Independent commercial agents in software marketing

Analysis of the consideration of “commercial agent” and “sale of goods” when it comes to intermediaries marketing software

The judgment of the Court of Justice of the European Union (Case C-410/19), dated 16 September 2021, has answered a number of questions that are of paramount importance in determining whether an intermediary who markets computer software can be considered a “commercial agent” within the meaning of the provisions laid down in Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents and, consequently, whether he is entitled to customer indemnity.

In summary, the questions raised are as follows:

• is a copy of a software considered as “goods”?
• is a licence for perpetual use of a copy of a software considered a “sale of goods”?
• is an intermediary who promotes and markets software considered a “commercial agent”?

Before answering the above questions as ruled by the CJEU in Case C-410/19, let us look at the background to the case which gave rise to the decision: The English company Computer Associates, which was engaged in the production of computer software, entrusted the marketing of that software to the company The Software Incubator, by means of a commercial representation contract.

It should be noted that The Software Incubator merely promoted licences for the use of the software and that these could be granted on a perpetual or temporary basis, although in most cases the former was granted.

However, all intellectual property rights remained with Computer Associates.

The dispute arose when Computer Associates terminated the contract with The Software Incubator without paying any compensation. The Software Incubator went to the English courts claiming customer indemnity on the basis of English law which had transposed Article 17 of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the rights of Member States relating to self-employed commercial agents.

Computer Associates objected to the complaint on the grounds that Directive 86/653/EEC does not apply as the supply of software promoted by the applicant did not involve a sale of goods and therefore does not fall within the definition of “commercial agent”.

Basically, it argued that it was not entitled to customer indemnity as The Software Incubator could not be considered as a ‘commercial agent’.

According to Directive 86/653/EEC a “commercial agent” is “any person who, as an independent intermediary, is engaged on a permanent basis either to negotiate on behalf of another person, hereinafter referred to as the “principal”, the sale or purchase of goods, or to negotiate and conclude such transactions in the name and on behalf of the principal” At this point it should be noted that at Community level the right to compensation for clients in favour of the agent is recognised by Article 17 of Directive 86/653/EEC, which most EU countries have transposed into their national legislation.

As far as Spanish law is concerned, customer indemnity is recognised in Article 28 of Law 12/1992 of 27 May 1992 on agency contracts. Under this article, “an agent who has brought new clients to the principal or who has significantly increased his operations with the pre-existing clientele shall be entitled to compensation if his previous activity can continue to produce substantial advantages for the principal and is equitably justified by the existence of agreements limiting competition, by the commissions he loses or by the other circumstances” This indemnity may not exceed the average annual amount of the remuneration received by the agent during the last 5 years or, during the entire duration of the contract, whichever is less.

That said, it was essential for The Software Incubator that the Court understood that its figure fulfilled the requirements to be considered a “commercial agent”; and all of this, regardless of the title that the parties gave to the contractual relationship (commercial representation contract), since in law the principle of “contracts are what they are and not what the parties say they are” prevails. The UK courts initially upheld the plaintiff, but on appeal the plaintiff’s claims were dismissed.

The Software Incubator then turned to the English High Court. That court, having doubts about the concept of “commercial agent” in this case, asked the CJEU, by way of a preliminary ruling, whether (i) computer software which is supplied electronically constitutes “goods” from the perspective of Article 1(2) of Directive 86/653/EEC, and whether (ii) the supply of such software by means of a perpetual licence is considered a “sale of goods” under that directive. In response to the questions posed at the outset, the CJEU ruled that:

• The copy of a computer software is considered a “commodity” because it is a product that can be valued in money and can be the subject of commercial transactions, regardless of whether it is tangible or intangible.
• The supply of computer software through a licence for perpetual use is considered a “sale of goods” insofar as, by means of a licence contract, a person transfers to another person the ownership rights of a tangible or intangible asset belonging to him (computer software) in exchange for the payment of a price and, therefore, meets the parameters established by the CJEU to define “sale”.
• The Software Incubator is considered a “commercial agent” because, in addition to the fact that the product it markets through the relevant licence meets the requirements of a “sale of goods”, the company fulfils the three requirements of the Directive: (i) it is an independent intermediary; (ii) it is contractually bound on a permanent basis to the entrepreneur; and (iii) it negotiates the sale of goods on behalf of the entrepreneur or negotiates and concludes such transactions in the name and on behalf of the entrepreneur.

In conclusion, The Software Incubator is entitled to customer indemnity as it is considered for all purposes to be a “commercial agent” within the meaning of Directive 86/653/EEC. This ruling has a major impact for all operators operating in the technology sector.

AddVANTE stresses the need to seek advice prior to entering into this type of contract, which for any of the parties is usually somewhat complex to deal with.