JJH Enterprises v Microsoft: exhausting another avenue in the battle over software resale markets

As the software resale market continues to develop, questions remain over when holders of UK and EU copyrights might be able to prevent sales of second-hand software licences. 

More than a decade after the CJEU’s landmark 2012 ruling in UsedSoft v Oracle, the UK Court of Appeal has recently delivered a comprehensive judgment on the application of the principle of copyright exhaustion to complex computer software, addressing some of these questions in the process. 

The facts

JJH Enterprises (trading as ValueLicensing) (VL) is in the business of selling second-hand licences for Microsoft software products such as Microsoft Office and Microsoft Windows. 

VL claimed that Microsoft had stifled the resale of those licences through its actions in migrating customers from a perpetual licensing model to a subscription-based one, and by including certain restrictions in the underlying enterprise agreements, between 2014 and 2022. It brought a first-instance claim in the Competition Appeal Tribunal (the CAT) against Microsoft, arguing such actions breached competition law in the UK and the EEA (including the EU).

Part of Microsoft’s defence hinged on copyright law. It sought to argue that the copyright in its software products had not been exhausted, that VL had no right to resell the relevant licences in the first place and that VL was in fact itself infringing Microsoft’s copyright. If Microsoft were right on these points (which the parties agreed were to be determined under EU law in force at the time, in the form of the Software Directive, the InfoSoc Directive and relevant CJEU case law), it was common ground that VL’s competition claim would fail.

Microsoft also challenged the CAT’s jurisdiction to adjudicate the copyright issues, arguing that those issues should be determined by the High Court. The CAT found that it did have jurisdiction to hear the copyright aspects of the claim where (as here) doing so was necessary to resolve the competition claim before it, with the two substantive copyright points later being tried as preliminary issues. 

Issues at stake

Two core copyright questions were at the heart of this case. 

The first concerned the correct approach to digital exhaustion for so-called “complex matter” – that is, where works comprise both a computer program protected by the Software Directive and other non-program copyright works (such as icons and user interfaces) that are protected under the InfoSoc Directive.  

The second looked at whether VL could legitimately sub-divide bulk, or volume, licences sold by Microsoft and then resell them. For example, if Microsoft sells 1,000 licences in bulk, can those licences be split up so that VL can sell on a portion (e.g., 500) whilst keeping the rest (e.g., the remaining 500)?

At first instance, the CAT held that all copyright, including that of the non-program works, in the resold software products had been exhausted by virtue of their first sale by Microsoft.  It also found that VL’s sub-division of the relevant licences was permissible.

Microsoft appealed both points (as well as the CAT’s jurisdiction to determine the copyright aspects of the claim) and the Court of Appeal handed down its judgment on 7 July.

The Court of Appeal’s decision

The Court of Appeal upheld the CAT’s finding that it had jurisdiction to hear the copyright aspects of the claim.

Perhaps more importantly, however, is the Court of Appeal’s judgment on the two core copyright questions noted above. 

Approach to digital exhaustion for “complex matter”

As some readers will be aware, exhaustion of rights is treated differently under the Software Directive and the InfoSoc Directive. Under the Software Directive, first sale of a copy of a computer program by the rightsholder (or with their consent) exhausts the distribution right in that copy. This applies equally to tangible and intangible (i.e., downloaded) copies, as per the CJEU’s decision in UsedSoft v Oracle. The distribution right under the InfoSoc Directive, by contrast, is only exhausted on first sale of a tangible object. So, as an example, whilst the distribution right would be exhausted on first sale of a physical book, it would not be exhausted on the first sale of an e-book (as per the CJEU’s decision in Tom Kabinet).

Going back to the Microsoft case, the products in question were made up of computer programs (governed by the Software Directive) and certain non-program works, such as graphic works in the form of icons and user interfaces (governed by the InfoSoc Directive).

The Court concluded that the correct approach to dealing with these types of “complex” products is to consider the product as a whole and to make a judgment about its proper characterisation in order to determine which single regime governs it (Software or InfoSoc Directive), rather than apply both regimes to their respective components. 

Applying this to the Microsoft Office and Windows products in issue, the Court of Appeal agreed with the CAT that these are, in substance, computer programs, with the graphics, user interface and similar works being incidental or having only accessory character. As a result, the Software Directive was found to apply and Microsoft’s copyrights in both the program and non-program works were exhausted on first sale.

Division of bulk licences

The Court of Appeal also upheld the CAT’s decision on the second copyright issue, finding that Microsoft’s bulk licences could lawfully be sub-divided. 

Microsoft sought to argue that the CJEU had already found in UsedSoft that this sort of sub-division is not permitted. However, the Court of Appeal agreed with the CAT that UsedSoft could be distinguished from the facts before it. In UsedSoft, a single copy of the software was downloaded and stored on a central server, with that copy then accessed by individual users in a “hub and spokes” arrangement. Here, however, each copy of the software was found to be independent of the others, with no program running on a central server. 

The Court of Appeal also found that it makes no difference whether the software being licensed is contractually labelled as a single licence for multiple devices or as a bundle of separate licences. What really matters is what the first acquirer does with the original copies after resale. If they keep and retain one or more of the original copies (such that there are more copies in circulation than originally licensed), those retained copies will be unlicensed and infringing. As the Court of Appeal made clear, however, any such failure by the first acquirer will not affect a later purchaser’s right to use the copy it has bought.

Practical takeaways

The Court of Appeal’s decision is a helpful clarification of how copyright exhaustion principles apply in a digital software context. 

As the Court explained, complex products need to be considered in the round to determine which exhaustion rules (Software Directive or InfoSoc Directive) apply. Software providers should take note that bundling non-program works – such as icons, user interfaces and fonts – with program works will not, by itself, prevent exhaustion. 

When it comes to bulk software licensing, the Court of Appeal has made clear that there is no blanket ban on sub-division. Software vendors seeking to control the resale of their products should therefore carefully look at how their software deployment is structured. Contractual labels alone will not determine the outcome.

With public market research projecting strong growth in software resale markets over the years to come, there is a lot at stake here and it is clear to see why this is an important battleground for rightsholders and second-hand licence vendors alike. This remains a case to watch, with Microsoft reportedly looking to appeal to the Supreme Court.