The meaning of “sale of goods” under the Commercial Agents Directive

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

The question

When does an agent’s supply of software to users constitute a “sale of goods” under the Commercial Agents Directive? 

The key takeaway

The CJEU has confirmed that software constitutes “goods” under the Commercial Agents Directive; however whether or not there has been a “sale of goods” is likely to depend on the scope of the user’s licence to use that software.

The background

The Software Incubator Ltd (Software Incubator) entered into a contract with Computer Associates (UK) Ltd (Computer Associates) to promote, market and sell Computer Associates’ software to customers. 

Computer Associates terminated the contract after six months. Software Incubator brought a claim for damages on the basis that, as a commercial agent, it was entitled to compensation under the national provisions implementing the Commercial Agents Directive 86/653 (the Directive). Computer Associates argued that Software Incubator wasn’t a commercial agent because the services it had provided did not constitute a “sale of goods” under Article 1(2) of the Directive. 

At first instance, software was held to be “goods”; Software Incubator was therefore deemed to be a commercial agent and was awarded compensation. However, the decision was overturned by the Court of Appeal. Software Incubator then appealed to the Supreme Court, which subsequently referred the matter to the CJEU. 

The decision

The question for the CJEU was whether the supply of software to a customer, along with the grant of a perpetual user licence, constitutes a “sale of goods” under Article 1(2) of the Directive.

The CJEU held that it did. Software Incubator was therefore capable of being a commercial agent under the definition in Article 1(2) of the Directive. Although the Directive did not explicitly define the meaning of “sale of goods”, the CJEU said it should be interpreted by taking into account the everyday meaning of the words, as well as the context in which they appear and the purpose of the rules of which they are part.

On that basis, the CJEU held that:

• “goods” means products (whether tangible or electronic) which have a monetary value and can be capable of forming the subject of commercial transactions. This includes software
•  a “sale” is an agreement where ownership rights are transferred between parties in tangible or intangible property in return for payment. The perpetual software licence was sufficient to transfer ownership to the user and therefore constitute a “sale of goods”, and
• if the supply of software (accompanied by a perpetual user licence) was excluded from the concept of “sale of goods”, the purpose of, and the protection granted by, the Directive to commercial agents would be undermined.

Why is this important?

The decision provides greater certainty that agents supplying software or electronic downloads (at least on a perpetual basis) will fall within the protections in the Directive should an agency agreement be terminated. 

However, the position is not so clear where software is provided with a licence limited by time (ie not perpetual). In such circumstances, it remains unclear whether the supply would be a “sale of goods” and whether the agent would fall within the definition of a commercial agent under the Directive.

Any practical tips?

When considering distribution of software, note that an agency agreement may fall within the scope of the Directive. Ensure that an agency agreement concerning the supply of software on a perpetual basis complies with the Directive’s requirements, and consider the basis of payments on termination. Before considering whether to terminate such an agency agreement, review the terms of the agency agreement and the terms of the relevant software user licence(s) to determine whether termination payments may be triggered and the calculation of any such payments under the Directive.