We’re pleased to bring you a guest post by Vedangini Bisht and Shubham Chaudhary on a recent Supreme Court order wherein the Doctrine of Copyright Exhaustion was recognised vis-a-vis Software. Vedangini and Shubham are both fourth year students at National Law University, Delhi. Vedangini has earlier written guest posts for us on frequently overlooked corollaries of academic patenting here, and the need for an expansive application of copyright exhaustion on digital medium here.
Supreme Court Recognises Doctrine of Copyright Exhaustion in Softwares, And Its Subservience to EULAs
Vedangini Bisht and Shubham Chaudhary
Does the doctrine of Copyright Exhaustion also exist in software? Can it be restricted through a EULA? The ill-effects of not recognising digital copyright exhaustion, especially in computer programmes, has been discussed by one of the co-authors here on the blog.
On 2 March 2021, the Supreme Court in Engineering Analysis Centre for Excellence Pvt. Ltd. v. CIT held that amounts paid by Indian companies for using software developed by foreign companies would not be considered as “royalty” which is taxable in India. While the case is primarily concerned with issues related to tax law, it also touches upon copyright issues related to End User License Agreements (“EULA”) of software and the doctrine of Copyright Exhaustion. Briefly, the Court recognised the doctrine of Exhaustion in software and held that the EULAs in the facts of the case were not licenses under Section 30 of the Copyright Act, 1957 (“Act”) as they did not transfer any rights given under Sections 14(a) or 14(b) of the Act to the Indian distributors. Hence, the Supreme Court recognised EULAs that allow end users to use software but do not transfer or exhaust any rights given under Sections 14(a) or 14(b).
While the Delhi High Court has previously adopted the same view that the said amount could not be a royalty, a view also adopted by the Madras High Court, the Karnataka High Court has adopted a different position, a combined appeal from which is how the question reached the Supreme Court.
The decision has been hailed by tax experts, as it brings to a close a contention which had been around for two decades. But the Court has also set clear two important issues with respect to the doctrine of Copyright Exhaustion.
Recognition of the Doctrine of Exhaustion in software
First, the Supreme Court has made clear that there indeed exists Copyright Exhaustion in computer programmes. It did so by stating that the 1999 Amendment to the Act re-established the doctrine of exhaustion in the statute.
- As has been mentioned hereinabove, section 14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999… After the 1999 Amendment, what is conspicuous by its absence is the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions”. This is a statutory recognition of the doctrine of first sale/principle of exhaustion.
This sets to rest the debate regarding the effect Section 14(b)(ii) had on the doctrine of Copyright Exhaustion provided under Section 14(a)(ii).
The 1994 Amendment to Section 14(b)(ii) created an exception to the doctrine of Copyright Exhaustion in software. However, it had largely been the understanding that, had the aim of deleting the words “regardless of whether such copy has been sold or given on hire on earlier occasions” in the 1999 Amendment Act been to re-establish the doctrine of copyright exhaustion, then this would have been achieved by Section 14(a)(ii) itself. That would render Section 14(b)(ii) largely redundant. Hence, it was debated that Section 14(b)(ii) still continued to be a clear exception to First Sale Doctrine. Section 14(b)(ii) being a specific provision in respect of computer programmes, would override Section 14(a)(ii).
With the doctrine of exhaustion now being recognised in computer programmes, this shall now allow for the creation of secondary markets, and in effect, alternative distribution models. An immediate social consequence would be greater access. It creates an avenue where if a work is withdrawn by the right holder the work would continue to remain in circulation. This would further increase competition in the market and consequently, would provide better consumer experience.
EULAs Ability to Restrict Copyright principles?
However, what this case also does, is provide overriding powers to EULAs to restrict the doctrine of Copyright Exhaustion. The Court laid down that in even in situations where the software is purchased directly by an end-user from a foreign supplier or manufacturer, the payments for using foreign software did not amount to ‘royalty’ which is taxable in India since all the rights with respect to further sale of it are restricted by the EULA in this case. Restriction of copyright exhaustion through EULAs has also been recognised in the US, where the Court has largely held that a software user is a licensee rather than an owner of a copy where the copyright owner significantly restricts the user’s ability to transfer the software. It appears that India is moving in the same direction.
Another important consequence of the doctrine of Exhaustion is that this recognition allows users to modify products, adapting them to their own needs. However, it is also necessary to mention that in the present case, the EULAs explicitly forbid the end users from reverse engineering the software. The fair dealing provisions contained in Sections 52(1)(aa) to (ad) of the Act include reverse engineering of software for certain purposes. Hence, it can be argued that engaging in reverse engineering does not result in copyright infringement. However, as has been shown in another article on the blog, the law in India is unclear on whether EULAs can restrict fair dealing provisions.
Reverse engineering allows a consumer to customise the software they own as per their own needs. Further, it is essential to improve the inter-operability of the software with other programmes. Inter-operability and compatibility of software falling in the same category would improve competition in such category, as consumers can switch to a competing software without losing their work. Restrictive EULAs would grant the right of developing such improvements exclusively to the base software maker which can charge any price for supplying such improvements. Unfortunately, this has not been dealt with by the Court in this case and the uncertainty still remains.
Transfer from copyright owners to distributors does not amount to first sale
Second, the Supreme Court has clarified the position of distributors when it comes to sale of software, and held that conveying the title to distributors would not amount to first sale. Hence, Copyright Exhaustion does not apply when it comes to distributors.
- The language of section 14(b)(ii) of the Copyright Act makes it clear that it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental “any copy of the computer programme”. Thus, a distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within the scope of the aforesaid provision. The sale or commercial rental spoken of in section 14(b)(ii) of the Copyright Act is of “any copy of a computer programme”, making it clear that the section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction of the same for sale or commercial rental.
The Court also contrasted it with the John Wiley case, where low-price editions of a book were sold in a territory where they were not permitted to be sold. Since the sale was not permitted, the sale of them could not be considered ‘copies already in circulation.’ That is the reason the doctrine of exhaustion was not applicable. But in this case, the copies are put in circulation by the foreign suppliers themselves via distribution agreements, and thus would not be hit by Section 14(a)(ii).
While agreeing that the 1999 Amendment of Section 14(b)(ii) has titled the provision in favour of the purchaser, the Court sought to bring attention to the objective of introducing section 14(b)(ii) in the first place. The objective is to prevent copies of computer software once sold from being reproduced and then transferred by way of sale or otherwise. A distributer cannot be understood as the user of the computer software at all. And has to pass on the said software, as shrink-wrapped by the owner, to the end users. They merely act as intermediaries. Hence, there is no grant of copyright interest of distribution, as was argued by the CIT, and therefore, no payment of royalty.
This, according to the authors, is a correct reading of the provision. This has the implication that software developers can control the price of their software in geographical markets. If the copyright interest of distribution was granted to distributors, then competing distributors (who have entered into agreements with the software developer) in the same geographical market could compete to offer the best price to end users. The software developer could still ensure profits by receiving adequate remuneration for transferring the interest to the distributors
Conclusion
While there are some issues that certainly remain, most of these are inherent to Copyright Exhaustion in software all around the world, and it is expected that they shall be resolved with time. The decision is well-reasoned and brings the much-needed clarity to the doctrine of Copyright Exhaustion in software; and its relation to EULAs.
Hi. I have a different view on the conclusions you draw from para 142 of the judgment. What the judgment states is simply this: the re-selling of a purchased object containing the software is not an exercise of the right under Section 14(b)(ii). This becomes clear when you read it with para 144. In my opinion, what the Supreme Court has done in paras 135-144, is to reject a government argument that the distribution contracts in that case were an exercise of the rights under Section 14(b)(ii). IN para 141, the court says that after the amendments to 14(b)(ii), the rights have tilted in favour of the purchaser. So, I don’t think the Court concluded “conveying the title to distributors would not amount to first sale” as you mention in your post. On the contrary, the Govt argued that the first sale doctrine did not apply for the distributor and that the re-sale by the distributor would be an exercise of copyright. The supreme court squarely rejected this contention. This is my reading of the judgment.
Hi Adarsh. Thank you so much for your comment. We agree with what you mention in your comment, that the re-selling of a purchased object containing the software is not an exercise of the right under Section 14(b)(ii). This is what we have tried to convey as well in the post by mentioning that the objective of Section 14(b)(ii) is to prevent copies of computer software once sold from being reproduced and then transferred by way of sale or otherwise. Copies do not created in this case since the distributors have to pass on the said software, as shrink-wrapped by the owner, to the end users. We also agree that the Supreme Court rejected the contention of the government that the distribution contracts were an exercise of rights under Section 14(b)(ii). However, the conclusion that we drew with respect to it not being a first sale is that since the distributors have been considered mere intermediaries who merely resell the same product to the end-user (Para 143), the passing of title by the software developers to distributors would not amount to a first sale for the purpose for the exhaustion doctrine and the distributors would not have independence with respect to further distribution of the software. The first sale, instead, would be when the sale takes place to the end users. The way we understand it is because the exhaustion doctrine gives complete freedom to the purchaser to undertake further distribution of the work, in any way they want, which is not what distributors get as intermediaries. Of course, we could be mistaken in our reading and would like any further guidance in this regard.
Hi Vedangini. Thank you for the reply. If u see IBM’s argument at para 14/18, you will see Appellants position was this – the Indian distributor “purchased” and “resold” the same and that this subsequent sale by the distributor is after the first sale – thus not covered by copyright (which stands exhausted in that copy). The Govt argued (para 23 and 119) that first sale *did not* apply to the the copy received by the distributors. The Court agreed with the Appellants. I agree that the portion about it being an intermediary is little confusing for me as well. I think in the scheme of the entire judgment, the use of that word is not relevant.
Thank you so much Adarsh, for engaging with us on this. Agreed, the use of the word intermediary for the distributors and their role was a bit confusing. Your comment definitely gives us some perspective on how the judgment can be interpreted.