knowledge 5 October 2021 |

CJEU Finds that Software Supplied Electronically with Perpetual Licence is a ‘Sale of Goods’ Under Commercial Agents Directive

By way of background, a commercial agent under the Commercial Agents Directive is a ‘self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person’ (emphasis added) or ‘to negotiate and conclude such transactions on behalf of and in the name of that principal’.  The Directive does not apply to the sale of services.

The Commercial Agents Directive has been implemented in Irish law by the European Communities (Commercial Agents) Regulations 1994 and 1997 (the “Commercial Agents Regulations”).  The Commercial Agents Regulations provide for various protections in favour of such self-employed intermediaries.  One of the more important and notable protections for such commercial agents is a statutory right to compensation for the agent on termination of the agency contract.

Summary of case and ruling

In case C-410/19, The Software Incubator Ltd v Computer Associates (UK) Ltd, the CJEU was asked to rule on whether the concept of a ‘commercial agent’ having authority to negotiate the ‘sale of goods’ applies in the case of a supply of software by electronic means to the customer where the use of that software is governed by a perpetual licence. 

The underlying national proceedings related to the sale by The Software Incubator of Computer Associates’ data centre automation software under an agreement with Computer Associates.  That agreement permitted The Software Incubator to act on behalf of Computer Associates to approach potential customers in the UK and Ireland for the purposes of promoting and selling such software.  After only a few months, Computer Associates terminated the agreement with The Software Incubator and The Software Incubator brought an action in the English High Court for compensation for termination of agency under the Commercial Agents Directive on the basis of the UK law implementing that directive.  Computer Associates disputed the classification of the relationship between the parties as being one of commercial agency.  The High Court decided in favour of The Software Incubator and awarded £475,000 in compensation as, in its view, the term ‘sale of goods’ should have an autonomous definition which included the supply of this software.

On appeal to the English Court of Appeal, that court disagreed that software supplied electronically constituted ‘goods’ within the meaning of the Commercial Agents Directive.  On further appeal, the UK Supreme Court then referred the matter to the CJEU for a preliminary ruling.

In its judgment, the CJEU noted that the term ‘sale of goods’ does not make any reference to national law concerning the meaning to be given to such term and, as such, that concept must be given an autonomous and uniform meaning throughout the EU.  

As to the issue of the definition of the general term ‘goods’, the court reasoned that this can cover software, such as the software at issue, since software has a commercial value and is capable of forming the subject of a commercial transaction and it did not matter whether it was supplied by tangible medium or electronic download.  In this regard, the court referred to earlier case law in relation to copyright which decided that, from an economic point of view, the sale of a computer program on CD‑ROM or DVD and the sale of such a program by downloading from the internet are similar.¹

As to the issue of whether the commercial transactions at hand constituted a ‘sale of goods’, the court affirmed that making a copy of software available by means of a download and concluding a permanent/perpetual user licence agreement for that copy, in return for a fee which corresponds to the economic value of the copy of the work, involves the transfer of the right of ownership of that copy.

The court therefore concluded that, in this case, the supply, in return for a fee, of software to a customer by electronic means where that supply is accompanied by the grant of a perpetual licence to use that software constituted a ‘sale of goods’ for the purposes of the Commercial Agents Directive.

Furthermore, the Court reasoned that the effectiveness of the protections granted by the Commercial Agents Directive would be undermined if the supply of software, in these circumstances, were to be excluded from the concept of ‘sale of goods’.  The Court pointed out that it would not be appropriate to exclude from the benefit of that protection persons carrying out, with the assistance of modern technology, tasks (such as those carried out by The Software Company) which are comparable to those carried out by other commercial agents whose task is to sell tangible goods, e.g. in identifying prospective clients and directly approaching them.

Comment

This is a significant decision on the classification of software for the purposes of the Commercial Agents Directive.  Software companies that engage third party independent ‘resellers’ or similar to sell their software (where it is accompanied by a perpetual licence to use that software) should now be mindful of the application of the Commercial Agents Regulations.  In particular, where software companies are considering terminating any such relationships, particular thought should be given to the potential for such ‘resellers’ to make claims for compensation under the Commercial Agents Regulations.