The Principle of Exhaustion in the Labyrinth of Digital Markets

The Principle of Exhaustion in the Labyrinth of Digital Markets

The Principle of Exhaustion is the touchstone feature of IP law in many countries including the European Union, where it is labeled as the “exhaustion of rights.” This guiding principle is the equivalent of the “first sale of doctrine” which plays a pivotal regulatory role in the United States. There are obvious consequences with the development of digital distribution and the invention of cloud computing in the ebbing landscape of the ever-expanding digital market. Suffice it to say that the solid guarantees of copyright holders and of the users of their respective works in digital markets teeters upon the delicate balance which may be achieved and proved efficient via the principle of exhaustion. Whence addressing the balancing act of a copyright holder’s interest in selling more copies of his or her work at market and the user’s interest in selling the copy he or she has purchased—that principle of exhaustion regulates competition in internal markets in general. However, there is a slew of prevailing issues looming in the backdrop, inevitably influencing the exhaustion of digital rights, including just how extensively private copying exceptions should extend and most importantly whether technical protective measures which grant control over content whilst heading down the cobblestoned distribution chain, shall be permissible. Should the copyright holder be prevented from direct control of the quantity of copies he/she desires to present at market, then the conditions of access itself to such work in the long-term perspective (which is normally in the economic interest of the user) shall essentially be out of the control of said copyright holder entirely. The Digital Resale Markets (secondary markets) perhaps could aid somewhat in (a) simplifying the access to the copyright holder’s work by interested users while the copyrighted work has not yet infiltrated the realm of public domain and in (b) simplifying the access (in relation to the price) of the copyrighted work to interested users when copyright holders distribute their work. On the other hand, these secondary markets for digital goods essentially signify the presence of ominously marred second hand digital goods. It’s been a pervasive standing policy in the saturated litigious world of publishing that a digital business model appeals to the publisher’s palate only when there is a certain lack of prospective resale. Nevertheless, technology has gifted the world with the resale of digital goods and there is a cultural initiative to loosen the shackles on digital entertainment. The sprouting of electronic thrift shops entice consumers worldwide. The creators of content, however, stand before a Chinese wall which can lead to a stifling of the creative process.

The Principle of Exhaustion is an imperative contemporary tool implemented in balancing copyright interests as pertaining to governments. This principle though, was not expressed in the TRIPS Agreement, one of the main components of the WTO Agreement. There was no consensus reached between participating parties regarding this principle, mainly whether it should apply internationally. However, the principle was expressed in Article 6(2) of the WIPO Copyright Treaty of 1996. The definition in this particular treaty can be applied to digital works and copies thereof. This treaty recognized the need to introduce novel international rules and to clarify the interpretation of certain existing rules in order to provide adequate responses to the questions posed by rapid technological developments and to tackle the profound impact and convergence of information and communication technologies on the creation and use of literary/artistic works. Most of EU legislation on intellectual property was adopted in the 1990’s. The 1991 Software Directive 91/250/EEC could not succinctly solve the problems of software distribution since “software-as-a-service” (SAAS) had not yet existed. The 1992 Recent and Lending Rights Directive 92/100/EEC presented a similar problem. Finally, in 1995, the Green Paper on copyright and related rights in the Information Society^[1] cast the net wider and confronted the prospective dilemmas arising from conflicting Internet activities, directly dealing with “whether a distribution right is capable of being exhausted by an exploitative act of the rights-holder depending upon the form in which the protected work or related matter is exploited.” The 1996 Database Directive 96/9/EC explicitly states that “the question of exhaustion of the right of distribution does not arise in the case of on-line databases, which are drawn within the field of provision of services.”^[2] The first landmark decision of the European Union was the Deutsche Grammophon Case,^[3] resolving two poignant points: (a) the balance of rights, namely the protection and use of copyrighted work which can be accomplished in compliance with the basic EU internal market principle—“the free movement of goods” and (b) the internal market can be salvaged as the common and the sole market of the EU while partitioning shall be precluded, since it is unacceptable for all the purposes of EU.^[4] The judicial and legislative recognition of the principle of exhaustion has been the basic element upon which to ensure that the protection of intellectual property rights is consistent with the free movement of goods in such a manner as to avoid an unjustified and artificial partitioning of the common market, an outcome that would be adverse to the essential purpose of the EU Treaty. This principle is further expressed in secondary EU legislation, namely Article 4(2) of Directive 29/2001/EC on copyright in the information society.^[5] Still, after decades, the CJEU decisions subjugated this principle to restrictive limitations such as the right of distribution of only one copy released to the market,^[6] restricted only to the EU market^[7] and only when the work product is distributed in physical copy format and the ownership is transferred^[8] directly by the copyright holder or with his/her distinct consent.

The European Commission remains the main EU body responsible for reviewing the legislation in intellectual property rights. Management legislation is concerned that the EU single market has erected numerous barriers and thus “remains a patchwork of national online markets.”^[9] The Principle of Exhaustion of copyright works its magic in the online environment as well, churning the market into a truly single market. In December 2013, the Commission launched a “Public Consultation on the Review of the EU Copyright Rules,”^[10] inquiring whether the principle may be broadly extended so as to cover the acts of transmission of digital copies “equivalent in its effect to distribution.”  The review’s approach is predominantly based on the economy and on the online trends but the coveted effect should ultimately be expressed in legislation which is not a simple feat. There is a chance that we shall witness either newly improvised CJEU Cases that strengthen the principle of copyright exhaustion in the digital environment (this is clearly demonstrated in the UsedSoft Case,^[11] where the decision is based on trend and economic rationale despite the actual facts of the case). The CJEU encouraged the use of digital rights management in this seminal case but the application of these systems brings to the forefront dangers in the exercise of copyright limitations and exceptions. The predominant regulation of anti-circumvention measures, particularly in the EU, sweeps broadly, leading to a de facto extension of copyright. The future potential of the UsedSoft verdict in light of the prevalence of subscription based services (such as Spotify and Netflix), which merely offer limited access to digital content and Cloud-based services, where media is streamed over the cloud and accessed purely over the internet, will tip the balance. As the tangible status of the copy grows irrelevant in the EU, a similar question applies to the digital content stored and its fate. Digital exhaustion should be gracefully and carefully extended, taking into account the full consequences in the principle’s practice and in its proportional theory. After all, the community origin of the principle of exhaustion is tied to the regulation of the internal market and to the assurance of its competitive functioning with the hope of achieving an equitable balance between the individual interests of the copyright holder in controlling the number of copies of the original work released into the market, while harnessing the purchaser’s interest in retaining the ability to resell any individual copy he/she may own.  Striking that balanced chord remains the yolk of this principle’s challenge.