By Kaare M. Risung and Sondre Arora Aaserud
On 16 September 2021, the Court of Justice of the European Union ("CJEU") tried the case between Software Incubator Ltd. ("SI") and Computer Associates UK Ltd. ("CA") in C-410/19. CJEU ruled that the supply of software by way of perpetual licence to use it amounts to the "sale of goods" within the meaning of the Agency Directive (86/653/EEC). The Court has thus concluded in accordance with the General Advocate's proposal in the preliminary ruling on 17 December 2020.
The background of the specific case relates to an agent agreement for software signed in 2013. SI and 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. In September 2013, SI entered into an agency agreement with another software company, and in October 2013, CA terminated its agreement with SI on the alleged basis that SI, by reason of accepting another engagement, was in breach of its duties.
After the agreement was terminated, SI brought an action against CA claiming compensation with reference to the Agency Directive. CA, however, disputed this claim and stated that no agency agreement had been entered into. CA argued that electronically supplied software by way of a perpetual licence did not amount to "sale of goods" within the meaning of the Agency Directive.
The CJEU stated that software has commercial value and can be subject to commercial transactions, and therefore can be considered as "goods" regardless of how the software was supplied, and even if not accompanies by any form of physical means whatsoever. This was also in accordance with the CJEU's established definition of "goods". Furthermore, the CJEU states that a "sale" is an agreement in which a person pays for transfer of rights to tangible or intellectual property. Thereafter, the CJEU stated that when customers pay to download a copy of software and a license agreement for the purpose of using it permanently, the rights to the specific copy are transferred and that this constitutes a "sale" of goods.
As mentioned, the CJEU ruled in accordance with the General Advocate's opinion. This was expected due to the opinion of the General Advocate, as this is considered to be an important factor in the CJEU's rulings and is often indicative of the court's conclusion. Yet, both the opinion of the General Advocate and the ruling of the CJEU may come 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. On the bright side, the software owner's ability to set the resale prices for agents is unaffected and will therefore remain as the key argument in favour of agencies.
However, the judgement will result in increased costs of distribution through agents due to their statutory right to claim indemnity upon termination and shifts the balance towards resellers and distributors. Accordingly, the software industry, and other service industries who relies on distribution through agents, must carefully review its distribution strategy going forward. Furthermore, the companies should also review its current agreements and identify if these agreements include any risks due to the CJEU ruling. Even though the software owner chooses the resale prices for its agents, it is important to be aware of the risks in the agreement and how to possibly decrease these risks. One option may be to include a time limit to licenses. The matter concern SW that was downloadable. The decision does not address making SW available by way of online access to the software (SaaS). It may still be argued that SaaS distribution does not constitute "goods". But, as SaaS licensing is typically remunerated by recurring payments, such modelling would rarely anyway be deemed perpetual licensing and may for this reason alone "go free" of the judgements. Licensors should make sure that their license terms clarify that the right to use the SW expires upon defined events.