Exhaustion, Distribution and Communication to the Public – The CJEU’s Decision C-263/18 – TomKabinet on E-Books and Beyond


 In its Tom Kabinet decision,****See the text of the decision in this issue of GRUR International at DOI: 10.1093/grurint/ikaa041. The author wishes to thank Aaron Stumpf, Stefan Scheuerer and Laura Valtere for fruitful discussions. the CJEU took a further step in dealing with digital facts under the InfoSoc Directive. This decision on the sale of ‘second-hand’ e-books through a website has set a number of things in motion: besides distinguishing between the distribution right and the right of communication to the public, the decision also affects the exhaustion doctrine and the coherence of European copyright law.
 In the past few years, discussions about the so-called ‘digital exhaustion’ and related issues have increased enormously. A few days before Christmas 2019, the CJEU published its long-awaited judgment in case C-263/18, also known as Tom Kabinet, in which it decided that the sale of ‘second-hand’ e-books through a website constitutes communication to the public and therefore requires the consent of the rightholder.
 This opinion gives insights into why the Tom Kabinet decision was so eagerly awaited, what exactly was decided and whether the CJEU’s decision could fulfil these great expectations.


I. The issue at stake
Basically, the judgment was expected to answer the question whether the exhaustion rule -traditionally applied to analogue copies of a work -can be extended to cover acts of transmission as regards digital copies, enabling a permanent use of traditional works.
From a practical point of view, the outcome certainly has economic consequences since the existence of secondhand markets for e-books (as well as for other digital works) is at stake.
Upon closer inspection, the impact from a legal point of view is great on more than one level.
Obviously, there is the question whether a doctrine elaborated in the late 19th century 1 can cope with digital facts. In this case, it is especially questionable if the act of handing over a physical carrier and downloading can be treated equally.
Dealing with digital facts brings up another issue in the context of exhaustion: the natural use of the work after a potentially exhausted distribution. Since the enjoyment of a digital work -in contrast to the enjoyment of an analogue work -requires reproductions most of the time, which fall under Art. 2 InfoSoc Directive, a potential user needs permission for these technically necessary reproductions. If law cannot grant such permission, 2 the question arises if the permission of the first user could be transferred to the second user. 3 Broadening the picture, the issue of 'digital exhaustion' has arisen before with regard to the suitable exploitation right. Since at least de lege lata the exhaustion rule in Art. 4(2) InfoSoc Directive only applies to the limitation of the distribution right in Art. 4(1) InfoSoc Directive, the capacity of the distribution right regarding transfers without any physical carrier involved is already in question. 4 Taking into consideration an even wider perspective, the issue is not only related to copyright law. Since the exploitation of a work is essentially always based on contracts, rules enabling contractual positions can easily conflict with restrictions set by copyright law. It is especially doubtful if a granted possibility to resell 5 can be limited by copyright law -which could be the case if exhaustion is not applicable. 6

II. Context of the case
The CJEU's Tom Kabinet decision was expected to constitute a preliminary highlight in a row of decisions regarding the application of the exhaustion rule in the digital context.
When talking about this issue, one must distinguish between software and traditional works. This formal distinction 7 results from the fact that software is regulated in the Software Directive 8 and traditional works in the InfoSoc Directive. 9 Whereas after a while it became clear that the exhaustion rule can be applied when works (be they software or traditional works) are embedded in a physical data carrier that is handed over like a tangible book, 10 the question arose how to assess the situation when no such carrier is involved.

Software
Following a series of judgments that have paved the way regarding software, 11 the CJEU's renowned UsedSoft decision was a cornerstone for the application of the exhaustion doctrine in the digital context. In short, the CJEU ruled that the exhaustion doctrine can be applied to situations where a computer programme is lawfully put in circulation via download. 12 Since downloading and transferring a physical carrier were therefore treated in the same way, 13 the judgment was considered a paradigm shift 14 and of course heavily discussed. 15 It is by no means surprising that the idea to transfer this finding to the exhaustion (and also to the distribution) of traditional works became attractive. 16 2. Traditional works a) Download for temporary use (in the case of lending) In 2016, the CJEU was asked if lending e-books follows the same rules as lending analogue books. After stating that no binding law on a contrary view exists, the CJEU held in its Stichting decision that in the case of public lending, the transmission of digital and the transfer of analogue copies are comparable and should therefore be assessed in the same way. 17 This decision caused problems, at least for German law, according to which the right to lend is covered by the distribution right (Sec. 17 German Copyright Act) and the limitation of Art. 6(1) Rental and Lending Directive 18 regarding public lending is expressed inter alia in the exhaustion rule in Sec. 17(2) German Copyright Act. 19 Although the decision dealt with the special exploitation right of public lending, it raised expectations that the same technology-neutral approach would be applied to traditional works under the InfoSoc Directive. 20

b) Download for permanent use
The application of the exhaustion rule to downloading of traditional works for permanent use has not yet been decided finally on a European level. 21 The existing decisions by lower instances on a national level had different results: 22 whilst it seemed to be clear for German courts that the exhaustion rule cannot be applied to traditional works in the case of downloading, 23 the courts in the Netherlands tended to see it differently. Since the present dispute has a longstanding history which includes a previous lawsuit, not only all instances in that lawsuit 24 but also the referring court in the present case were not averse to applying the exhaustion rule. 25 To finally raise the tension, it seems that the academic discussion 26 is more or less equally divided between proponents of each side -pro and contra application of the exhaustion rule. 27 Unsurprisingly, when the Rechtbank Den Haag (District Court, The Hague) referred inter alia the second question to the CJEU -the application of the exhaustion rule to downloads -it was greeted with much anticipation. 28

III. The Tom Kabinet case
The Tom Kabinet decision deals on the surface with two related issues. One is the extension of exhaustion, as discussed above. The other is the differentiation between distribution and communication to the public.
At first glance, the judgment gives the impression that some exhaustion enthusiasts, longing for a detailed elaboration on this doctrine, will be disappointed. The CJEU only answered the first out of four referred questions, which was directed to the issue of applying the distribution right.
The Court decided that the supply of e-books via download for permanent use does not affect the distribution right (Art. 4(1) InfoSoc Directive), but rather the right of making available to the public as a subset of communication to the public (Art. 3(1) InfoSoc Directive). 29 Under this premise, the CJEU did not answer questions two to four, including the question regarding an application of the exhaustion rule in Art. 4(2) InfoSoc Directive.
However, this decision has a major impact not only on the distinction between the distribution right and the right of communication to the public but also on the exhaustion doctrine and beyond, which will be set out in the following part.

Facts
Tom Kabinet was operating an online platform called 'Tom reading club'. Tom Kabinet obtained e-books either from official distributors or from private persons and offered these e-books to its members via download for potentially permanent use. 30 The e-books on this platform could therefore be referred to as 'used' or 'second-hand' e-books, 31 though these terms are not without contradictions if one takes into account the nature of digital copies.
Tom Kabinet was aiming only to offer legally obtained e-books. Thus, the company attached a digital watermark to the e-books either when they were originally acquired by Tom Kabinet itself or when the members providing e-books declared not to have kept a copy of the book. 32 A fact that is not explicitly provided by the CJEU but crucial to understand the questions referred is that Tom Kabinet kept 50 cents for each traded book to forward to the authors and publishers, at the same time stating that they were not obliged to do so. 33 The CJEU not only answered one of the four questions referred but also reformulated this question. The reason for this approach in the view of the CJEU was to provide better grounds for the national court's decision. 34 Whilst this is not the first time the CJEU has applied this procedure, 35 it is not as simple as it seems at first glance. 36

The differentiation between the distribution right and the right of communication to the public
Before answering the question whether an exploitation right can be limited, it seems logical to first clarify which exploitation right, if any, could have been infringed by the defendant. 37 After emphasising that the question whether providing a download that enables a permanent use for one user 38 falls under the right of distribution 39 cannot be answered from the wording of the InfoSoc Directive, the CJEU begins with a systematic, historical and teleological interpretation of the InfoSoc Directive. 40 Finally, the Court denies the application of the distribution right but rules that the right of communication to the public is applicable. 36 The question referred in the disputed case could have been answered abstractly. By changing the question in the way the CJEU did, this was not possible anymore. Instead of a question about the scope of art 4 InfoSoc Directive, the question now regarded a fact (the supply of an ebook via download for permanent use) and asked for one of two possibly fitting exclusive rights. In theory, the CJEU therefore no longer needed to determine the exact requirements of art 4 InfoSoc Directive.
In the present case, uncertainties also arise. Since different transmissions of e-books were carried out (from Tom Kabinet to members but also from members to Tom Kabinet), the reformulated question creates uncertainty as to which particular transfer is under examination by the CJEU (see Kuschel (n 30) 138 f). It is not the reformulated question but the procedural constellation, the facts of the referring court and the answer the CJEU provided that make it clear that only the e-book transfer from Tom Kabinet to customers could be the subject of both the referring and the reformulated question. The CJEU based its decision to a large extent on its understanding of certain terms of the InfoSoc Directive, the WCT 41 and the explanatory memorandum of the European Commission.
It should be mentioned that the terminology 'tangible and intangible copies' 42 that the CJEU uses as a key element in its line of argument is (once again) 43 controversial. A copy seems by its very nature to always be tangible. It makes no difference if a work is incorporated in paper or in an electronic device -since only a material fixation is necessary, both are referred to and treated as tangible copies. 44 Thus, one should rather differentiate the ways of dissemination: if an analogue copy (e.g. a normal book) is handed over from one person to another, the copy itself is in circulation. On the other hand, if a digital copy that is embodied in an electronic device (e.g. an e-book in a tablet) should be transmitted to a second user, the copy remains tangible but is not in circulation -it is the data (in a transmittable form) of the e-book file, e.g. via download, that is being circulated. 45

b) The Court's decision
The Court comes to its conclusion by stating that the term 'original and copies' in Art. 4 InfoSoc Directive (the distribution right) only refers to copies that are put into circulation as physical objects. The CJEU derives this finding from the requirements of international law (Agreed Statements concerning Arts. 6 and 7 of the WCT). 46 Further, electronic and tangible dissemination should be treated differently. The Court refers here to the explanatory memorandum of the European Commission 47 and a variety of recitals in the InfoSoc Directive. 48 Whereas the citation of some recitals might be part of a regular repetition the Court routinely uses to back its arguments (e.g. recitals 2, 5, 4, 9 and 10, in which the Directive aims to respond to technical progress and strengthen the right of the author), 49 recitals 28 and 29 in particular more specifically regard the issue at stake since they assess the exhaustion rule.
The CJEU provides another argument on the interpretation of the distribution right according to its understanding of the exhaustion rule in Art. 4(2) InfoSoc Directive, which is that the distribution right should control the initial circulation of only a physical carrier. 50 These arguments, mainly based on the assumed intention of the legislator, are already known but not substantial for everybody. 51 However, the result, which is applicable to all other traditional works (such as music or movies) regulated under the same directive, is convincing as such. It confirms the systematic understanding of the distribution right and the right of communication to the public as partly practiced at the national level. 52 Moreover, the finding is not very surprising considering that, in its previous decisions, the CJEU had already explicitly highlighted the distinctive nature of the InfoSoc Directive at least in relation to the Software Directive. The Court even indicated its intention to decide in a different manner than in its previous decisions regarding software. 53 Beyond analysing the wording of the InfoSoc Directive, the WCT and the explanatory memorandum of the European Commission (rules which were not initially intended to grapple with the great impact of digitalisation), 54 the CJEU at one point takes into account the values involved: rightly, the Court points out that the transfer of a book and the transmission of an e-book are not comparable. 55 If a teleologically balanced interpretation is considered the goal, this finding constitutes a sound argument. 56 But since the CJEU only argues that ebooks do not lose quality and therefore that second-hand markets deal with perfect substitutes, such feared economic consequences could merely be the starting point of further distinctions.
It should also be mentioned that it could be far easier to transfer a digital copy than an analogue copy. This finding goes along with the idea that digital copies cover another public since recipients worldwide could at least in theory be supplied via download. Most notably, analogue copies are economically characterised by scarcity -digital copies are not. One option to reconstruct a digital form of scarcity is applying the 'one copy one user' model, which only enables one recipient to use a digital copy. This in turn causes considerable practical hurdles like proving the seller's guarantee of incontestably deleting his or her copy. 57 This was also a serious issue in the post-UsedSoft era regarding software. 58 Seeing that the differences seem convincing, one might ask why the same should not hold for software or lending? Sure, due to its special features 59 software was and is a disputed exotic phenomenon in copyright protection, and lending (especially public lending) creates challenges of its own kind. 60 But after all, software is awarded with protection just as a written work, and lending, like every other form of exploitation, must deal with the barriers this exploitation brings along. 61 One can already see here that the effects of the Tom Kabinet decision go beyond the answer to the first question.

The impact on the exhaustion doctrine
The direct effect on exhaustion is apparent. Stating that ebook supply via download enabling a permanent use falls only under the right of communication to the public entails that the exhaustion rule in Art. 4(2) InfoSoc Directive, which is linked to the distribution right, is not applicable. Moreover, Art. 3(3) InfoSoc Directive dictates that the right of communication to the public cannot be exhausted.
But that is not all. It is generally acknowledged that a copyright-protected work must be embedded in a perceivable form (be it on paper, sound waves, data or others) to be protected. 62 Even if copyright protection by its very nature as an intellectual property right protects only intangible goods, 63 the exploitation rights are more or less linked to the perceivable form. The CJEU itself stated that the exhaustion rule refers to an object and not to the work as such. 64 As a logical consequence, the question arises what the object of reference as regards the exhaustion rule could be.
This issue was raised already before the digital transformation. In Germany, the Federal Court of Justice (BGH) applied exhaustion to retransmission in the broadcasting process. 65 It was not until two decades later that the BGH slightly altered its view under the influence of international law. 66 In the end, three relevant subjects of exhaustion are conceivable regarding the dissemination of a copyright-protected work: 67 • physical carrier, • data, • legal position. 68 When it comes to the transmission of digital copies via download like in the present case, no physical carrier is involved and the particular data set is unlikely to be 'transferred' but rather reproduced. 69 This brings the possible subject of exhaustion to a transfer of the legal position which enables the natural use of the work. 70 The same is even more apparent concerning the streaming technology where data is only temporarily reproduced . 71 The CJEU's decision on the distribution right also defines the subject of exhaustion: since the exhaustion rule in the InfoSoc Directive is de lege lata linked to the distribution right -which the CJEU acknowledges by not answering questions two to four here -exhaustion can only limit what the distribution right covers. According to the decision at stake, this is only the transfer of physical carriers. This view might have already been indicated in the Allposters decision. 72 However, the CJEU now leaves no room for doubt. It becomes especially clear with the Court's argument regarding the distribution right based on an understanding of the exhaustion rule in Art. 4(2) InfoSoc Directive, which according to the Court only covers the circulation of physical copies. 73 This finding also has consequences for the second user: since transferring the legal position is not possible, permission to use a digital work in its natural way (usually by reproductions) cannot be received via exhaustion.
Even though this finding may have the consequence that exhaustion only applies to the transfer of physical goods, it should also be noted that no definite answer was given to the general question if the legal position to use the work could be passed on to a second user. Possible solutions beyond the exhaustion doctrine are already under discussion 74 and will probably be further developed.

The larger impact
Beyond the specifics of the case, the Tom Kabinet decision has far-reaching effects which are worth taking into consideration.
Even though different directives and regulations exist in copyright law, they are all united under the goal of achieving a balance of the involved interests when an intellectual creation is awarded copyright protection. Thus, all of these rules should be seen and treated as one copyright law. Under this premise, it is generally requiredand desired by the CJEU 75 -that terminology and concepts contained in different directives are interpreted in the same way. 76 With such an approach, the systematic coherence and unity of the European Union legal order can and should be reached. 77 When assessing the transmission and exhaustion of digital copies, the interpretation of at least three terms and concepts is crucial: 'copy', 'distribution' and 'sale'. 78 a) InfoSoc Directive vs. Software Directive and Rental and Lending Directive Obviously, the question arises of how the findings in Tom Kabinet regarding the InfoSoc Directive go along not only with the UsedSoft decision as regards the Software Directive but also with the Stichting decision as regards the Rental and Lending Directive.
Whereas in UsedSoft and Stichting the Court considered the term 'copy' to encompass digital and analogue variants, 79 it states in Tom Kabinet that under the InfoSoc Directive 'copy' is only to be understood as analogue copy. 80 As a consequence, the distribution right also differs between the Software and the InfoSoc Directives: the latter only covers the transfer of physical copies 81 while the Software Directive also factors in transmission via download. 82 Although in Stichting the exploitation concerned lending as opposed to distribution, 83 the very same exploitation right covers the temporary transfer of physical carriers and downloading. 84 One key argument in UsedSoft was the extended interpretation of the term 'sale' in Art. 4(2) Software Directive. 85 Because the Court did not answer the second question in Tom Kabinet, which was explicitly directed to the application of the exhaustion rule, it is not clear whether the CJEU also aims at a deviating interpretation as regards the term 'sale' in the InfoSoc Directive. However, if one day the CJEU needs to take a position on this matter, the new directives -2019/770 on certain aspects concerning contracts for the supply of digital content and digital services and 2019/771 on certain aspects concerning contracts for the sale of goods -should also be taken into account.
Obviously, the three decisions can hardly be united under a common abstract idea. Upon closer inspection, it is not the Tom Kabinet decision that lacks doctrinal coherence. The application of the distribution right to download was already unconvincing in UsedSoft. 86 One might even struggle to follow the Stichting decision since the wording of Art. 2(1) b; Art. 1(1) Rental and Lending Directive is also not really fitting for lending digital copies. 87 It should further be added that the differing treatment of terms did not arise first with Tom Kabinet but was already stated in Stichting. The CJEU differed here between lending rights and rental rights regarding the application of the same rule in the very same directive. 88 b) The legal principle of exhaustion When it comes to the various applications of the exhaustion doctrine, it gets even more delicate.
The exhaustion doctrine is widely acknowledged as a legal principle. 89 Over the years, it has been codified in law both in many member states at the national level 90 and ultimately also at the European level. One significant function of every legal principle is to treat comparable facts in a comparable way. 91 The incoherent treatment of exhaustion regarding software and traditional works is not in line with this idea: whereas the CJEU has acknowledged -not only in UsedSoft but also in subsequent decisions -that due to the exhaustion principle even the transfer of the legal position does not need the rightholder's consent, 92 the Court does not apply this view when it comes to traditional works.
Although codified in separate directives, the different application of the very same doctrine is irritating, especially because the wording of these directives does not evoke different interpretations. To be more precise: even though the InfoSoc Directive might imply that the exhaustion rule cannot be applied to downloading, the wording of the Software Directive does not explicitly require an application in the same situation. 93 Moreover, the exhaustion doctrine has been applied for decades without being codified. 94 In German patent law this is still the case: here, the exhaustion principle is assumed to be rooted in customary law. 95 The exhaustion doctrine was a concept principally independent of any specific provisions. With its recently inconsistent application, the legal principle's inherent function of coherence is in danger of not only creating a rule/exception relation but of falling apart.
Besides theoretical concepts, one particular issue is the increasing relevance of hybrid products containing a combination of software and traditional works. 96 A good example is that of computer games, which are already an established part of the entertainment industry. These are regulated by both the Software and the InfoSoc Directives because a computer programme and traditional works (e.g. storytelling and music) are encompassed in such games. 97 Different rules for the same product are unlikely to increase legal certainty on how or if to sell and resell such products. 98

c) Evaluation
How to explain the differences outlined above? The answer the CJEU gives in Tom Kabinet -which it has given before 99 -is quite formal: the legislator intended to treat digital and analogue copies in the same way as regards the Software Directive but not as regards the InfoSoc Directive. 100 The different directives may formally legitimate the Court's view. However, considering the whole picture, the diverse treatment regarding the same terminology, same exploitation rights and same limitations (exhaustion) is in contradiction to the aforementioned function of coherence in copyright law. 101 Ultimately, this is not a mistake caused by the Tom Kabinet decision. It is rather the case that the previous decisions, UsedSoft and Stichting, were focused on market sectors and raised doctrinal issues 102 that could not generally be adopted. At a certain point this approach could no longer be maintained: that is when the CJEU made its Tom Kabinet decision.

IV. Conclusion and ways forward
In the end, the question remains if the Tom Kabinet decision could have fulfilled the aforementioned high expectations. 103 The CJEU decided that reselling e-books via download requires the permission of the rightholder. Thus, from a practical point of view, the issue is solved.
From a theoretical point of view, it is only partly solved. By interpreting the scope of exclusive rights, the CJEU also drew consequences regarding the subject of the exhaustion rule in Art. 4(2) InfoSoc Directive. The way the CJEU chose to get to its ruling (the wording of rules and recitals which were implemented before the existence of many digital business models) may not offer great insights about the legal principle of exhaustion as such, but after all, this is the approach the CJEU is expected to take. Thus, in principle, the judgment is to be welcomed.
However, this should not hide the issue underlying the positive law: how far should the rightholder's exclusive right (may it be the distribution right or the right of communication to the public) be extended?
One could start with the exhaustion doctrine and argue to release this principle de lege ferenda from the distribution right. 104 But maybe it is slowly becoming time to move away from this doctrine, including its dogmatic frame, and strike out in new directions. One way would be to revitalise the roots of exhaustion -a contractual construct according to which the rightholder implicitly gives his or her consent to forward and use a copyright protected work ('implied licence'). 105 Whether such implied consent regarding digital works can be extracted of the rightholder's own free will seems doubtful. Fully featured consent can hardly be imputed and consent in the sense of the 'one copy one user' model 106 seems too artificially construed. However, the possibility to override a person's implied consent via an explicit contractual restriction (and ultimately technical measures) hinders an effective mechanism.
Another discussed possibility would be an assessment by competition law, which limits anticompetitive effects of copyright (over-)protection even if specific copyright limitations (like exhaustion) do not apply. 107 But here, doubts remain as to whether antitrust law and its requirements are really helpful and effective in the specific situation. 108 Since trading with physical carriers is decreasing, contracts regarding access to copyright-protected works come more into focus. Whether the new directive regarding contracts for the supply of digital content and digital services 109 can help remains to be seen. At the very least, the interpretation of Art. 8(1) a Directive 2019/770 regarding 'normal use' 110 could provide new options for the future. It will be interesting to see if and how broad the contractual position will be interpreted and whether that could ultimately lead to any limiting effects on copyright law.