We analyze the judgment of the Court of Justice of the European Union (“CJEU”) in matter C-410/19 (The Software Incubator)
In this post, we analyze the Judgement of the Court of Justice of the European Union(“CJEU”) 09.16.2021 Case C-410/19 (ECLI:EU:C:2021:742) (The Software Incubator) ruling that software supplied electronically can be considered “goods” and that, if the copy of the downloaded software is accompanied by a perpetual license for use, this must be considered “sale of goods,” in the meaning of article 1(2) of Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of Member States relating to self-employed commercial agents (the “Directive”).
Although the issue at hand is fairly unrelated to the field of intellectual property, the landmark UsedSoft case Jutgement CJEU de 07.03.2012 Case C-128/11 (ECLI:EU:C:2012:407) plays a decisive role in its resolution. This judgment had a major impact on copyright, since the CJEU examined whether there could be distribution of software products and, therefore, that right could be exhausted when sold in intangible form by offering a copy to download online.
The CJEU reached four main conclusions: (i) when the copy of a software program is supplied through a perpetual license at a price, there is a transfer of ownership of that copy that is equivalent to a “sale”; (ii) irrespective of the sale of the program being physical or by a download; (iii) once the software is sold, the owner’s right of distribution is exhausted, and the buyer can resell it; and (iv) the subsequent buyers of the software are legitimate.
Facts of The Software Incubator case
Before explaining the relevance of the UsedSoft judgment to the case at hand, we must identify the parties to the ruling and what brought them to their dispute. Firstly, the parties are Computer Associates, a company located in the United Kingdom that sells software designed for large institutions such as banks or insurance companies, and The Software Incubator, a company that promotes and sells that software in the UK and Ireland on behalf of Computer Associates under a contract entered to by the two companies in March 2013. The software was sold by granting an electronic license for use in a certain geographical area and by a limited number of authorized users. Although the licenses could be purchased with a perpetual or limited license, the majority were purchased sine die.
When, in October 2013, Computer Associates terminated the agreement with The Software Incubator, the latter brought an action for damages under the UK law that transposes Directive 86/653.
To grant damages under article 6.1 of Directive 83/653, there must be a contract or commercial agent relationship in place. Article 1.2 of the Directive defines commercial agent as:
“a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person, hereinafter the ‘principal,’ or to negotiate and conclude such transactions on behalf of and in the name of that principal.”
The defendant denied that the contract was that of a commercial agent because it believed that supplying a software program electronically together with a perpetual license for use was not a “sale of goods” for the purpose of defining a commercial agent under the Directive. Among other reasons, it argued that the term “goods” could only be applied to tangible assets.
The first instance court ruled in favor of The Software Incubator and ordered Computer Associated to pay damages. However, after Computer Associates filed its appeal, the court of appeals dismissed The Software Incubator’s claims because it did not consider it a “commercial agent.” The Software Incubator challenged that decision before the UK High Court in a final attempt to win the legal battle.
The UK High Court asked the CJEU whether, under article 1(2) of Directive 86/653, computer software supplied by electronic means constitutes “goods” and, therefore, a “sale of goods” applies if a copy of the software is supplied with a perpetual license for use.
The CJEU, which due to Brexit could issue a preliminary ruling only until December 31, 2020 and with the petition filed within the deadline, ruled jointly on the issues brought before it based on the following arguments:
- The disputed Directive uses the term “goods” but does not specify whether these are tangible or intangible. As such, this term should be interpreted according to CJEU caselaw, as any other product that can be valued in money and as such be the subject of commercial transactions. Software meets these parameters, regardless of whether it is supplied in physical or electronic form via a download, both modes of transfer being equivalent.
- To define the notion of “sale,” the CJEU refers to its decision in the UsedSoft case and indicates that it must be interpreted as an agreement under which ownership rights over goods–whether physical or not–are transferred at a price. Therefore, supplying a copy of a software program by downloading it and entering a perpetual user license agreement are indivisible, thus requiring analysis as a whole. This is so because the downloaded copy would be useless without the appropriate authorization to use it. Furthermore, the Court points out that for computer software, that combination entails a transfer of ownership of the copy of the licensed software.
Therefore, the CJEU finds that the electronic supply of computer software at a price, and provided it comes with a perpetual license to use that software, can be covered by the concept of “sale of goods” within the meaning of Directive 86/653.