Member Article

Is the sale or purchase of software by an agent on behalf of its principal a sale or purchase of ‘goods’ for the purposes of the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) within the technology sector?

Following the Court of Justice of the European Union (the “CJEU”) preliminary ruling in The Software Incubator Ltd v. Computer Associates UK Ltd case, we move a step closer to a much-needed consistent answer.

The Regulations implement the Commercial Agents Directive (86/653/EEC) (the “Directive”) and provide a number of potentially significant protections for commercial agents where the sale or purchase of ‘goods’ are concerned.

When we consider what goods may be, we normally think of tangible items – physical materials, consumables, merchandise etc. The Directive dates back to 1986 and when the Regulations came into force in the UK on 1 January 1994, the world was very much at the start of the digital age. The first release of Microsoft Windows was only 8 years old, the Apple Mac was close to celebrating its tenth anniversary and the idea of mainstream social media was still a decade away. When you purchased software, you would typically go into your local electronic store, head to the relevant computer aisle and pick up a box and inside that box you would find your software in disk form alongside your guides on how to set it all up.

The world has changed remarkably over the last 30 or so years. New technologies have changed how we all live and the way that the world communicates, operates and progresses.

Often there is no box and no disk. Now, your software is more likely to be pre-programmed on to your laptop and updated for you automatically by your software provider whenever they want to make it safer or better to use. You often never actually have to do anything. If you want to change your laptop’s software, you can simply go online, buy it and download it. You may never have to leave your sofa and in many cases you will never actually see the software as you may have done previously.

So, when you look into it, the question of whether software can be classed as ‘goods’ is actually quite a challenge. Whilst you may be thinking it is an interesting point for debate, you may be questioning why this issue is an important point of law.

Well, consider this. Although commercial agents (as defined) are protected by the Regulations, these protections generally only apply in the UK to those agents who sell or purchase goods on behalf of their principal, not services.

These protections which may be significant and mandatory, include certain requirements for minimum notice periods for termination related to length of service, and may result in potentially substantial payments being due to an agent following the termination of the agency arrangement.

In terms of software, there is no indication in the Regulations as to whether it constitutes goods or services and currently much depends on the nature of the software in issue and how it is supplied to a principal’s customers. For example, until the UK Supreme Court decides otherwise, software supplied on discs or with hardware will be ‘goods’ for the purposes of the Regulations, but software that is downloaded will not be.

In 2016 the High Court found in The Software Incubator Ltd v Computer Associates UK Limited that software was ‘goods’ for the purposes of the Regulations even when it was supplied in an intangible medium. Computer Associates produced software which was supplied as a download and entered into an agreement with Software Incubator who agreed to promote the software in the UK and Ireland. Computer Associates terminated the agreement after Software Incubator entered into a similar agreement with a third-party.

Software Incubator sued Computer Associates for compensation under the Regulations. Computer Associates argued that as the software was provided by a download, this did not amount to ‘goods’ for the purposes of the Regulations. The High Court disagreed and found that a sale of electronically supplied software was a sale of ‘goods’ for the purposes of the Regulations.

After a series of appeals, the UK Supreme Court referred a number of specific issues on the Directive to the CJEU (as the agreement in this case was entered into while the UK was still a member of the EU). Firstly, does electronically supplied software amount to ‘goods’ and secondly, whether the supply of software by way of a perpetual and/or limited term licence to use amounts to the ‘sale of goods’.

Following this request, the CJEU has now confirmed for the purpose of the Directive that software, regardless of the medium on which that software is supplied including by electronic means and not on any tangible medium, can constitute ‘goods’ and the supply of software by way of a perpetual licence, in return for payment of a fee, can constitute a ‘sale of goods’. This preliminary ruling of the CJEU will now go back to the UK Supreme Court for its consideration.

Whilst this may now raise a number of considerations for example where an agent performs cross border activities in EU member states, in a post Brexit UK we are going to need to wait until the UK Supreme Court gives its decision in relation to the English litigation before we are likely to be fully able to understand the impact of this CJEU preliminary ruling.

It is clear however, in the meantime, that this could have significant implications for businesses that currently already have, or are thinking of appointing, introduction, marketing, sales or purchasing agents for software supplied in an intangible medium, especially in consideration of any post-termination payments.

The decision to classify software as ‘goods’ for the purpose of the Directive is further confirmation of the court’s willingness to accept a movement in time and technology and it will be interesting to see in the coming months and years how other ‘items’ which have been developed throughout the decades to become more digital and less tangible may be affected by this ruling.

If you have any queries or would like to discuss how this may impact your business, please do get in touch.