CJEU Decides Electronically Supplied Software can Constitute a Sale of Goods

The Court of Justice of the European Union (CJEU) has recently delivered a ruling which confirms that the grant of a perpetual licence of electronically supplied software constitutes a sale of goods for the purposes of the Commercial Agents Directive 86/653 (the Directive).

The decision is important because, if the UK Supreme Court choose to follow it (which is likely), many software resellers who act as agents will be protected by the Commercial Agents Regulations 1993 (the Regulations), which implemented the Directive into UK law. Amongst other things, this will mean that, in many cases, such resellers will be entitled to a payment when their contracts come to an end.

What lead to the CJEU decision?

The decision relates to the case of Computer Associates UK Ltd v The Software Incubator Ltd [2016]. This case involved a claim for compensation made by The Software Incubator Ltd (TSIL) against Computer Associates UK Limited (Computer Associates) under the Regulations, following termination by Computer Associates of an agency agreement which had been entered into by the parties.

Under the agency agreement, TSIL had been appointed to promote, market and sell Computer Associate’s application service software. The software was supplied by Computer Associates to its customers entirely electronically and customers were generally granted a perpetual licence to use the software.

Computer Associates argued that the Regulations did not apply as the supply of the software did not constitute a ‘sale of goods’ (the Regulations only provide rights for commercial agents who have entered into an agreement to buy or sell goods on behalf of their principal).

The case had worked its way through the High Court (which ruled that the supply of the software did constitute a sale of goods) and the Court of Appeal (which overturned the High Court’s decision) before reaching the Supreme Court, which decided to refer two key questions to the CJEU.

What did the CJEU have to decide?

The questions the Supreme Court asked the CJEU were:

• If software is supplied electronically and not on a tangible medium, does that constitute ‘goods’ under the Regulations?
• If computer software is supplied to a principal’s customer by way of a grant to the customer of a perpetual licence to use a copy of the computer software, does that constitute a “sale of goods” for the purposes of the Regulations?

What did the CJEU decide and why?

The CJEU made the following key decisions:

• ‘Goods’ means ‘products which can be valued in money and which are capable of forming the subject of commercial transactions’. Consequently, goods can include computer software, whether the software is supplied in tangible form (such as on a CD‑ROM or USB drive) or by electronic download (as in this case).
• A ‘sale’ is ‘an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him’. Where a supplier of software grants a perpetual licence to a customer and makes the software available by electronic download, this involves the supplier transferring ownership in the copy of the software to the customer for a fee. Consequently, a sale will have taken place.

The CJEU therefore concluded that the supply, in return for payment of a fee, of computer software by electronic means, where it is accompanied by the grant of a perpetual licence, constitutes a ‘sale of goods’ under the Regulations.

What are the commercial implications?

We won’t know fully until the UK Supreme Court issues its judgment.

However, if the Supreme Court follows the CJEU’s findings:

• many software resellers who act as agents will find themselves protected by the Regulations and, in particular, may be entitled to a payment on termination of their agreement;
• many software companies may seek to re-structure their reseller relationships to try to avoid being caught by the Regulations.

Even so, the question whether the supply of software is a ‘sale of goods’ under the Regulations is unlikely to go away completely. These days, software is made available to customers in a number of different ways, using a number of different licensing and payment models. It remains to be seen whether all of these will be treated as the sale of a good.