Is the supply of digital content a supply of goods or of services? Until recently, few would have had any difficulty in giving an unqualified answer to this question. Recent developments, however, suggest that the position may be changing.
The distinction between goods and services underlies a good deal of current law and regulation. In IP law, for example, the exhaustion of rights principle and the prohibition on parallel imports applies to goods but not to services. In consumer law, the consumer’s rights differ according to whether the consumer is buying goods or services.
Exhaustion of rights
In IP law, the conventional perception of exhaustion is illustrated by recital 29 of the 2001 Directive on copyright in the information society:
“The question of exhaustion does not arise in the case of services and on-line services in particular. … Unlike CD-ROM or CD-I, where the intellectual property is incorporated in a material medium, namely an item of goods, every on-line service is in fact an act which should be subject to authorisation where the copyright or related right so provides.”
Ten years on, that perception has been challenged by the Advocate General in the current pub football cases, which concern the question whether exclusive territorial licensing of live transmissions of Premier League football matches are compatible with single market principles and are currently before the European Court of Justice. In those cases (Murphy v Media Protection Services and FAPL V QC Leisure), the Advocate General has taken the opposite view of on-line services from that which appears in recital 29. She says:
“… Admittedly, some services differ from goods in that they cannot be re-used per se, for example the services provided by hairdressers. With the payment for the provision of the service the economic value is realised, but the service cannot be passed on as such. In this sense, there is actually no scope for an ‘exhaustion’ of the right to the service. … Other services, by contrast, do not differ significantly from goods. Computer software, musical works, e-books, films etc. which are downloaded from the internet can easily be passed on in electronic form. This is also illustrated by the fact that additional digital rights management measures are needed to prevent them being passed on.”
She therefore argues that to limit the application of two of the fundamental freedoms of the single market, the free movement of goods and the freedom to provide services, by a strict delimitation of goods and services would be “arbitrary”.
She goes on to argue that IP-based restrictions on the single market freedom to provide services, specifically the prohibition on using smart cards issued in one member state to watch the transmission in another member state, are not justifiable, notwithstanding that this means in effect that the rights in relation to that supply of services are thereby treated as exhausted. In other words, if her analysis is upheld by the ECJ, parallel trading in the right to watch the transmission, a service, will be outlawed in much the same way as parallel imports are outlawed.
In other words, in the context of digital broadcasting, and by extension the provision of music, films and other content on the internet, digital content is to be treated in the same way as goods notwithstanding that it is supplied as part of a service.
Download to own
A similar trend is emerging in the unrelated field of consumer rights. A draft Consumer Rights Directive has been proposed by the European Commission and is intended to replace a number of existing consumer protection directives. The Commission’s draft provides in the conventional way that digital content stored on physical media, such as CDs and DVDs, is to be treated as goods whilst content downloaded from the internet is to be treated as the supply of a service. The European Parliament’s recently published (January 2011) report has suggested otherwise, however, and has proposed a definition of “goods” that extends to any intangible item that is useable in a manner which can be equated with physical possession. It explains what it means in a proposed new recital as follows:
“Digital content transmitted to the consumer in a digital format, where the consumer obtains the possibility of use on a permanent basis or in a way similar to the physical possession of a good, should be treated as goods for the application of the provisions of this Directive which apply to sales contracts. However, a withdrawal right should only apply until the moment the consumer chooses to download the digital content.”
In other words, download to own would be treated as a supply of goods for the purposes of consumer rights. So, for example, consumer cancellation rights would be assimilated to the treatment of tangible digital goods such as a CD. Just as those rights would be deemed to expire as soon as the CD was unsealed from its packaging, so in the case of downloaded digital content they would be deemed to expire if the download takes place with the consumer’s express consent. Treating digital content as a “good” under the Directive would therefore avoid the problem of leaving consumers of downloaded digital content unprotected by many of the protections within the Directive which do not apply to the supply of services.
Some of the consequences may be difficult to manage, such as a suggested right of cancellation. The report acknowledges that a right of cancellation would pose some tricky practical problems, not least of which would be the question of how to prevent consumers who have exercised their right of cancellation from continuing to use the digital content, about which rights holders will have strong views.
Certainly, a general abandonment in relation to digital content of such a deeply embedded distinction as that between goods and services is likely to lead to a number of changes. If the ECJ follows the Advocate General’s opinion in the pub football cases, a radical rethink of digital licensing practices in Europe will be urgently needed. If the Council adopts the Parliament’s suggestion in the Consumer Rights Directive, consumer rights in online transactions for digital content will equally require a radical rethink. And other consequences will no doubt follow in other areas as well.
By Tony Ballard and Nicolas Murfett