Landmark ruling affecting software vendors and resellers – Software sold with a perpetual licence is a ‘sale of goods’ under commercial agents law

Wednesday 22nd September 2021

Whether to categorise software as goods or services has been an issue for the Courts for some time. To date the concept has depended entirely on the delivery medium – if the software is delivered on a CD or other tangible medium it’s goods; if it’s delivered electronically it’s services.

However, in a landmark case following a referral from the UK’s Supreme Court, the EU Court of Justice have ruled that the electronic supply of computer software, licensed for an unlimited period in return for the payment of a fee, constitutes a sale of goods within the meaning of the Commercial Agents Regulations. The case will now go back to the Supreme Court which is bound to follow the CoJ’s ruling under the UK/EU Withdrawal Agreement.

What are the practical implications of this case

We need to wait for the outcome of the Supreme Court’s application of the ruling, though the decision has significant implications for the software industry and the reseller business model.

Following the ruling, regardless of the medium on which the software is transferred to customers, software resellers are now considered commercial agents and will have the protections and benefits of the Commercial Agents Regulations – which, most notably, includes an entitlement to potentially significant compensation payments on termination of their agency.

It is equally significant for the businesses who, acting as principals, engage resellers as a method of distributing their software that is primarily made available electronically. Those businesses should take steps to quantify and mitigate their potential exposure to the compensation payments that can be due on termination of an agency.

Principals should also undertake contract audits to assess the extent to which their reseller agreements already address the possibility of the relationship falling within the commercial agency laws. If they don’t, then contracts may need to be significantly modified.

Until the Supreme Court implement the decision, various questions remain.

First, the CoJ’s judgement relates to software sold on a perpetual licence. They did not expressly rule on whether software sold on non-perpetual licences constitute a ‘sale of goods’ and fall within the scope of the Regulations.

Second, they did not provide clarity on how software-as-a-service might be treated. Although SaaS doesn’t involve the transfer of software on a physical medium, it can involve the download of software on a local computer.

Third, the ruling relates solely to the Commercial Agents Regulations. It didn’t consider wider legislation governing the supply of goods, like the Sale of Goods Act 1979, which would bring in a whole host of additional legislation affecting software. At present, software must be sold or hired on physical media to constitute goods. Whether the Supreme Court considers this broader question remains to be seen.

How can we help

We have a specialist team of technology lawyers experienced in software licensing and reselling, as well as the application of the Commercial Agents Regulations.

We can work with software principals and resellers to assess the impact of the ruling, undertake contract audits, and implement and deliver risk management strategies.

For further advice, please contact Ryan or visit our Digital & Technology page.