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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

The Court of Justice of the European Union (CJEU) has held in Case C-410/19 The Software Incubator Ltd v Computer Associates (UK) Ltd that the supply of software by electronic means, where accompanied by the grant of a perpetual user license in return for a fee, could constitute a “sale of goods” for the purpose of defining a commercial agent under the EU Commercial Agents Directive (the Directive).

Providers of software for resale in the United Kingdom and/or European Union should be cognizant of the clarity now provided; resellers could qualify as commercial agents and be entitled to certain statutory protections, such as minimum notice periods for termination and post-termination payments.

CJEU’s Decision

Under the Directive and the implementing UK Commercial Agents Regulations (the UK Regulations), “sale of goods” is not defined. This had led to a lack clarity as to whether resale agents of software could qualify as commercial agents under the Directive and the UK Regulations; previously in the Software Incubator case, the UK Court of Appeal held that the electronically provided software at issue did not constitute a “sale of goods.” On appeal, the UK Supreme Court referred the following two points for preliminary ruling by the CJEU:

  • Whether software supplied to a principal’s customers electronically, and not on any tangible medium, constitutes “goods” within the definition of a commercial agent under the Directive.
  • Whether software supplied to a principal’s customers by way of the grant to the customer of a perpetual license to use a copy of the software constitutes a “sale of goods.”

The CJEU considered these questions together and answered both affirmatively. The CJEU also confirmed the equivalence, from an economic point of view, of the sale of tangible software in the form of a CD-ROM or DVD and the sale of digital forms of such software—e.g., downloaded from the internet.

The CJEU’s ruling is binding on the UK Supreme Court by virtue of the UK-EU Withdrawal Agreement, as the Supreme Court’s referral was made before the end of the transition period on December 31, 2020.

Constituting a Commercial Agent

Under the UK Regulations, there are three necessary conditions for a person or entity to be classified as a “commercial agent”: (1) they must be a self-employed intermediary; (2) they must be bound to the principal by a contractual relationship of a continuing character; and (3) they must exercise, on behalf of and in the name of the principal, an activity which may consist either in simply being an intermediary for the sale or purchase of goods or in acting both as intermediary and concluding sales or purchases of goods.

With the clarity provided by the CJEU, a reseller could be a commercial agent if appointed by a software provider for a specified term to sell to end-customers in the United Kingdom, in return for a fee, a perpetual license to use software under the terms of an end user license agreement (EULA) between the software provider and the end-customer; in this example, the reseller would be appointed to agree the EULA on behalf of and in the name of the software provider.

This is distinct from a distributorship under which an independent intermediary would sell use of software to its own customers under the distributor’s contract for sale and in its own name.

It is also worth highlighting that the CJEU’s decision relates to a perpetual license for use, rather than a term-limited license. For software-as-a-service, the end-customer typically receives a license for as long as it pays the usage fee, and that arrangement would not fall within a “sale of goods” as considered by the CJEU.

Commercial Agency Considerations

If an arrangement constitutes commercial agency, this may provide the following statutory protections for the agent, among others:

  • The software provider must inform the agent within a reasonable period of its acceptance or refusal of any commercial transaction negotiated or concluded by the agent.
  • Post-termination restrictions could be prohibited from lasting for more than two years following termination.
  • Requirements around the structure of commission (and a risk of double commission) may apply unless expressly contracted out.
  • On termination, an agent may have a right to compensation for “lost” commission that it would have otherwise generated.

These are just some considerations if a software resale arrangement were to constitute a commercial agency relationship in the United Kingdom. In the European Union, certain national rules of EU member states which implemented the Directive may vary.

Software providers and resellers may wish to review their arrangements in light of the CJEU’s decision and consider if commercial agency does need to be considered. As any consequences of commercial agency will be fact specific, it is important to seek legal advice if this may be a concern.