Landmark ruling: electronically supplied software constitutes 'sale of goods' under Commercial Agents Regs

In a landmark ruling today (16 September), the Court of Justice of the European Union has ruled the sale of electronically supplied software is a ‘sale of goods’ within the meaning of the Commercial Agents Regulations.

The decision has significant implications for the software industry and the reseller business model; IT lawyers will need to familiarise themselves with the judgment.

The court’s decision related to a dispute between Computer Associates UK Limited (Computer Associates) and The Software Incubator Limited (TSIL) over the termination of an agency contract.

Steve Sidkin, partner at Fox Williams, who represented TSIL, said: “This has been a long-running case, but we’re delighted with the Court of Justice’s decision. Although it has taken a long time, the Court of Justice’s decision confirms that Computer Associates wrongfully terminated its agreement with TSIL.

“Software companies both in the UK and EU which use resellers – in effect agents – will now need to consider their use. This has particular implications for the European subsidiaries of US software houses that use the reseller business model”.

He explained: “All software companies can now expect claims for compensation when their contracts with resellers come to an end for any reason other than a serious breach by the reseller”.

Sidkin said: “For resellers, the Court of Justice’s decision is to be welcomed as it clarifies that they are protected by the EU Agents Directive and the UK Commercial Agents Regulations”.

In 2013, TSIL agreed to promote Computer Associates’ automation software in the UK and Ireland, and were supplied electronically with a licence for use. Subsequently, TSIL also entered into a separate agreement with a competitor company, Intigua, under which it also agreed to promote and market Intigua’s software in the UK and Ireland.

Computer Associates subsequently alleged TSIL had breached obligations to devote "substantial time and effort" to its provision of services, and to not engage in any activity which competed directly with Computer Associates software. TSIL commenced proceedings against Computer Associates for damages for breach of contract and compensation under the Commercial Agents Regulations.

In the High Court, TSIL was awarded compensation, though this was later overturned on appeal, with the Court of Appeal ruling that electronically supplied software does not constitute “goods” within the meaning of the Commercial Agents Regulations.

In 2019, TSIL appeared before the Supreme Court which asked two questions of the Court of Justice of the European Union:

1. Does bespoke software supplied electronically (and not on any tangible medium) constitute “goods” for the purpose of the definition of a commercial agent?

2. Does bespoke software supplied to a principal’s customer under a perpetual licence constitute a sale of goods for the purpose of the definition of a commercial agent?

The Court of Justice ruled in favour of TSIL and confirmed the grant of a licence to use electronically supplied software constitutes a sale of goods.

Sidkin concluded: “Following this decision, software companies should now give thought to including provisions in their contracts with resellers which reduce the protection given by the Commercial Agents Regulations and the EU Agents Directive to resellers.”