 4(2) of the Software Directive, which treated digital and physical software as being legally equivalent, and on the applicability of the first sale doctrine to software. In this respect, the NUV and GAU interpreted that, since books are different from e-books in many ways, such as format variety, presentation, usability and durability, the same result could not be reached in this case.

Finally, the claimants argued that the rights of the publishers were being infringed because all e-books were stored on Tom Kabinet's servers, thus performing two acts of reproduction without proper authorization (one being the uploading, the other downloading). This was not the case in UsedSoft, because only the licence was transferred, and the software was directly downloaded from the original page, instead of downloading the program installer from the UsedSoft page.

Tom Kabinet's defence

The defendant first raised some procedural exceptions, which are not relevant to this analysis and which were all rejected, except for the exception relating to the inadmissibility of the inclusion of other societies related to the group listed in the claim presented by NUV and GAU, which was granted.

Tom Kabinet also argued that the only e-books that were resaleable via its website were in epub format and files without Digital Rights Management (DRM-free). Tom Kabinet also provided a list of online stores that sold e-books with those characteristics, and all those stores were legitimate shops in accordance with the general conditions established by the Dutch Home Shopping Organization (Nederlandse Thuiswinkel Organisatie). Further, the defendant considered that, as in the UsedSoft decision, the content was acquired through a licence of indefinite duration for a one-time fee; the purchase thus became an ordinary sale and, as such, might fall within the scope of the CJEU ruling.

Regarding its sale process, the defendant maintained that its software scanned each uploaded e-book in order to verify that it had not previously been sold by the same user, asking that user to remove the file if he had done so. If the e-book went through this process and was deemed compliant, Tom Kabinet would provide a watermark for the file. This would not necessarily stop illegal sales through other platforms, but would do so on the defendant's.

Lastly, Tom Kabinet submitted that it had not, strictly speaking, committed any act of reproduction: uploading the file by the seller contravened neither the Copyright Act nor the Copyright Directive.

Findings of the court

Judge Pompe began his conclusions with a summary of the further exposition of NUV and GAU as to why UsedSoft should not be applicable to the scenario at hand. Even though the judge conceded that it might be the case, he added that it might be the other way around, since the CJEU did not give a concrete ruling on how wide the scope of the UsedSoft decision was. From the judge's point of view, even though some German courts had gone so far as to restrict the applicability of the ruling to software, there is no definite answer until the CJEU gives a ruling itself, most likely through a matter referred for a preliminary ruling from the court in The Hague.

The judge considered para 62 of UsedSoft to be very important. There, the court responded to the argument of the European Commission on how the European Union law did not provide for the exhaustion right in case of services, explaining that the exhaustion principle (or first sale doctrine) is constructed so as to limit the application of restrictions only to cases where it is necessary to safeguard the object of the intellectual property, in order to avoid the extension of exhaustion to cases in which such additional protection is not necessary.

In judge Pompe's eyes, the business model used by Tom Kabinet did not contravene the law, even less so if it is taken into account that the platform put measures in place to prevent illegal commerce with copyright works, like abstaining from accepting DRM-protected files, compensating right holders and providing a watermark.

After all these considerations, the judge granted the website permission to carry on with its business and imposed costs on NUV and GAU.

Practical significance

With the publishers′ associations planning to appeal, it is not easy to know if the findings of these proceedings will be overturned or if the matter will be referred to the CJEU for a preliminary ruling, but it is nonetheless another step in the same direction as that taken by the Higher Regional Court in Frankfurt am Main when deciding that the splitting-up of licences was legitimate.

There are many who could easily contest the ruling by stating that second-hand sale is only applicable to the physical work, because such sale is based on the loss of value, which can be of two kinds: subjective value (such as gifts from a former lover or a game that has become boring after being played a hundred times) or objective value (mostly by ageing or accidental damage). In the case of digital works, many claim that there is no loss of objective value, because the file stays the same. This assertion is arguable because, as has happened in the physical world with VHS and DVD, when a superior competitor appears, the loss of value is inevitable. This has been seen with the emergence of new music and video formats, such as FLAC and MKV, which leave older formats obsolete and thus thus subject to a loss of objective value.

Having said that, if European courts follow the path drawn by these rulings, one can only expect a wave of online second-hand markets to compete against ReDigi, UsedSoft and Tom Kabinet for the resale of all kinds of unwanted digital files. Maybe it is time for the self-same companies that commercialize the products to offer buy-back programs for the unwanted digital files as an alternative for the users to reselling them because, once the exhaustion train gets in motion, it is going to be really difficult to stop.

Monday, 20 October 2014

The typical licence royalty rate: a time of change

Here's the Editorial for the November 2014 issue of JIPLP, which we are pleased to post in full and at no expense to readers of this weblog.  For once, this is not a guest editorial but is actually written by the journal's editor!
The typical licence royalty rate: a time of change

The Curies: garden shed inventors ...
Many years ago, I found myself reviewing a book on protecting and commercialising ideas that had been written by a patent attorney. The intended readership was the stereotype of the day: the small-scale inventor who worked away on creative projects in his garden shed. This was before the advent of the personal computer, so prototypes were made by hand rather than designed by computer, while mathematical calculations were performed on battery-operated pocket calculators that had only a few years earlier become affordable. The book introduced the reader to some basic concepts of do-it-yourself patent law and some sturdily practical advice about keeping your invention secret till it was time to write your own patent application (which was not recommended) or show it to your patent attorney who would do it for you.

I read without excitement or interest until I came to a chapter on the business side of patents. This chapter explained that, once your patent was granted, you didn't have to use it yourself, since you could enter into a contract by which you would let someone else use make your invention in return for payment. I was then confronted with the most pointless sentence I had ever read in any intellectual property book up to then. Getting on for four decades later, I still doubt that I have read anything more pointless. The author wrote: “A typical licence royalty rate is 5 per cent”.

“How could anything be more meaningless”, I asked myself. There was nothing to explain why 5 per cent was typical, what sort of things it typified, or what precisely it was 5 per cent of.

Many years later, while still chafing at this proposition, I had come to understand the position of the author a little better. I now pictured him in practice, at his desk, and being asked on an almost daily basis by actual or prospective clients the perennial question: “what sort of royalty should I be charging?” Without access to reliable data in terms of the size and dynamics of the market, the repercussions in terms of changes in consumer spending patterns, comparable royalty rates elsewhere in the market and beyond, or any other helpful guidance, neither the client nor his patent attorney could say with confidence what the royalty rate should be. The innovating client however would both assume and expect that his patent attorney's experience in assessing the prospects of patentability, in drafting claims and in dealing with Patent Office formalities would enable him to intuit more successfully what that royalty rate should be.

Now in 2014 the situation is very different. Licence royalty rates still need to be fixed at the highest price that will confer a worthwhile economic benefit on the patent owner and on the licensee. However the patentee, his professional adviser and the would-be licensee are faced with too much information: commercial databases abound with information concerning corporate activity in the patent's field activity, as well as challenges to patent validity, the quantum of patent infringement damages and the bases upon which they were made, as well as more general economic data concerning consumer spend, the grinding of the tectonic plates of competing and complementary technologies with one another, the rate at which emergent technologies mature and ultimately fade into obsolescence and so on. The growth of pools of standard-essential patents has added to the complexity of licence royalty calculations, since there has to be a trade-off between the legitimate entitlement of patent owners to receive fair remuneration for the use of their inventions and the legitimate expectation of the free market that patents will not be used so as to create a market to which new entrants are forever barred.

It is notable now that an increasing amount of attention is being focused not on the provision of information necessary for negotiating sensible royalty rates, since that information is now largely available, but rather on techniques for making that information accessible and comprehensible to ordinary business folk, and to the financial institutions which back them. When such information can be visualised and then used by the parties to intellectual property transactions, we need never again feel the need to tell our client, as we guide him to the door: “A typical licence royalty rate is 5 per cent”.

November JIPLP now available online

The November 2014 issue of the Journal of Intellectual Property Law & Practice is now available in full online to the journal's e-subscribers.  The full list of contents appears below and can also be accessed here.   If you don't subscribe to the journal but still wish to access any of the items below, you can do so on a pay-for-limited-access basis via the JIPLP website here.

The Editorial will be posted in full on this weblog later today.

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