Why the CJEU may rock the boat of software audits

Is non-compliance with a software licence a copyright infringement (i.e. a tort), or a breach of contract?

This question is intensely debated by professionals of the software industry, as some of its major actors (SAP, Oracle) tend to audit their licensees and sue them for copyright infringement afterwards. That may all change as the Court of Justice of the European Union (CJEU) is being asked to decide the question definitively.

The current approach

In 2016, the Paris Court of Appeal decided in a landmark decision to reject Oracle’s copyright claims against its licensee, finding that Oracle had acted “in bad faith and disloyally”.

Since then, it has been commonly accepted that, at least under French law, any breach of a software licence agreement was a matter of contractual liability rather than copyright infringement.

On 16 October 2018, the Paris Court of Appeal had a chance to clearly confirm, or reject, this principle. It did neither of those and, instead, decided to ask the CJEU.

What was the dispute about?

IT-Développement, a software publisher, had concluded with Free Mobile, one of France’s four telecom operators, a licence and maintenance agreement aimed at monitoring the deployment of 4G antennas in France. In order to satisfy some specific needs, Free Mobile had taken the liberty of modifying the software’s operation (new forms were created). IT-Développement, considering that the agreement expressly prohibited such modification, sued for copyright infringement.

With its claims dismissed by the first instance court, IT-Développement lodged an appeal, asking the Court of Appeal, on a preliminary basis, to refer to the CJEU the following question:

“Is non-compliance with a software licensee (including using a software after a trial period, allowing more users than authorized, or modifying the source code whereas this right is contractually reserved to the licensor):

a. an infringement (within the meaning of EU Directive 2004/48 of 29 April 2004) to the copyright holder’s exclusive rights (as defined in Article 4 of EU Directive 2009/24 of 23 April 2009 on computer programs)

b. or does it fall under another legal regime, such as the ordinary contractual liability regime?”

In accepting to do so, the Court took into account the facts that:

• no provision of French or EU law expressly provides that infringement actions are reserved to cases where the parties are not contractually bound; and
• the French IP Code expressly authorises patents and trademarks licensors to sue their licensees for infringement when the licence terms are breached (articles L. 613-8 and 714-1).

A highly anticipated decision

The answer to this question is not without interest, for two reasons:

First, concerning the pre-litigation period and collection of evidence, should the CJEU rule that breaching a software license is a copyright infringement, software publishers could resort, in France, to the very powerful saisie-contrefaçon (seizures, granted ex parte, of allegedly infringing goods and/or administrative and financial documents relating thereto, often performed on the alleged infringer’s premises). This procedure will undoubtedly strengthen their strategic position if an audit reveals a breach.

Second, as regards damages, the amounts awarded in successful infringement actions are often much more significant than in contract cases (especially since, in intellectual property rights cases, the court can take into account all the “negative economic impacts” of the infringement, including profits made by the infringer).

Should the CJEU find a breach of a software licence to be a tort, software providers may be emboldened to more aggressively pursue non-compliance with licences. But whatever the result, with businesses ever-more reliant on an array of different software solutions, this case highlights the need to pay close attention to the terms of software licences.