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Pre-Owned Product and the Law

Does the industry have the power to kill second hand sales?

Following the recent rumours that Sony's Playstation 3 would utilise a form of licence in a bid to prevent the sale of pre-owned titles, this article examines the legal implications of such a licensing scheme in the marketplace, as well as looking at some of the other issues arising out of games publishers' attempts to stem the sale of pre-owned games. We will also look at some of the options available to publishers in addressing this increasingly lucrative market.

Unlike pirated games, the pre-owned market involves the sale of genuine products that have already been sold to punters. The concern for publishers is that such copies do not feed back any further royalties into the industry and that the size of the pre-owned market threatens to stifle future development and income.

The Software Licence Model

Whilst software licensing is nothing new in the realm of PC gaming and software, the Sony proposal, if real, would go somewhat further by attempting to preclude the re-sale of the disk or its use on other PS3 consoles. The concept would be a radical departure from the current system, effectively tying the purchased disk to a single machine. The idea is based upon the consumer purchasing a licence to use the game, rather than acquiring ownership of the product itself.

Leaving aside the practicalities of creating such a form of licence and the various difficulties that might arise, for example, where the purchaser owned two consoles, it is difficult to determine the legal basis upon which Sony would be able to prevent subsequent resale of the disk. The consumer would have to agree to the terms of the licence itself, either through the use of a "shrink-wrap" agreement (whereby the user indicates acceptance to the terms of the agreement by opening the box, the enforceability of which remains unclear in both the EU and UK) or through a "click-wrap" agreement, where the user indicates their acceptance of the terms by ticking a box before installing the software onto their computer, and if they do not, the software will not install. Whilst both methods are common in the use of PC software, they have rarely, if ever, been seen in the console sector before.

The problem for console software is that it is still, despite the gradual maturing of the marketplace, aimed at young people and children, who could not be legally bound by a complicated terms of use licence. Even if a child were to indicate their acceptance to the terms, such a contract would not be enforceable and the courts would in all likelihood take a very dim view of any such practice. The licence would therefore either require a user to be over eighteen years old (a minor is anyone under the age of eighteen for litigation purposes in the UK) or provide a means of opt-out, which would presumably involve a circumvention of whatever form of registration the system would use.

Even if the game disk were to utilise a similar system to the PC model, the Sony licence would take this one stage further, by tying the disk to an individual console, presumably by marking it through an online verification system. Given that the disk itself would presumably not be changed physically by this process (unless there is some additional technology at work in the PS3 that we have not heard about), it is not easy to see how the licence would operate if the console were not connected online.

There are other problems that also spring to mind. For example, whilst a user could agree not to transfer his personal licence, the legal basis upon which Sony would be able to stop the user selling the physical disk that holds the licence is less clear. The contract would be personal between the user and Sony and it would not be enforceable against a third party. Notwithstanding that such a term may be unfair under the Unfair Terms of Consumer Contracts Regulations 1994 (given the detriment such a term would represent to the consumer and inequality of the parties' respective bargaining positions), the fact that the disk is unlikely to be physically altered means that it is difficult to see what measures could be taken that would comprehensively prevent the subsequent resale (and use) of the game. Whilst Sony could theoretically sue the original user (if they can be traced) for breaching the terms of their licence, the obvious practical difficulties of doing so, not to mention cost and negative impact on the company's goodwill, means that the rumoured licence scheme is unlikely to see the light of day.

If licensing is therefore not a viable solution, what other options are available?

The starting point is for publishers to consider their ability to control the resale of their games. Is there any means of redress? Unfortunately, the short answer is probably no. In the European Economic Area or EEA (which includes all EU countries), once goods have been put on the market in one jurisdiction, a publisher is deemed, under European law to have "exhausted" its right to control the resale of those goods in all those markets. Accordingly although there is little authority on this point, it would seem that a supplier cannot attempt to assert its rights in respect of those goods.

An in-depth examination of the ramifications of competition law on the ability of publishers to prevent or restrict the sale of pre-owned is beyond the scope of this article. The courts and related enforcement bodies adopt a purposive approach to competition law, meaning they will look at the underlying purpose (and the effects) of the agreement. Stated in the briefest terms, any manufacturer or supplier which sought to restrict the sale of goods to distributors, who agreed not to sell pre-owned games, could find itself in hot water. Any agreement (whether formal or informal) which has as its object or effect, the effect of distorting competition, or stopping and/or restricting the growth of the pre-owned market, may fall foul of the Competition Act 1998.

Conclusion

Clearly the options explored above are all, to some extent, unsatisfactory or unworkable for publishers. However, the digital distribution model can be very lucrative (although it presents its own problems by undermining physical retail). This in itself may prove to be a powerful tool for publishers in the future. The success of Xbox Live demonstrates that console owners are prepared to accept such a means of distribution, and the Live features included in the games help prolong the use and consequently the ownership of the product. Perhaps by building on this area, by focussing on maintaining and extending the life of the game, the industry may be able to stem some of the flow to the pre-owned market.


Brian Miller is a partner and Tim Shirley a trainee solicitor at Davenport Lyons. They can be contacted on 020 7468 2600 or at: bmiller@davenportlyons.com, tshirley@davenportlyons.com



Related Reading:

  • ELSPA has a wealth of information for publishers, codes of practice, piracy and other matters relevant to the UK games industry
  • The Office of Fair Trading provides guidance on the Competition Act 1998 together with notes for businesses.
  • Our original article on Sony's rumoured new licensing system and Sony's swift denial
  • Unfair Terms - this section of the OFT website provides information on unfair terms in consumer contracts

This article reflects the law and practice as at June 2006. It is general in nature, and does not purport in any way to be comprehensive or a substitute for specialist legal advice in individual circumstances.

(c) Davenport Lyons 2006

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