Earlier this year, a Court of Appeal decision in Computer Associates UK Ltd v. The Software Incubator  EWCA Civ 518 confirmed that software does not constitute ‘goods’ within the meaning of the Commercial Agents (Council Directive) Regulations 1993 (the Commercial Agents Regulations), reversing the previous High Court decision in the same case.
The Commercial Agents Regulations, terms of which are implied into all relevant commercial agency agreements, govern the relationship between principals and commercial agents. For the purposes of the Commercial Agents Regulations, a commercial agent is anyone who is a ‘self-employed intermediary’, whether natural person, company or partnership, and who has authority to negotiate ‘the sale or purchase of goods’ on behalf of another. The Commercial Agents Regulations offer certain types of protection for commercial agents, including entitlement to remuneration as well as entitlement to compensation or an indemnity on termination of the commercial agent’s contract (see our previous client alert).
Computer Associates (CA) entered into an agency agreement with The Software Incubator (TSI) to promote release automation software, which was sold by way of perpetual licence and supplied electronically by means of a download link.
CA terminated the agency agreement with TSI, alleging that TSI was in breach of its obligations by failing to devote ‘substantial time and effort to performing its obligations under the Agreement’, and by engaging in an activity that directly competed with CA’s software, in breach of certain restrictive covenants in the agreement.
TSI claimed damages for breach of the agency agreement and certain claims under the Commercial Agents Regulations, including, a termination payment based on the compensation method and an entitlement to commission for post-termination sales. The High Court held that the software was ‘goods’ for the purpose of the Commercial Agents Regulations, and that TSI was entitled to, among others, £475,000 in compensation pursuant to the Commercial Agents Regulations.
The Court of Appeal reached a unanimous decision that the licence to use electronically supplied software did not amount to a ‘sale of goods’ under the Commercial Agents Regulations as the grant of the licence did not involve any tangible property. The meaning of ‘sale of goods’ under the Commercial Agents Regulations is limited to tangible property, and this does not include software which has been electronically supplied.1 Delivering the judgment, the judge noted her discomfort with this conclusion and commented that the tangible/intangible distinction seemed artificial in light of technological developments. The Court of Appeal accepted that there was no logic in the decision that whether software was classified as ‘goods’ was dependent on the medium on which it was delivered or installed. Had the company or individual been sent a back-up disk that carried the software, then that software would have been tangible property, and the terms of the Commercial Agents Regulations would have applied to the agency agreement.
The Court of Appeal also accepted that it was impossible to explain why, for example, the supply of gas and electricity constituted a ‘sale of goods’ under the Commercial Agents Regulations, or indeed why gas and electricity were in any way more tangible forms of property than software.
Nevertheless, the Court of Appeal noted that the meaning of ‘goods’ was well established by previous case law. The court reviewed various cases to confirm that the tangible/intangible distinction determines ‘goods’, including European law authorities, sale of goods authorities as well as authorities under the Commercial Agents Regulations. The court noted that it was down to the legislators to create any kind of reform in relation to electronically supplied software.
Despite concerns that the tangible/intangible distinction for classification of goods may be an artificial one, the decision generally confirms the understanding in relation to circumstances in which software would be classified as ‘goods’ for the purposes of the Commercial Agents Regulations. Given the comments from the court and also the developments we’ve seen with digital media in other areas of the law (such as the Consumer Rights Act 2015), it should only be a matter of time before legislators consider the scope of the Commercial Agents Regulations and their application to software.