Last week, the big news in the video game blogosphere was the reported sale of the world’s largest video game collection, comprising over 11,000 games, for more than $750,000 at auction. While the most salient fact of this story may be the magnitude of both the collection and the winning bid, the large numbers obscure a thread of intellectual property law — one that relates to a European court decision made a scant few days before the collection went thrice and was sold. That thread is the doctrine of copyright exhaustion, which has been the subject of growing contention and litigation in the United States and the European Union as online distribution of goods has become more popular.
The US doctrine of copyright exhaustion (17 USC § 109) states that a copyright owner’s exclusive right of distribution in a copyright-protected work is exhausted upon first sale of that item (hence the doctrine of exhaustion’s other name: the first-sale doctrine). Although Canada’s Copyright Act does not expressly include an exclusive right of distribution among those rights enjoyed by the owner of copyright in a work, Canadian copyright law has functional equivalency by operation of other doctrines. However, copyright exhaustion is an important consideration elsewhere in the world as the question of whether purely digital goods such as ebooks, MP3s, and audiobooks may be resold on secondary markets is still a contentious question.
On June 15, the German Court of Appeal of Hamm released the first appellate-level decision on the application of the doctrine of copyright exhaustion to digital goods since the Court of Justice of the European Union (CJEU) decided UsedSoft v Oracle in 2012. UsedSoft was a case involving the resale of licences to software distributed by Oracle. After passing through Germany’s court system, the case reached the CJEU, which ruled that the doctrine of exhaustion applied to Oracle’s exclusive right to distribute the software in question. Further, it held that the second owner of the software licences could use those licences to download updated versions of the software from Oracle.
Last week’s decision by the Court of Appeal of Hamm is currently only available in German, but from what information is available online, the appeal court upheld the decision of the trial court and concluded that the UsedSoft decision was lex specialis and only applied to the Software Directive. The Software Directive, as its name suggests, governs software, while other kinds of digital media such as ebooks and audiobooks instead fall under the purview of the InfoSoc Directive.
After UsedSoft, there was much speculation about whether the CJEU’s decision regarding copyright exhaustion under the Software Directive would also apply to works falling under the scope of the InfoSoc Directive. With this decision, it appears that computer programs like the one at issue in UsedSoft are subject to different judicial treatment than other commonly-traded digital goods such as ebooks.
The court’s decision here was a victory for copyright owners and distributors of works in digital format, as it provides them more control over the sale and resale of such goods online. However, even if the court had extended the doctrine of exhaustion to the InfoSoc Directive, it is likely that copyright owners could have used other exclusive rights granted by copyright statutes to block the development of secondary markets for digital-format works. The copyright owner’s exclusive right of reproduction is a strong tool against the resale of digital goods as the transfer of a file from one user to another necessarily requires the reproduction of that file. This tactic was used in the United States case Capitol Records LLC v ReDigi Inc in response to efforts by ReDigi to launch a pre-owned marketplace for digital music using the doctrine of exhaustion as a defence. Capitol Records successfully argued that even if its distribution rights in the music files were exhausted, it retained its exclusive right of reproduction. Because of the nature of online file transfer, it contended that every transfer of a copyright-protected file would constitute copyright infringement by way of the reproduction of the file on the recipient’s computer.
While there may be other legal routes to the establishment of secondary markets for digital-format goods, it appears that one of the more promising arguments in favour of digital resale has been dealt yet another blow with the latest decision out of Germany. It remains to be seen whether inventive defences to copyright claims may allow for the creation of such markets, but the legal battles over the growing market for digital goods are only just beginning.