The Xbox One, DRM and EU Law

Xbox One

As a long-time fan of videogames the announcement of new generation of consoles is always exciting, but this time round the announcements of the PlayStation 4 (PS4) and the Xbox One (XbOne) also had an interesting legal angle.

One of the most controversial elements of the new Xbox One console is its DRM and restrictions on the sharing of games purchased by users. In previous generations games were bought on optical media and once gamers had completed a game they were able to share it with friends or ‘trade-in’ the title at a retail store for cash or credit to purchase a new title. It looks like Microsoft are to restrict that practice with the Xbox One.

The Xbox One will require an internet connection and all gamers will have unique accounts with each user having their own ‘Gamertag’. After purchase on optical disc the game will be installed and that game will become associated with the 1st users Gamertag. That game disc then will not be able to be played by another user with a different Gamertag (unless they are playing on the 1st user’s physical console). This effectively means that friends cannot share discs and the games cannot be traded in for credit. Microsoft have indicated there may be systems to allow such trades, but they have not yet been detailed. It certainly appears the ‘pre-owned’ market will be much more limited that the ‘open’ system in place for previous generation machines.

The announcement of these restrictions fit into a much larger debate about the place of the pre-owned trade in the videogame market, and how game publishers do not raise any revenue from the pre-owned trade. Publishers may be delighted by these restrictions, but the response from gamers has been very negative. It is also interesting to note that the PS4 is not adopting such a system, in fact they are highlighting the fact that they are not.

One issue that has been overlooked in the furore is whether Microsoft can implement such a system in the EU, as EU law has adopted a pro-consumer stance beginning to give strong rights over the ownership of software products. Will Microsoft be able to adopt such a restrictive form of DRM across the EU?  All is can say is that the general view is that the legal issues in the either the EU or US are not yet clear. I may contribute more that debate in the future, but here I reproduce a blog post I co-wrote with Albert Sánchez Graells on the leading EU case published at EUtopialaw.com in July 2012.

The CJEU, Copyright, and the ‘First Sale’ Doctrine

Posted on July 10, 2012

Angus MacCulloch (Lancaster University Law School)
& Albert Sánchez Graells (Law School, University of Hull)

The Court of Justice of the EU delivered a controversial judgment on the 3rd July 2012 in Case C-128/11 UsedSoft v Oracle. The case will have a significant impact on a number of developing business models in digital software distribution. The case also highlights to growing tensions in the IP world between those who see greater restrictions as necessary to protect against the ease of digital copyright infringement and those who wish to maintain the ‘traditional’ balance between right-holders and the consumer/public. The two authors hold rather different views and we shall attempt to express both positions.

UsedSoft v Oracle

The case stems from a dispute between UsedSoft, a company specialising the sale of ‘pre-owned’ software licenses, and Oracle, a software company that sold licences and software online. Oracle’s EULA (End User Licence Agreement) barred any transfer of the licence to a third party, but UsedSoft would sell a licence which was no longer being used by one of Oracle’s direct customers onto third parties. Pre-owned software markets are common, and lucrative, in relation to software sold via optical media but are heavily restricted when software is sold directly via digital distribution. Software publishers are increasingly turning to digital distribution as it reduces costs (by reducing packaging and distribution costs and cutting out the retailers’ margin) and allows them to eliminate secondary markets, and therefore increase primary sales, through the EULA. That benefit may be reduced in the EU following this judgment.

The case centred on the interpretation of the 1st Sale Doctrine enshrined in Directive 2009/24/EC on the Legal Protection of Computer Programs. Under Art 4(1) the author of a computer program has the exclusive right to prohibit distribution to the public, unless, under Art 4(2), that right is exhausted within the EU on the ‘first sale or other transfer of ownership’ with his consent. This has always been the position with copyright works. The right-holder loses the right to control the distribution of the work, be it an individual book or computer program, once the product has been sold onto the market – the purchaser can sell on that product without gaining further permission from the right-holder. This contrasted with the terms of Oracle’s EULA which limited the licence ‘for an unlimited period’ to ‘a non-exclusive non-transferable user right’.

Oracle argued that they were not transferring ownership of the program, within the terms of Art 4, as they were only selling a licence, which then permitted the download of associated software. The Court followed the line of reasoning adopted by AG Bot and found that the downloading of the software and the conclusion of the licence were part of an ‘indivisible whole’ [44] giving a right to use that software in return for payment of a fee for an ‘unlimited period’ [45]. This amounted to the transfer of the right of ownership [46]. The Court stressed that it should make no difference whether the program was sold as a download or on optical media [47], and that if a narrower interpretation were taken it would remove the effectiveness of the Directive if were possible to call the sale one of a licence to circumvent the rule of exhaustion [49]. This would allow the copyright holder to demand further remuneration on the occasion of each new sale, even though the first sale had enabled it to obtain appropriate remuneration. Nor was it necessary to safeguard the specific subject-matter of the IP concerned [63].

The Consumers’ Perspective

This looks to be good news for the Consumer. Oracle’s attempt to restrict the first sale doctrine for digital sales would have eroded the consumers’ position further – stripping them of any residual value in software they have legitimately purchased but no longer use (the whole purchased licence must be transferred and the original copy of the software deleted by the original licence holder). It would have also created anomalous treatment of download software when compared to exactly the same product sold on optical media. This isn’t only an issue for software, for instance, should paper and e-books be treated the same or differently? This judgment does create a threat to the business model that makes online distribution potentially profitable for content providers, but it only challenges one income stream – denial of a secondary market – other increased profit streams remain. In recent months there appears to be a reaction to IP right-holders continuing attempts to redefine IP law in their favour. This case follows the legislative failure of SOPA and ACTA in the US and the EU; both shifted the balance in IP law away from the consumer to protect content providers’ business from technological challenge. Oracle’s argument in UsedSoft, supported by the EU Commission and several MSs, was a more blatant attempt to simply remove an established right from the digital consumer to bolster their profits. It will be very interesting to see how the big content providers react to this judgment; especially as most of them are based outside the EU. Will they alter their, often proprietary, distribution systems to facilitate consumer-to-consumer transfers or will they put up further legal resistance?

The Right-Holders’ Perspective

UsedSoft can significantly impair the ability of software publishers to raise revenue due to the ‘dynamic’ concept of ‘copy’ that it has constructed. An indefinite period licence remains closer to a service contract than to the sale of a copy of the program (and therefore should be non-transferable) because it builds any significant developments (other than patches and error corrections) into the ‘copy’ bundled therewith. That does not happen to the same extent with optical media, which are ‘static’ copies by nature and require further connection to an internet capable device to offer enhanced features (possibly as part of complementary, separate after-sales services, although trying to draw the line between a software product being static and dynamic is very difficult) . Therefore, in a hard media environment, software publishers obtain fresh revenue with the release of every new version (i.e. incremental developments trigger new revenues), and the resale value of ‘used’ old version copies downs to zero quickly. On the other hand, indefinite time licences basically allow software publishers to obtain remuneration only once and upfront (as the licence is potentially indefinite and, hence, would suppress the opportunity of raising revenue by issuing subsequent versions of the same program—i.e. incremental developments would not spur income); whereas outstanding ‘used’ licences keep capturing the value of new versions and, consequently, retain almost full price as resale value throughout their lifetime. This can significantly restrict the ability of software publishers to sell new licences, particularly if a ‘second hand’ market is further developed in light of UsedSoft. Its effects may be particularly intense because it will not only impact the pricing and conditions of future licenses but, first and foremost, it has an immediate repercussion on existing licenses (which were priced before the UsedSoft extension of consumer resale rights). This significant economic imbalance between publishers’ and users’ rights in the digital environment may end up stifling innovation by reducing funding for R&D activities and by generating perverse incentives for a further push towards (more profitable) ‘program multiplication’ rather than (more value adding) incremental development of existing programs—which would generate waste and inefficiency in terms of information and changing costs, steeper user learning curves, potential redundancies, etc.

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