Software licence exhaustion: what ValueLicensing v Microsoft means for resale
In short: Software licence exhaustion is the principle that once a copyright owner has sold a copy of its software, it cannot use copyright to control the resale of that copy. On 7 July 2026, in ValueLicensing v Microsoft [2026] EWCA Civ 872, the Court of Appeal dismissed Microsoft’s appeals and allowed a reseller’s competition claim over pre-owned licences to proceed.
Businesses that buy and sell pre-owned software licences have faced years of uncertainty about whether the original vendor could use copyright to block the resale. A Court of Appeal decision handed down on 7 July 2026 has resolved part of that uncertainty in the reseller’s favour. The court declined to allow Microsoft to rely on copyright to defeat a competition damages claim brought by a licence reseller, and confirmed that software licence exhaustion can reach software delivered by download rather than on a disc.
Key findings in ValueLicensing v Microsoft
- The Court of Appeal dismissed both of Microsoft’s appeals, one on jurisdiction and one on the copyright issues ([2026] EWCA Civ 872).
- The Competition Appeal Tribunal was entitled to decide the copyright questions that arose inside the competition claim, rather than sending them to the High Court.
- Exhaustion of the distribution right, recognised by the Court of Justice in UsedSoft (Case C-128/11), extends to copies of software sold by download, not only to physical media.
- The presence of graphic elements, or “non-program works”, such as icons and user interfaces did not defeat exhaustion of the software as a whole.
| Issue on appeal | What Microsoft argued | What the Court of Appeal decided |
|---|---|---|
| Jurisdiction | The copyright issues had to be decided by the High Court, not the Tribunal. | The Tribunal had jurisdiction to decide the copyright issues; appeal dismissed. |
| Non-program works | Exhaustion could not apply because the software contained graphic works, whose copyright was not exhausted. | The graphic elements were integral to the software; exhaustion of the whole was not defeated; appeal dismissed. |
| Subdivision of volume licences | A reseller cannot disaggregate a bulk licence and sell part of it. | The Tribunal’s distinction between a single multi-user copy and a genuine volume arrangement was upheld; appeal dismissed and the claim proceeds. |
The regulatory background to software licence exhaustion
Exhaustion is a limit on copyright. Once the copyright owner, or someone with its consent, has sold a copy of a work in the United Kingdom or the European Economic Area, the owner’s right to control the distribution of that particular copy is exhausted. The buyer can pass the copy on. In the United Kingdom the relevant restricted act is the issue of copies to the public under section 18 of the Copyright, Designs and Patents Act 1988, which does not catch the later sale of a copy already put on the market in the United Kingdom or the European Economic Area with the owner’s consent. That domestic right is read with two pieces of assimilated EU law that survived Brexit: the Software Directive (2009/24/EC) and the Information Society Directive (2001/29/EC). Since Brexit the United Kingdom has kept the UK+ exhaustion regime, under which a first sale in either the United Kingdom or the EEA exhausts the UK right, although a first sale in the UK does not exhaust rights in the EEA.
The pivotal authority is the Court of Justice’s 2012 decision in UsedSoft (Case C-128/11), which held that the distribution right in a computer program is exhausted by a first sale even where the program was supplied by download and licensed for an unlimited period. Later decisions refined the boundary: Tom Kabinet (Case C-263/18) declined to extend the same treatment to e-books, and Nintendo (Case C-355/12) addressed technical protection measures. That case law was applied as assimilated law in force at the material time, and neither party asked the court to depart from it. The competition claim itself was brought under the Chapter I and Chapter II prohibitions in the Competition Act 1998, at section 2 and section 18, and the Treaty equivalents for the earlier period.
Exhaustion under UsedSoft is subject to conditions. Exhaustion of the distribution right arises on the first sale, provided that sale was for an unlimited period against a price reflecting the economic value of the copy. On resale the first acquirer must stop using the copy it has sold; if it does not, it may infringe the reproduction right, but that does not undo the exhaustion of the distribution right, which has already happened. UsedSoft also limits subdivision. An acquirer of a single server copy licensed for several users cannot resell part of that user capacity while still using the same copy. The Tribunal distinguished that from a genuine volume arrangement made up of multiple independent copies or licences, where resale of a corresponding number can be permissible once the first acquirer no longer uses them. On the cross-border point, the court recorded that the applicable law was the EU law in force during the claim period, and that neither party invited it to depart from assimilated EU case law.
What the Court of Appeal decided on software licence exhaustion
ValueLicensing resells pre-owned perpetual licences for Microsoft products, including Windows and Office. It claims that Microsoft foreclosed the market in second-hand licences through contractual restrictions and by moving customers onto subscription models, and it seeks damages for abuse of a dominant position and anti-competitive agreements. Microsoft’s defence had a copyright limb: if the copyright in the software had not been exhausted, ValueLicensing had no right to resell, was itself infringing, and the competition claim would fall away. The Tribunal decided a set of preliminary copyright issues in ValueLicensing’s favour in November 2025 (JJH Enterprises Ltd (t/a ValueLicensing) v Microsoft Corporation [2025] CAT 75, [2026] Bus LR 161), having earlier rejected Microsoft’s challenge to its jurisdiction, and Microsoft appealed on both.
The Court of Appeal dismissed both appeals. On jurisdiction, it held that the Tribunal could determine the copyright questions that arose within the competition claim; the copyright defence did not have to be carved off to the High Court. On the substance, it confirmed that the UsedSoft principle applies to downloaded software, and held that graphic works integral to the product did not prevent exhaustion of the software as a whole. On subdivision, the court examined the limits UsedSoft places on reselling part of a bulk or volume licence. ValueLicensing’s competition claim now proceeds to trial on its merits.
A defendant can no longer separate an embedded intellectual-property question into different proceedings, with the delay and cost a parallel forum entails. The Competition Appeal Tribunal can determine the copyright issue as part of the competition claim it is already hearing. That lowers a practical barrier to foreclosure claims where the defence rests on an intellectual-property right, and removes a means of dividing such a claim across two forums.
Commercial implications for vendors, resellers and buyers
The most exposed party is the software vendor that has built its distribution and pricing model on the assumption that a licence, once sold, stays with the original customer. The ruling confirms that copyright is not a reliable means of preventing a secondary market in perpetual licences delivered by download, and that a copyright argument cannot be used to strike out a competition claim. Whether a contractual restriction or a change of licensing model raises competition-law exposure is the assessment set out in Bratby Law’s regulatory perimeter and market entry page. When a vendor migrates customers from perpetual licences to subscriptions, that migration is itself open to examination for its effect on the resale market, rather than being a neutral commercial choice.
The decision supports the legitimacy of a market in pre-owned licences for resellers and their customers, subject to the conditions UsedSoft imposes, including that the first acquirer stops using the copy it has sold. A lawful secondary market can mean materially lower software costs for buyers. On a corporate transaction the transferability of a target’s software estate and the drafting of its licensing terms are diligence points that carry real value, and licence drafting is where most of the practical risk now sits; Bratby Law’s commercial and technology contract support and transactions pages address both.
The decision changes less than it first appears. Exhaustion applies to the resale of a copy that has been sold; it does not turn a subscription, which is a time-limited service, into something a customer can resell, and it does not stop a vendor building new products around subscription from the outset. What a vendor cannot safely do is sell perpetual licences, then use contractual resale restrictions or a forced migration to close down the secondary market, and expect copyright to defeat the competition claim that follows. For buyers and resellers, the evidence that each condition of a lawful resale has been met is what turns the principle into a defence to an infringement claim, so that record is worth preserving.
Viewpoint
The interest in the decision lies less in the exhaustion doctrine than in the treatment of the copyright defence. UsedSoft settled the download point in 2012, and the Court of Appeal has applied it rather than restated it. The operative step is the court’s refusal to allow a copyright defence to dispose of a competition claim before it is heard. A supplier that restricts resale and then migrates its customer base to subscriptions cannot assume that copyright will remove the competition question from the proceedings. The practical issues are the terms of the licence, the mechanics of any subscription migration, and whether either has the object or effect of foreclosing a secondary market. Those questions sit at the intersection of copyright, competition and digital-markets regulation.
Frequently asked questions
What is software licence exhaustion?
Software licence exhaustion is the rule that once a copyright owner has sold a copy of its software in the United Kingdom or the European Economic Area, it cannot use its distribution right to prevent the resale of that copy. The buyer may pass it on. The first acquirer must stop using the copy it has resold, though that goes to a separate reproduction-right question rather than to whether exhaustion happened.
Did Microsoft win or lose the appeal?
Microsoft’s appeals were dismissed. On 7 July 2026 the Court of Appeal dismissed both appeals in ValueLicensing v Microsoft [2026] EWCA Civ 872, one on whether the Competition Appeal Tribunal could decide the copyright issues and one on the copyright issues themselves. ValueLicensing’s competition claim proceeds.
Does exhaustion apply to downloaded software and subscriptions?
Exhaustion can apply to perpetual licences for software supplied by download, following UsedSoft (Case C-128/11). It does not fit a subscription, which is a time-limited service rather than the sale of a copy. That difference is one reason a shift from perpetual licences to subscriptions can attract competition-law scrutiny.
What does the ruling mean for buyers of second-hand software?
It supports the legitimacy of a market in pre-owned perpetual licences, which can lower software costs. A lawful resale still depends on the reseller showing an unbroken chain of title, and on the first acquirer having stopped using the copy it sold. The second point goes to whether there has been a separate reproduction-right infringement, rather than to whether the distribution right was exhausted, which happens on the first sale.
For advice on software licensing, resale restrictions or the competition-law exposure of a change in licensing model, contact Rob Bratby at Bratby Law.
