Exhaustion is back baby!
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Georgia Jenkins
Jul 21, 2026, 8:54:16 AM (18 hours ago) Jul 21
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Home / complex product / computer software / contract interpretation / copyright exhaustion / Copyright/competition appeal / digital exhaustion / EU/UK copyright / subdivision / Exhaustion is back baby!
Exhaustion is back baby!
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| This Kat is already exhausted with software exhaustion Photo by Sam Grozyan on Unsplash |
The case centred on VL’s claim that Microsoft used contractual restrictions to stifle the supply of licences by transferring customers from a perpetual licence to a subscription-based model. VL argued that this breached Articles 101 and 102 of theTreaty on the Functioning of the EU (TFEU) and analogous provisions in the EEA Agreement and in the Competition Act of 1998. However, there was no counterclaim for copyright infringement based on VL’s activities. Microsoft merely requested that the competition claims be dismissed on the basis that VL’s activities amounted to copyright infringement because rights related to the resold software were not exhausted.
Most of the judgment centres upon two issues: (1) whether the CAT had jurisdiction to decide copyright issues; and (2) if the CAT erred in law relating to the application of exhaustion, specifically the possibility to subdivide software user rights.
Microsoft maintained that the High Court was the relevant jurisdiction to determine the copyright issues, not the CAT. However, affirming the decision of the CAT, the Court of Appeal returned to s47A of the Competition Act of 1998, which outlines the CAT’s jurisdiction. As it relates to persons claiming a Chapter I or Chapter II prohibition (mirroring Articles 101 and 102 of the TFEU), the Court of Appeal found there was no restriction on subject matter. The CAT has competence over questions that arise in the context of a claim for damages. Here, the copyright issues relating to exhaustion. If the tribunal were unable to decide these issues, the CAT would become impractical as it is in the nature of competition proceedings to raise legal issues outside of competition law relating to monopolies.
Microsoft’s second argument was that a determination from the CAT would establish a cause of action of copyright infringement that, again, the High Court would need to decide. In response, the Court of Appeal held that – even if Microsoft brought a counterclaim of copyright infringement – case management principles would apply to avoid the risk of conflicting rulings. That said, in this case, Microsoft merely requested that the CAT dismiss the competition claim. Lastly, the Court of Appeal distinguished the facts from Unwired Planet (IPKat here) where issues related to contractual breaches formed an alternative cause of action, not an issue necessary to resolve the competition law claim itself.
Is a software product “complex matter”?
As exhaustion aficionados well know, the distinction between the Software Directive and the Information Society Directive is paramount. The absence of the term ‘object’ alongside the emphasis on ‘copy’ within Article 4(2) of the Software Directive provides more flexibility for the exhaustion of the distribution right, compared to the Information Society Directive. This is so despite the Agreed Statement concerning Articles 6 and 7 of the WCT requiring the terms ‘copies’ and ‘original copies’, subject of both the distribution right and rental right, to refer exclusively to fixed copies that can be circulates as tangible objects. In contrast, the lex specialis nature of the Software Directive allows for the exhaustion of digital copies.
When it comes to hybrid products, Nintendo v PC Box Srl (IPKat here) provides a starting point to define ‘complex matter’ that falls within the Information Society Directive. Inter alia, the CJEU held that computer games constitute complex matter as they contain audio-visual elements. While for some it seemed like Tom Kabinet (IPKat here) spelt the end of the road for exhausting hybrid software products like ebooks or, by extension, video games, the Court of Appeal in JJH Enterprises Limited adopted a refined approach. Referring to the CJEU’s finding that an ebook is ‘complex matter’, the Court of Appeal characterized the test as requiring wholistic assessment of the subject matter to determine whether the non-program works (e.g. images of icons and graphic user interfaces) remain incidental in relation to the computer programs.
Although Microsoft argued this was an unjustified derogation from the high level of protection for works enshrined in the Information Society Directive, the Court of Appeal reflected that ‘a choice must be made’ as it remains impractical to apply both exhaustion systems. The Court of Appeal agreed with the CAT that in substance the product was a computer program. Interestingly, the Court noted that both ebooks and computer games, as hybrid products, were subject to a similar choice by the CJEU. For this Kat, the most intriguing part of the judgment is the characterisation of exhaustion as a balancing mechanism between rightsholders and the wider interests of the market and consumers.
When it comes to hybrid products, Nintendo v PC Box Srl (IPKat here) provides a starting point to define ‘complex matter’ that falls within the Information Society Directive. Inter alia, the CJEU held that computer games constitute complex matter as they contain audio-visual elements. While for some it seemed like Tom Kabinet (IPKat here) spelt the end of the road for exhausting hybrid software products like ebooks or, by extension, video games, the Court of Appeal in JJH Enterprises Limited adopted a refined approach. Referring to the CJEU’s finding that an ebook is ‘complex matter’, the Court of Appeal characterized the test as requiring wholistic assessment of the subject matter to determine whether the non-program works (e.g. images of icons and graphic user interfaces) remain incidental in relation to the computer programs.
Although Microsoft argued this was an unjustified derogation from the high level of protection for works enshrined in the Information Society Directive, the Court of Appeal reflected that ‘a choice must be made’ as it remains impractical to apply both exhaustion systems. The Court of Appeal agreed with the CAT that in substance the product was a computer program. Interestingly, the Court noted that both ebooks and computer games, as hybrid products, were subject to a similar choice by the CJEU. For this Kat, the most intriguing part of the judgment is the characterisation of exhaustion as a balancing mechanism between rightsholders and the wider interests of the market and consumers.
Does exhaustion survive subdivision?
The second issue turned on whether VL could subdivide a block of multi-user rights. Referring to UsedSoft (IPKat here), Microsoft argued that, following exhaustion, the first acquirer (e.g. VL) cannot subdivide the license and resell more user rights for the computer program than the initial license contemplated. However, the Court of Appeal distinguished UsedSoft and explained that it related to client-server software, while in JJH Enterprises Limited, the subject matter was software that could be used independently. In UsedSoft it was impossible to subdivide access to a single copy of a computer program stored on the server. In contrast, the software products VL resold were independent and did not involve or require permission to access another element. The tribunal also relied on the UsedSoft 3 in which the German Federal Court held that the CJEU case does not prohibit subdivision per se. The Court of Appeal found that this was not an erroneous interpretation.
Microsoft also submitted that the characterisation of its licenses has legal consequences that attach to the effects of exhaustion, namely that the terms of its licences had the effect of making subdivision unlawful as the Enterprise Agreements related to a single licence. The CAT held that the distinction between a single licence and multiple licenses is irrelevant on the facts. Instead, whether VL’s activities amount to copyright infringement depends on whether, as first acquirer, they failed to dispose of copies it had acquired. The Court of Appeal agreed and noted that exhaustion occurs regardless of the contractual terms that might purport to prevent or undermine it. Even where the licence requires a ‘Perpetual Licence Transfer Form’ that Microsoft claimed ‘effect[ed] a transfer of the so called block user rights in the licences’, this only matters if the rights are not exhausted. Equally, Microsoft’s argument that VL’s use of product keys to facilitate resale contravened Article 6 of the Information Society Directive relating to technical measures was rejected.
Microsoft also submitted that the characterisation of its licenses has legal consequences that attach to the effects of exhaustion, namely that the terms of its licences had the effect of making subdivision unlawful as the Enterprise Agreements related to a single licence. The CAT held that the distinction between a single licence and multiple licenses is irrelevant on the facts. Instead, whether VL’s activities amount to copyright infringement depends on whether, as first acquirer, they failed to dispose of copies it had acquired. The Court of Appeal agreed and noted that exhaustion occurs regardless of the contractual terms that might purport to prevent or undermine it. Even where the licence requires a ‘Perpetual Licence Transfer Form’ that Microsoft claimed ‘effect[ed] a transfer of the so called block user rights in the licences’, this only matters if the rights are not exhausted. Equally, Microsoft’s argument that VL’s use of product keys to facilitate resale contravened Article 6 of the Information Society Directive relating to technical measures was rejected.
Comment
Microsoft reportedly intends to seek permission to appeal to the UK Supreme Court. If it continues, this will be a case to watch as the Court of Appeal’s judgment sketches some of the missing principles from UsedSoft, namely when a computer programme falls outside the bounds of a ‘complex product’ and whether subdivision is possible. This discussion brings more fundamental questions into the spotlight on the practicality of a hybrid system which could see resellers required to remove the non-exhausted elements (e.g. logos and graphic user interfaces) from computer programmes. Instead, the judgment uses the incidental feature test to preserve the balance between the Software Directive and Information Society Directive: this time, it was in favour of market and consumer interests.
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