Commercial agents who sell downloadable software may now receive a significant change in the protection afforded to them following a recent case.
Widening the scope of the law of commercial agency
Goods is a phrase often referred to in statutory definitions such as the Sale of Goods Act and the Consumer Rights Act. The definition of this term is important because many pieces of legislation will only apply if there is a contract with respect to “goods”. Accordingly, if the asset being supplied does not fall within the definition of “goods” as defined in the legislation, the legislation is unlikely to apply. This is especially important for commercial agents.
Historically, English case law has distinguished software provided in a tangible form (e.g. on a tape or CD) from software supplied only in an electronic or intangible form (e.g. a download). This has meant the intangible software did not fall within the legal definition of “goods”.
However, in a recent case, the Court decided to depart from this approach and held that certain downloadable software can fall within the definition of “goods” for the purposes of at least the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”).
Who are Commercial agents?
The Regulations govern the law in respect of commercial agents. Commercial agents are self-employed intermediaries who have the authority to negotiate or conclude the sale or purchase of goods on behalf of their principal.
The Regulations offer commercial agents significant protection including the right to significant compensation if their engagement is terminated.
Previously, intermediaries who sold downloadable software would not fall within the scope of the Regulations because the product they were selling did not meet the definition for “goods”.
The Software Incubator Ltd had a contract with the Computer Associates whereby it was engaged to “promote” software to the Computer Associates’ customers. In 2013, the Computer Associates terminated the agreement with immediate effect as a result of an alleged breach by the Software Incubator.
The Software Incubator subsequently issued a claim against Computer Associates for compensation under the Regulations as a result of this termination (The Software Incubator Ltd v Computer Associates UK Ltd  EWCA Civ 518). Computer Associates argued that the Regulations only applied to agents authorised to negotiate or conclude the sale of goods, and software supplied electronically did not amount to “goods”.
In 2016, the judge at first instance found in favour of The Software Incubator and awarded them £475,000 in compensation. The judge took the view that whilst some software is intangible and will be delivered in an electronic format, the overall result is very similar (if not the same) to software loaded onto a hard disc and run on a computer.
Court of Appeal
The Court of Appeal took a different approach and held that the legislation was clear in that downloaded software did not amount to “goods” and therefore they could not vary from that.
European change in position
However in September 2021, the Court of Justice of the European Union (CJEU) confirmed for the purpose of the EU Commercial Agents Directive that software can constitute “goods” regardless of the medium that it is supplied.
The CJEU decision was binding on the Supreme Court and therefore judgment was awarded in favour of The Software Incubator.
The Software Incubator ruling represents a significant change in the protection afforded to software resellers who act as agents. The decision means that more software resellers may now be protected by the Regulations.
It is however important to be aware that the ruling specifically related to the sale of downloadable software which was accompanied by the grant of a perpetual licence. It is therefore unclear how a Court would approach term licence cases where a customer is only offered temporary use of the software.
Following this decision, software licensors should carefully review their current agency contracts. Their re-sellers may now be classed as commercial agents which could result in them being entitled to a significant amount of compensation on termination.
Our Dispute Resolution team has a significant amount of experience in dealing with Commercial Agents disputes. In addition, our Intellectual Property/ IT team specialises in software contracts so please do get in contact if you require assistance in either of these areas.