Significant change in protection afforded to software resellers who act as agents – UK Supreme Court ruling on point awaited

In a much-anticipated judgment, the Court of Justice of the European Union (CJEU) has ruled that the supply of computer software by electronic means only (and not on any tangible medium) can be the supply of a "good" within the meaning of the Commercial Agents Directive 86/653.

This is important because the Commercial Agents Directive provides protection to commercial agents who have continuing authority to negotiate, or to negotiate and conclude, the sale or purchase of goods only (and not services). "Goods" is not defined in the Directive, nor in the Commercial Agents (Council Directive) Regulations 1993, which implement the Directive in Great Britain.

What is the background?

In 2018, in this long-running case, the Court of Appeal (CA) held that software supplied to a customer electronically did not constitute a "good" within the meaning of the Commercial Agents Directive. The software that the agent, Software Incubator, was promoting and selling on behalf of its principal, Computer Associates, was provided electronically via an email which contained a link to an online portal from which the customer downloaded the software. The software was never provided using any tangible media, and the CA would not go behind the judge's finding of fact that such software was intangible property. Precedent had not on the whole held intangible property to be "goods". The CA was of the view that reform in this area must come from the European legislature and/or the UK parliament and not through its own judicial interpretation. The court also felt it was relevant that the Consumer Rights Directive (CRD) had created a new category of legal contract for the supply of digital content – rather than widening the meaning of "goods" to include electronically supplied software – and did not feel that this development should be ignored simply because the CRD concerns consumers.

The CA therefore concluded that Software Incubator was not a "commercial agent" because the software it was promoting and selling was not a "good". Consequently, Software Incubator was not entitled to compensation when Computer Associates terminated its agency agreement.

Software Incubator challenged the decision before the Supreme Court, which then referred two questions to the CJEU. First, whether a copy of computer software supplied to customers electronically, and not on any tangible medium, constitutes "goods"; and secondly, whether computer software supplied to customers by granting a perpetual licence to use constitutes a "sale of goods", each within the meaning of those terms in the Commercial Agents Directive.

The CJEU ruling

In its ruling, the CJEU considered that the term "goods" means products which can be valued in money and which are capable, as such, of forming the subject of commercial transactions. From this, the CJEU concluded that software can be classified as a "good" regardless of the medium on which that software is supplied. It noted that the use of the term "goods" in the various language versions of the Commercial Agents Directive does not indicate any distinction dependent on the tangible or intangible nature of the relevant goods. It noted secondly that, as established in UsedSoft, from an economic point of view, the sale of a computer program on a physical disk, and by downloading from the internet, are similar because they are functionally equivalent.

The CJEU also ruled that computer software supplied to customers by granting a perpetual licence to use a copy of that computer software does constitute a "sale of goods". A "sale" is an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him. And the CJEU took the view that making available a copy of computer software by means of a download, and the conclusion of a licence agreement intended to make that copy usable by the customer, permanently, in return for the payment of a fee corresponding to the economic value of that copy, does involve the transfer of the right of ownership of that copy.

Consequently, it held that the paid supply of computer software to a customer by electronic means where that supply is accompanied by the grant of a perpetual licence to use, can be covered by the concept of "sale of goods".

What happens next?

The Supreme Court stayed the proceedings before it while it referred its questions to the CJEU. It made that referral before the end of the Brexit transition period which expired at 11pm on 31 December 2020. Despite the end of the transition period, the Supreme Court can choose to have regard to the decisions of the CJEU made after 31 December 2020 and, given the referral, it is expected that the Supreme Court will apply the ruling of the CJEU to the case before it.

Doing so will represent a shift from the current position set out in the CA decision.

Osborne Clarke comment

We now await the Supreme Court judgment. If the Supreme Court follows the CJEU ruling, this will represent a significant change in the protection afforded to software resellers who act as agents. Many will now be protected by the Commercial Agents Regulations and, in many instances, will be entitled to a payment on termination of their agency agreements. Software companies may now want to consider reviewing their agency contracts, and the structuring of their reseller relationships, to reduce this risk - where possible - in the event of termination.

It is not immediately clear whether software which is licensed on a subscription basis, and which is not accompanied by the grant of a perpetual licence, would fall within this ruling. Such software may now be a "good" (given that software can be classified as a "good" regardless of the medium on which it is supplied). But it is perhaps arguable that software which is centrally hosted and accessed by the customer but not downloaded, and which is accessible on a subscription basis only, will fall outside of this ruling because there may not be a "sale of goods". This ruling therefore leaves open questions as to how it should be applied to various software-as-a-service (SaaS) models.

Notwithstanding this issue, this is an important ruling that will affect software companies and their resellers/agents alike.

You can read the full judgment here.