Software – goods or services?

On the eve of Brexit (or so we thought) last month the Supreme Court decided to refer two questions to the Court of Justice of the European Union (the CJEU). The questions concerned the meaning of “goods” and “sale of goods” in the Council Directive 86/653/EEC of December 1986 (the Directive).

The law

The Directive was incorporated into UK law by the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) which came into force on 1 January 1994 (the Regulations). It sought to enhance and protect the position of commercial agents in relation to their instructing principals and the Regulations make these rights enforceable for commercial agents in the UK.

Amongst other rights, the Regulation provides minimum notice periods and compensation for commercial agents upon termination of an agency agreement.

A “commercial agent” is defined as a self-employed intermediary who has continuing authority to negotiate the sale and/or purchase of goods on behalf of another person (the principal) or in the name of the principal. The question of whether a person is a commercial agent or not therefore rests, in part, on whether they are aiding in the supply of goods or services. If the intermediary is involved in the supply of services, the intermediary is not a commercial agent that can benefit from the rights and protections afforded by the Regulations.

The Regulations do not define goods or services. Consequently, whether a product is a good or a service has been considered by the courts on many occasions. In relation to software, the position has also been considered on a number of occasions. Most recently in Accentuate Ltd v Asigra Inc [2010] the position was said to be that software was intellectual property and would only be considered goods, under the Regulations, if supplied on a disc or with some form of hardware.

The case – Computer Associates (UK) Ltd (Respondent) -v- The Software Incubator Ltd (Appellant)

Software Incubator Ltd (the Agent), acted as a sales agent for Computer Associates (UK) Ltd (the Principal). The Agent would negotiate and sell the Principal’s software. The Principal’s software was designed to give effect to the automatic deployment of, or changes to, other applications across a large computer network. As such the software was an intangible product that cannot be physically handled or seen, but its effects can be observed through the computer or similar product.

Upon the conclusion of a sale, the software would be electronically supplied to the end customer i.e. downloaded, rather than delivered in tangible form on a disc or bundled with hardware. Therefore, the contested issue in this case was whether the software constitutes “goods” and whether the electronic supply of the software amounts to “sales of goods”.

The High Court held in the affirmative and awarded compensation to the Agent under the Regulations. Waksman J held that software was goods even when supplied in an intangible form. However, the Court of Appeal unanimously overruled this decision last year stating that any change to the current law was a matter for European legislation and the UK parliament, not the courts.

The Agent has appealed this decision to the UK Supreme Court and a hearing was held on 28 March 2019. At this hearing, the Supreme Court decided to refer these two long-disputed questions to the CJEU for guidance.

How long will it take to receive the CJEU’s preliminary ruling? How long is a piece of string? In 2016, the average duration of requests for preliminary rulings was 15 months. With the Brexit deadline delayed until 31 October 2019, it remains to be seen whether the Supreme Court will receive its ruling on these two questions before then, and if not before Brexit, whether it shall ever receive such guidance.

For those working in the technology sector this may seem like an antiquated debate with online and electronic downloads becoming increasingly common in the modern day. Even the Court of Appeal admitted that their decision could be deemed “out-moded in light of technological advances” (Lady Justice Gloucester at paragraph 19 of the Judgment). However, that is the status of the current law and we shall wait to see whether the CJEU has a differing interpretation.

If you would like to discuss how the Regulations affect your business, please contact Nick Phillips or any member of the Edwin Coe Intellectual Property Team.

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