The High Court has recently ruled that the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053)(the Regulations) did apply to a situation where an agent was selling commoditised software on behalf of its principal (The Software Incubator Ltd v Computer Associates Ltd  EWHC 1587). It had been previously thought that such arrangements were outside the scope of the Regulations (which only apply to agents who supply goods on behalf of their principal, not services) save in situations where software was bundled in with hardware.
This could have significant implications for software resellers who may, if now protected by the Regulations, be entitled to significant compensation if the agency arrangement breaks down. This generous and modern reading of 'goods' for the purpose of the Regulations may also have ramifications for other agency arrangements, not previously thought to have been caught by the Regulations.
What are the Commercial Agents Regulations?
The Regulations were introduced to bring the law of agency in the UK into line with other EU member states. They implement the Commercial Agents Directive (86/653/EC) (the Directive). The intention of the Directive was to enhance and protect the position of commercial agents in relation to their principals and to harmonise the different national laws on commercial agency agreements.
Broadly speaking, the Regulations apply to agents who sell or purchase goods on behalf of their principal. If they apply then they can have a big impact on the nature of the relationship and the protections available to the agent. While some provisions can be expressly contracted out of, others cannot.
The Regulations contain detailed provisions how commission should be calculated and when it should be paid.
Perhaps most importantly, the agent may be entitled to commission for post-termination sales and compensation will be payable in the event that the agreement is terminated, regardless of the reasons for the termination. This may be calculated on an indemnity basis or compensation basis. This is intended to reflect the value of the goodwill the agent has generated for the principal. If the agreement does not contain any provisions for how this payment is to be calculated, the payment will be calculated on a compensation basis. These can result in significant pay-outs on the part of the principal.
Principals entering into agency arrangements that are caught by the Regulations should be aware of the cost implications of terminating the arrangement and aim to factor this in to the commercial offering.
In this case The Software Incubator Ltd (TSI) had a contract with Computer Associates UK Ltd (CA) under which TSI was appointed to promote specific software to CA customers. The relationship broke down with CA seeking to terminate on notice on the grounds of repudiatory breach. TSI counterclaimed against CA for compensation under the Regulations, as well as commission on post-termination sales and damages. CA defended the claim on the basis that the Regulations did not apply to this relationship.
The Status of Software
The judge, Waksman J found that TSI was protected by the Regulations as software could amount to goods for the purpose of the Regulations. While noting that this conclusion had not been drawn in the past, Waksman J held that the modern interpretation of a software product should allow it to be treated as a good, albeit that it is not tangible.
The Regulations themselves do not provide a definition for "goods" however this has traditionally been read to mean goods as defined in the Sale of Goods Act 1979 which states that goods includes all personal chattels other than things in action and money.
Waksman J considered the non-exhaustive nature of the list to be relevant, but noted in any case that a definition that may be apt for the pure law of sales of goods may not be apt for the purposes of the Regulations, as there were a number of supplies that were now caught by the Regulations (utilities being an obvious one) that are not caught by the Sale of Goods Act definition.
He thought it was relevant that in common parlance a piece of sophisticated, commercial non-bespoke software is regarded as a product. While not falling squarely within the definition of goods in the Sale of Goods Act sense, it was not obviously a service either. Waksman J said whether a software product is delivered on tangible media or electronically was not relevant, stating: "the essential characteristics of a piece of software…cannot depend on its mode of delivery any more than the nature of tangible goods depends on whether they are transported by rail, sea or air."
In finding that software amounted to goods in this instance, Waksman J summarised his conclusions as such:
"(1) It is permissible and indeed desirable to have an autonomous definition of sale of goods for the purpose of the Regulations; how software is treated within the "pure" law of sale of goods is of limited assistance;
(2) Where the "goods" in question here, software are treated in the agency agreement in the same way as other "tangible" goods, they should be interpreted in the same way when they are clearly a "product" and not, for example, a service;
(3) In the modern world, and in the case of the Regulations, there is no reason to require the Product to be tangible or a "chattel" in the traditional sense, especially when installed so as to operate in a physical (i.e. hardware) environment;
(4) There is nothing in EU or domestic legislation or case-law to prevent this interpretation;
(5) The fact that the proprietorial character of software is intellectual and not real or personal does not alter the position."
A key aspect of the finding that there had been a sale of goods was the fact that the licences being sold by TSI were perpetual, allowing the purchaser unfettered ability to use the software product forever (subject to certain normal restrictions and upgrades). Interestingly, the Judge stated that software was much more than just intellectual property and so found that the right of continued use amounted to a sale notwithstanding the fact that the proprietor continued to own the underlying intellectual property rights. The distinction between a perpetual licence and a limited licence was not fully discussed in the judgement but it is, I would argue, an important one.
While the desire to give a modern interpretation to the Regulations is refreshing, one has to wonder whether this judgment will only cause further confusion and litigation in this area as principals seek to push back on the financial implications of being caught by the Regulations. It is still not clear where the precise boundary between those supplies of software that are caught by the Regulations and those that are not lies.
Certainly on the other end of the scale one assumes that software licensed on an annual basis and provided through the web through the Software as a Service (SaaS) model will not be affected by this judgement as there is no 'sale' as the concept is understood in this judgement; nor is the software installed so as to operate on the customer's physical (hardware) environment. Of course there will be many business models that fall somewhere between the two and it is here where we think the confusion could lie in the future.
From a common-sense / policy perspective it is perhaps hard to see the logic behind a judgment that provides protection to resellers who sell software under a perpetual licence, while not providing protection to those who sells time-limited licences, and so while this judgment is limited to perpetual licences, we might see a further widening of this interpretation in the future.
What does it mean in practice?
Software providers who use resellers with the authority to negotiate and conclude contracts on behalf of their principals for the sale of unlimited licences for software products should carefully assess the basis upon which the reseller is engaged to determine whether the Regulations apply and, if they do or might do, the implications arising. If they do not, then they could be stung by the no-fault automatic compensation mechanisms provided for in the Regulations.
Considering the issue more widely, the judgment is likely to have implications for agents selling e-books and other digital downloads, which are also considered as 'products' in common parlance and 'sold' on the basis of a perpetual licence, for download onto a physical environment.
One final thought. As with so much of our national legislation, and in this new post-Brexit world, one must consider the future of a set of regulations one of whose core purposes was to harmonise the treatment of agents across the EU member states. If the UK does decides to repeal or significantly modify the Regulations this would raise a whole host of questions about the validity and appropriateness of agency agreements which are governed by English law and which have been drafted on the basis that the Regulations do or might apply.
If you require further information on anything covered in this briefing please contact Jane Randell (firstname.lastname@example.org / 020 3375 7198) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Intellectual Property and Technology page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2016