Commercial
Is SaaS defined as “goods”? The judgment in Kompaktwerk GmbH v LivePerson Netherlands B.V [2024] EWHC 2278 (Comm)
Author
Colin Lambertus
Author
Colin Lambertus
September 6, 2024
Commercial
Contract Law
Dispute Resolution
Software & Technology
A recent judgment in the Commercial Court brings useful clarification to the law of agency and an agent’s entitlement to the protections of the Commercial Agents (Council Directive) Regulations 1993 (the Regulations).
The highlight is Christopher Hancock KC’s ruling that the supply of Software-as-a-Service (SaaS) is for the purposes of the Regulations a supply of services, not goods. The Regulations do not apply to agents for services, as opposed to goods.
Background
LivePerson, is a prominent SaaS provider. Its core product is a platform, integrated with the websites of its customers, that enables Liveperson’s customers to speak directly with their end-customers (usually consumers) called LiveEngage.
LivePerson’s Dutch arm (LivePerson Netherlands B.V, the defendant) in 2013 entered into two agreements with the claimant – Kompaktwerk GmbH:
1. a referral agreement whereby Kompaktwerk would refer potential customers to Liveperson; and
2. a reseller agreement entitling Kompaktwerk to purchase Liveperson’s product and sell it on to Kompaktwerk’s own customers.
It appears from the text of the judgment that the referral arrangement was such that Kompaktwerk would market LiveEngage and introduce customers to LivePerson. Subsequently, LivePerson would enter into a separate agreement with the customer and renumerate Kompaktwerk by way of a fee.
It is this fee which appears to be the original focus of the dispute between the claimant and the defendant.
Kompaktwerk filed a claim on or around December 2018, but that claim was put on ice following the Supreme Court’s referral in Computer Associates UK Ltd v Software Incubator Ltd (UKSC 2018/0090). The Supreme Court referred a question of law pertaining to the Regulations to the Court of Justice of the European Union (CJEU). Prior to Brexit, the UK could refer questions on EU Law to the CJEU for determination. This referral had direct relevance to Kompaktwerk’s claim – we return to it below.
Following the CJEU’s ruling in Software Incubator Ltd v Computer Associates (UK) Ltd (C-410/19), Kompaktwerk’s claim got up and running again.
In essence, Kompaktwerk sought permission to amend its Claim Form and Particulars of Claim to incorporate a claim for (a) compensation under the Regulations and (b) commission under the Regulations. Christopher Hancock KC’s judgment here is the judgment on that application.
The decision
Under the Regulations, agents that are protected by it (not all of them are, as we shall see) are entitled primarily to two things:
1. compensation from the principal if its agency is terminated by its principal through no (major) fault of its own; and
2. commission in respect of transactions concluded by the principal and a result of the agent’s action.
Pursuant to the Regulations, an agent is a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal.
SaaS – a service not goods
LivePerson’s central argument was that Kompaktwerk was not a commercial agent for the purposes of the Regulations because its agency ‘was concerned with services rather than goods’.
This is where the Supreme Court’s referral in Software Incubator comes in.
Software Incubator was an agent that was involved in the sale of a software to customers in the financial services sector. At first instance, the High Court determined that software supplied online (i.e in the modern way – not by the sale of a disc) amounts to a sale of goods. The Court of Appeal disagreed. The Supreme Court asked the CJEU:
1. Does the sale of computer software online amount to a sale of goods or services for the purpose of the Regulations?
2. If so, if the sale involved the grant of a perpetual licence to use and copy the software did that sale amount to a sale of goods?
The CJEU held that the software could amount to a good.
The focus is therefore whether a grant of a perpetual licence amounts to a “sale”. The CJEU held that where there is an intention to transfer an unlimited and permanent right to a third party (i.e a perpetual licence) that is a sale. A grant of a licence for a limited period is more akin to a rental. Under separate EU law (the Computer Programs Directive) the copyright holder’s right to object to the resale of its software (in which copyright subsists) was exhausted upon a sale, but not a rental. Put simply, if someone purchases software and that purchase involves the publisher granting the customer use of the software for an unlimited period, the customer can sell the software on again without interference.
LiveEngage was sold by way of a time limited, revocable licence (which would renew every 12 months in exchange for the payment of more subscription fees). This is the standard approach with SaaS.
Kompaktwerk argued that the sale of LiveEngage was a sale of a good. LiveEngage was made available by way of a transfer of computer code. Whilst the licence granted by LivePerson in connection with the sale of LiveEngage was not perpetual, it effectively was, as long as the customer kept up with its payments.
In contrast, LivePerson argued that there is no permanent transfer whatsoever, and the licence was “renewed” upon payment of the subscription fee. There was no renewal if the fee was not paid, in contrast with software sold for a one off payment. Moreover, whilst computer code was made available to LivePerson’s customers to integrate LiveEngage with customer websites, that code was meaningless without the services provided by LivePerson to host LiveEngage on its servers, which customers called on electronically to make LiveEngage function. The entire SaaS model would not make sense if this was a final and permanent sale.
Christopher Hancock KC agreed with LivePerson’s arguments – SaaS is a service not a good for the purpose of the Regulations. Much emphasis was put on the lay example of contrasting SaaS with a gym membership. If you are a member of a gym, you get a keycard to access the gym and the right to use the equipment – you didn’t get the gym equipment itself. That is an agreement to supply services not the supply of goods.
Commission
Given that it was decided that Kompaktwerk was not an agent within the meaning of the Regulations, Christopher Hancock KC did decide on the claim for commission.
Kompaktwerk argued (in support of its original claim for fees, which is disputed) that it was entitled to commission anyway under the Regulations.
The Regulation dealing with commission expressly states that this right cannot be excluded by the relevant agency contract. However, LivePerson argued that that does not mean, in law, that the parties cannot agree contractually the method of calculation. Accordingly, the only mechanism for commission in issue is the mechanism in the contract. Christopher Hancock KC agreed – there is no overarching right to commission under the Regulations if the parties have agreed to a method by which that commission is to be paid. Therefore, the Regulations were of no assistance to Kompaktwerk in any event.
Comment
As the name suggests, the determination that SaaS is a service, and not a good, does not come as a surprise.
Whilst each case will be determined on its specific facts, this decision illustrates that Software Incubator does not open the door to technical distinctions between SaaS and a traditional licenced software. As long as nothing permanent is granted or intended, the grant of a software licence online is the supply of a service, and not a good.
That said, this decision does not come off as all encompassing. Software developers will be familiar with other examples not dealt with in this judgment. Christopher Hancock KC at one stage comments:
‘The whole point of the SaaS model (software as a service) is that a customer is obtaining the right to use a particular computer program as a service, hence the name. The customer has access to the service provided by the SaaS provider, rather than its own copy of the software. This is a fundamentally different model to a traditional arrangement, where a customer would make a one-off purchase for a particular computer program, which it would then install on its own computer systems and use without any further involvement of the seller.’
In the modern age, a great deal of software is sold on a one-off basis and installed locally, but the seller remains very much involved.
Video games are a good example of an arguable midpoint between traditional software and SaaS. The grant of the licence is perpetual, and the game is rendered on the local platform of the customer (via an Xbox or gaming PC). But developers and publishers need to stick around to run the games’ multiplayer servers. Certain games do not even make themselves available without an initial login or an ‘always online’ presence to the ire of some gamers who wish to play single player on the go. In the context of an industry dominated by select distribution channels, these are interesting points to consider.
Software Incubator (and indeed this judgment) suggests a realistic and fact specific approach to what is going on, rather than a technical one. Whilst Kompaktwerk will be of comfort to SaaS providers, it is not an automatic safe harbour. More case law in this area is to be welcomed.
At EM Law, we are experts in SaaS. If you have any questions about this judgment or SaaS in general, please do not hesitate to contact us.
