CJEU decides that downloaded software is a sale of goods, not services

Background

In 2013 The Software Incubator was appointed by Computer Associates as a sales agent to promote and market Computer Associates’ application service automation software, which was deployed by CA’s customers to manage applications across data centres.  The software was downloaded by customers directly from Computer Associates’ servers, subject to a perpetual licence which restricted use to a specified territory and a maximum number of authorised users.

The relationship was short lived, and The Software Incubator’s appointment was terminated later in 2013.   The Software Incubator claimed compensation from Computer Associates under the Commercial Agents (Council Directive) Regulations 1993 (“UK Regulations”), which provides that a ‘commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal’ (Section 17(6)).  The UK Regulations define “commercial agent” as a ‘self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person’, but then does not provide a definition of “goods”.  As you have probably already guessed, The Software Incubator and Computer Associates had different views on whether the software promoted by The Software Incubator constituted goods for the purposes of the UK Regulations, and the dispute ended up in court.

In 2018 the Court of Appeal decided, in part, in favour of Computer Associates.  The Software Incubator appealed to the Supreme Court, which then referred the issue to the Court of Justice of the European Union (CJEU).  In short the question for the CJEU was: Does the the supply of computer software to a customer by electronic means, together with the grant of a perpetual licence, constitute a “sale” of “goods” within the meaning of article 1(2) of the Commercial Agents Directive (Council Directive 86/653/EEC), being the original EU Directive that was implemented by the UK Regulations?

CJEU decision

The CJEU decided that:

  1. the term “goods” could cover computer software, since software has a commercial value and was capable of forming the subject of a commercial transaction, and it was irrelevant whether the software was supplied on a CD ROM or tangible medium, or by electronic download; and
  2. the making available of a copy of the computer software and the conclusion of a user licence agreement for that copy which entitles use of the software for an unlimited period, in return for payment of a fee, results in the transfer of the right of ownership of that copy, and therefore constitutes a “sale”.

Accordingly, the supply by Computer Associates of its software to a customer by electronic download, together with the grant of a perpetual licence constituted a “sale of goods” for the purposes of the UK Regulations, entitling The Software Incubator to compensation for termination of its sales agent appointment.

Because the question was referred to the CJEU before Brexit, the CJEU’s decision is binding on the Supreme Court.

Comment

The CJEU decision is clearly good news for sales agents which promote the supply of perpetual software licences, and probably fixed term software licences where the term is at least equal to the software’s expected economic lifespan.  Less good news for software vendors, who may want to review existing arrangements with their agents and tread carefully if looking to terminate the relationships.  More generally it remains to be seen to what extent the UK courts will have regard to the decision when considering the issue of whether software should be considered to be goods or services (or neither) in other contexts, particularly sale of goods legislation.

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