Case C-410/19 The Software Incubator Ltd v Computer Associates (UK) Ltd

The CJEU (Court of Justice of the European Union) has determined that the sale of software supplied electronically and not on any tangible medium constitutes "sale of goods" within the meaning of Article 1(2) of the Commercial Agents Directive (86/653/EEC) (the Directive).

The determination was made in response to a referral from the English Supreme Court in the case of Computer Associates (UK) Ltd (Respondent) v The Software Incubator Ltd (Appellant) UKSC 2018/0090 (judgment awaited).  This case is an appeal in respect of the Court of Appeal decision that the electronic supply of software did not constitute the sale of goods for the purposes of the Commercial Agents (Council Directive) Regulations 1993/3053 (the Regulations).

The CJEU determination is to be welcomed as, in our opinion, the contrary Court of Appeal decision left the legal and regulatory framework for commercial agents falling behind technological advances when it came to software. For further analysis of the Court of Appeal decision, please see our previous update: The Commercial Agents Regulations: a step behind the times?

In this update we further consider the CJEU’s ruling in case C‑410/19.

Background

The case concerned release automation software which was supplied as an electronic download.  Computer Associates UK Ltd (CA) appointed The Software Incubator Ltd (TSI) as an agent to promote the software in the UK and Ireland.  When TSI accepted a similar role for a competitor, CA terminated the arrangement and TSI sued for compensation. The judge at first instance awarded £475,000 under the Regulations. CA appealed.

The most important issue on appeal was whether the software, which was supplied to CA's customers electronically and not on a tangible medium, constituted "goods" within the meaning of Regulation 2(1). CA argued that the Regulations did not apply to the agreement with TSI because the supply of "goods" must involve tangible property.

Despite concerns that the approach was out of step with technological advances, the Court of Appeal held that it was compelled to conclude that the software did not constitute "goods" within the meaning of Regulation 2(1).

TSI appealed to the Supreme Court who requested a preliminary ruling on the Directive from the CJEU.

CJEU Ruling

The two questions referred by the Supreme Court to the CJEU were:

  • “Where a copy of computer software is supplied to a principal’s customers electronically, and not on any tangible medium, does it constitute “goods” within the meaning of that term as it appears in the definition of a commercial agent in Article 1(2) of the Directive?”; and

  • “Where computer software is supplied to a principal’s customers by way of the grant to the customer of a perpetual licence to use a copy of the computer software, does that constitute a “sale of goods” within the meaning of that term as it appears in the definition of commercial agent in Article 1(2) of the Directive?”

The Advocate General handed down his ruling at the end of 2020, stating his view that software supplied electronically should constitute goods under the Directive and that a perpetual licence of such software for a fee constitutes “sale of goods” within the meaning of the Directive.

The CJEU agreed with the Advocate General ruling that the concept of “sale of goods” referred to in Article 1(2) of the Directive must be interpreted as covering the supply, in return for payment of a fee, of computer software to a customer by electronic means where that supply is accompanied by the grant of a perpetual licence to use that software.

In relation to “goods”, the CJEU referred to its caselaw that indicated the term meant “products which can be valued in money and which are capable, as such, of forming the subject of commercial transactions”. It followed that software fell within this definition, and that this was the case irrespective of whether it is supplied on a tangible medium or by electronic download.

In relation to “sale”, the CJEU applied the commonly accepted definition of “an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him.

The CJEU further noted that the downloading of a copy of a computer program and the conclusion of a user licence agreement for that copy, although two operations, must be viewed as an indivisible whole for the purposes of legal classification. As such “the supply, in return for payment of a fee, of computer software to a customer by electronic means where that supply is accompanied by the grant of a perpetual licence to use that software can be covered by the concept of ‘sale of goods’ within the meaning of [the Directive]”.

Comment

For the final word on this point, we await the judgment of the Supreme Court in the UK litigation (yet to be handed down). Under Articles 86 and 89 of the UK/EU Withdrawal Agreement, however, the Supreme Court is bound to follow the CJEU ruling so it is anticipated this key point around “sale of goods” in the Regulations is settled.

As per the views expressed in our article on the Court of Appeal case, the CJEU ruling is more aligned with modern thinking. It will be welcomed by software resellers acting as agents who will be afforded the benefit of the Regulations. Principals who engage resellers as agents should take stock of their reseller contract suite to assess and, to the extent possible, mitigate their exposure under the Regulations.

The other point to note is that this case only relates to the interpretation of software under the Directive and Regulations. The leading authority in relation to the assessment of software as goods or services under the Sale of Goods Act 1979 or the Supply of Goods and Services Act 1982 is St Albans City and District Council v International Computers [1996] 4 All E.R. 481.  Obiter, this case suggests that software must be sold with the medium on which it is stored in order for the transaction to constitute a sale of goods. So, while clarity is emerging under the Directive and Regulations, broader uncertainty around this issue remains.  It will be interesting to see whether, in time, the CJEU ruling will pressurise any updates to how software is construed under said UK legislation.  Software and other digital content providers will need to continue to watch this space….

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Written by

Alex Williamson

Alex Williamson

Date published

26 January 2022

RELATED INSIGHTS AND EVENTS

View all