Digital Exhaustion

When I was a poor student I was extremely grateful that the local bookshop had both a new and a second hand section. Text books were and are expensive, and I would always check the used section for a usable if dog-eared copy of whatever text I was seeking. At the end of each term I would lug a stack of books up to the second hand department and recover some beer money.

These days students will probably acquire at least some of their textbooks in digital form, to be read on tablets or ereaders. Often these copies will be cheaper than their physical equivalents, but as things stand right now, they lack the end-of-term-beer-money-cash-in value that their heavier cousins still enjoy. Why is this?

It might make more sense to ask why we can resell the physical copies. After all, books are copyright works, and one of the exclusive rights a copyright owner enjoys is the right of distribution. Why can I distribute a book to which I don’t own the copyright when I sell it second hand? It’s because of what is called ‘exhaustion’. Exhaustion means that – for any given copy of a copyright or patented item –  the copyright or patent owner’s rights run out  when it is sold for the first time. This leaves the first buyer free to resell that copy of the item without the rights holder complaining that the sale infringes their rights. Why does the law explicitly allow this? It’s chiefly because the reverse situation – in which the rights holder controls every subsequent sale – is generally considered to give them too much power to fix prices therefore distort the market in ways that are societally undesirable.

So if resale of copyright and patented items is societally beneficial, shouldn’t it be possible to resell digital copies in the same way we can resell physical copies? As things stand I can resell my paperbacks but not my ebooks, my CDs but not my mp3s, my games on DVD but not the apps on my phone. The technologies that prevent users from illegally duplicating digital copies (and which are illegal to disable) also prevent this kind of resale. Only the controller of the necessary encryption keys can permit the transfer required for resale. This issue has become more pressing recently for a number of separate reasons.

Firstly, large scale digital retailers Apple and Amazon have both obtained patents for systems of resale for digital items. These systems are interesting in that they both seem to presuppose that the rights holder can enforce their rights after first sale (in Amazon’s case by effectively destroying the item after a certain number of resales, and in Apple’s case by enforcing a cut of the resale price being handed over to the rights holder).

Secondly, the announcements of the next generation of home consoles (Xbox One and PS4) have both led to speculation that the second hand games market will be restrained by the new technologies built into the new systems. It has been clear for years that games creators and console manufacturers resent the second hand games market. Second hand sales – it is argued – reduce the market for new copies and new games. None of the second hand price goes to the console or game manufacturers. However, when the game disc is all that is required to play the game, there is little they can do to restrain that disc changing hands after first sale. In the case at least of the Xbox One, it seems clear that some kind of controlled resale of games will be implemented, although the details are yet to be fully announced. This would – it seems likely – involve unique identifiers being assigned to each copy of a game (whether on disc or downloaded), and registration of these identifiers with a user account being a technological necessity for a user to play. Thus resale would necessarily involve the console manufacturer’s consent (to transfer the game ID from one account to another), whether it was legally required or not, and at that point of transfer it seems likely that some kind of levy may end up being charged.

This would all be rather disheartening if it were not for the third development, which was last year’s European Court of Justice decision in the case of Usedsoft v Oracle. This case concerned whether a company (Usedsoft) could resell licences to Oracle software that it had bought from legitimate Oracle licensees. The question being considered was, in essence, whether a combination of transfer of a copy and transfer of a licence to use the copy amounted to a ‘first sale’ that could trigger rights exhaustion. Oracle argued that it couldn’t, and that what they were doing was selling perpetual licences that could not be transferred from one user to another. Usedsoft argued that in effect Oracle were selling copies of the software and so could not control resale. The ECJ agreed with Usedsoft, and ruled that when you provide a perpetual licence and a copy of the licensed software you are selling a copy, and lose rights over that particular copy.

The fallout from this decision has yet to fully play out. Law firm Linklaters advises its software developing readers to consider stopping selling perpetual licences altogether, instead moving to a rental or service provision model. It’s hard to see this working well for consumer products however. Would customers accept annual renewals to keep their books, games and music? Probably not, unless the initial prices were a lot lower, and that is not an attractive prospect for creators and distributors.

So how does this affect free and open source software? In the worst case, one could potentially argue that the responsibilities associated with various FOSS licences, such as attribution, copyleft and source provision only apply to the first acquirer of the software and that – as a result of exhaustion – responsibilities associated with that copy no longer apply once it passes from a first acquirer to later downstream users. As the FOSS model relies on all copies requiring the same compliance with the licence, this could construably be an ugly problem. Whether this problem actually is a problem depends to a large extent on what we consider to be a ‘sale’. The Usedsoft judgement has this to say on the subject:

According to a commonly accepted definition, a ‘sale’ is an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him.

Using this definition it would seem fairly clear that the usual method of acquiring FOSS does not fit the pattern for a ‘sale’, due to the absence of a payment in exchange for rights of ownership over a copy. However it should be noted that Oracle tried to argue that they were handing out the copies for free but the licences for money, and that therefore it was not sale of an item, and that was rejected by the ECJ. As I am not a lawyer I can’t really give an informed opinion on how closely the judgement might bear on the FOSS model. I have certainly heard a number of people who are lawyers express very similar reluctance to give an opinion.

What seems clear is that older notions associated with physical items, first sale and exhaustion are hard to apply in the digital world, where the idea of a discrete ‘item’ is problematic. To play devil’s advocate, we can probably assume that the idea of exhaustion of rights was first conceived when it seemed obvious that a new copy would have certain advantages over a resold copy in the market, in terms of absence of physical wear and tear. Is exhaustion as fair a principle in the digital world, where the resold item is identical to the original? We can also see that the very idea of a discrete copy of a digital item is something innately tied to copy protection and digital signing technologies. If we cannot identify a particular ‘item’ we cannot know if it has been resold. While as consumers we may want a healthy second hand market in digital items, in practice such a market may well require the embracing of the kind of copy protection technologies that – up to now – consumer groups have tended to decry. What we can say is that, as technology and law continue to develop, the issue of rights in digital copies will need a clearer resolution than we have now.