When Is A Software License Transferable Even If It Says It Is Non-Transferable? (Byrt & Prinsley)

Second-hand software licences and the European Court’s judgment in UsedSoft v Oracle

Software companies cannot prevent the sale of “second-hand” software licences, where those licences are for a one-off fee and an unlimited period. Clauses in these licences stating that they are non-transferable will not be enforceable. This is the effect of a recent judgment by the Court of Justice of the European Union in the case of UsedSoft GmbH v Oracle International Corp. (3 July 2012).

The case is based on EU competition law “exhaustion of rights” principles according to which, once a product incorporating intellectual property rights has been sold inside the EU by the rights-owner (or with his consent), the rights-owner cannot object to the product then being sold to someone else. The European Court has now looked at how that principle applies to software licences.

UsedSoft is a Munich-based company which on-sells used software licences for Oracle and other products. Oracle’s licences were expressly stated to be non-transferable and it sued UsedSoft in Germany. The German court referred a number of questions up to the European Court back in April 2009, to determine whether or not UsedSoft’s business model was legitimate.

Relevant clause of Oracle licence

“With the payment for services you receive, exclusively for your internal business purposes, for an unlimited period a non-exclusive non-transferable user right free of charge for everything that Oracle develops and makes available to you on the basis of this agreement.”

Key legal provisions

Recital (28) of InfoSoc Directive¹: “The first sale in the Community of the original of a work or copies thereof by the rightholder or with his consent exhausts the right to control resale of that object in the Community.”

Article 4(2) of Software Directive²: “The first sale in the Community of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the Community of that copy …”.

Article 5(1) of Software Directive: “In the absence of specific contractual provisions … [acts such as running, copying, translating etc, the program] shall not require authorisation by the rightholder where they are necessary for the use of the computer program by the lawful acquirer in accordance with its intended purpose, including for error correction.”

The decision

When Oracle’s original customer downloaded software from the Oracle website, was this a “first sale”, which would mean that Oracle could not object to the on-sale? “First sale” in this context, the Court said, means a transfer of the right of ownership in the particular copy of the software.

The Court went on to say that if the copyright holder (i.e. Oracle) who has authorised the downloading of the software (even if free of charge) has also conferred a right to use that copy for an unlimited period, in return for “payment of a fee intended to enable him to obtain a remuneration corresponding to the economic value” of that copy of the software, the right of distribution of a copy of a computer program is exhausted. It does not make any difference whether the first customer acquired the software on a tangible medium such as a CD or downloaded a soft copy.

In other words, the software company cannot sue the buyer of a second-hand licence where the licence was:

• For a fee which represents the value of the software (which seems to mean a one-off fee i.e. not a recurring licence fee which is still payable after the sale of the second-hand licence) and
• For an unlimited period.

The person who buys the second-hand licence in this situation is a “lawful acquirer” (as is anyone to whom he on-sells the licence), which means that the software house cannot use its copyright to object to the buyer using the software or on-selling the licence.

Not all bad news for software companies

However, there are limits to this freeing up of the second-hand market in software licences.

• As noted above, it does not apply where the software is licensed for a recurring fee or for a limited time (nor where software is rented). So those business models are not affected.
• Where the licence is for a single block of users, you cannot split it up into chunks and sell off only part of the licence for the excess number of users. So “enterprise” licences, as opposed to individual licences, are not affected unless the original licensee wants to sell off the right to use the whole block.
• You cannot sell a services agreement (such as a software maintenance agreement) in this way, since the exhaustion principle does not apply to services. So the acquirer of the licence cannot oblige the software company to provide services.
• The original licensee must not carry on using the software after the sale, otherwise it will be infringing copyright. It must make its own copy of the software “unusable”. Technical protection measures may provide some help, but in practice it will be hard for Oracle and other software houses to be absolutely sure whether the original customer is still using in parallel with the acquirer of the second-hand copy.

These limits on the judgment may influence the business models adopted in the software industry wherever the existence of a second-hand market is seen as posing a significant threat.

Footnotes

<sup>1 Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society.
2 Directive 2009/24 which codifies Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs.

This post is intended for your information only and is not intended to constitute a legal opinion.  If you require specific advice, you should contact a Bahamian technology attorney.  You can contact a Bahamian technology attorney by clicking here.</sup>

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Incorporation of Bahamas IBCs

New site

Hello All.

I now have my new site up and running.  I will not be making as many posts to this site anymore, however, you can feel free to check out the new site at http://lordellor.com/blog.html.

Some of my posts will be transferred from here to my new blog site, however the new posts will be appearing on the new site.

Thanks for following and I hope you continue reading.

Bahamas - Real Property taxes

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Land is currently assessed for the payment of real property tax at the rates set forth below per annum:

OWNER-OCCUPIED PROPERTY		COMMERICAL PROPERTY		VACANT LAND		CROWN LEASED CAY
First $250,0000	Exempt	First $500,000	1%	First $7,000	$100.00	Market value of improvements under $10 Million	0.5%
Homes belonging to first time homeowners with market value above $250,000 but under $500,000	Exempt for 5 years from date of occupancy or conveyance1	Balance	2%	Balance	1.5%	Market value of improvements above $10 Million	0.25%
Homes with market value above $250,000 but under $500,000	0.75%2
Homes with market value above $500,000 but under $5,000,000	1%3
Homes with market value above $5,000,000	0.25% upon that part of the market value which exceeds $5,000,0004

¹ Section 3(d) of Real Property Tax (Amendment) Act, 2009
² Section 5 of Real Property Tax (Amendment) Act, 2008
³ Section 3(2) of Real Property Tax (Amendment) Act, 2002
⁴ Section 3(a)(iii) of Real Property Tax (Amendment) Act, 2009

Owner-Occupied Property

The Real Property Tax (Amendment) Act, 2008, was implemented on 1st July 2008. It introduced an exemption for first time homeowners for a period of 5 years for owner-occupied property with a market value above $250,000 but under $500,000.

Previously, an owner had to occupy his home for an aggregate of 9 months per annum to qualify for the owner-occupied exemption. However, this requirement was removed by the Real Property Tax (Amendment) Act, 2009, which was implemented on 13th July 2009. Owner-occupied property is now defined as property occupied by the owner in fee simple or the mortgagor in possession who occupies and resides in the property exclusively on a permanent or seasonal basis. There is no longer a restriction on the amount of time that the owner must occupy the home on an annual basis but the property should not be leased or rented to a third party for more than 9 months during the calendar year.⁵

For owner-occupied property exceeding $5,000,000 in value, the 2009 amendment also reduced the tax from ¾% to ¼% per annum upon that part of the market value of the property which exceeds $5,000,000.

Vacant (Undeveloped) Land

The 2009 amendment introduced an entirely new rate of assessment for vacant land. Upon that part of the market value which does not exceed $7,000, the tax is $100.00 and, upon that part which exceeds $7,000, the tax is 1½%.

Undeveloped land owned by Bahamians is exempt. Property in the Family Islands owned by Bahamians is also exempt.

The remedy of the power of sale is now available to the Treasurer in relation to unimproved property in arrears where such arrears are unpaid for more than 6 months after the expiration of 30 days from becoming due.

Crown Leased Cay

As a result of the 2009 amendment, this is an entirely new category of property now being assessed. The tax is ½% per annum of the market value of the improvements under $10 million and ¼% per annum of the market value of the improvements above $10 million.

Surcharges on Arrears

The 2009 amendment introduced a new rate of surcharge on arrears of 5% per annum until payment.

This post is for your information only and is not intended to constitute a legal opinion.  If you require specific advice you should contact a Bahamian real estate attorney.  You can contact a Bahamian Real Estate attorney by clicking here.

Offshore Corporate and Private Wealth Management Strategies

     The perfect offshore corporate and trust structuring strategy, should one exist, would constitute the 'holy grail' of commerce and wealth management. 

It would free its employer from the chains of taxation (both domestically and internationally), render assets immune from adverse adjudication and cloak finances with an impenetrable veil of privacy insurmountable by even the most determined and capable of inquirers. 

     Firms of expensive lawyers and accountants earn fortunes each year from companies and individuals with deep pockets looking for strategies to maximise and preserve their wealth. As a consequence, to this end, individuals and companies (particularly those with international interests) are deploying increasingly sophisticated arrangements of offshore agreements, trusts, corporations, foundations, powers of attorney, bank accounts and other mechanisms.

     This series of articles will consider some of the common components of offshore corporate and private wealth management strategies typically employed by high net worth individuals and corporations around the world.

What is an 'Offshore' Jurisdiction

     The term 'offshore' generally refers to any territory outside of one's home jurisdiction. In the context of finance management however, the term refers to a jurisdiction which offers attractive financial and legal incentives to non-residents who assume a legal presence or hold assets there.

    These incentives tend to include tax concessions or exemptions together with banking facilities and confidentiality rules which purport to enable non-residents to maximize the value of, protect and conceal their wealth. Examples of the tax concessions available offshore include the complete exemptions for all international business of non-residents offered by Belize, St Lucia and the Seychelles. Other examples include the exemptions from income and capital gains taxation for companies incorporated in the British Virgin Islands and the tax concessions on investment income available in the Bahamas and the Cayman Islands. There are currently in excess of fifty jurisdictions offering such incentives to offshore businesses.

The IBC

     An individual or company wishing to establish a presence in an offshore jurisdiction in order to take advantage of the incentives available there usually does so by way of an International Business Company ('IBC') incorporated under the laws of the offshore jurisdiction.

     In the more popular offshore jurisdictions, an IBC may be incorporated quickly and relatively cheaply. Where privacy is of particular concern to the beneficial owner, the IBC is often incorporated with nominee corporate directors and shareholders thereby obscuring the beneficial owner's interest in the company. Other mechanisms are available to further enhance the privacy afforded by the offshore arrangements if so required.

     It is a common misconception that simply contracting through an offshore IBC circumvents the tax liability that would otherwise have arisen. The tax rules of most 'normal' and 'higher' tax jurisdictions include anti-tax-avoidance provisions carefully crafted to prevent the use of offshore entities in the avoidance of taxation of domestically sourced income. 

   However, notwithstanding such domestic legislation, a properly executed offshore strategy may, in appropriate circumstances, reduce, defer or completely eliminate liabilities that would otherwise arise. Some of the more common uses of IBCs are outlined below. The legality and effectiveness of such arrangements will depend on a range of very important factors including the laws of the home and offshore jurisdictions as well as those of the jurisdiction in which the business is conducted. The existence and terms of any applicable double-taxation treaties are also critically important, particularly as it relates to the operation of withholding taxes and other anti-avoidance mechanisms.

Common IBC Strategies

     IBCs are frequently included in a trading corporate group as a distribution, import/export, procurement or sales intermediary. For example, where goods are being sourced from a producer in one country for sale to a consumer in another, an offshore IBC may be used to purchase the goods from the manufacturer for shipment directly to the end consumer. Similarly, IBCs are often used by importers for procurement of goods sourced abroad, and by producers for foreign distribution. The ultimate objective of these arrangements is to accumulate the trading profits in the tax-free offshore jurisdiction. IBCs are also used by professional consultants, athletes and entertainers as service companies through which fee income is accumulated offshore. Contracting through an IBC also reduces the individual service provider's personal exposure to liability for breach of contract.

    Many private investment funds are administered through offshore investment companies. Although the fund's investments would in many cases be subject to withholding tax or capital gains tax at source, there are a number of investment instruments where no such taxation applies.

IBCs are also used to hold and exploit intellectual property rights. Such offshore IP holding strategies have become less prevalent as a result of the withholding taxes applied on royalty payments at source by most of the higher tax jurisdictions. Depending on the territories involved, a double taxation avoidance treaty may operate to reduce the withholding taxes.

    One area in which there appears to be very good scope for offshore structuring is the provision of international electronic services. This is because transnational e-commerce challenges the concept of legal jurisdiction which is traditionally based on clearly defined geographical boundaries - boundaries which are not so easily delineated in 'cyberspace.' IBCs are increasingly being used to hold domain names and operate service providing websites from their tax friendly offshore territories.

    Perhaps the most popular use of an IBC is to hold shares of subsidiaries and real estate based in other jurisdictions with less friendly tax regimes. However, the utility of IBCs in this regard has declined as a result of the various withholding taxes and rules applicable to 'immovable property' imposed by many of the higher tax jurisdictions. Despite these rules, IBCs are still frequently used to acquire and hold property with a view to simplifying the subsequent disposal process. The transfer of shares or real estate held by an IBC may be accomplished by transferring ownership of the IBC itself circumventing domestic red tape. Depending on the jurisdictions involved, this may also save on some legal fees, transfer taxes and duties levied by the state. Where an individual owns a number of assets in different countries, by consolidating ownership through an IBC, estate transfer upon death may become less complicated, expensive and time consuming.

    The above examples have been simplified and are provided for illustrative purposes only. Offshore trust and corporate structuring is highly risky and extremely complex. A misconceived or improperly executed strategy may result in severe criminal and/or civil liability. Most jurisdictions have entered into numerous Tax Information Exchange Treaties, which have significantly limited the tax planning capabilities of IBCs. Individuals or companies seeking to explore offshore options should ensure that they are properly advised by suitably qualified and experienced legal and accounting professionals.

W. A. Brenford Christie

Lord Ellor & Co.
Nassau, Bahamas
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