Insights

In a preliminary ruling delivered on 16 September 2021, the Court of Justice of the European Union (the “CJEU”) in ‘The Software Incubator Ltd vs. Computer Associates (UK) Ltd’ held that the supply of a license to computer software falls within the definition of ‘sale of goods’ under 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” or “the Directive”)

By way of background, the Commercial Agents Directive is aimed at coordinating Member State laws governing the relationship between commercial agents and principals and providing self-employed commercial agents with the minimum protection at law. One of the key features and protections embodied within the Commercial Agents Directive is the right to compensation which is granted to the commercial agent upon the termination of the contract if damages are suffered as a result of such.

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

For the purposes of this Directive, ‘commercial agent’ shall mean a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person, hereinafter called ‘the principal’ or to negotiate and conclude such transactions on behalf of and in the name of that principal.’

From a reading of the above article, one can appreciate that it is the sale or purchase of goods which falls within the scope of the Commercial Agents Directive, and not the promotion or selling of services. The latter falls outside the ambit of the Commercial Agents Directive and therefore if a person is engaged in providing a service and not in the sale or purchase of goods, s/he would not enjoy the rights and protections provided by the Commercial Agents Directive. A problem often arises when interpreting what constitutes a good and what constitutes a service.

This classification issue was also encountered in the Software Incubator Ltd vs. Computer Associates (UK) Ltd case. In a nutshell, Computer Associates (UK) Ltd (the “principal”), a company which markets application service automation software for developing and managing applications across a data centre, had entered into an agreement with The Software Incubator Ltd (the “applicant”). The applicant was tasked with approaching potential customers within 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 the customers with a link to download the principal’s software. The agreement was eventually terminated by the principal.

Feeling aggrieved by this decision, the applicant brought an action before the High Court of Justice (England & Wales), Queen’s Bench Division (United Kingdom) (the “High Court”) seeking compensation from the principal, as guaranteed under the provisions of the Commercial Agents Directive. The principal contested this, holding that the relationship between the applicant and the principal was not of a commercial agent nature, given the fact that the supply of computer software to a customer does not fall within the definition of a ‘sale of goods’ under Article 1(2) of the Commercial Agents Directive and therefore the right to compensation does not arise.

The High Court, in disagreeing with this classification, made reference to the Commercial Agents (Council Directive) Regulations 1993, the law which transposed 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 by way of compensation, to be paid by the principal.

An appeal was lodged by the principal in the Court of Appeal (England & Wales) (Civil Division) (United Kingdom) (the “Court of Appeal”). Straying from the decision that the High Court took, the Court of Appeal held that the supply of software did not in fact fall within the definition of ‘sale of goods’ and therefore the applicant was not to be considered as a commercial agent. Therefore, the Court of Appeal rejected the claim for compensation.

This time, the applicant chose to file an appeal before the Supreme Court of the United Kingdom (the “Supreme Court”). The Supreme Court chose to stay the proceedings and sought a clarification from the CJEU about the matter by asking the following:

1. 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 Council Directive 86/653/EEC of December 1986 on the co-ordination of the laws of Member States relating to self-employed commercial agents?
2. Where a 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 “sale of goods” within the meaning of that term as it appears in the definition of the commercial agent in Article 1(2) of the Directive?

For clarity’s sake, although the preliminary ruling was made by a UK Court, meaning that it was made by a Court which is not a member state of the EU, by virtue of Article 86 of the Withdrawal Agreement entered into between the EU and the United Kingdom, the CJEU has jurisdiction over any preliminary reference made before the end of the transition period.

In its ruling, the CJEU first observed how the concept of ‘sale of goods’ is not defined within the Commercial Agents Directive, while highlighting the need to have a harmonised definition of the concept across all 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 that can be valued in money and which are capable of forming the subject of a commercial transaction. Therefore, since computer software has a commercial value and is capable of forming the subject of a commercial transaction, it does indeed fall within the definition of ‘goods’, irrespective of the medium upon which it is provided. The fact that the software is downloaded by means of a link and is not given to the customer by means of a tangible medium is immaterial, as, from an economic point of view, the link method is functionally equivalent to the supply of a material medium, as established in Usedsoft C-128/11. Therefore, the software is to be classified as a good.

In defining the concept of ‘sale’ the CJEU held that a sale is 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. In the CJEU’s view, the making available of a copy of computer software by means of a download and the conclusion of a user licence agreement for that copy, with the end goal being of making that copy available to the customer on a  permanent basis, and in return for payment of a fee designed to enable the copyright holder to obtain a remuneration corresponding to the economic value of the copy, involving the transfer of the right of ownership of that copy, was a transaction that fell within the meaning of sale.

Therefore, the CJEU reached the conclusion that the supply, in return for a payment of a fee of computer software to a customer, by use of electronic means where that supply is accompanied by the grant of perpetual license to use that software, falls within the concept of sale of goods under the Commercial Agents Directive and therefore, commercial agents carrying out such activity are guaranteed the protections as arising from the Directive.

The CJEU further held that if such an interpretation is not adopted, commercial agents availing themselves of modern technologies when carrying out their duties would fall outside of the scope of the Commercial Agents Directive meaning that they would be excluded from the protections granted by the same Directive.

In justifying the stance taken, the CJEU also made reference to the Commercial Agents Directive’s rationale itself. It held that a wide interpretation of the concept of ‘sale of goods’ is necessary so that the Commercial Agents Directive can live up to its aims, which are the protection of commercial agents in their relations with their principals, the promotion of security of commercial transactions, and the facilitation of trade of goods between the Member States by harmonising the concept of commercial representation.

This report was first published in the Malta Independent.