The Commercial Agents Directive – electronically supplied software can constitute “goods’’

In a recent decision the European Court of Justice (ECJ) has found that the supply of computer software by electronic means only (as opposed to software provided on any physical media) constitutes ‘goods’ for the purposes of the EU Commercial Agents Directive (86/653/EEC) (the “Directive”)

The Issue

This judgment follows a period of uncertainty as the meaning of ‘goods’ is not defined in either the Directive or the Commercial Agents Directive 1993 (the “Regulations”) which implements the Directive in the UK.  It is a significant decision because the Regulations provide protection to agents involved in the supply of goods, but not those involved in the supply of services. Previous cases had held that tangible software bundled within hardware or supplied on physical media, like a disk, constituted ‘goods’ but that software supplied via digital download without involving tangible digital media (like a USB stick) constituted a ‘service’.

Basis for the Decision

The ECJ judgment relied upon consideration of the wider context of goods in relation to a sale.  This was necessary because Article 1(2) of the Directive refers to the concept of the ‘sale of goods’ but does not explain its meaning. The ECJ addressed both the meaning of ‘goods’, and a ‘sale’ and concluded that:

‘Goods’: Computer software has a commercial value and can form the subject of commercial transactions and therefore satisfies the meaning of a ‘good’. This is the case irrespective of whether it is supplied on a tangible medium or electronic download.

A ‘Sale’: A ‘sale’ is an agreement whereby a person, in return for a payment, transfers their ownership rights in an item of tangible or intangible property. The downloading of a computer program would be pointless if it could not then be used. Therefore, this action should be viewed as inseparable from concluding a licence agreement to make use of the program.  Accordingly downloading software and entering into a licence agreement to make that copy permanently usable by the customer in return for a payment, involves the transfer of the rights of ownership and satisfies the meaning of a ‘sale’.

Therefore, the term ‘sale of goods’ covers the supply of computer software by electronic means, in return for a fee, where that supply is accompanied by the grant of a perpetual user licence.

The ECJ also considered if the effectiveness of the protection granted by the Directive would be undermined if the supply of software by electronic download were excluded from the concept of ‘sale of goods.’ This might allow a principal to avoid paying compensation due to agents simply by arranging for goods to be supplied by intangible means.

Implications

It remains unclear as to whether this decision can also apply to ‘software-as-a-service’ applications (whereby software is centrally hosted rather than downloaded and accessible on a subscription basis only). Whilst such applications now constitute a ‘good’ within the meaning of the ECJ ruling, they still fall outside the meaning of a ‘sale’.

Going forwards

It seems probable that the UK Supreme Court will adopt this ruling as UK law, in which case it will bring more agents involved in the sale of software within the scope of the Regulation and the protection it offers, including the right to receive compensation or indemnity payments on termination of their agreements. It would be prudent therefore for software companies to review the contracts they use for appointing agents in view of these developments, particularly the provisions dealing with the consequences of termination.