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Good news for resellers, bad news for developers: CJEU rules software to be a "good"

Posted on 8 October 2021

The Court of Justice of the European Union (the "CJEU") in The Software Incubator Ltd v Computer Associates UK Ltd has decided that computer software supplied under a perpetual licence by electronic download is a 'sale of goods' under the EU Directive relating to commercial agents, implemented in the UK by the Commercial Agents (Council Directive) Regulations 1993 ("CAR").  The CJEU's ruling follows questions for interpretation that were referred by the UK Supreme Court in May 2019. Under the terms of the UK/EU Withdrawal Agreement, and because the reference was made before the end of the Brexit transition period, the CJEU's decision is binding on the UK courts as retained EU law, though it will be possible for the Supreme Court to depart from this approach.

The CJEU's decision focuses on a specific factual scenario: where a relationship exists between a software development company ("developer") and an agent/reseller ("reseller") for the marketing and sale of computer software by electronic download that is accompanied with a perpetual licence, that relationship is bound by the CAR. As a result, such resellers may be entitled to certain post-termination payments from the developer in accordance with the CAR.

Background

Computer Associates marketed computer software and granted its customers, by electronic means, licences to use the software. These licences could be granted indefinitely, or for a limited period of time but, in practice, most licences were granted to customers indefinitely.

Computer Associates entered into a reseller agreement with The Software Incubator, under which The Software Incubator was tasked with promoting, marketing and selling the software in the UK and Ireland.

On 9 October 2013, Computer Associates terminated the agreement and The Software Incubator sought compensation under the CAR. These offer significant protection to commercial agents, including the right to post-termination payments upon the termination of a commercial agency relationship. The CAR apply to commercial agents who have the authority to negotiate the 'sale of goods' for another person. 

The High Court concluded that the relationship between the parties was a commercial agency contract and in the context of the supply of computer software by electronic means, accompanied by the grant of a perpetual licence, it did constitute a 'sale of goods' for the purposes of the CAR. The Software Incubator was awarded £475,000 in damages.

However, the Court of Appeal reversed the High Court decision, noting in particular that the question of whether software should be defined as 'goods' was a policy issue that should be resolved by the UK and EU legislatures, as appropriate.

On further appeal, the Supreme Court decided to stay the proceedings and refer two questions to the CJEU:

  1. Where a copy of computer software is supplied electronically, does it constitute a 'good' within the meaning of the Directive?
  2. Where computer software is supplied with a perpetual licence to use a copy of the computer software, does that constitute a 'sale of goods' under the Directive?

CJEU Decision

As the Directive does not define 'sale of goods', the CJEU noted that it must be determined by considering its usual meaning in everyday language.

The CJEU found that the term 'goods' means products which can be valued for money, and which are capable of forming the subject of commercial transactions. It therefore covered computer software as this has a commercial value and is capable of forming the subject of a commercial transaction. Further, software could be classified as 'goods' irrespective of whether it is supplied on a tangible medium or, as here, by electronic download.

A 'sale' meanwhile is an agreement by which a person, in return for payment, transfers to another person their right of ownership in an item of tangible or intangible property belonging to them. Following previous case law, the CJEU has determined that making computer software available by means of a download and intending to make the copy usable by the customer, permanently, in return for a fee, constitutes the transfer of the right of ownership in that copy.

Accordingly, the CJEU concluded that computer software supplied by electronic download together with the grant of a perpetual licence is covered by the concept of 'sale of goods' within the meaning of the Directive.

The case will now return to the Supreme Court for it to consider the CJEU's ruling, and its potential implications. For example, it was noted before the Court of Appeal that maintaining the distinction between tangible and intangible medium led to an undesirable result from the perspective of commercial agents. 

Practical consequences

As a consequence of this decision, developers may now have to reconsider the relationships they have in place with resellers – particularly where resellers are given a wide remit to license software on a perpetual basis. Any termination of such relationships will need to be handled with care and considered up front when entering into a contract. Under the CAR, an agent has the right either to "compensation" (i.e. the right to be compensated for the damage it suffers as a result of the termination) or an "indemnity" (i.e. to reflect the notional buying out of the agent from the agreement), although "compensation" is generally the default position. Generally speaking, principals prefer the "indemnity" route, in particular as this is capped at one year's commission, so it is important that this is considered at the time of the agreement between the reseller and developer. 

In addition, while a significant proportion of software licences are not perpetual, it remains to be seen whether the granting of certain perpetual rights, for example over materials that are often referred to as foreground intellectual property or bespoke materials, would also provide the reseller with additional rights pursuant to the CAR.

However, there is some comfort for developers who may fear that this decision will open the floodgates. A reseller must notify its intention to bring a claim under the CAR within one year of the termination of the arrangement, which limits developers' liability to agreements currently in force, or those that have been terminated in the past 12 months. 

It is yet to be seen if this  decision that software sold by electronic means is a 'good' will have a wider impact beyond the specific scenario, especially in the context of other areas where disputes have arisen as to how software is to be treated, such as tax and consumer-related law. 

The Court of Appeal was particularly concerned that a finding that electronically supplied software was a good could have 'unintended consequences' in a number of areas, including: the creation of proprietary rights presenting a preferential position for customers in the event of an IT company's insolvency; the recognition of information as property; and the creation of a new offence under the law of theft.

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