A judgment reflecting 'the modern world

Following the landmark decision in Software Incubator, software agents are now entitled to statutory protection under the Commercial Agents Regulations, writes Stephen Sidkin

Can 'software' be 'goods'? Even if it can be, if software is licensed, does the grant of a licence amount to the sale of goods? The answer to these questions 'in the modern world' lay at the heart of the recent judgment in The Software Incubator Limited v Computer Associates Limited [2016] EWHC 1587 (QB), given that regulation 2(1) of the Commercial Agents (Council Directive) Regulations 1993 (as amended) defines a common agent by reference to the 'sale or purchase of goods'.

In Software Incubator, the agent was concerned with obtaining orders for licences of application release automation software, which facilitates the deployment of and upgrades for other software applications used in different operational environments of large commercial operations.

However, over a period of time, the relationship between the agent and Computer Associates deteriorated.
The agent entered into discussions with another, non-competing software company, Intigua. Without knowledge of these discussions, Computer Associates gave three months' contractual notice. Subsequently, Computer Associates learnt of the discussions and terminated the agreement summarily.

However, at trial, it was found that Computer Associates was not justified in so doing - the products of Computer Associates and Intigua did not compete. Further, although the agent was in breach of other provisions of the agreement with Computer Associates, these were found to be minor, and even taken together did not amount to a repudiatory breach. There was therefore a need for Judge Waksman QC to consider whether the regulations applied to the agreement.In this respect, what was significant was that the agreement treated the software as a product in the same way as other tangible goods. Indeed, '[The Software Incubator] was engaged to promote, market and sell [the software] - there was clearly no difficulty foreseen in referring to sales and commission on those sales'.

The judge also noted that the agreement contained a release by the agent of Computer Associates of any claims under the regulations, which suggested objectively that in the absence of such a release (and without consideration of regulation 19), 'the Regulations would have applied'.

As such, the judge considered that the installation and operation of software through a hard disk or server negated any reason for the software product to be a chattel, as had been traditionally understood. On the contrary, so far as the regulations were concerned, it was desirable to have an autonomous definition of 'sale of goods'.

Although the judge considered that the debate as to whether software constituted goods for the purpose of sale of goods legislation was not directly relevant, he did consider it and found:

• The observations made in the Court of Appeal in ICL v
  St Albans Council were obiter;

• In Southwark v IBM, Mr Justice Akenhead saw no reason in principle why software could not be goods;

• Accentuate v Asigra Inc was of no real assistance, respectfully disagreeing with Mr Justice Tugendhat's finding that 'software is simply intellectual property'; and

• There was nothing in the observations of Mr Justice Mann in Fern Computer Consultancy v Intergraph which counted against his finding that software is goods for the purpose of the regulations.

So what of the issue of 'sale'? The judge considered the European Court of Justice's decision in Usedsoft v Oracle, which concerned the directive on the protection of computer programs. While the context in Usedsoft was different to Software Incubator, the judge found it was important as it recognised that software could be 'sold' using an autonomous definition of sale, and it supported the argument that context was important.

It followed that the judge had no difficulty in finding that software was goods and that a licence of software was a sale for the purpose of the regulations.

The judge then went on to consider the issue of quantum. In the context of the regulations, the agent was entitled to compensation as opposed to indemnity. As such, he had regard to the judgment of Lord Hoffman in Lonsdale v Howard. However, the judge found the claim of compensation to be particularly difficult for a number of reasons, including the non-exclusive nature of the agent's agency and the fact that yearly sales of the product were subject to significant peaks and troughs.

Having found 'very serious' and 'real' problems with the expert evidence of both claimant and defendant, the judge proceeded to determine compensation using a discounted cashflow approach rather than net earnings multiplied by a multiplier.

On this basis he adopted a notional agency term of four years, a 25 per cent discount given the uncertainties about the product and the non-exclusive nature of the
agency, and arrived at a figure
of £475 after tax and the discount factor.

Stephen Sidkin is partner at Fox Williams @foxwilliams www.foxwilliams.com