The European Court of Justice has ruled that customers have a right to resell software they purchase regardless of whether the software was originally distributed on a physical medium or downloaded over the Internet. The ruling is a defeat for Oracle, which had argued that the court should uphold provisions in its license agreement prohibiting such transfers.

Software vendors have long argued that software is "licensed, not sold." This claim is in tension with the doctrine of copyright exhaustion (called the first sale doctrine in the United States), which holds that copyright law does not give rightsholders control over used copies of their work. And the principle has gotten even more murky as software is increasingly distributed directly over digital networks, meaning that there's no physical copy of the work to resell.

Oracle distributes its software online. Once a customer has signed a licensing agreement, they have an unlimited right to download copies of the database software from Oracle's website, and to install as many copies of the software as specified in the licensing agreement. A company called UsedSoft acted as a broker for used Oracle licenses, allowing Oracle customers who no longer need their licenses to resell them to another firm that could put them to better use.

Oracle sued UsedSoft, arguing that UsedSoft was merely facilitating piracy of its software. The database giant noted that its license agreements specifically state that licenses are nontransferable. And it argued that the exhaustion doctrine only applied to physical copies, like CDs or DVDs, not to copies downloaded from a website.

On Wednesday, the European Court of Justice, the EU's highest court, decisively rejected Oracle's arguments.

"It makes no difference whether the copy of the computer program was made available by means of a download from the rightholder’s website or by means of a material medium such as a CD-ROM or DVD," the court ruled. "Even if the rightholder formally separates the customer’s right to use the copy of the program supplied from the operation of transferring the copy of the program to the customer on a material medium, the operation of downloading from that medium a copy of the computer program and that of concluding a license agreement remain inseparable from the point of view of the acquirer."

The court noted that if it accepted Oracle's argument, then "suppliers would merely have to call the contract a ‘license’ rather than a ‘sale’ in order to circumvent the rule of exhaustion and divest it of all scope."

"From an economic point of view, the sale of a computer program on CD-ROM or DVD and the sale of a program by downloading from the internet are similar," the court ruled. "The on-line transmission method is the functional equivalent of the supply of a material medium."

The court also rejected Oracle's contention that even if the original software license was transferable, the new owner was not entitled to use the free updates Oracle supplied with the software.

But the court did place some important limits on customers' rights to resell used software licenses. First, if a customer purchases a multiseat license, it is not allowed to split the license up into parts and sell them separately.

The court also held that after reselling the software, the previous owner must render his own copy of the software inoperable. Oracle had argued that this would be impossible to enforce in practice. But the court noted that this difficulty isn't unique to online software sales—the same problem arises when a customer resells a CD or DVD after using it to install software on his own computer.

European software purchasers now enjoy substantially stronger first-sale rights than their American counterparts. While the United States Court of Appeals for the Ninth Circuit has upheld the right to resell used CDs, the same court has been more deferential to software vendors, ruling that no-resale clauses in licensing agreements are enforceable. And since software companies invariably insert such clauses into their EULAs, the Ninth Circuit's ruling places used software sales under a legal cloud.