CAT can decide copyright issues in competition claims, court confirms

The Court of Appeal of England and Wales has dismissed two appeals brought by Microsoft in a competition law damages claim concerning the resale of second-hand software licences, in a judgment that clarifies the CAT’s ability to decide non-competition law issues where they are necessary to resolve a competition claim.

The claim was brought by JJH Enterprises, trading as ValueLicensing, which sells, or purported to sell, second-hand licences for Microsoft software products.

ValueLicensing alleged that Microsoft infringed competition law by restricting the availability of second-hand licences for products including Windows and Office, including through contractual restrictions and by encouraging or moving customers away from perpetual licences towards subscription-based models.

The claim is framed as a damages action for alleged breaches of Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU), corresponding provisions of the European Economic Area (EEA) Agreement and of the Competition Act 1998. It covers the UK and the EEA, including the EU, and relates to the period from 1 January 2014 to 31 December 2022.

The company alleged that Microsoft’s conduct reduced the supply of used Microsoft software licences in the secondary market and caused ValueLicensing to suffer loss for which it seeks damages. Microsoft denies the allegations, and the Court of Appeal’s judgment does not decide whether any competition law infringement occurred.

Microsoft argued that ValueLicensing’s competition claim depends on ValueLicensing having a lawful right to resell second-hand Microsoft software licences. The company also alleged that, if copyright in the relevant software had not been exhausted, ValueLicensing’s resale activity was not lawful secondary trading but copyright infringement.

On that basis, Microsoft argued that ValueLicensing could not claim that it had unlawfully restricted, in breach of competition law, a resale market in which ValueLicensing was entitled to operate. It maintained that if Microsoft’s copyright submissions succeeded, ValueLicensing’s competition claim would inevitably fail.

The appeals arose from two rulings made by the CAT. In the first ruling, the CAT held that it had jurisdiction to determine copyright issues that arose in the competition claim. In the second, the CAT decided preliminary copyright issues in ValueLicensing’s favour. Microsoft appealed both rulings.

Microsoft argued that the copyright issues fell outside the CAT’s jurisdiction because they were anterior to the competition law claim and because, if resolved in Microsoft’s favour, they would establish that ValueLicensing’s activities infringed Microsoft’s copyright.

The Court of Appeal rejected that argument. It held that, where an issue needs to be decided in order to resolve a claim for an alleged infringement of competition law, that issue falls within the CAT’s jurisdiction under section 47A of the Competition Act 1998.

Alex Stratakis, competition law expert at Pinsent Masons, said: “The judgment is a useful reminder that competition litigation often requires the tribunal to engage with issues that sit outside competition law in a narrow sense. That is particularly true in technology markets, where competition, contract and intellectual property questions frequently overlap.”

He said the Court of Appeal had taken a practical approach by “confirming that the CAT can decide those issues where they are necessary to resolve the competition claim before it.”

The Court of Appeal also considered how copyright exhaustion principles apply to software products that contain both computer programs and other copyright works, such as graphics, user interfaces, icons, fonts and help files.

It upheld the CAT’s conclusion that Microsoft Windows and Office were, when looked at as a whole, computer programs, and that the non-program works were ancillary or had an accessory character to the computer program functionality for which the products were purchased and used. That meant the Software Directive’s exhaustion regime applied. The court rejected Microsoft’s argument that the existence of non-program copyright works meant that the different exhaustion rules under the InfoSoc Directive should apply to those elements separately.

The court said that in cases involving “complex matter” – made up of both software and other copyright works – it is necessary to characterise the product as a whole rather than apply competing regimes to different components in a way that would allow one to override the other.

Commenting on the ruling, Gill Dennis, intellectual property and copyright law expert at Pinsent Masons said: “The Court of Appeal has taken a pragmatic approach to the jurisdiction issue. Given the depth of intellectual property expertise available to the CAT, it would have been difficult to justify a rule preventing the tribunal from deciding IP issues that are integral to resolving the competition claim before it and the additional cost, delay and real risk of inconsistent outcomes that would result”.

On copyright exhaustion in non-program elements, Dennis said: “The decision confirms that the exhaustion analysis should focus on what was actually bought. If the product is, in substance, software, it is unsurprising that ancillary elements such as user interfaces and graphics follow the same legal treatment. The ruling is a logical application of the principles established in UsedSoft, applying existing case law authorities. However, in practice, it does extend UsedSoft as we currently know it and this is commercially significant.”

The second substantive issue concerned whether volume licences could be subdivided. Microsoft argued that the ruling by the Court of Justice of the EU (CJEU) in a case involving UsedSoft in 2012 did not permit a block or multi-user licence to be divided and resold in smaller quantities.

However, the Court of Appeal rejected that argument in the circumstances of this case. It distinguished the client-server arrangement considered in UsedSoft from the Microsoft software at issue, where copies of Windows and Office were used independently rather than by accessing a program running on a central server.

The court also agreed with the CAT that exhaustion takes effect at the point of first sale and operates by law. It said that contractual terms cannot prevent or undermine the operation of exhaustion where the legal conditions for exhaustion are otherwise satisfied. If a first acquirer resells a licence but continues to use its own retained copy, that may give rise to infringement by the first acquirer, but it does not undermine the second acquirer’s right to use the copy it has acquired.

Competition law expert Ian Hastings at Pinsent Masons said: "Cases involving the interplay between competition law and intellectual property are often complex. One set of rules does not have priority over the other, and any relevant court or authority should seek to respect both in its decisions. Doing this is rarely straightforward, but this judgment confirms that the CAT has full jurisdiction to adjudicate on IP matters connected to competition law concerns".

"The judgment provides a useful application of the 2011 UsedSoft decision, but it will remain challenging for companies to assess what levels of IP rights enforcement could give rise to antitrust issues."

Tadeusz Gielas, competition law expert at Pinsent Masons, said: “The judgment should not be read as a finding that Microsoft breached competition law. Those allegations remain to be determined. Its immediate importance lies in the Court of Appeal’s treatment of the copyright and jurisdiction issues, and in the way it applies EU-derived exhaustion principles to digital software licensing arrangements.”

For businesses, he said the ruling illustrates the need to consider software licensing, intellectual property rights and competition law risk together rather than in isolation.

"The judgment is likely to be reviewed closely by software vendors, resellers and customers with significant software portfolios," he said. "The ruling is also relevant to competition litigants more generally since it confirms that the CAT may determine issues from other areas of law where they are necessary to decide a competition damages claim."

It is understood that Microsoft is seeking to appeal the Court of Appeal’s judgment to the UK Supreme Court.