E-books distinguished from software, not exhausted

Author: Emma Linklater (European University Institute, Florence)

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

Journal of Intellectual Property Law & Practice (2013), doi: 10.1093/jiplp/jpt124, first published online: July 23, 2013

According to the German Regional Court of Bielefeld, the Court of Justice of the European Union's (CJEU's) UsedSoft decision is not applicable to the resale of other digital content, and contractual provisions restricting use, insofar as they prohibit resale of downloaded e-books and audio books, do not place a disproportionate disadvantage on consumers.

Legal context

German and EU copyright provisions

Article 4(2) of the Information Society (InfoSoc) Directive provides for the exhaustion of the copyright holder's distribution right and is implemented by s 17(2) of the German Copyright Act (Urheberrechtsgesetz; UrhG). Although the UrhG makes no distinction between tangibles and intangibles, the InfoSoc Directive's Recital 29 does, expressly rejecting the exhaustion of ‘services, and online services in particular’.

On 3 July 2012, the CJEU responded to a preliminary reference in Case C-128/11 Usedsoft v Oracle relating to this issue in the context of digitally downloaded software. In this case, the CJEU found the specific Software Directive to be the applicable legal instrument, overriding the more general InfoSoc Directive.

Article 4(1) of the Software Directive gives rights holders the exclusive right to authorize reproduction, adaptation and distribution to the public. Article 4(2) provides that upon first sale of a copy of a computer program in the Community, the distribution right is exhausted. Article 5(1) stipulates that no authorization by the rights holder is required for reproduction or adaptation of the program where necessary for use by the lawful acquirer in accordance with its intended purpose. The CJEU held that the distribution right could be exhausted where the copyright holder has authorized a download of software via the internet, and that a second or subsequent acquirer could become a ‘lawful acquirer’. The provision of Article 5(1) enabled that lawful acquirer to make a copy of the file, without infringing the rights holder's reproduction right.

German contract law

Under s 307(1) of the German Civil Code, contract terms must not unreasonably disadvantage consumers contrary to the requirement of good faith. Under s 307(2)(II), an unreasonable disadvantage is presumed to exist if the contract limits the essential rights inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardized.

Facts

The defendant, an unnamed retailer, operates a website selling media in both physical and intangible (downloadable e-book and audio book) formats. Article 10(3) of the terms and conditions for sale provided that ‘the customer acquires the simple, non-transferable right to use the title offered for personal use only’. Additionally, the consumer's ability to copy, modify, transfer, make publically available, resell or use the download for commercial purposes was restricted.

The applicant, a German ‘umbrella’ consumer organization (Verbraucherzentrale Bundesverband; VZBZ), alleged that the contract clauses restricting use unreasonably disadvantaged consumers. The placement of e-books and audiobooks on the website and the use of ‘physical goods’ language employed would lead consumers to download them in good faith that they would have the same usage rights as for print books or CDs. Further, the contract terms went against the exhaustion principle set out in s 17(2) UrhG. Relying on UsedSoft, the applicant submitted that exhaustion should apply to both tangibles and intangibles alike, the decisive factor being that the contract concerns a marketable, tradable commodity.

Analysis

The court dismissed the action as unfounded. Looking first at the consumer contract at issue, the court found that the primary purpose of the contract with the defendant was to enable the consumer to ‘use’ the desired content; the defendant is therefore only contractually responsible for facilitating the download so that the content can be stored on the consumer's local disk to be accessed at will. Thus, from a contractual perspective, the contract's purpose is not endangered by limiting further sale or use. From the consumer's perspective, the court reasoned that, because consumers know about the piracy problem and since digital copies do not degrade with use, they expect that they will not be allowed to pass on their copies and anticipate that all they will get from the contract is the ability to download the content and the right to its personal use. According to the court, the terms are clear and precise so as not to mislead the consumer into thinking that he is getting a right that can be assimilated to a property right in a physical object.

In this case, the defendant's interest in preventing an uncontrollable and potentially infringing secondary market outweighed the consumer interest in establishing such a market. Since digital files can be transmitted instantly, without loss of quality, there is a strong economic risk for the defendant. However, no forward-and-delete technologies (as employed by Usedsoft or Redigi) were mentioned in this case. Accordingly, the consumer interest here was in accessing the download and in attaining a copy to read or listen to at will—not in being able to sell the file. Further, due to the lower price of downloadable e-books and audio books, ‘the average consumer’ should be satisfied with having the file for personal use.

Moving to the exhaustion issue, the court reiterated that Community exhaustion applies to the distribution right. The downloading of the file, however, creates a local copy and is therefore an act of reproduction. For a downloaded file to be legally resold, a further copy must be made; the distribution right must be exhausted, but also the acquirer must have the right to reproduce a copy to enable use. Referring to Usedsoft, it emphasized that the conclusions in that case were specific to the Software Directive because, through Article 5(1), reproduction without authorization is possible where necessary for use of by the lawful acquirer. In UsedSoft, the CJEU did not provide for the exhaustion of the reproduction right itself, but it was the combination of exhaustion of the distribution right and Article 5(1) which enabled resale of the downloaded software. The InfoSoc Directive, on the other hand, does not provide for such scenarios. Without an equivalent of Article 5(1), even if the distribution right could be exhausted the necessity of producing a reproduction copy to use the downloaded e-book or audio book would be an infringement.

Lastly, the court found that prohibiting copying by a third party or resale of the e-book or audio book file does not depart from the essential spirit of s 44a para 1 UrhG. The download and duplication here were intended and did not arise ‘incidentally during a technological process’.

Practical significance

One practical element—if not from a copyright perspective then from a business one—is the acceptance by the court that a lower price equals fewer rights, and that this is acceptable from a consumer perspective. This may be a relief to the publishing industry, but also contains a warning that for restrictions to personal use only to be warranted, there needs to be a consumer benefit in the form of increased accessibility through affordability.

Unfortunately, the significance of this decision is also limited by the lack of any reference to forward-and-delete technologies, which were seemingly not on the court's horizon. This limits the scope of the court's finding that the interest in preserving the rights holders' monopoly outweighs the consumer interest in allowing resale, since with such technologies, the rights holders’ interests can be preserved without an impact on piracy (ie one that one user's copy will be re-circulated). Further questions may be raised on appeal about the ‘reasonable consumer’ approach adopted: To assume that all consumers are aware of the contractual limitations of their downloaded content likely paints a simplified picture, since the growing number of business models promoting lending, sharing and cross-platform access have created a hazy grey-zone where ‘personal use’ is starting to be less clear.

Undoubtedly, the real significance of this decision comes more from its topicality than its substance. It essentially upholds the status quo; however, with the applicants set to appeal and against the backdrop of Redigi (see Case No 4 O 191/11, Landgericht [German Regional Court] Bielefeld, 5 March 2013] in the USA and the recent patents for ‘forward-and-delete’ technologies granted to tech giants Amazon and Apple, the issue of digital exhaustion does not look likely to go away this easily. Although there is little way that a regional court would have found UsedSoft to apply outside the (limited) context of the Software Directive, a judgment such as this making its way through the European legal system (again bearing in mind the music industry equivalent in the USA) could signal alarm bells in the minds of policymakers on both sides of the Atlantic. Although politicians have seemingly opted to keep silent on this issue for the moment, they are unlikely to be able to do so for long.