The US doctrine of copyright exhaustion ()��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 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����in 2012.��������峧�Ǵڳ���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 , but from what information is , the appeal court upheld the decision of the trial court and concluded that the��UsedSoft decision was��lex specialis��and only applied to the . 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 .��

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 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.

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The defendant, Kirtsaeng, was having friends buy foreign editions of textbooks (produced in Thailand), and having them shipped the textbooks��to America where they were resold by Kirtsaeng for a profit.��The plaintiff publishing corporation John Wiley & Sons Inc. argued that Kirtsaeng was in violation of section 602(a)(1) of the ; which deals with the importation of copies into the US without copyright owner approval. Kirtsaeng’s defence was section 109(a) which permits persons who buy copies of a works to resell them without any permission from the copyright holder. There appeared to be a conflict between those two sections. The Court of Appeal found that Kirtsaeng had violated section 602(a)(1) and could not rely on section 109(a), in order to keep both sections active. The ABA that line of reasoning.

US copyright law states that “Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under ”. states that “notwithstanding the provisions of the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord”. The Court of Appeal identifies section 109(a) as simply a “codification of a long-standing ‘first sale doctrine’”. In other words, the right to sell copies in of the US Copyright act is limited to the right to sell the copy of a work first.

The Court of Appeal, when reconciling these sections, was bound by the previous Supreme Court decision of (hereafter “Quality King”). In that decision, the court held that copies made in the US, sold abroad and then resold again in the US did not contravene section 602(a)(1) because of section 109(a). The Court of Appeal had to explain why this case was different, and the effect of section 109(a). The court focused on the words “made under this title” in section 109(a) and concluded that those words must be interpreted to mean “made in the United States” despite the finding that “the relevant text is simply unclear”. That would distinguish this case from the Quality King decision because, in this case, the copies of textbooks were produced in a foreign nation. While the court admittedly struggled with that interpretation, they claimed that they were bound to it, in order to give section 602(a)(1) any force and effect. The court, as well as the , also relied on dictum in the Quality King decision which suggested that people reselling copies could not rely on section 109(a) if the copies were not made in the US.

In coming to their decision the court’s stated goal was “to adopt an interpretation of § 109(a) that best comports with both § 602(a)(1) and the Supreme Court's opinion in Quality King”.�� Is interpreting the words “made under this act” in section 109(a) as “made in the USA” the best interpretation to comport with both section 602(a)(1) and Quality King?�� The court addressed the interpretation to “made under this act” which would include copies manufactured in foreign nations but it was not adopted.

If we were to adopt an interpretation of “made under this act” that included copies manufactured in foreign nations, Section 602(a)(1) would still have limited effect. Consider a scenario where we have an “importation into the United States”, without the permission of the “owner of copyright”, of copies “acquired outside the United States” however, no sale has taken place prior to the sales in the US.�� This might occur when a foreign distributor tries to sell directly into the American market. ��The foreign distributor cannot rely on section 109(a) because these copies have not been sold to them, they were produced by them.�� In other words, “made under this title” can be interpreted to apply to copies manufactured in foreign nations without rendering section 602(a)(1) inoperative.

That interpretation allows section 602(a)(1) to have force without the need for a limited interpretation of the words “made under this title” in section 109(a). ��The Court of Appeal, acknowledged that "’lawfully made under this title’ appears in other provisions of Title 17 where it is at least arguable that Congress intended this language to apply to copies of works manufactured outside of the United States”.�� ��The court was reluctant to apply this interpretation because section 602(a)(1) “would have no force in the vast majority of cases if the first sale doctrine was interpreted to apply to every copy manufactured abroad that was either made ‘subject to protection under Title 17,’ or ‘consistent with the requirements of Title 17 had Title 17 been applicable’”.

The court didn’t want to apply the section because it would limit the application of section 602(a)(1). ��However, since the Court in Quality King was willing to restrict the application of section 602(a)(1), why should this court be reluctant to here? At least the broad interpretation allows the law to be interpreted consistently, a goal stated by both the and the , without the need for any problematic interpretation of the words “made under this title”.

Adam Stevenson is a JD Candidate at Western University, Faculty of Law

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At first glance, the century old seems simple enough. However, as with many other IP doctrines, the digital world has thrown a wrench in this otherwise well-understood principle (see on a similar topic). In the case of a Ninth Circuit District Court was confronted with the issue of whether first-sale applied upon the purchase of computer software that the seller termed to be subject to an end user licence agreement, and thus if Vernor had the right to re-sell the software.

The abbreviated facts are as follows. Autodesk is the undisputed copyright owner of the software and all printed materials contained in its "AutoCAD packages". These printed materials explicitly state that the software is subject to the AutoCAD Software Licence Agreement that is both contained in the box and also appears during the installation of the software. Some of these packages were sold to CTA, an architectural firm who in turn sold them to Mr. Vernor. Without using or installing the software, Mr. Vernor sold the packages on eBay. The dispute turns on whether ownership was acquired by CTA on the initial sale, thus invoking the first-sale doctrine. If ownership was not transferred, the AutoCAD licence provisions forbidding transfer to others would be binding.

This issue has produced a long and contradictory line of case law. The�� Ninth Circuit alone contains contradictory precedent. In the court dealt with numerous transfer agreements. It was found that simply designating the agreement to be a "licence" is not determinative, nor are clauses in the agreement that reserve title to the copyright holder or that require the transferee to destroy transferred copies. There was only one common characteristic in all of the transfer agreements where ownership was deemed transferred; this was the right of the transferee to�� indefinite possession. In the Vernor decision, Justice Jones explained this by stating that retaining title in a copy is meaningless without any means to regain possession of it.

Following Wise came three cases known as the MAI Trilogy. These cases hold that ownership is not transferred when there is a licence agreement that imposes significant redistribution restrictions on the transferee and also clearly stipulates that only a licence is granted to the copy of the software.

Jones J. found that both the Wise and MAI rulings applied in the context of Vernor. With respect to Wise, CTA has a right to retain possession. There is a clause in the agreement mandating that CTA destroy the original copy if it upgrades the software. However, it is not mandatory to upgrade the software in the first place and thus CTA has an ongoing right to possession of the original. Regarding the MAI rulings, the AutoCAD licence agreement forbids transfer without AutoCAD's permission. The agreement also stipulates that AutoCAD retains title to the software and accompanying materials.

In a rather unsatisfactory fashion, Jones J. reached the decision that the Wise precedent should be followed over the three more recent rulings because "the court must follow the oldest precedent among conflicting opinions". The policy considerations put forward by both parties were rejected, and, in what appears to be a plea to the legislature to clean up this muddied law, it was stated that Congress, not the courts, should deal with policy.

What will the impacts of this decision be? Reaction in the blogosphere is mixed. Most agree that it is too early to tell, as the ruling is and there are currently in the Ninth Circuit dealing with the same issue. Some as beneficial to consumers in the sense that it is a step towards software resales. However, it should be noted that this case does not mean that the consumer automatically gets ownership rights despite a licence agreement. Based on the reasons given by Justice Jones, a licensor simply needs to incorporate a clause denying perpetual possession to the licensee in order to avoid AutoCAD's fate.

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