The Software Incubator Ltd v Computer Associates UK Ltd concerned a sales agent’s claim for statutory compensation after Computer Associates (CA), now part of Broadcom, terminated its agency. The agent could only claim if it had negotiated the “sale of goods” for CA, so the case turned on whether supplying software by download under a perpetual licence is a sale of goods. The High Court said yes, the Court of Appeal said no, and on a reference from the UK Supreme Court the Court of Justice of the European Union (CJEU) ruled in 2021 that it can be.[1] The parties then settled.[4]
Background
CA sold release automation software, used by large organisations such as banks and insurers to automate the deployment of other applications across their environments.[1] The Court of Appeal recorded that the software was generally sold as a download rather than on disk, by way of a usually perpetual licence. CA acquired it when it bought the Israeli company Nolio in March 2013.[2]
CA granted customers, by electronic means, licences to use the software in a specified territory for an authorised number of end users. Customers could not access unauthorised parts of the software, decompile or modify it, or rent, assign, transfer or sublicense it. Licences could be indefinite or time-limited, but most were granted indefinitely, and CA kept all intellectual property rights.[1]
On 25 March 2013 CA appointed The Software Incubator (TSI) to promote, market and sell the software in the UK and Ireland. TSI had no authority to transfer property in the software. CA terminated the agreement by letter of 9 October 2013, citing TSI’s engagement with another software company, Intigua.[1][2]
The dispute
TSI claimed compensation under the Commercial Agents (Council Directive) Regulations 1993, which implement Directive 86/653/EEC. Both define a commercial agent as an intermediary with continuing authority to negotiate the sale or purchase of “goods” for a principal. CA argued that supplying software electronically with a perpetual licence was not a sale of goods, so TSI was not a commercial agent.[1]
Decision or outcome
High Court (2016)
HHJ Waksman QC held that electronically supplied software was goods and that supply by perpetual licence was a sale. In a judgment of 1 July 2016 he awarded TSI GBP 475,000 under the Regulations, plus commission and GBP 15,631.06 damages for lack of notice, finding that CA had no lawful basis to terminate.[2][3]
Court of Appeal (2018)
The Court of Appeal allowed CA’s appeal on the goods question on 19 March 2018. It held that software supplied electronically, and not on a tangible medium, was not “goods” within the Regulations, so TSI was not a commercial agent and the GBP 475,000 award fell away. It upheld the finding that CA’s termination was itself a repudiatory breach, leaving TSI with damages limited to the notice period.[2][1]
Court of Justice of the European Union (2021)
TSI appealed to the UK Supreme Court, which on 22 May 2019 asked the CJEU whether software supplied electronically is “goods” and whether a perpetual licence is a “sale”. The CJEU kept jurisdiction after Brexit because the reference was made before the end of the transition period.[1]
The CJEU held that “sale of goods” is an autonomous EU concept. Software has commercial value and can be the subject of a commercial transaction, so it can be goods whether supplied on a tangible medium or by download. Relying on its UsedSoft judgment, it held that a download combined with a licence to use the copy permanently, for a fee reflecting the copy’s economic value, transfers ownership of that copy. Excluding such software would undermine the protection the Directive gives to agents who do with modern technology what agents for tangible goods do.[1] The ruling:
The concept of ‘sale of goods’ referred to in Article 1(2) of Council Directive 86/653/EEC … can cover the supply, in return for payment of a fee, of computer software to a customer by electronic means where that supply is accompanied by the grant of a perpetual licence to use that software.[1]
A later High Court judgment records that the parties settled their dispute following the CJEU decision, and that the ruling binds UK courts as a starting point because it was referred before the transition period ended.[4]
Significance for software licensing and SAM practice
The case extends the CJEU’s reasoning that a perpetual software licence for a fee is a sale of a copy, first set out for resale of used licences in UsedSoft v Oracle, into the law on sales intermediaries.[1] For vendors it means sales agents in the EU, and in the UK as the case law stands, can claim termination compensation where they sell perpetual licences. In Kompaktwerk v LivePerson the High Court later held that a twelve-month SaaS subscription falls outside the ruling because it is not permanent.[4]
Lessons learned
- Under the EU rule, supplying software by download for a fee with a perpetual licence can be a sale of goods, which brings intermediaries selling it within commercial agency protection. This is the CJEU’s answer to the Supreme Court’s questions.[1]
- Vendors terminating sales agents or referral partners for perpetual licences should expect a possible statutory compensation claim on top of contract damages. The High Court had awarded GBP 475,000 under the Regulations, separate from notice damages.[2]
- The perpetual licence was central to the ruling; later English decisions treat time-limited subscriptions differently. The High Court in Kompaktwerk treated a twelve-month renewable subscription as akin to a rental, not a sale.[4]
- Partner agreements should state whether the partner acts as agent or as buyer and reseller, and that choice should match practice. TSI’s agreement was an agency for CA as principal, which is what made the Regulations relevant.[2]