Agency and goodwill indemnity - is electronically supplied software "goods" or not?
By Inge Kristian Brodersen & Kaare M. Risung.
On 17 December 2020, the EU General Advocate Tanchev published an opinion in response to a request for a preliminary ruling by the EU Court of Justice (CJEU) from the UK Supreme Court regarding the concepts of "goods" and "sale of goods" in the context of electronically supplied software. The topic of the opinion concerns whether the supply of computer software to a principal’s customers by electronic means accompanied by the grant of a licence can be characterized as the "sale" of "goods" within the meaning of Article 1(2) of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents ("the Agency Directive").
The overarching objective of the Agency Directive was to move towards a single market for commercial representation and improve the conditions of competition by facilitating the conclusion and operation of commercial representation contracts across borders through harmonized rules. The Agency Directive defines the commercial agents falling under its scope and harmonises the rights and obligations of commercial agents and their principals. Amongst other rights, the Agency Directive provides minimum notice periods and goodwill indemnity for commercial agents upon termination of an agency agreement. 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 Agency Directive.
The dispute between Software Incubator Ltd. and Computer Associates UK Ltd.
The background of the specific case relates to an agent agreement for software signed in 2013. Software Incubator Ltd. ("SI") and Computer Associates UK Ltd. ("CA") entered into an agency agreement for the promotion, marketing and selling of CA's software. CA was the principal and SI was the agent. The purpose of CA's software is to coordinate deploying and upgrading other software applications across large organizations. In September 2013, SI entered into an agency agreement with another software company, Intigua, which was on terms similar to the agreement with CA, whereby SI agreed to promote and market the Intigua software in UK/Ireland. On 9 October 2013, CA terminated its agreement with SI on the alleged basis that SI, by reason of accepting an engagement with Intigua, was in breach of its duties: (a) to devote substantial time and effort to performing its obligations under the agreement with CA, and (b) not to engage in any activity competing directly with CA's software.
SI brought an action against CA claiming compensation pursuant to the provisions of the UK regulations implementing the Agency Directive. In 2016, the High Court awarded compensation to SI under the Agency Directive and held that electronically supplied software amounted to “goods” and the supply of the software by way of a perpetual licence amounted to the “sale of goods” within the meaning of the Agency Directive. CA lodged an appeal, and in 2018 the Court of Appeal reversed the judgment by the High Court. According to the Court of Appeal, only tangible property can be "goods" within the meaning of the Agency Directive. In other words, software supplied in tangible form such as on a disk is capable of being a "sale of goods", while electronically supplied software is not.
SI lodged an appeal, and in 2019, the Supreme Court decided to refer two questions as to the meaning of the Agency Directive to the CJEU:
(1) whether electronically supplied software amounts to goods; and
(2) whether the supply of software by way of a perpetual licence to use it amounts to the sale of goods.
The opinion of the general advocate
Regarding question 1, the General Advocate proposes that the CJEU's preliminary ruling should be that electronically supplied software amounts to “goods” within the meaning of Agency Directive. The General Advocate stresses the importance of an "autonomous and uniform interpretation throughout the EU, which is independent of national legislation". When interpreting Article 1(2), the General Advocate takes into account the wording, its context, objectives, as well as its origins.
The General Advocate stresses that the wording of the Agency Directive does not specify the meaning or scope of the term "goods". Also, he asserts that the words in other language versions do not appear to restrict the interpretation to tangible items and, thus, that the wording of the Agency Directive allows for a "broad interpretation" of the term "goods". He makes a distinction between this case and Mavrona in which the CJEU rejected extending the scope of the Agency Directive to "commission" agents due to it being explicitly excluded from scope by the wording of Article 1(2).
The General Advocate points out that during drafting, the delegates discussed whether to exclude "services" from the scope of the Agency Directive or not. According to the General Advocate, the agreed term "goods" came out of that discussion, and not as a "conscious" decision to delineate between tangible and intangible products: "[…] that term was intended to cover in a broad sense the subject matter of transactions which represented the main activities of commercial agents, and […] not necessarily limited to tangible and moveable items."
The General Advocate specifically argues that electronic games (including computer games) are "goods" notwithstanding their intangible nature, and that the Court's rulings in Sacchi (regarding transmission of TV signals) and Jägerskiöld (regarding fishing rights and permits) did not indicate a general limitation of "goods" to tangible items, as said activities were deemed "services" due to "specific circumstances of those cases".
He also finds support for his "broad interpretation" the term "goods" in other fields of EU law in which the term "goods" sometimes expressly includes electronically supplied software (e.g. measures on trademarks and medical devices) and sometimes not (e.g. measures on customs and VAT). The opinion states that the EU consumer contract law directives 2011/83 (Consumer Rights), 2019/770 (Contracts for the supply of digital content and digital services) and 2019/771 (Contracts for the sale of goods) "represent the EU legislature’s intention to develop special rules to accommodate digital content, including computer software, in consumer contracts without disturbing the traditional notion of ‘goods’ which, unlike Directive 86/653, is explicitly tied to tangible items".
Finally, the General Advocate finds it to be contrary to the objective of the Agency Directive to limit the term "goods" to tangible items, as it "would have the effect of failing to protect commercial agents who negotiate the sale of the same item supplied in intangible form".
Regarding question 2, the General Advocate proposes the CJEU's preliminary ruling should be that supply of software by way of a perpetual licence to use it amounts to the “sale of goods” within the meaning of the Agency Directive. Similarly to question 1, he underscores that the term "sale" must be regarded an autonomous concept of EU law to be applied uniformly and applies an interpretation based on the wording, context and objectives of the Agency Directive.
He is not able find support in the wording of Article 1(2) of the Agency Directive of a specific indication on how the term "sale" should be understood. Instead, the General Advocate draws a parallel with a previous judgment UsedSoft in which the CJEU applied a broad interpretation of the term "sale", including all forms of product marketing by grant of right to use a copy of a computer program for an unlimited period in return for a payment fee. Again, he believes it would be contrary to the objectives of the Agency Directive to differentiate between "licence" and "sale" given that software is most often marketed through licences and a differentiation would exclude several commercial agents from the rights given under the Agency Directive. In summary, the General Advocate concludes that that the Agency Directive applies to an agent engaged to promote the computer software in question, and that the claim in the abovementioned case for compensation based on the Agency Directive can succeed.
The opinion comes as a surprise to software owners, principals and practitioners who have relied on a strict interpretation of the Agency Directive as implemented in national law. As in the EU, the Norwegian Supreme Court has been hesitant to expand the applicability of the agency act.
Of course, the opinion from the General Advocate is in itself a proposal, which the CJEU in theory is free to reject. However, an opinion from the General Advocate is an important factor in CJEU's rulings and is often indicative of the conclusion of the court. Should the CJEU follow the General Advocate's opinion and deem licensing of software as sale of goods, then the software industry and other service industries who rely on distribution through agents must carefully review its distribution strategy. A ruling along the lines of the General Advocate's ruling will increase cost of distribution through agents and shift the balance towards resellers or distributors. The ability of the software owner to set resale prices for agents will however not be affected and remain as the key argument in favor of agency.