Does Brexit create uncertainty for online software sales agents?
The UK’s departure from the EU means that online software sales agents could face continued uncertainty, according to Hunters’ partner, Richard Baxter.
The Court of Justice of the European Union (CJEU) recently handed down a landmark judgment, which held that software products supplied online with perpetual licences (so distinct from SaaS arrangements) are to be considered goods rather than services. It should be noted that the relevant software was in fact licensed on both indefinite or limited period licences, subject to termination on licensee insolvency and/or material breach. The CJEU found, however, that ‘in practice’ licences were granted indefinitely. The latter point may be of significant interest to software owners and their agents particularly with regard to internal licence management and administration.
The issue was referred to the CJEU by the UK Supreme Court (UKSC) in 2019 when the UKSC stayed its own proceedings pending the CJEU ruling. Now the CJEU has delivered its determination, the UKSC is yet to rule definitively on the matter, but it appears likely to accept the CJEU’s determination and base its reasoning around that, not least because it referred the matter to CJEU before the end of the transition period. The CJEU’s judgment may therefore represent an important interjection into the long-standing legal debate around the sale and supply of software and whether such is classified as a service or goods.
On 16 September 2021, the CJEU delivered its judgment in the case of The Software Incubator Ltd. v Computer Associates (UK) Ltd (C-410/19). The CJEU acknowledged that that Council Directive 86/653/EEC (the Commercial Agents Directive) did not define the concept of “sale of goods”. It also acknowledged that the directive did not reference national law as defining the “sale of goods” and the court therefore held that the meaning of “sale of goods”, in terms of the Commercial Agents Directive, must be given “an autonomous and uniform interpretation” throughout the EU, applying the “principle of equality”. The Commercial Agents Directive was implemented into UK law by the Commercial Agents (Council Directive) Regulations 1993 (Statutory Instruments 1993/3053) (the Regulations).
The factual background of the case was that a UK company, Computer Associates (UK) Limited (Computer Associates), created software, which it supplied as an electronic download accompanied by what has been held by CJEU to be, in practice, a perpetual licence. It entered into an agency agreement with The Software Incubator Ltd in March 2013 for the software to be promoted in the UK and Ireland (the Agreement). However, in September 2013, The Software Incubator Ltd also entered into a similar agreement with another company, Intigua, to promote and market Intigua’s software in the UK and Ireland.
In October 2013, Computer Associates terminated the Agreement summarily on the basis that The Software Incubator was in breach of its contractual obligations to devote “substantial time and effort” to performing its obligations, and to refrain from engaging in direct competition with their software.
The Software Incubator then brought High Court proceedings for damages for breach of contract and also sought compensation under the Regulations. Computer Associates argued that the Regulations did not apply on the basis that software supplied electronically did not amount to “goods” within the meaning of regulation 2(1) of the Regulations. The High Court disagreed and awarded damages, both under the Regulations and for breach of contract.
Computer Associates appealed the High Court’s decision. The Court of Appeal then allowed Computer Associates appeal on the meaning of “goods” in regulation 2(1), that the sale of electronically supplied software was a sale of “goods” within the meaning of regulation 2(1) to the Court of Appeal. This decision was in turn appealed to the UKSC, which stayed proceedings pending a ruling from the CJEU as to the key question in the case.
On 27 May 2019, the UKSC posed the following to the CJEU for a preliminary ruling:
“Whether the supply, in return for payment of a fee, of computer software to a customer by electronic means where that supply is accompanied by the grant of a perpetual licence to use that software fell within the definition of a “sale of goods” under Article 1(2) of the Council Directive 86/653/EEC?”
As stated above, the preliminary ruling of the CJEU has found that the supply of such software constitutes sale of goods.
Impact of Brexit
This question was, of course, posed at a time when the UK was still an EU member state and the precise terms of the UK’s withdrawal were unclear. The UK withdrew from the EU formally on 31 January 2020, and the implementation period ended on 31 December 2020.
Article 86 of the Withdrawal Agreement with the EU deals with pending cases before the ECJ, stating that the “Court of Justice of the European Union shall continue to have jurisdiction to give preliminary rulings on requests from courts and tribunals of the United Kingdom made before the end of the transition period”. That period has now passed. The Supreme Court states that it, and some other UK appellate courts, are now“free to depart from decisions of the Court of Justice of the European Union taken before 11pm on 31 December 2020. In deciding whether or not to depart from this retained EU case law, the courts will apply the same test that the Supreme Court applies when deciding whether to depart from its own case law. This means that the Supreme Court (and other relevant UK appellate courts) will depart from a previous decision of the Luxembourg Court where it appears right to do so.”
Therefore, while the CJEU’s ruling is undoubtedly significant, some uncertainty will remain until we learn whether or not the UKSC adopts that ruling. It is however reasonable to assume that the UKSC, as currently constituted, is likely to accept the substance of the CJEU judgment.
The overall effect of the judgment is that even when it is delivered intangibly, as a download, software is a “good”, in terms of the Regulations, where it is accompanied by a perpetual licence or what is in practice a perpetual licence. Should this be accepted by the UKSC, it would mean that agents who resell such software for principals will have greater protections as commercial agents who negotiate the sale of goods on behalf of a principal.
The Regulations impose certain mandatory provisions into contracts between agents and principals which software companies using agents should now be mindful of. Certain duties are imposed on the agent and the principal by the Regulations.
This case provides a timely reminder that while the UK still currently retrains a great deal of EU law post-Brexit, and much of this is set to remain in place for the foreseeable future, it has reverted to the position where its own Supreme Court is not subject to appeals to the CJEU or bound by future decisions of the CJEU.
Although many will feel that it is likely that the UKSC will follow the CJEU’s ruling, it may well add some nuance to it, so we will continue to ‘watch this space’ closely. If the CJEU’s essential finding that software is a good, and not a service, forms part of the Supreme Court’s eventual judgment and that ruling will then be binding on the lower UK courts. This may alleviate concerns that the UK’s departure from the European Union (EU) could result in ongoing uncertainty for software sales agents, acting both domestically in the UK and in a cross-border capacity into the EU.
In light of the CJEU’s judgment, and pending final judgment from the UKSC, the Regulations should be considered carefully where principals are considering terminating their agreements with agents. The Regulations can entitle agents to receive significant compensation in certain circumstances. Where agents selling downloadable software have had their contracts terminated in the past, some may now be minded to consider taking retrospective legal action seeking compensation should the CJEU ruling be upheld in the Supreme Court.
Businesses selling software with perpetual licences through online sales agents should now consider undertaking a review of their agreements and arrangements. It may be appropriate to take legal advice as to the potential impact of the CJEU ruling and the ultimate UKSC judgment on both current arrangements and indeed upon any past arrangements, which could yet give rise to a claim for compensation.
Richard Baxter is a partner at Hunters Law LLP