Software distribution: a seller of software licenses may be protected as a commercial agent

“Resellers”, “(affiliate) distributors” and “partners” are not known in Belgian law and very often the question arises as to what exactly is the legal relationship between software producer and software distributor. The answer to that question can have far-reaching consequences, for example, for termination payments at the end of the cooperation.

A recent judgment of the European Court of Justice now confirms that software distributors can, in certain cases, also be (legally very protected) commercial agents.

 

Commercial agency

Commercial agents are self-employed intermediaries who “without being under his authority, are charged permanently and for a fee with mediating and potentially concluding business in the name of and on behalf of their principal.” They are distinguished from salaried commercial representatives, who work as clerks on the one hand, and from self-employed distributors, who sell in their own name and on their own behalf (who, in other words, keep their own stock, set their own prices, and invoice their customers in their own name).

Commercial agents are particularly well protected by strict (European) legislation, which guarantees their independence and which, at the end of the cooperation, entitles them to often considerable notice periods and compensation, up to even six months of turnover, and, to additional compensation for the clientele they have built up for their principal and for the investments they have put into that build-up.

Software licensing = sale of goods

Software distribution also involves independent intermediaries who distribute software on commission in the name and for the account of their principal. Very often the question arises whether, upon termination of the contract, the distributor can invoke the protection of the commercial agency law (and claim the associated termination fees and goodwill indemnity). The stumbling block here is, on the one hand, whether the distributor was working “in the name and on behalf of his principal” (in other words, whether a direct contract is established between the customer and the principal, with the distributor receiving a commission). On the other hand, it is the very wording of the Commercial Agency Directive and the Commercial Agency Act itself that create ambiguity, as it refers to “sale of goods” in order to be considered a commercial agent. Thus, the question is (or was) whether licensing software can be considered a “sale of goods”…

On September 16, 2021, the European Court of Justice ruled in Software Incubator Ltd v Computer Associates (UK) Ltd (C-410/19) on exactly that question. In this judgment, the European Court says, in summary, that the concept of “sale of goods” can indeed include the granting of software licenses that are not limited in time. After all, in the case of software licenses that are not limited in time, there is a “transfer of ownership” of the supplied software to the buyer and thus a sale of ( albeit intangible) goods.

Does this apply to all software licenses?

This applies not only to the sale of software on a carrier or in the case of an on premise installation, but also to downloads from a web shop or platform. 

The answer might be different for temporary software licenses, because there is no real “transfer of ownership” but only a temporary right of use, and the granting of such licenses by a distributor/intermediary might therefore not fall under the protection of the Commercial Agency Act, even if that distributor works “in the name and on behalf of”.)

Our first impression is that a lot will depend on the precise content of the End User License Agreement that binds the end customer to the software supplier. In many cases this agreement explicitly states that the end customer acquires no property rights to the software, not even in the case of perpetual licenses. In that case, there is no question of a “sale of goods” and that could mean that the distributor/intermediary is not a commercial agent and therefore cannot (rightly or wrongly) claim the far-reaching legal protection that this status offers him or her. However, it remains to be seen how courts will rule on that question….

So what does this mean for you in practice?

Many software suppliers use intermediaries for the (online) distribution of their products, based on a variety of cooperation models. 

Unfortunately, it has been observed that they often work on the basis of (often American or British) copy/paste contracts, without paying too much attention to the legal implications that these contracts may have under Belgian law. The same applies to the End User License Agreements that come with the software, again rarely given much attention.

This leads to quite considerable surprises when collaborations fail and all too often disputes end up in a legal battle, the financial and human cost of which is many times greater than the price of a good contract.

We can’t repeat it often enough: seeking legal advice in advance and in time will save you a lot of trouble and money in the long run. So be sure to think about your distribution model in advance and get your lawyer to assist you with the precise structure of your distribution contracts and software licences…