The Commercial Agents Directive
The Commercial Agents Directive (the "Directive") provides a number of legal protections to commercial agents selling "goods" on behalf of a principal. These include the right to receive compensation and the right to indemnity payments on termination of their appointment.
The Directive was implemented in the UK in the form of the Commercial Agency Regulations (the "Regulations"). Notwithstanding the UK's exit from the European Union, the Regulations will remain in force in the UK until revoked or replaced.
Software Incubator Ltd -v- Computer Associates UK Ltd
The Software Incubator Ltd ("Software Incubator") was appointed by Computer Associates UK Ltd ("CAUK") to act as commercial agent in respect of software that CAUK licensed to end customers. Following the termination of Software Incubator's appointment by CAUK, Software Incubator brought a claim against CAUK under the Regulations. In defending that claim CAUK argued the Regulations did not apply because software supplied electronically did not constitute the "sale of goods".
The High Court initially ruled in Software Incubator's favour, determining the supply of software did constitute a sale of goods. That decision was however overturned by the Court of Appeal. Software Incubator then appealed to the Supreme Court, who opted to stay the proceedings and refer the following two questions to the European Court of Justice ("CJEU") for a preliminary ruling:
- does electronically supplied software amount to “goods”; and
- does the supply of software by way of a perpetual and/or limited licence amount to “sale of goods”.
Because the referral was made the day before "exit day" under the European Union (Withdrawal Act) 2018 (the "Withdrawal Act"), the CJEU retains jurisdiction to hear the case. It should be noted that under the Withdrawal Act the Supreme Court retains the power to deviate from CJEU case law "when it appears just to do so". There is however no suggestion that the Supreme Court will opt to do so in this case.
The Advocate General's Opinion
On 17 December 2020 the CJEU's Advocate General ("AG") delivered his opinion, stating categorically that:
- the court should hold that a copy of computer software supplied electronically constitutes "goods"; and
- the court should hold that the supply of software by way of the grant of a perpetual license to use a copy for an unlimited period, for a fee corresponding to the economic value of that copy, constitutes a “sale of goods”.
It is important to note that the CJEU is not bound by the AG's opinion. That said, opinions are generally very influential and in this case the view of the AG has already seen strong support from both the German government and the European Commission. It therefore seems likely that the CJEU will follow suit.
Assuming that both the CJEU and UK Supreme Court do follow the AG's opinion, it will bring much needed clarity to an area that has been the subject of considerable debate.
Our reading of the AG's opinion, which we anticipate the Supreme Court adopting, is that:
- the term ‘goods’ ought to be given an autonomous and uniform interpretation throughout the EU;
- there is a need for a dynamic or evolving interpretation of the Directive, which takes account of technological developments;
- the medium of supply of software should not change the legal analysis;
- it is important to protect all commercial agents in their relations with their principals; and
- likewise it is important to look at the situation as a matter of substance and economy reality.
Whilst the AG's opinion was technically concerned with supply of software pursuant to a 'perpetual licence', the above would appear to have equal application to licences that were time-limited (e.g. a licence to use the software for 12 months).
Similarly, the AG's opinion contains little that would support drawing a distinction between downloading software onto a user's own server, versus a user being granted access to software hosted by the provider (e.g. via cloud computing / 'software as a service').
If you have a question concerning the matters discussed in this article, please do not hesitate to get in contact with the authors: Jonathan Isaacs and Joseph Martin.
For more on Commercial Agency in general, our colleague Ben Griffin has also recently co-authored (with Oliver Segal QC)the book: 'Commercial Agency – A Practical and Legal Guide', which provides practical analysis and advice to agents, principals and their representatives on the key questions that arise between them – during an agency relationship and following its conclusion.