European court confirms the right to resell used software licences

A recent European Court of Justice (ECJ) decision has confirmed that organisations can resell "used" software licences, regardless of whether they were purchased in a physical form or downloaded from the internet.

In addition to opening up greater competition in the software market and allowing organisations legitimately to source additional software licences from the second-hand market (as opposed to from an authorised reseller), the decision also means that organisations may be able to make better use of the intellectual assets on their balance sheet.

The background

The case involved the US software giant Oracle and a German company, UsedSoft, which provides a means for Oracle's customers to sell unused licences. Under Oracle's licence agreement, Oracle's customers download computer programmes from its website, and then install that software on a server, which can then, in turn, be accessed by a set number of users (licenses were sold in blocks of 25 users).

Under European law, the licensor of a computer programme loses its right to control onward distribution of a copy of that programme when that copy is first sold in the EU. This is known as the principle of exhaustion.

Oracle sought to argue that this law did not apply to software provided by way of a download (as opposed to a DVD or CD-ROM), and that UsedSoft's service therefore breached the restrictions in its licence agreement preventing the licensee transferring its rights to a third party.

THE court's decision

The ECJ dismissed Oracle's argument, holding that the principle of exhaustion applied regardless of the means by which software is distributed.

The decision is good news for organisations that currently are tied to buying licences through authorised resellers, as the decision will provide an alternative, legal source of software licences. This competition may have an impact on the cost of new licences, as customers are given the choice of buying cheaper, used, licences through other channels.

There are some key points to note:

• The decision applies only to software licensed on a perpetual basis - in other words licences that are not limited in duration (for example, for a fixed term or subject to payment of an annual licence fee). This means that the decision does not apply to licences subject to ongoing maintenance contracts, such as those under Microsoft's Software Assurance programme (which only become perpetual at the end of the Software Assurance contract).
• The decision applies to the version of the software "as corrected and updated", which means it includes any patches or updates that the original licensee was entitled to, even if the relevant maintenance agreement has now expired.
• The decision does not allow a licence to be sub-divided. So if a licence is for a block of 25 licences, you cannot resell only 10 of those licences. If, however, you pay a per-seat licence fee, you may be able to sell individual seats.
• Once the licence has been sold, the original licensee has to delete the "sold" copy from the relevant device. It remains to be seen how software companies will audit compliance with this requirement.

Licenses as an asset of the business

To date, many organisations have tended to view software licences as an expense, rather than count them as an asset on their balance sheet.

The confirmation by the court that it is legal to trade these licences on a second-hand market means that an organisation can put a value on those licences as it would with its other assets, such as property, IT hardware and office equipment.

Indeed, the decision may change the way in which those organisations that already include their software licences on their balance sheet do so, as this decision is likely to affect the level of depreciation applied to the licences. As an intangible asset that suffers no wear and tear, a one year old licence for a still current version of a programme arguably still has the same value as the cost of a "new" licence. The licence will only really start to depreciate in value when a new version of the programme is imminent.

The decision therefore allows accountants to reconsider how they treat software licences when looking at an organisation's assets. For organisations with extensive licence portfolios, this may have a noticeable impact on their balance sheet.