ValueLicensing v Microsoft, GTA 6, and the death of the physical videogame

On the first of the month, Sony announced that it would cease to produce physical PlayStation games at the start of 2028, meaning that from then on, new games would be released only in digital form.

This all followed the announcement by Rockstar Games in late June that it would not be releasing physical copies of Grand Theft Auto 6 – touted by the FT, of all publications, as the biggest entertainment product in history, capable of “uniting the world”¹.

Despite significant gamer backlash, both Sony and Take-Two Interactive (owner of the Rockstar Games label) have reiterated their commitment to digital-only distribution.

Much of that backlash related to the demise of the second-hand market for games, which would be heralded by a move to digital-only. In IP terms, legitimate resale of protected material is governed by the doctrine of exhaustion, which provides that a rightsholder cannot prevent resale of articles put on the market by them or with their consent. The CJEU has held that exhaustion cannot be contracted out of².

Why, therefore, given exhaustion, are gamers so concerned about the end of physical games?‍

ValueLicensing v Microsoft‍

The second event of note (in this regard) over the summer was the Court of Appeal’s judgment in ValueLicensing v Microsoft [2026] EWCA Civ 872. Unusually for one directed at copyright, the judgment arose out of a preliminary decision before the Competition Appeal Tribunal (“CAT”). The case ultimately goes to the question of to what extent IP rights permit a proprietor to control secondary markets. That question is likely to become increasingly important as the software and entertainment industries continue their shift from ownership models to licensed digital access.

By way of background, ValueLicensing (“VL”) is a vendor of pre-owned licences for Microsoft software, including Windows and Office. They brought proceedings against Microsoft before the CAT, on the basis that Microsoft had offered discounted Microsoft 365 subscriptions to companies migrating from old, perpetual versions of Microsoft Office and who agreed to terms providing that they would not resell their old perpetual licences. VL asserted that these “anti-resell” terms were anticompetitive and that it was entitled to £270m in compensation for lost sales.

Microsoft raised two preliminary issues, asserting that:

• its software comprised “complex matter”, being a combination of software and other works (in this case, comprising, for example, graphical icons), and that its rights were not, therefore, exhausted; and
• that its sale of bulk (e.g. 100-seat) licences did not exhaust its rights in individual licences (in other words, that resellers were not allowed to break up bulk software licences and to sell access individually).

If it was right on either point, VL’s resale of software would comprise copyright infringement, and it would not therefore be entitled to any compensation for lost sales.

Did ValueLicensing v Microsoft suffer from the law of exhaustion?

For those of a legal persuasion, paragraphs 30-78 of the Court of Appeal judgment summarise clearly the development of the law of exhaustion, its effect on software, and the (significant) related complexities. The key points are that:

1. There is a distinction between a rightsholder’s right (the “distribution right”) to object to the distribution of copies of a work (e.g. the sale of software on a CD), and to object to the communication to the public of a work (e.g. via streaming or subscription).
2. Exhaustion is clearly provided for in relation to the distribution right, and is not provided for in relation to the communication right. A grey area arises, however, in relation to the distribution of downloadable works.
3. Most works (eg images or literary text) are governed by the law pursuant to 2001’s Infosoc Directive³. As interpreted by case law, where (as is often the case) online communication of these works falls under the communication right, it cannot therefore be exhausted.
4. Software, however, is governed by 2009’s Software Directive. It provides⁴ for a distribution right in respect of software, regardless of whether distributed via a tangible or intangible medium. In other words, downloadable copies of software are covered by the distribution right. And, under the Software Directive, the distribution right can be exhausted.

In summary, the law distinguishes between software and most other digital content. Rights in downloaded software are much more likely to be subject to exhaustion than those in downloaded books, music, films and similar digital works.

In this case, if rights in Microsoft’s software were deemed exhausted, they would be unable to argue that VL’s resale was infringing, and therefore to rely on copyright infringement to avoid the competition law claim. The distribution of mere software distributed via download, however, is exhausted in most circumstances, and Microsoft was therefore fighting an uphill battle. It relied on two arguments.‍

ValueLicensing v Microsoft asks whether software is “complex matter”

Microsoft’s first attempt to avoid this difficulty was to argue that its software is “complex matter”, following the CJEU’s judgment in Nintendo⁵. There, a question arose as to whether videogames were mere software. The CJEU held that their reliance on graphics, storytelling, music and other media meant that they really stay within the regime of the Infosoc Directive, and could not therefore be exhausted where digitally distributed.

Microsoft attempted to rely on this judgment by pointing to graphical and audio elements of its software (for example, icons within Office), and asserting that it comprised “complex matter” and was therefore not subject to exhaustion. The Court of Appeal gave this position short shrift. It relied on the CJEU judgment in Tom Kabinet⁶, which dealt with ebooks. There, the computer program underpinning the functioning of the ebook was ancillary to the purpose of the ebook (namely to be a book). Therefore, Infosoc applied, and exhaustion was excluded.

Here, the Court found the opposite – the core purpose of Microsoft’s software was to be computer software, and the other works that sit within the software are themselves ancillary. Therefore, the Software Directive applies to Microsoft’s works, and they are subject to exhaustion.‍

Subdivision in the case of ValueLicensing v Microsoft‍

Microsoft also attempted to rely on UsedSoft. There, the CJEU had prevented the resale of some licences from a packet of bulk licences in relation to Oracle software. If the equivalent applied here, then Microsoft’s sale of bulk licences would not have exhausted its right to prevent the onward sale of individual licences.

However, the Court of Appeal was clear that UsedSoft related to specific circumstances; the Oracle software in question granted a licence to access a single copy of the software stored on a server, and it made sense to prevent subdivision in those circumstances, because the bulk licences were tied to the server software and not independent.

Conversely, Microsoft’s bulk licensing is to a bundle of equivalent standalone software, and is therefore divisible. It had therefore exhausted its rights via the bulk sale of licences.‍

Nintendo, Microsoft and the death of physical videogames

It is somewhat serendipitous that a series of case law involving Nintendo and Microsoft appears to have paved the way for Sony to kill off physical games. The Microsoft judgment, on the basis of Nintendo, holds that the sale of digital videogames does not lead to exhaustion (and therefore closes down the market for the sale of second-hand digital products).

The restrictiveness of digital games distribution is reflected by the terms and conditions of some of the industry's biggest players. By way of example, the terms and conditions for Steam⁷ provide that its users are “subscribers”, and that purchases grant access to (rather than ownership of copies of) game content. Likewise, Sony’s PS5 software EULA is clear that software is licensed, not sold, to users. From a practical perspective, digital videogames distributors do not provide functionality to allow for second-hand sales; even if such sales were not restricted by copyright law and contract, there would be no practical way to facilitate such sales.

Concerns about the impact of Sony’s move away from physical media and its effect on a second-hand market are therefore wholly justified, despite the Microsoft judgment. Videogame ecosystems will be left in a position in which there is no avenue for resale, and an important source of price competition will disappear.

Whether that is considered to be abusive will ultimately be a question for the competition lawyers. Competition authorities have previously intervened where companies have used control over an ecosystem or technical platform to restrict downstream competition, whether in relation to telecoms networks, PC operating systems, search engines or mobile app stores. It would not be a surprise if Sony’s move were scrutinised once it starts to have an impact.

For now, Sony's move away from physical media serves as a useful reminder that copyright and competition law often address the same commercial issue from opposite directions. The Court of Appeal judgment illustrates the limits that copyright law places on downstream control. The next question may be whether competition law is asked to step in where those copyright limits no longer apply.‍

As a specialist IP solicitor advising businesses across the creative, gaming, and technology sectors, Mark Nichols specialises in the evolving relationship between copyright and competition law. If this blog has raised any questions or you’re facing similar issues, please contact Mark today.

1. "Forget the football — Grand Theft Auto can unite the world", subscription only‍
2. UsedSoft v Oracle Case C-128/11 at 77
3. Thankfully, all EU law relied on in the Court of Appeal judgment was pre-Brexit, and assimilated into UK law
4. As interpreted by UsedSoft‍
5. Case C-355/12
6. Case C‑263/18
7. Owned by Valve, and the largest digital distributor of PC games