The recent case of The Software Incubator Ltd v Computer Associates (UK) Ltd has concluded that software falls within the term ‘goods’ for the purposes of laws governing the sale of goods. This is the case even if the software is transferred by electronic download and there is no tangible media like a USB or CD.
The case involved The Software Incubator, who had been promoting and selling software as an agent on behalf of Computer Associates. The software was sold via an online portal which was shared with customers by email. The case reached the Court of Appeal in 2018, where it was held that if the software was not provided using any tangible media, it did not fall within the term ‘goods’. The Software Incubator wished to prove that it was a commercial agent and would therefore be entitled to compensation when Computer Associates terminated the agency agreement.
The Software Incubator appealed to the Supreme Court, who referred the question to the European Court of Justice (CJEU). The CJEU confirmed that the supply, in return for a fee, of computer software to a customer by electronic means, where that supply is accompanied by the grant of a perpetual user licence, is a supply of goods. The decision forms part of retained law in the UK following Brexit, as the referral was made before Brexit.
The CJEU decision
The CJEU concluded that ‘goods’ means “products which can be valued in money and which are capable, as such, of forming the subject of commercial transactions”. This led to the conclusion that software is covered regardless of the medium through which it is sold. The court made the point that software is functionally equivalent whether it is provided on a disk or provided electronically. A ‘sale’ arises where software is supplied on a perpetual licence, as a sale is an agreement where a person, in return for payment, transfers rights of ownership to another person. On this basis, the electronic transfer of software on a perpetual licence is a sale of goods.
What does this mean?
This means that the laws which govern the sale of goods apply to software. In particular, this means that the Commercial Agents Directive (86/653/EEC) applies to the supply of software. The directive provides protection to commercial agents who negotiate or conclude the sale or purchase of goods (but not services).
The directive could also capture ‘introducer agreements’ which are quite common with software companies looking to extend their reach. Software companies should seek advice to ensure they fully understand the effect this decision has on its operation and future agreements.
The decision will be welcome news for software resellers, who can take comfort in the rights afforded to them under the directive. Commercial agents, like The Software Incubator, may now be entitled to compensation.
What happens next?
The Supreme Court is to decide whether to apply the CJEU verdict, but it is expected to do so.
We can only speculate on what the next step will be, but it is possible that the next argument to be raised is that software-as-a-service is also captured by the regulations. Further questions will arise around how this affects software which is supplied on a temporary, rather than perpetual, licence. Following the CJEU decision, this will clearly be a supply of ‘goods’, but it may not be a ‘sale’.
Whatever the next development is, this decision means there is a significant change in the rights of software resellers who act as agents, who will likely be entitled to payment on termination of the agency agreements. Software companies need to come to terms with the regulations and seek advice about how these apply to their business.