Xu Jing, Partner and Zhao Ye, Associate, IP Litigation

According to the fundamental principles of Chinese courts concerning software resale, the resalability of software under different sales models may also be different.

A. Traditional sales model

Under the traditional model, the supplier sells to their clients a CD-Rom or floppy disk containing the software and enters into an agreement with the clients on the scope of license.

This model involves three relationships

1) The transfer of ownership of the medium carrying the software ;

2) The transfer of the copy of the software; and

3) The licensing of copyright.

Among these issues, the transfer of ownership of the hard copy is subject to property law, while the transfer of the copies of the software falls into the category of exercising the distribution right by the right owners under the Copyright Law, and the licensing of the copyrighted software relates to the defined licensing relationship between the copyright owner and the user under the Copyright Law.

As the sale of software sold under the said model is completed by transferring of the ownership of the medium containing the software, the doctrine of exhaustion of rights is applicable to this model. In practice, software can be resold without the consent of the copyright holder.

B. Corporate sales model

Since corporate users usually need a large number of licensed copies of the software, the suppliers do not usually provide corporate users a CD-ROM for each of the copies. Instead, corporate users are provided with a master copy and a certain number of licenses. From the view point of the Copyright Law, this sales model does not affect the relevant legal relationships which refer to the transfer of ownership of the medium, the transfer of the copy of the software and copyright licensing.

Under the corporate sales model, software is usually resalable as in the traditional sales model, if the sale involves the transfer of the medium carrying the software such as a master copy on a CD-ROM. However, if the corporate client only purchased the license right to use the software — for example, only paid for an increase in the number of software users — based on the current practice, it would be difficult to implement a lawful resale. In practice, the judges may also evaluate a sales activity according to the PRC Anti-Monopoly Law or the PRC Anti-Unfair Competition Law on a case-by-case basis.

C. Online sales model

The increased usage of the Internet and the expansion of bandwidth have caused fundamental changes to the sale of software. Software suppliers do not need to provide CD-ROM for their products; instead, they may direct their clients to the designated websites where the clients can download the software. After downloading the software on their computer, the clients can install and activate the software with the registration code or serial number provided by the software suppliers. Compared with the first two sales models, the possession of the medium containing the software does not shift from the suppliers to their clients. Therefore, this type of sale only involves transferring the copy of the software and licensing.

Online sale of software is merely an act of licensing. According to the Regulations on the Protection of Software Copyright, the copyright owner is entitled to all copyrights which are not clearly mentioned otherwise and the licensee shall not sub-license such rights. Therefore, unless otherwise specifically stated in a written agreement, reselling software by transferring registration codes or accounts infringes the copyright of the software owners and is prohibited by the existing PRC laws.

D. Sales of distributed software

As the Internet evolves, software no longer runs on stand-alone computers, instead, the actual running of software requires simultaneous running of both server software and the client software. A typical example of distributed software is online game software, where the distributors of online game software are also acting as server providers. These companies only provide clients with the installation software for clients’ computer with related use right license for logging on to the server. The sale of this type of software involves the license of the client terminal software and the server software, and the scopes of the said two licenses are also different. The license of the client software includes the authorization for client terminal software installation, copying and operation, and the license of the server software only grants the clients use right to access the server from their terminals. In other words, the former license grants the client’s use right under the Copyright Law, and the latter license merely allows the functional use of the software for the purpose of visiting a server.

The scope of license for distributed software varies since such software usually differentiates between client terminal software and server software. Therefore, whether distributed software can be resold and to what extent it can be resold should be decided on a case-by-case basis.