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Court holds regularly licensing software is 'sale of goods'
Until recently, there has been uncertainty as to whether agents who market and promote software on behalf of their principals are covered by the Commercial Agents (Council Directive) Regulations 1993 (Regulations). The prevailing view, based on limited case law in this area, has been that software would not be considered goods (and therefore the Regulations would not apply) unless it is supplied bundled within hardware.
On the 1 July 2016, the High Court in The Software Incubator Limited v Computer Associates UK Limited  EWHC 1587 (QB) handed down a significant judgment which provides some clarity on this question. The Court held that the licensing of software on a perpetual basis was a ‘sale of goods’ for the purposes of the Regulations, despite the software being supplied in intangible form.
The Regulations apply only to agents who are involved in the sale or purchase of goods on behalf of their principal and do not apply in relation to services. Goods are not defined under the Regulations. When the Regulations came into force, and in the absence of any European guidance, the UK Government considered the meaning of goods under the Sale of Goods Act 1979 and issued guidance that this would be a reasonable guide as to interpretation under the Regulations, without being definitive. This, together with the limited case law we have had in this area, has resulted in a widely held view that software is not goods under the Regulations unless it is sold on tangible media or bundled within hardware.
The Software Incubator Limited (TSI) was appointed by Computer Associates UK Limited (CA) as a non-exclusive agent to market, promote and sell CA’s release automation software (RAS) product in the UK. TSI was required under the agency agreement to dedicate a substantial amount of time and effort in providing its services on behalf of CA and the agreement between the parties also contained a non-compete provision. TSI had a proven track record in making sales of the product, but became dissatisfied with the relationship with CA, and decided to start acting as agent for a third party, Intigua. CA terminated the agency with immediate effect on learning of the arrangement with Intigua. TSI claimed against CA under the Regulations for compensation in addition to claiming for commission on post-termination sales and damages.
Part of CA’s defence was that there was no valid claim under the Regulations because the licensing of software was not the ‘sale of goods’ for the purpose of the definition of “commercial agent” under the Regulations.
Wakeman, J held that the supply of the software in this case was a ‘sale of goods’. In doing so, he departed from earlier court decisions by concluding that, in the absence of a definition of goods under the Regulations, it was “permissible and indeed desirable to have an autonomous definition of sale of goods for the purposes of the Regulations” and that “there is no logic in making the status of software as goods (or not) turn on the medium by which they were delivered or installed…[T]he essential characteristics of a piece of software like [CA’s RAS software] cannot depend on its mode of delivery (i.e. whether or not it is delivered on or with hardware) any more than the nature of tangible goods depends on whether they are transported by rail, sea or air”.
Key factors in Wakeman, J reaching this conclusion were:
- how the software product was treated by the parties under the agreement: the agreement described TSI as having been engaged to “sell” the software, and purported to release CA from any claims under the Regulations. Where software is treated in the same way as goods, Wakemn, J’s view was that it is logical that it should be interpreted in the same way for the purposes of the Regulations
- the software was sophisticated and non-bespoke, and should, therefore, be considered a “product”, rather than a “service”
- there was a “sale” of the software because the vast majority of customers received a perpetual licence (subject only to particular conditions in relation to breach); the intention, therefore, was that the purchaser had the ability to use it forever, as with the sale of any product
- there is nothing under EU or domestic legislation, or existing case law which prohibits the interpretation this way, and
- the fact that software is ‘intellectual’ property rather than real or personal property does not prevent software being treated as goods.
Companies using agents to market and promote their software products should review their arrangements to ensure their exposure under the Regulations is minimised, in particular by considering which of the two termination payment calculation methodologies (compensation or indemnity) will apply.
Companies should also take care as to how the software, and the agent’s activities are described in the agreement: As noted above, the fact that the agreement between TSI and CA referred to sales was relevant to the court’s decision in this case.
It should also be noted that this decision does not mean that software will always be treated as goods for the purposes of the Regulations. In particular, and as noted above:
- a factor in Wakeman J concluding that the software was a product and not a service was that it was non-bespoke; it is possible, therefore, that where software is heavily customised, it would be treated as the supply of a service rather than the sale of goods, and
- the software in this case was licensed on a perpetual basis and, as such, was akin the sale of any other product; it is by no means certain, therefore, that the licensing of software on a subscription basis (which is the case with many software products) would be treated as the sale of goods under the Regulations.