Software distributor held arguably to be a commercial agent because a hardware dongle was supplied with the software

10 May 2010

Carolyn Burbridge, Rachel Irwin

The software industry has often had concerns about whether distributorship arrangements are caught by the EU Commercial Agents Directive, resulting in liability to pay compensation if the agency is terminated.  A recent English case has held that packaging a dongle with software can bring a distributorship agreement within the Directive.

In Accentuate Ltd v Asigra Inc the English High Court had to consider whether there was an arguable case that a software distributorship agreement was covered by the Commercial Agents (Council Directive) Regulations 1993, which implement the Commercial Agents Directive in the UK.  Whether an individual falls within the definition of a commercial agent turns on whether the relevant individual negotiates the sale or purchase of “goods” on behalf of another.  There has been uncertainty in the IT sector as to whether software constitutes “goods” for the purposes of the Regulations. 

In this case the software was supplied by the distributor to the end-customer, who entered into a licence direct with the software publisher.  The distributor then provided a hardware dongle to the end-customer, which was required in order to make the software work.  The court held that, although the supply of the software alone was insufficient to bring the agreement within the Regulations, the ancillary supply of the dongle arguably amounted to sale and purchase of “goods” under the Regulations. 

Background

The Distributor, Accentuate, is an English company and the Licensor, Asigra, is a Canadian company based in Ontario.  The parties entered into a Master Reseller Agreement (MRA) under which the Distributor was to “distribute” the Licensor’s software. In addition, the Distributor was to provide the end-customer with a DS-Key, which was defined in the MRA as “the hardware and software dongle which enables the software to function properly”. This hardware was included within the contractual definition of the software. A DS-Key was provided to the Distributor upon receipt by the Licensor from the Distributor of the relevant documentation and fees due from the end user.

The MRA contained a choice of law clause identifying the law of Ontario and the federal law of Canada as the contract’s governing law. It also contained an arbitration clause which required that all disputes should be settled by Toronto-based arbitration. 

The Licensor gave notice of termination, and the Distributor consequently notified the Licensor that it was preparing to bring a claim for breach of contract and for compensation under the Regulations. The Distributor then issued a claim against the Licensor, and was given permission by a District Judge to serve the Licensor out of the jurisdiction. The Licensor applied to have the order for service out of the jurisdiction set aside, and for proceedings to be stayed pursuant to section 9 of the Arbitration Act 1996 (the Act). Section 9 of the Act requires that proceedings be stayed where the parties have agreed to refer a matter to arbitration, unless the arbitration agreement is void or incapable of being performed.

The District Judge declared that the court had no jurisdiction to hear the claim, granted the Licensor’s applications and gave the Distributor permission to appeal.

In the meantime, the arbitration proceeded with the Licensor claiming a declaration that the Distributor had no claims against it under the MRA. The Distributor argued that its claim for compensation under the Regulations fell outside the scope of the arbitration. The arbitration tribunal determined that the Regulations did not apply to this dispute, but that Ontario law and the federal laws of Canada did apply.

The Distributor then appealed the decision to grant a stay of proceedings in the English courts.

Decision

Tugendhat J first addressed whether the Distributor was a commercial agent for the purposes of the Regulations. The Distributor was not authorised to enter into agreements on the Licensor’s behalf, but only to negotiate on a retained basis. In practice, direct licensing agreements were always entered into between the Licensor and the end users, by means of the end user pressing a virtual button which appears on the screen marked with the words “I accept”. The judge stated that this fell within the common law test for an agency relationship. As discussed above, the Regulations will only apply if the arrangement is a commercial agency in respect of goods.  The judge stated that software is intellectual property, not a chattel, whereas hardware is a chattel. He considered that if no hardware was to be supplied under the MRA, then the Regulations would not apply at all. On the facts of this case he held that, although the supply of the hardware is ancillary to the supply of the software, the supply of the hardware was critical to the Distributor’s case that the Regulations applied. 

He concluded therefore that although the legal analysis in respect of the supply of hardware was not clear, there was a real prospect of the Distributor’s claim to be acting as the Licensor’s agent being successful.

The judge applied the ECJ decision in Ingmar v Eaton Leonard Technologies [2000] EUECJ C-381/98, which stated that any choice of law clause which attempts to avoid liability under the Regulations is unenforceable. Therefore, the court held that it was required to give effect to mandatory provisions of EU law. In this instance, an arbitration clause which had the effect of excluding the application of a mandatory law (i.e. the Regulations) amounted to an attempt to avoid liability. As such there was a good case that the arbitration clause would be null and void. Accordingly, Tugendhat J ruled that the stay of proceedings granted pursuant to section 9 of the Act was incorrect, and that it be lifted.

Implications

The case acts as a useful reminder that the court will always look at the facts of a case in determining the true nature of a relationship. Simply identifying a party as a distributor and the agreement as a distributorship will not in any way override evidence to the contrary.

This decision is important to all software licensors and their re-sellers, since it illustrates that even the provision of ancillary hardware can provide a basis for an argument that a distributorship agreement can fall within the Regulations. As discussed, under Regulation 17 a commercial agent is entitled to significant levels of compensation or indemnity upon termination of an agency contract.  The default position under the Regulations is that an agent is entitled to compensation for the damage he suffers as a result of the termination.  This includes commission which he would have received if the contract had been properly performed, and the amortisation of costs and expenses. Licensors will therefore need to consider the contractual relationship with their re-sellers carefully, where the contract relates to both software and hardware.

Case reference: Accentuate Ltd v Asigra Inc [2009] EWHC 2655 (QB)