Triumph for the Small Print: Consumer Rights in Virtual Products

April 13, 2014

Recent technological advances have brought about significant changes in the way that we consume creative content. Although it’s easy to exaggerate the phenomena, it’s fair to say that we are experiencing a considerable shift in our focus away from the ownership of hard-copy mediums (such as books, CDs and DVDs) towards the purchase of licensed products, which are either downloaded or streamed via an internet-connected device and can be watched by consumers on-demand. The pool of statistics on this topic is vast. For risk of drowning, let us simply dip our toes in: in 2012, UK sales of music stored on physical products dropped by 30%, while downloads increased by 8.5%. In the same year, US consumers streamed more movies online than they watched via DVDs.[1] Netflix users alone have watched over 2 billion hours of streamed video (that’s roughly 55 hours per user). Sales of e-books are predicted to overtake their printed counterparts in 2014[2]. The music-streaming service Spotify makes more than 20 million songs available to 24 million users, with the International Federation of the Phonographic Industry (IFPI) now describing it and other music subscription platforms as ‘integral part[s] of the recorded music market’.[3]

The rapid growth of the virtual world has been accompanied by increasing levels of public debate. Of these, privacy and piracy have been at the fore. The impact on consumer rights is less discussed, yet the uptake of licensed products has had an interesting impact here. The UK government has recently updated the UK’s consumer protection laws with the aim of ensuring that purchasers of faulty digital products enjoy the same level of protection at law as those who purchase faulty hard-copy products, which seems logical. However, these reforms do not address the fundamental issue that purchasers of licensed products do not have the levels of security and freedom of use enjoyed by purchasers of physical products.

Of course, virtual delivery isn’t all bad for consumers. Increased choice over the way content is consumed, an ability to interact with content in a more personalised manner and – where a subscription to content is purchased (as with Spotify or Netflix) – alternative pricing models, are just some of the benefits of digitally-delivered content. However, many consumers may be under an illusion of ‘ownership’ when it comes to products which are, in fact, licensed to them. Many are unaware that the legal rights they associate with ownership of a hard-copy product (such as the rights to lend, sell or bequeath) are typically restricted by the small print of an online licence. For many consumers making the switch from hard-copy ownership, this will come as a complete and unpleasant surprise.

This article will examine some of the ways in which the scope of a consumer’s ownership rights may be narrowed when accepting the terms of a digital licence. In doing so, it will also explore some of the implications for consumers, businesses and the content itself. 

‘This time next year we’ll be millionaires’: second-hand licences

The grandly named ‘exhaustion of rights doctrine’ (or, less excitingly, ‘the right of first sale’) applies to ‘tangible articles’[4] such as books, DVDs and CDS. This doctrine demands that when a consumer purchases, say, an album on a CD, then so long as they purchased the CD with the content owner’s permission, they will have the legal right to resell the CD to another person. The doctrine provides that, once the music company has sold a CD, its rights in that individual CD are exhausted, so the music company cannot restrict the consumer from reselling the CD. Copyright still prevents the consumer from making and distributing copies of the CD, but essentially the consumer can transfer  ownership of the CD to whomsoever he or she wishes. The exhaustion of rights doctrine can be thought of as the backbone of second-hand markets.

Virtual’s second-hand backbone

Currently, EU legislation appears not to allow for such exhaustion in the context of licensed products, prescribing that: ‘Unlike CD-ROM[…], where intellectual property is incorporated in a material medium […], every on-line service is in fact an act which should be subject to authorisation’.[5] Such authorisation is granted within the terms and conditions that consumers agree to when they click ‘I accept’ during the sign up process to an online platform. When consumers sign up to iTunes, for example, he or she agrees that any creative content purchased and downloaded through the iStore is provided to them by way of a licence and can only be used for personal, non-commercial use. The right of first sale – a key, protected right for tangible products – is therefore restricted by the licence terms.

However, a recent decision from the Court of Justice of the European Union suggests that such a restriction may not always be effective[6]. Although specific facts were at play in the case, the CJEU nevertheless held that a download of a computer program could in theory be sold on to a third party, second-hand, despite the fact that the licence underpinning the download specifically prohibited that act. So the principle of exhaustion appears to apply to – at least – downloaded computer programs (albeit downloads involving the sale of a product, rather than streaming or renting). This finding has led to a fair amount of consternation from rights holders. The extent to which exhaustion can apply to works other than computer programs is not clear. A separate CJEU case seems to suggest that the exhaustion principle will only apply to pure software, and may not apply to other forms of copyright content which are (apparently) more deserving of protection due to their being ‘unique’ and ‘complex’ multimedia products.[7]

As may be expected from an uncertain legal situation, an established market practice for second-hand licensed products has yet to emerge. Evidence of a nascent market can still be found, but it is subject to strong headwinds. Creative industries have in the past acted aggressively to counter efforts to start up virtual second-hand markets. The US music industry recently mounted a legal challenge against ReDigi, a web site which claimed to be the world’s first pre-owned digital marketplace. Amongst other things, the industry argued that the US equivalent of the exhaustion of rights doctrine did not apply to products bought under licence.

It is important to understand industry’s concern here, which in part stems from the lack of deterioration of licensed digital products compared to their tangible equivalents. CDs almost seem to have a will to be tarnished, scratched or otherwise irreparably damaged; they are hardly the most resilient of objects. This eventually leads to vast amounts of copies being thrown out. This drives up demand for new CDs, which in turn drives up music industry revenue. The lifespan of a digital download, by comparison, is potentially infinite, subject to you being able to find players that will recognise obsolete file formats, of course. This offers the consumer greater product security and integrity than they may have received with an easily tarnished CD, and the associated reduction in demand for the content hurts industry revenue.

But second-hand markets can be big business. It seems inevitable that, in time, a dominant player will emerge who will shape market practice and shake up some of the restrictions found in virtual licensing models. Apple and Amazon have both applied for patents relating to marketplaces for pre-used, digitally downloaded goods. It may take the resources of one of these Silicon Valley giants to negotiate around the concerns of right holders before the pre-used market gets off the ground. But, for now, consumers purchasing licensed products will need to continue to at least tick the box to accept the licensor’s prohibition against re-sale of the licensed product (but, given the CJEU’s rulings discussed above, they might have cause to wonder if that prohibition is worth the source code it is written in).  

‘You should read this book (in 14 days or less)’

The consumer’s right to lend is also different between tangible and licensed products. Thankfully it is perfectly legal for you to lend a book to your friend. It is also very easy; you just hand it straight over and wait for the friend to return it. This can potentially be quite a long wait. Lending an e-book can be more complicated as this act may be subject to the restrictions of the associated licence. Currently, Kindle book owners can only lend eligible titles within their collections. In addition, they can only lend a particular title once, and for a maximum of 14 days. If it’s a tome, the borrower will need to be a fast reader.

Outside the personal sphere, there has been much debate in the UK about the role of e-book lending by libraries. Rights holders are concerned with the ease with which consumers could access e-books through libraries. With hard copies, consumers must travel to the local library, and even then there’s no guarantee that the book you’re after will: (1) be there or (2) be in a decent condition (or (3) that the library will be in a decent condition). That puts many people off. With digital download, you could borrow a pristine digital copy of a book from the comfort of your home. In that case, why would you ever spend money buying it?

A government review of e-lending in public libraries recently recommended that the ‘digital loan of a book should emulate its printed counterpart’.[8] The review’s author, William Sieghart, suggested that digital copies of books should be deemed to deteriorate, therefore ensuring their eventual repurchase. Perhaps, as is the case with real-world products, were an individual digital copy to be ‘borrowed’ a great deal of times, it would be deemed to deteriorate quicker than a copy which is only ever ‘borrowed’ occasionally. This is a fascinating concept, and it remains to be seen whether Sieghart’s recommendations relating to deemed deterioration will be taken up as part of licensed products generally. 

‘I’m sorry, Dave. I’m afraid I can’t do that’: DRM restrictions

The ability for rights holders to deploy digital rights management (‘DRM’) technologies to protect their content is another key difference between tangible and intangible products. DRM technologies allow rights holders to restrict the use of digital products by consumers following purchase. Although DRM is not exclusive to digital products, digitisation permits a much broader array of DRM restrictions to be attached to creative content. In a similar way, the licensing model can also be used to broaden the scope of possible DRM restrictions, such as the well-known requirement for consumers to create an account with a username and password which must be inputted in order to gain access to content. Certain streaming services (such as blinkbox) will only allow consumers to access licensed content purchased through the platform if the device you watch the content from is in the UK. The transfer of products from one kind of device to another – even if both devices are under the ownership and control of the same person – may also be restricted.

The EU recognises that DRM technologies are important weapons in a rights holder’s arsenal against piracy. That being the case, EU member states are required to provide legal protection to rights holders against pirates who circumvent or break DRM restrictions. However, recent case law from the CJEU suggests that DRM cannot be used to prevent copying where such copying is exempt from protection under applicable national copyright law.[9] If that is the case, any DRM technology that prohibits an activity not restricted by copyright, rights related to copyright or the sui generis right in databases could be legitimately broken by consumers. Perhaps the right to sell a digital download second-hand, as suggested by the CJEU case law discussed above, falls into this category.

Restrictions are typically established by platform providers as a result of the provisions and scope of the licences they negotiate with rights holders. However, the negotiating position of the platform shouldn’t be understated. As noted above, the IFPI recognises Spotify to be an integral part of the recorded music market, and Radiohead’s Tom Yorke recently highlighted that the platform is loved by record companies because it allows them to ‘re-sell a lot of their old stuff… [and] make a fortune’.[10] The wording of Apple’s iStore licence is of interest here. It states that, ‘As an accommodation’ to the consumer, consumers may download purchased products on up to 10 ‘Associated Devices’. It is hard to know who is ‘accommodating’ the consumer here: the rights holders or Apple. Presumably it is the rights holders: Apple wouldn’t want a consumer’s decision to update to the new iPhone scuppered just because the consumer would not be permitted to listen to their music on their 11th device.

There are also practical issues which impact DRM use. As no DRM technology is guaranteed, tech-savvy consumers can often break DRM restrictions. In addition, the use of DRM technologies is controversial, and rights holders may be faced with significant policy issues when implementing these technologies. Anti-DRM lobbying groups argue that the use of DRM creates inherently faulty consumer products, making perfectly legal and legitimate activities – exercisable where DRM is not in place – impossible.

Consumer backlash can result in DRM-technologies being wound-up. So it was that Microsoft was forced to make a U-turn with respect to its use of DRM technologies on the XBoxOne. Microsoft had intended to restrict gamers’ ability to share games, impose region-locking on the console and require users to be online at least every 24 hours. All of these restrictions were dropped in the face of fierce consumer criticism. And it could be said that, in the context of the music industry at least, the use of DRM is so widely discredited that many sellers choose to sell music which is DRM-free.

However, DRM compatibility is currently on the table to be introduced into the new HTML standard. For the time being, at least, DRM use will continue to impact the rights of consumers over their licensed products. 

‘Don’t leave me this way’: what happens when your provider goes bust?

Nothing hurts quite like a breakup, except perhaps a breakup where your ex keeps all of your favourite CDs, DVDs and books. Purchasing licensed products with the intention to store these in a cloud environment and access them later (rather than downloading them to a device) carries the risk that the cloud provider goes bust and you are left with no content whatsoever.

In 2013 Acetrax, a video-on-demand service which was purchased by BSkyB and integrated into that media giant’s over-the-top rental services, was switched off. You could not subscribe to Acetrax, but you could pay to rent and watch a film within a set period of time or to purchase a film and store it in Acetrax’s cloud until you were ready to download it. Users who rented had to watch their films by 21 June or they disappeared. Users who had purchased content had a month to review their catalogues and download that content. However, the download process was complicated due to the DRM technologies that had been applied: the download could only be made to a PC, could not be transferred to any other devices and was available only in standard definition (even if an HD version had been purchased by the consumer). Irritatingly for consumers with large libraries, the process also required the user to play the film for five minutes in order to validate the licence. Luckily, refunds were also available. Acetrax demonstrates some of the risks to consumers of purchasing digitally downloaded content as opposed to the tangible counterpart. 

I’ve proved to be as difficult to convert as I am to hypnotize‘: format shifting

Format shifting is the process of converting a digital file into a different format so that it can be played on a different device (for example, ripping a copy of a CD on to the hard drive of your computer). Many consumers do this, and have done for many years: indeed, format shifting played a key role in the success of early digital players such as the iPod. Yet many consumers do not realise that, under UK copyright law, format shifting is a restricted act, despite being lawful in the USA, Australia, Canada and most other European countries. This causes some difficulties for consumers who have content playable on a device which breaks and where a replacement device is no longer available.

Virtual platforms have had some success at achieving rights holder concessions to the format shifting rule, allowing some consumer content to be played across a range of devices. For example, iTunes Match enables users to access their music libraries across the full range of devices they own, in return for a yearly fee. In a similar vein, Amazon’s AutoRip service effectively carries out the format shifting on the individual’s behalf: when you buy an AutoRip album in hard copy, Amazon will automatically upload the MP3 version to your Amazon Cloud Player.

The Intellectual Property Office has recently suggested that there be a narrow private copying exemption within the UK’s copyright law regime which will allow consumers to copy content they legally own to another device for their own personal use[11], but as at the time of writing this is not law.   

To my eldest son, my virtual record collection…

I doubt that a bequest of my CD / DVD collection would do much to ease anyone’s grief following my death. In fact, it could make things worse. If I could pass on my download collection, that would be another story: there’s some great stuff on my iTunes account. But most virtual platforms do not permit consumers to bequeath their licensed content to their nearest and dearest. Unlike death, there is a relatively easy way around this obstacle – you could leave your password and username to your next of kin in your will. However, this appears to be outside (at the very least) Apple’s licence terms, with its plain order of ‘Don’t reveal your Account information to anyone else’. In addition, and from a practical perspective, doing so would require your beneficiary to oscillate between their ‘genuine’ account and your account, which is cumbersome.

I have found when discussing this particular restriction with non-lawyers that very few stop to consider this rather grim difference between tangible and digitally downloaded products at the time of purchase. I have also found that raising the issue results in a level of awkwardness, possibly because of the bleak context. Recent press articles set Bruce Willis against Apple, with the action hero instructing lawyers to consider establishing a family trust in order to ‘hold’ his music collection for his descendants.[12] Of course, the story is apocryphal, and as a creative content producer, Willis himself is ultimately a beneficiary of this situation: the descendants of a Die Hard film fanatic are required to repurchase the same five films that their antecedent purchased, thereby increasing Willis’ royalty stream.  

The death of ownership?

Let’s leave the morbid tone of previous section to explore an overarching theme: does the move to licensed downloading and streaming services for music, films and e-books mean that the very concept of owning a music, film or book collection is dying out?

There are those who are immensely proud of their DVD box sets which adorn the walls and floors of their homes. Are such people particularly attached to the physical copy of these DVDs, or would the download version suffice? Most tablets have ditched the CD player, and smart TVs are increasing in prevalence. Of course, some consumers have never been particularly attached to the physical copies of films, as it is fairly rare that they would watch the same film more than once (and the same could well be said for books).

Music is slightly different as people tend to listen to the same album again and again, so perhaps to these consumers it makes more sense to ‘own’ the copy that they purchase.  Yet, for this writer, the concept of a tangible music collection has seemed outdated ever since the iPod.

Surely the book will remain; the oldest of the tangible products discussed in this article and the most resilient. Little compares to the smell and feel of a book, and I wholeheartedly agree with Ray Bradbury’s view that e-books ‘smell liked burned fuel’. Casting an eye over someone’s book collection can be highly informative (as well as occasionally resulting in feelings of superiority). But how comfortable would you feel if someone were to casually ask to have a look through your e-book library? Still, I am sure even a bibliophile like me could be tempted away from tree-destruction by a highly competitive pricing model.

If there is an ongoing, slow death of tangible ownership, what does this mean for the product itself? There is something compelling and powerful in owning something that you can touch. Ownership imbues a sense of investment in, and dedication to, the content it accompanies, a sense which is strengthened when you can actually lay a hand on the product itself. The physical implies a sense of permanence and durability. In addition, the way a physical product is put together – be that the way a book is bound, the art work accompanying a CD or the blurb on the back of the box set – can be informative and can enrich the consumption of the work. This can all lead to a more critical and focussed approach to the content housed within that tangible article, which ultimately makes the interaction with the work more fulfilling. Digitally downloaded products – and the restrictions of the licences that accompany them – lead to a sense of a product which is somehow less permanent than the tangible counterpart, and perhaps something in the interaction between artist and audience is lost as a result.

Even if consumers do turn away from hard copy products and towards licensed copies, they are still faced with the choice of downloading the digital title or renting/streaming it on an on-demand basis via subscription services. Even here, the concept of ownership of the downloaded digital title is under a very real threat by the (often) attractively priced alternatives. Why not sacrifice some of the freedoms associated with ownership in order to pay a smaller monthly subscription and gain access to any music, film or book you wish to consume, on any device, anywhere? 


Most consumers are unlikely to be aware of the restrictions imposed by digital licences. After all, who reads the small print? Digital platforms seem to be getting better at using summary boxes to point out key restrictions, especially around DRM, but (understandably) they don’t tend to emphasise the difference between tangible ownership and digital download or streaming. Greater consumer awareness is to be encouraged – possibly through marketing practices – but this author is under no illusion that the legal subject matter at play here is seen as worse than dull to the average consumer.

And even if consumers were made aware of the restrictions, would that really affect their economic choices? Function and price tend to drive consumer choice, not the law, and digitisation can rightfully claim to offer consumers some excellent advantages over their hard copy cousins.

As with many things in the virtual world, consumers seem either not to be aware of the impact that legal processes are having on their rights or not to care. This leads to choices being made without the full facts, which can result in shock or surprise to the consumer while simultaneously strengthening the IP rights and revenue streams of rights holders and digital platforms. Overall, then, a triumph for the small print.

Scott Allardyce is an Associate working in the Commercial IP/IT Department at Bristows




[4] Directive 2001/29, Article 28.

[5] Directive 2001/29, Article 29.

[6] UsedSoft GmbH v Oracle International Corp (C-128/11)

[7] It is hard to see how it is of benefit to the EU economy that an MP3 of a school band’s execrable cover version of ‘Roxanne’ is not subject to the exhaustion doctrine but that the coding for a pure software product (for example, the algorithms that govern real time air traffic control over the UK) is. 

[8] ‘An Independent Review of E-Lending in Public Libraries in England’, William Sieghart, March 2013.

[9] VG Wort v Kyocera (C?457/11 to C?460/11), and see also the Advocate General’s opinion in Nintendo Co. Ltd v PC Box Srl (C?355/12)