Software agents now not entitled to statutory protection

For many years there has been uncertainty about whether:

1. software is goods; and
2. the grant of a software licence represents the sale of goods for the purposes of the Commercial Agents Regulations.

This is important because the Regulations define a commercial agent by reference to an agent who is concerned with the sale of goods.

On 1 July 2016, judgment was given in the High Court in favour of The Software Incubator Limited (“TSI”) which had brought a claim under the Regulations against Computer Associates Limited (the UK subsidiary of Nasdaq listed CA Inc.).

TSI acted as the agent of the Computer Associates before its agency agreement was terminated by Computer Associates in October 2013.

Following termination, Fox Williams LLP, on behalf of TSI, issued a claim in the High Court for compensation and post-termination commission under the Regulations and for damages for failure to give proper notice of termination.

Last week, however, the Court of Appeal disagreed with the judgment which had been given in favour of TSI in 2016. On an appeal brought by Computer Associates against the original judgment, the Court of Appeal decided that software is not goods.

So why did the Court of Appeal disagree with the original judgment?

Certainly, the Court of Appeal had sympathy with the approach of the original judge. As Lady Justice Gloster (who gave the lead judgment in the Court of Appeal) remarked, at the core of the original judge’s conclusion was the view that the court should ensure that the law keeps abreast of recent developments in technology by giving an expansive interpretation of “goods” to accommodate electronically supplied software.

Lady Justice Gloster sympathised with this approach given what she perceived to be the various difficulties with maintaining the tangible/intangible distinction.

She outlined four difficulties:

1. She accepted that the original judge had a point when he stated that there was no logic in making the status of software as “goods” (or not) turn on the medium by which they were delivered or installed. Whilst she noted that such a distinction had been followed and applied by both the High Court and the Court of Appeal, she had difficulty in seeing any principled basis for such an approach. She noted that leading counsel appearing for Computer Associates had accepted that if in TSI’s case, a company or individual had asked for, or been sent, a back-up disc that carried the software in case something went wrong, in such circumstances, the software would be tangible property. The idea that this situation would fall under the Regulations, whilst if the software was downloaded from the Internet it would not, appeared illogical.
2. Lady Justice Gloster recognised that her conclusion that the definition of “goods” does not include electronically supplied software enables the odd inference to be drawn that the legislators would have wanted to protect a commercial agent selling hard copy books on behalf of its principal to a wholesaler for onward sale to consumers, but not one selling electronic books to the same wholesaler for onward sale to the same consumers. This lays bare the arbitrariness of the tangible/intangible distinction.
3. Leading Counsel for TSI had argued that Computer Associates’ argument was undermined by the way gas and electricity are treated under the Regulations. More than 17 years ago the High Court had accepted that the supply of gas and electricity constituted the sale of goods for the purpose of the Regulations. However, the Court of Appeal found it impossible to coherently explain why gas and electricity are any more tangible property than software.
4. The Court of Appeal noted that both New Zealand and Australia have updated their existing sale of goods legislation to take account of the increasing prevalence of intangible/digital products.

Despite these issues, Lady Justice Gloster was not persuaded that it was open to the Court of Appeal to impute what many might think was a common-sense meaning of “goods” to the legislators of the European Agents Directive and the Regulations.

It was her opinion that to do so would be contrary to precedent and the Court of Appeal could not simply ignore the “weight of judicial authority” that supports maintaining the tangible/intangible distinction.

She was therefore of the view that an approach which departed from precedent and the well understood meaning of “goods” in law “should be resisted by the judiciary”. But whilst noting that consumer legislation now addressed digital goods she did not consider that commercial parties are so in need of protection that the judiciary should adopt a completely different approach to interpreting “goods” than that established by precedent.

In short – the Court of Appeal in its judgment recognised that the law needs changing. However, it declined to do so.