The Software Incubator saga – a case study

Historically, it was established in English law that software sold electronically, on its own, was not considered to be “goods” because it was intangible property, therefore not covered by the Commercial Agents Regulations.

That status quo was challenged in The Software Incubator Ltd v Computer Associates UK Ltd case, where The Software Incubator Limited argued that it was entitled to compensation under the Commercial Agents Regulations following termination of a contract under which it marketed software as Computer Associates UK Ltd’s agent.

After years of judicial deliberation, the case reached the UK Supreme Court which referred several questions to the Court of Justice of the European Union (“CJEU”), including:

• 1) Does computer software supplied to a principal’s customer electronically, not on any tangible medium, constitute “goods” under the Commercial Agents Directive definition?
• 2) Does the supply of computer software to a principal’s customers by way of grant of a perpetual licence to use a copy of that software in return for payment of fee constitute a “sale of goods” under the Commercial Agents Directive?

The CJEU decided that software fell into the definition of “goods” irrespective of whether supplied on a tangible medium or by electronic download. The CJEU also agreed with the Advocate General’s view that software supplied electronically should constitute goods under the Commercial Agents Directive and that the granting of a perpetual licence of such software for a fee constitutes “sale of goods” within the meaning of the directive. The upshot being that software resellers acting as commercial agents would enjoy the benefits and protections set out in the Commercial Agents Regulations.

Although the UK has left the EU, the CJEU remains influential in the decision-making of UK courts. However, the effect of the CJEU’s ruling is uncertain as the parties withdrew the appeal meaning the UK Supreme Court did not rule further on it.

While this was a missed opportunity for the UK Supreme Court to provide a definitive UK interpretation on the wider legal status of software, the expectation is that in the context of the Commercial Agents Regulations software supplied under a perpetual licence other than on a tangible medium constitutes goods.

Implications for software vendors

The CJEU decision will apply to software marketing agency agreements where the applicable territory is an EEA state. While uncertainty remains on how UK courts will apply the CJEU’s ruling to any software marketing agency agreements entered into post-Brexit, software vendors can take action to ensure their contracts are drafted with this ruling in mind.

In particular, software vendors can include provisions to specify that, to the extent the Commercial Agents Regulations do apply to the arrangements, then any payment due to the agent on termination will be calculated on the indemnity, rather than compensation, basis.

The rationale being that the indemnity basis is subject to a maximum cap whereas the compensation basis is not, therefore protecting the software vendor from a scenario where the agent benefits from a more favourable position and larger payment on termination.