The provision of a computer software license falls within the sale of goods, CJEU Rules – Litigation, Mediation and Arbitration

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In a preliminary ruling issued on September 16, 2021, the Court of Justice of the European Union (the
“CJEU”) in the case “The Software Incubator Ltd vs. Computer Associates (UK) Ltd ”, considered that the provision of a license for computer software falls within the definition of“ sale of goods ”within the meaning of Council Directive 86/653 / EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents. (the
“Commercial Agents Directive” Where
the Directive “)

As a reminder, the Commercial Agents Directive aims to coordinate the laws of the Member States governing relations between commercial agents and principals and to provide independent commercial agents with minimum legal protection. One of the main features and protections incorporated in the Commercial Agents Directive is the right to compensation which is granted to the commercial agent upon termination of the contract if damage is suffered as a result.

The main bone of contention within the Commercial Agents Directive is found in Article 1 (2), which states that:

For the purposes of this Directive, “commercial agent” means an independent intermediary who has the permanent power to negotiate the sale or purchase of goods in the name of another person, hereinafter referred to as “the principal” or to negotiate and conclude such transactions in the name and on behalf of this principal. “

On reading the above article, it can be appreciated that it is the sale or purchase of goods that falls within the scope of the Directive on commercial agents, and not the promotion or sale of services. The latter does not fall within the scope of the Commercial Agents Directive and, therefore, if a person is engaged in the provision of a service and not in the sale or purchase of goods, he will not benefit rights and protections provided for in the Commercial Agents Directive. A problem often arises in the interpretation of what constitutes a good and what constitutes a service.

This classification problem was also encountered in Software Incubator Ltd v Computer Associates (UK) Ltd. In short, Computer Associates (UK) Ltd (the “main“), a company that markets application service automation software for the development and management of applications in a data center, had entered into an agreement with The Software Incubator Ltd (the
“applicant”). The applicant was responsible for approaching potential clients in the United Kingdom and Ireland to promote and market the software produced by the principal. The applicant was effectively charged with sending an email to clients with a link to download the principal’s software. The deal was eventually terminated by the principal.

Feeling aggrieved by this decision, the applicant applied to the High Court of Justice (England & Wales), Queen’s Bench Division (United Kingdom) (the “Supreme Court“) seeking compensation from the principal, as guaranteed by the provisions of the Directive on commercial agents. The principal contested this, considering that the relationship between the applicant and the principal was not of a commercial agent nature, given that the supply of software computers to a customer does not fall within the definition of a ‘sale of goods’ within the meaning of Article 1 (2) of the Commercial Agents Directive and, therefore, the right to compensation does not exist.

The High Court, disagreeing with this classification, referred to the Commercial Agents (Council Directive) Regulations 1993, the law which brought the Commercial Agents Directive into UK law, and held that the concept of “sale of goods” encompasses the supply of Software. On this basis, the High Court chose to award the applicant the sum of EUR 531,000 as compensation, payable by the principal.

An appeal was lodged by the principal before the Court of Appeal (England & Wales) (Civil Division) (United Kingdom) (the
“Court of Appeal”). Departing from the High Court ruling, the Court of Appeal held that the supply of software did not in fact fall within the definition of “sale of goods” and that the plaintiff should therefore not be considered as commercial agent. Therefore, the Court of Appeal dismissed the claim for compensation.

This time the applicant chose to appeal to the Supreme Court of the United Kingdom (the “Supreme CourtThe Supreme Court chose to stay the proceedings and sought clarification from the CJEU on the case by asking the following questions:

  1. When a copy of computer software is supplied to a principal’s customers electronically, and not on a physical medium, does it constitute “good” within the meaning of that term as it appears in the definition? of a commercial agent in Article 1 (2) of Council Directive 86/653 / EEC of December 1986 coordinating the laws of the Member States relating to self-employed commercial agents?
  2. Where computer software is provided to a principal’s customers by granting the customer a perpetual license to use a copy of the computer software, does this 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?

For the sake of clarity, although the preliminary ruling was given by a UK court, i.e. it was given by a court which is not an EU Member State, under Article 86 of the Withdrawal Agreement between the EU and the United States United Kingdom, the CJEU is competent to hear any preliminary ruling introduced before the end of the transition period.

In its judgment, the CJEU first observed that the concept of “sale of goods” is not defined in the directive on commercial agents, while emphasizing the need to have a harmonized definition of the concept in all cases. Member States and to avoid having divergent definitions of the matter.

The CJEU went on to explain how the term “goods” according to its own case law includes products which can be valued in money and which are likely to be the subject of a commercial transaction. Therefore, when computer software has commercial value and is likely to be the subject of a commercial transaction, it does fall within the definition of “good”, regardless of the medium on which it is provided. The fact that the software is downloaded by means of a link and not delivered to the customer by means of a physical medium is irrelevant, since, from an economic point of view, the method of the link is functionally equivalent to the provision of material support. , as established in Usedsoft C-128/11. Therefore, the software should be classified as an asset.

By defining the notion of “sale”, the CJEU considered that a sale is an agreement by which a person, in exchange for payment, transfers to another person his rights of ownership over a tangible or intangible good belonging to him. In the opinion of the CJEU, the making available of a copy of computer software by means of a download and the conclusion of a user license agreement for that copy, the final objective being to make this copy permanently available to the customer, and in return for the payment of a royalty intended to enable the copyright owner to obtain remuneration corresponding to the economic value of the copy, involving the transfer of the copyright ownership of this copy, was an operation within the meaning of the sale.

Consequently, the CJEU came to the conclusion that the provision, in return for the payment of a royalty of computer software to a customer, by the use of electronic means when this provision is accompanied by the granting of a perpetual license to use this software, falls under the concept of the sale of goods under the Commercial Agents Directive and, therefore, commercial agents carrying out such activity enjoy the protections deriving from the Directive.

The CJEU further ruled that if such an interpretation were not adopted, commercial agents using modern technologies in the performance of their duties would fall outside the scope of the Commercial Agents Directive, which means that they would be excluded from the protections granted by the same directive. .

To justify the position taken, the CJEU also referred to the logic of the Commercial Agents Directive itself. It considered that a broad interpretation of the concept of “sale of goods” is necessary for the Directive on commercial agents to meet its objectives, which are the protection of commercial agents in their relations with their principals, promotion of the security of commercial transactions and the facilitation of trade in goods between Member States by harmonizing the concept of commercial representation.

This report was first published in the Malta Independent.

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