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Court of Appeal ruling on software sales agents

22/03/2018
The Court of Appeal issued a ruling on 19 March 2018 that impacts software owners and their sales agents. The ruling reverses an earlier High Court decision. It's now clear that agents who negotiate or conclude software licences are not protected by the UK's Commercial Agents (Council Directive) Regulations 1993 ("the Regulations") if the customer receives the software solely in intangible form, for example, by downloading it.

The Court of Appeal issued a ruling on 19 March 2018 that impacts software owners and their sales agents.  The ruling reverses an earlier High Court decision. It's now clear that agents who negotiate or conclude software licences are not protected by the UK's Commercial Agents (Council Directive) Regulations 1993 ("the Regulations") if the customer receives the software solely in intangible form, for example, by downloading it.

Here's a link to the Court of Appeal judgment:  Computer Associates UK Limited v The Software Incubator Limited [2018] EWCA Civ 518

Where the Regulations apply, they give agents valuable rights. The most important of these is the right to receive compensation or an indemnity on termination of the agency agreement. Protected agents also have the right to receive commission on sales concluded during and after termination of the agency agreement, and the right to be paid within specified time periods. There are other protections too, such as controls on the principal's use of restraint of trade clauses. An agent who deals with software that is delivered to customers solely in intangible, electronic form will not have these rights. Instead, the agent will have to rely purely on its contractual and common law rights. 

The Regulations implement a 1986 European Directive and apply to independent agents who have continuing authority from their principals to negotiate and/or conclude sales of goods.  The Court of Appeal decision hinged on whether software in intangible, electronic form constitutes "goods" under the Regulations. Neither the Regulations nor the 1983 Directive define "goods". The Court of Appeal took into account the fact that case law - albeit mostly in areas outside the Regulations - consistently treats tangible software as "goods" and intangible software as "not goods".  The Court recognised that it might seem arbitrary and illogical to treat agents differently based on the method used to deliver the software to the customer, but the Court said that its decision had to be consistent with the weight of previous authority.  From a policy perspective, there might be sound reasons for removing any distinction between tangible and intangible software under the Regulations, but it wasn't for the Court to do that.  Any policy change would have to be implemented through legislation.

Once the Court had decided that intangible software does not constitute "goods" under the Regulations, it didn't have to answer other points that were raised on appeal.  That's disappointing because it leaves a small lingering uncertainty over whether the grant of a software licence is a "sale" under the Regulations at all.  The High Court in Computer Associates v TSI ruled in 2016 that the grant of a perpetual software licence in return for a one-off licence fee is a "sale" under the Regulations, but based this decision on the approach taken by the Court of Justice of the European Union in a case - (UsedSoft - C-128/11) -  that wasn't concerned with the Regulations or the 1986 Directive; UsedSoft was concerned with the first sale doctrine in relation to software under the European Software Directive.  A Court of Appeal ruling confirming whether a licence constitutes a "sale" under the Regulations would have given software providers and their agents some welcome certainty.

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