Ebooks and the exhaustion principle

Duncan Calow
Opinion - Digital 21 October 2015

Duncan Calow reports on the state of play in legal examinations of ebooks and resale rights.

This summer, a production of George Orwell's Nineteen Eighty-Four received rave reviews in London's West End. As the origin of "Big Brother", "telescreens" and the "memory hole", Orwell's novel clearly still has resonance as we struggle with cyber-security, wearable-tech and the right-to-be-forgotten. But I have always argued that it is Orwell's Books v Cigarettes, first published in 1946, that has more valuable insights for the world of digital content.

In that short article, Orwell conducted an audit of his hardbacks and paperbacks, and compared them with the costs of cigarettes and beer. He was, of course, making a political point about the audience for literature. Given, however, the difficulties in pricing digital content, the process he describes has, arguably, even wider relevance now. Indeed, the Web has several examples of bloggers attempting to update it for today's competing attractions of skinny lattes, apps and Netflix subscriptions. It is worth noting, though, that Orwell's use of private lending libraries itself demonstrates alternative access models some 60-odd years before talk of "Spotify for books".

Digital secondary markets
In Orwell's case, "book-giving, book-buying and book-stealing more or less evens out", and there is recognition of the value that possession of a shelf of books provides. The perceived value of ownership isn't just important in pricing though. Just as it motivated Orwell, as an enthusiastic purchaser of second-hand books, it is also fundamental to the debate over digital secondary markets. Not least because, three years ago, the highest court in the European Union decided that publisher rights in a software download could be treated as "exhausted" if the end-user licence amounted to a sale: essentially because it was granted for an unlimited period.

The principle of exhaustion (or "first sale doctrine" in the US) refers to when a rights-owner can no longer use copyright to prevent further sale of a work once placed on the market. It makes second-hand bookshops legal. The European Court chose to interpret EU software law in such a manner as to allow digital exhaustion. By contrast, a year later, a US court decided that, under their law, a record label's rights in digital music downloads were incapable of being exhausted in the same way as physical purchases. Indeed, the judge stated he was not going to "facilitate judicial amendment" of that law to reach such a "policy outcome".

Back in the EU, however, software publishers were forced to check the fine-print of their End User Licence Agreements (EULAs) to see whether they would be subject to digital resale rights. And where did that leave publishers of other content? Suddenly, the difference between subscription and one-off payment models, and cloud versus download, had a legal as well as a commercial and technical relevance. Then, last year, the European Court issued a further decision that held that video games, as complex multimedia works, fell outside the scope of the rules on software. In which case, might digital resale rights not be applicable to video games, ebooks or other copyright works after all?

The software approach
Some saw this as the EU moving back towards the US and the underlying international treaty with which copyright laws should comply. Others argue that the software approach may yet be applied to all works, and a decision in a Belgian ebook case may soon be issued by the European Court. In any event, copyright reform is once again on the agenda in both the EU and US. So the central debate around whether exhaustion principles applicable to physical works, which degrade with time and use, can and should be extended to digital products, which do not, will finally be addressed before too much longer.

The debate over digital exhaustion interconnects with other rights issues that legislators, or the courts, are under pressure to settle. Many result from the persistent tension between the strong monopoly rights granted by intellectual property and the market protections policed by competition law. Right now, of course, the publishing industry needs no reminding of the Orwellian power of the competition and antitrust authorities. The current activities of those authorities in a wide range of others sectors shows that their focus is still firmly on digital.

At the heart of much of that, certainly within the EU, is the consumer - a primary concern with the protection of freedoms for the individual e-reader, viewer, listener and browser. Which interconnects, in turn, with consumer law and changes implemented last year across the continent updating the already detailed rules for buying content online. Yet more legislation in the UK this autumn confirms specific rights of refund and other remedies for digital purchases - recognised for the first time as, uniquely, neither goods or services. All of which is on top of the well-established European rules prohibiting complexity or legalese in consumer terms.

George Orwell would at least have appreciated the clear use of language, but the jury is still out on how today's consumers will choose to exercise any rights that new legal developments allow.

Duncan Calow is Partner at DLA Piper UK LLP (duncan.calow@dlapiper.com).

This article first appeared in the Publishers Weekly/BookBrunch Frankfurt Show Daily.

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