In the case of The Software Incubator Ltd v Computer Associates UK Ltd, the Court of Justice of the EU has recently held that, for the purposes of the Commercial Agents Directive (Council Directive 86/653/EEC), a “sale of goods” can include the supply of software by electronic means (in addition to the supply of software on a tangible medium), under a perpetual licence.

This judgment was in response to a reference from the UK Supreme Court on the interpretation of the Commercial Agents (Council Directive) Regulations 1993 (the Commercial Agents Regs), which implement the Commercial Agents Directive in the UK.

In this case Computer Associates UK Ltd (CA) had appointed The Software Incubator Ltd (TSI) as an agent to sell their application release automation software. This software was primarily provided to CA’s customers electronically without using any tangible media.  CA terminated the agency agreement, and TSI claimed compensation and commission on post-termination sales under the Commercial Agents Regs. In order for the Commercial Agents Regs to be applicable, TSI argued that the “sale of goods” as used in the Commercial Agents Regs included software supplied to customers electronically.

The court at first instance agreed with TSI, and awarded compensation and commission on post-termination sales under the Commercial Agents Regs. On appeal by CA, the Court of Appeal disagreed with the first instance court.

The Court of Appeal pointed to the distinction (considered by some to be illogical) which has been made in English law for a number of years between the supply of software on a tangible medium (such as a CD or DVD) which has been capable of falling within the definition of “goods” (primarily for the purposes of the UK Sale of Goods Act 1979), and the supply of software by electronic means, which has fallen outside of that definition. Further appeal by TSI led to this reference by the UK Supreme Court to the CJEU.

This judgement by the CJEU now gives a clear outcome for the purposes of the Commercial Agents Regs, but the impact on English law more broadly remains to be seen. The Court of Appeal in this case was clear that a broader change to the status quo in the B2B context (particularly for the Sale of Goods Act) should be a matter for parliament and not for judicial legislation, and we expect that the Supreme Court will take a similar view.

In the B2C context, the UK Consumer Rights Act 2015 (implementing the EU Consumer Rights Directive 2011/83/EU (CRD)) clearly makes a distinction between goods (defined as tangible moveable items) and digital content (data which are produced and supplied in digital form), giving broadly similar protections to the latter. The recitals to the CRD support the tangible/intangible distinction, with software supplied on a tangible medium to be “goods” for the purposes of the CRD and via an electronic medium to be “digital content”.

The main impact of this judgement will be on businesses which use commercial agency arrangements to sell perpetual licences to software provided via electronic means, which may have assumed that Commercial Agency Regs do not apply to those arrangements. Those businesses will need to be aware of the effect of the Commercial Agents Regs on areas such as: (i) the remuneration of the agent; (ii) the termination notice period; and (iii) compensation of the agent on termination of the agency arrangement (which can include commission on post-termination sales).

However, the more general move in the IT industry towards the monetisation of software products through subscription-based services (such as Microsoft Office 365), and provision of software “as a service”, means that the “sale” of software by way of perpetual licence may in any event be waning.

 Many thanks to Amelia Tai for her research assistance in preparing this post.