ALL YOU NEED TO KNOW ABOUT USED SOFTWARE

Want to learn more about pre-owned software, the terms of its purchase and sale, the types of software licenses that are available to buy second-hand or the many benefits of used software for public bodies and businesses?

This article will tell you everything you need to know about used software licenses.

Contents

Dealing in used software licenses is entirely legal, as proclaimed by the European Court of Justice (ECJ) some time ago in its landmark decision of 3 July 2012 in case C-128/11. The ECJ judgment was later confirmed by the German Federal Supreme Court on 17 July 2013 (ref. I ZR 129/08). Dealing in second-hand software is permitted based on what is known in copyright law as the ‘principle of exhaustion’. According to this principle, a software company’s exclusive distribution right expires upon initial sale of a license with their consent.

From this point onwards – according to the ECJ judgment – the software company may no longer directly influence the future terms of ownership of the software, regardless of whether the purchaser acquired the software as a download or on a data carrier. Any originally granted volume discounts or special conditions do not impede this right of resale, either.

Thus, what the exhaustion principle means is that the pre-owned software market is a free market that does not require the consent of companies like Microsoft, but is instead supposed to function fully independently of such players.

In order for the exhaustion principle to apply – a prerequisite for dealing in used software – a number of conditions must be met:

• The license must originally have been placed on the market with the consent of the right-holder in the EU or in a country that is a Contracting Party of the European Economic Area.
• The initial purchaser must have paid a fee for the license that enables the right-holder to obtain appropriate compensation. It is sufficient for the right-holder to merely have the opportunity to obtain such compensation.
• The initial purchaser must also be authorised to use the software as well as any improvements or updates for an unlimited period.
• Once sold, they may no longer use the software and must render any copies unusable.

Many software companies use the threat of audits to encourage customers to provide information about their software assets and, if there are doubts about whether they have sufficient licenses, to purchase the additional licenses. However, the case law states that used software may and indeed should be sold freely. No consent of any kind is required from the software company, even if they suggest this is the case. If the software company is convinced that the (used) software is being used illegitimately, they are free to pursue this via legal means. Should they wish to take legal action they should do so, rather than merely issuing threats. Proactive involvement of software companies in the purchase of used software would take us right back to the start of the legal history of this subject and undo all the progress made so far.

According to the case law of the European Court of Justice and the German Federal Supreme Court (judgment of 11/12/2014 – I ZR 8/13), contractual provisions stipulated by the software company – such as those restricting use of the software to a particular group of users – cannot exclude or restrict the right to customary usage of software licenses. For example, companies are also free to resell volume licenses that they may have purchased at a cheaper rate due to bulk discounts. Therefore, provisions contained in a licensing agreement that restrict the use of the software to a particular group of users or a particular purpose do not govern the usage right acquired following the purchase of used software.

In other words, the exhaustion principle also causes any sale restrictions to expire. Thus, schools and universities may sell used educational licenses to a dealer, who may then resell them to any end customer they wish.

In a way, the term ‘pre-owned software’ could be more appropriate than ‘used software’ or ‘second-hand software’, which give the false impression that the software has depreciated in some way. Unlike used goods, second-hand software is identical to new software (of the same version). Under German law, the content of both pre-owned and new software is protected by copyright. Thus, the two are identical in nature and differ only in that used software was previously purchased by someone else (the initial purchaser). In addition, pre-owned software is usually much cheaper.

Generally speaking, it makes sense for businesses of all sizes across all sectors to purchase standard software like Microsoft Office or Microsoft Windows second-hand. This allows them to make cost savings that free up more of their budget for other important IT projects. In the case of public bodies, there is also the matter of whether they are really allowed to commit to a continuing obligation towards software companies, which is often the case with subscription models.

The market predominantly covers Microsoft Office and Windows licenses. Why? Quite simply because this is standard software used by almost every company.

Rely on well established, knowledgeable dealers

Although there is a clear legal framework governing the trade in second-hand software, the actual processes involved require a high degree of experience and expertise. The complex licensing terms drawn up by software companies make it difficult for many businesses to get a clear overview of their software assets, so it can be hard to tell whether a license meets the necessary criteria for legal purchase and sale. As such, companies should always call upon a well-established second-hand software dealer that has been active on the market for many years and boasts a thorough knowledge of the subject.

Businesses and public bodies can easily ask for a quote for second-hand licenses, allowing them to gain independence from software companies and the wholesale market whilst saving up to 70%. It is far cheaper to acquire licenses for Microsoft products in this way, for example for Microsoft Office or Windows operating systems. With LizenzDirekt, you also benefit from the expertise we have built up over many years and our comprehensive support network.

Have trust and certainty by having experts examine licenses

Well established and expert dealers perform the necessary checks of the supply chain on behalf of businesses and public bodies, thereby ensuring that the second-hand software is being bought or sold in full compliance with the law. Together with legal experts and independent auditors, they follow procedures that allow them to verify the validity of the software licenses and compliance with legal requirements.

Such dealers have a thorough understanding of the legal framework and the vast array of licensing terms employed by software companies (for example in the case of volume licenses), thereby guaranteeing that there are no legal grounds to contest the purchase or sale of the licenses in question. In the end, they take full responsibility and may also offer companies and public bodies a release of liability, even though this is not legally required.

Minimise risk thanks to experience, references and documentation

Financial loss liability insurance and certificates issued by auditors provide additional security. It is usually advisable to opt for a second-hand software dealer that not only boasts many years of expertise but can also provide evidence of collaboration with software companies and counts major companies or public bodies among its customers. Such dealers are highly likely to deliver a flawless service. In addition, you should make sure they have sophisticated documentation mechanisms in place, such as an efficient ERP system that fulfils all relevant obligations.

Dealing in second-hand software is not dependent on obtaining consent from software companies

The exhaustion principle means that the second-hand software market is a free market that does not require consent from or checks by software companies like Microsoft, but instead functions fully independently of them.

It is also nonsensical to talk about ‘evidence’ in the context of the sale and purchase of second-hand software. Evidence is exclusively provided in court procedures, where it may take the form of witness statements or expert reports. This means that by definition, there can be no such thing as extrajudicial evidence. Moreover, it is not clear exactly how evidence could be presented in a court case concerning second-hand software.

What it boils down to, though, is that a person buying second-hand software is not currently involved in a court case. What’s more, the risk of this happening is practically zero in Germany due to the existence of the exhaustion principle, as clearly confirmed by Westphalia Public Procurement Chamber, for example (Decision of 01/03/2016 – VK 1 – 02/16). As such, from a legal perspective, there is no need to obtain or provide ‘evidence’ when purchasing second-hand software.

However, this does not mean that dealers in second-hand licenses do not thoroughly inspect the supply chain. Of course there are some black sheep – as is the case on any market – whose operations are not always above-board. Yet they are balanced out by a whole host of well-established second-hand software dealers who have helped to shape the market from the very beginning and contributed to guiding the developments in relevant case law.

Still leaning towards new licenses?

It is not unusual for a company’s employee to wonder whether it is even worth looking into second-hand software. After all, they will barely feel the effect of the cost savings. New licenses are convenient, and account managers at software companies are always happy to confirm any orders. In actual fact, though, this is too short-sighted. Cost savings are what makes it possible to increase the economic health and thus the profitability of a company, something that everyone ultimately benefits from.

For public bodies, on the other hand, this issue is less relevant (at least these days). In the past, there were attempts to rule out second-hand software despite the fact that public procurement rules are heavily geared towards cost effectiveness, one of the main benefits of second-hand software. Ever since a decision was passed by the Westphalia Administrative Chamber on 01/03/2016 (VK 1 – 02/16), public bodies have been obliged to consider second-hand software during tender procedures.

Given the numerous benefits, it really is incomprehensible that not every company is using second-hand licenses for their software. However, those considering the option often remain hesitant, afraid there might be a catch. Although many years have passed since the landmark decision of the ECJ in 2012, the dominance of major US software companies continues to cast a persistent shadow as it has for decades. How will the software company respond if second-hand software is purchased? Will it entail the risk of an audit? Software companies like Microsoft are well aware of the issue and of the legal situation, but do not expect any support from their side – even though the ECJ encourages them to help with deactivating licenses. However, the case law does not oblige them to cooperate in this or any other matter. That is why any statements made in audits regarding traceability are not the be-all and end-all.

The more important question is whether the software was legally acquired, and this is something the dealer should be able to vouch for. Many dealers make a special effort to this end by indemnifying customers against any costs arising from legal proceedings. To our knowledge, there has not been one single case where such proceedings were initiated since the landmark decision.

It is also worth emphasising that this freedom guaranteed to all those in Europe should be regarded as a privilege that offers an alternative to dependency on major US software companies like Microsoft. Businesses should be conscious of this.

Dealers who only sell license keys should be treated with caution – on their own these do not represent a usage right, but only serve to activate a license. As such, buyers should always read the small print so they know exactly what they are paying for and ask questions in case of doubt.

It is also incorrect to assume that if a license key is not working, this means there is something wrong with the license. Depending on how frequently the initial buyer and subsequent buyers have used the key – for example to install a license on a new device – the number of further activations permitted may be limited. If a key has expired, it is only logical for the dealer to provide a replacement – they are not automatically trying to pull the wool over your eyes.

Dealers in second-hand software are not subject to a disclosure obligation as is often alleged. Customers of second-hand software dealers are in no way entitled to information about the entire supply chain. The obligation to disclose such confidential information is not stipulated either by the highest-level judgment of the ECJ or by the German Federal Supreme Court. The procurement regulations for public bodies do not regard such an obligation as justified, either. In fact, it is highly unorthodox for dealers in ‘standard goods’ – a category which includes second-hand software – to disclose their source of supply.

According to the German Federal Supreme Court judgment, subsequent purchasers need only be informed of the content of the usage rights, which occurs via the accompanying license terms and contracts. It is not in the legitimate interest of the subsequent buyer to obtain any other information, for example regarding the source of procurement, and providing this information would represent a breach of data protection law. In fact, if a customer made such a demand this could even be regarded as discriminatory, as a company could ultimately suffer loss of revenue or reputational damage if it becomes public knowledge that it is selling software licenses en masse. As such, both contractual confidentiality obligations and data protection law preclude disclosure of the full supply chain.

It is true that some dealers provide customers with a complete set of contractual documents, and they are fully entitled to do so. However, what this also means is that the customer must, as an agent in a commercial transaction, exercise due diligence and ensure they can understand the documents and flag up any shortcomings. This is often difficult due to the convoluted documentation and the fact that the contractual history spans many years and requires a large amount of resources. Yet if the documents are not inspected at all and are only made available for the event that the software company asks to see them, this brings us back to the reason why the case law came about. This essentially grants the software company power of approval and means that information about sources of procurement is being disclosed. The market will ultimately suffer as a result.

Finally, it should be noted that documents can easily be used to create an illusion of legality. However, these documents could have been used multiple times or amended. Therefore, they do not serve the interests of the customer, the second-hand software dealer or the transferor – they only serve the interests of the software company. This runs counter to the liberal spirit of the ECJ case law.

Unfortunately, this is a complex legal matter that is often miscommunicated to potential buyers – be that intentionally or out of a lack of knowledge – or is at least communicated in a very partisan manner. However, the consequences of misinterpretation can be severe for buyers.

Market relevance of second-hand software licenses

Based on the legal interpretation that has thus far prevailed in Germany, it is sometimes said that buyers of second-hand software should in particular request disclosure of the software licensing agreements and the chain of rights, since they are unable to invoke this vis-à-vis the software company (which would only be necessary in the event of legal proceedings anyway).

However, it should be noted that the aforementioned documents alone do not provide a legally protected ostensible legal authority.

What you as a buyer need to know

Even with all these documents in hand, the customer is still obliged

• to perform a precise and detailed check thereof and to notify any defects (Section 377 of the German Commercial Code, ‘obligation to notify defects’ on the part of merchants).
• This not only serves to uphold their own right to file claims in the event of defects: failure to conduct such checks with due legal appraisal could even result in an accusation of fault.

Thus, in order to meet market due diligence requirements, it is necessary to examine the exhaustion criteria, which can be extremely demanding.

Many dealers, SAM consultants, auditors and legal experts will know from their own experience of audits, for example, how difficult it can be to come to a conclusion on this matter. In practice, it is often a case not only of trawling through many years of contractual history across complex sets of agreements, but also establishing specific facts – the details of which may be disputed.

Even the mere suggestion that the buyer may have been aware of any shortcomings is sufficient to justify an accusation of fault. In the event of aggravated fault on the part of the buyer, they may even be at risk of prosecution under copyright law.

Thus the assertion of a need for ‘acquisition in good faith’ can (at least in Germany) essentially be regarded as a trap for buyers and a spurious claim if this would mean that the burden of proof and the associated responsibility or even liability are palmed off on the customer. This would be legally permissible, not to mention (strategically) beneficial from the dealer’s perspective. However, the documents disclosed cannot necessarily be said to have been received in good faith in any case, so the argument still holds.

At LizenzDirekt we do not shirk our responsibility: we trace every single license back to its origin. If this is not possible or the license cannot be clearly traced, we will refuse to purchase. When purchasing, we ensure all documents are stored case by case so as to remain accessible even in the event of an insolvency, and if necessary we obtain advice beforehand from renowned external experts.

The way things look today, it is unlikely that the cloud will conquer all. When it comes to business-critical software in particular, many companies (especially mid-sized enterprises) prefer to play it safe and make a one-off purchase of the required program version. If they opt for a monthly subscription to Office 365, there is always a risk that they will suddenly lose access to key business tools like Outlook, Word or Excel in the event of cash-flow problems. Moreover, there will always be a certain amount of sensitive data that companies prefer to store in their own data centre. In future, it seems that hybrid models will be the way forward.

Companies should always carefully check whether it is really worth transferring applications to the cloud. For example, some of the features of the subscription version of Microsoft Office, such as multi-device licensing and home use rights, are rarely needed. Indeed, most employees only use a fraction of the available Office features in their day-to-day work. An on-premises version that has been available on the market for a while is usually more than sufficient for their purposes.

In addition, in many cases it can ultimately be cheaper to use on-premises software than to switch to cloud versions. In the case of software as a service (SaaS), the alleged cost benefits of cloud computing can actually turn into a disadvantage. Take the example of Microsoft Office again: an on-premises package is a one-off purchase that is tax deductible and can be integrated into the existing IT infrastructure. This software program can then be used in this same form for many years to come. In the case of a cloud service like Office 365, however, a subscription fee is due every month.

Cloud services change quickly and constantly: certain features will be removed, others will be added. This means that staff in IT departments must constantly monitor and check for any developments. It may be that applications that are linked to Office stop working after an update and need to be modified. Moreover, employees often feel overwhelmed by the constant changes. If they are suddenly no longer able to use the software in the way they are used to, this will inevitably lead to efficiency losses due to the need for further training as well as numerous queries to IT support.

Another (often underestimated) problem with the cloud is that it makes organisations dependent on a cloud provider to a certain extent. If you buy software, you pay for it once, it is yours to own and you can use it for as long as you like. Cloud services, on the other hand, take the form of a subscription. This means that companies can only use them for as long as they keep paying for them. The monthly subscription fees are running costs that will continue to be incurred, even when budgets are tight. It is not normally possible to simply do without the software, as this would affect productivity. In addition, if a cloud provider changes their terms and conditions, companies essentially have no choice but to agree to them. As such, it is necessary to think long and hard before entering into such a relationship of dependency. In the case of public bodies and institutions, such relationships may actually not be permitted at all: by subscribing to a cloud service they are essentially incurring a liability, a continuing obligation.

Over the past 10 years, a growing number of companies, public bodies and organisations have been taking the opportunity to significantly reduce their IT costs by using a mixture of new and pre-owned software.

You could save up to 70%!