Is Software Goods, or even Property? A Recommendation for Sui Generis Categories

With the recent Court of Appeal decision in Computer Associates v The Software Incubator as a catalyst, Ken Moon embarks on a detailed analysis of the ‘software as goods’ debate and suggests a modern solution to problems arising from outdated classifications

 

The Court of Appeal in Computer Associates v The Software Incubator [2018] EWCA Civ 518 (reported in C&L April/May 2018, p 15 by Zoe O’Sullivan QC) decided that computer software delivered by download did not constitute goods, reversing the decision of the High Court below. The Court of Appeal, whose judgment was given by Lady Gloster LJ, favoured a sui generis category for software and other digital products delivered online, but considered this should be established by legislation and not the Court. However, the Court did express a number of concerns in reaching this decision. Some of these are addressed below, along with other issues.

While the case arose under the Commercial Agents (Council Directive) Regulations 1993 (deriving from EU Directive 86/653/EEC), the primary issue the Court of Appeal had to deal with was whether the supply of software by a download was a sale of goods. The Court’s interpretation of ‘goods’ under these Regulations should therefore rightly influence the perhaps more important question of the applicability of the Sale of Goods Act to software dispositions.

The Legal Nature of Software

In any analysis of the legal nature of software, the background issue is whether software is tangible or intangible. This applies to the issue of whether software is property just as much as it does to whether software is goods. The property issue, although not addressed by the Court in The Software Incubator, is relevant to a determination of whether the commercial contract normally employed for the disposition of software, namely a licence, can be said to constitute a sale under the Sale of Goods Act or any other legislation.

Unfortunately, in view of its finding that software was not goods, the Court of Appeal decided it could avoid deliberating on this second appeal issue. While the CJEU construed the online supply of software under a standard software licence to be a sale in UsedSoft v Oracle, it is submitted that the CJEU decision was wrong[1] and in any event was decided under the EU InfoSoc Directive so as to be able to declare that Oracle’s distribution rights under copyright had been exhausted.

But a finding in The Software Incubator on licensing versus selling may also have been useful to support the Court of Appeal’s reasoning on the goods issue. ‘In order for [an] agreement to be a sale, it must have as its objective the transfer of property in goods.’[2] For the moment and until a court is brave enough to find software unequivocally constitutes personal property, there is no property in it which can be transferred. Therefore it cannot be goods. Admittedly the goods conundrum would resurface again when software is eventually found by a court to constitute intangible personal property.

 The Court’s Approach and its Concerns

1.         A primary concern of Lady Gloster LJ (see [19]) was that any legal distinction between software supplied on a tangible medium and software supplied electronically ‘might appear out-moded in light of technological advances’.

But it is the reference to ‘medium’ which causes the problem because that can lead to confusing the message with the medium. And software is the ‘message’, not the medium. It is more rational to decide the legal character of software based on what it is and what it does rather than looking at how it was transferred in the old days and stamping that same legal classification on software as it is transferred today.

At [43] Gloster LJ said the tangible/intangible distinction which leads to a construction of goods that excludes software seems artificial in the modern age. But would she say that about data, which she had argued is analogous at [32]? Is it likely that a court would say data was goods? Not only has no court said data is property, but courts have expressly rejected the proposition. Data is information and as far back as Oxford v Moss (1978) 68 Cr App R 183 property has been rejected for information and even confidential information.[3] It might also be noted that the EU Trade Secrets Directive does not confer property rights in trade secret information.

2.         In reviewing UK case law (at [26]) Gloster LJ accepts the view of the High Court in Accentuate v Asigra [2009] EWHC 2659 (QB) (at [55]–[56]) that software is intellectual property and therefore there could be no sale of goods as required by the Regulation.

 While software is intangible, it of itself is not intellectual property, except in the loose sense of being the subject matter of the intellectual property right, copyright. If it was considered a useful and valid approach to side-track into intellectual property concepts, it would be preferable to take the CJEU approach that copyright subsists in ‘intellectual expression’; that court having held that software is intellectual expression[4] is yet another argument that it can hardly be goods.

3.         At [29] the Scottish case, Gailey v Environmental Waste Controls [2004] Eu. L.R. 355, was surprisingly found by Gloster LJ not to be helpful. The Outer House of the Court of Session had held that the Regulations excluded a sale of incorporeal property because this was a different type of transaction from a sale of goods.  While Gloster LJ had not questioned the view that software was intangible she considered it was not clear that incorporeal property in Scottish law was the same as intangible property. Bearing in mind ordinary dictionary definitions this statement is puzzling. Besides, the Dictionary of Scottish Land Law Terms – Scots Property Law Glossary defines ‘incorporeal property’ as ‘intangible property’. It actually would seem that this Scottish case is another persuasive authority that software is not goods.

4.         In any consideration as to whether an intangible can be goods for the purposes of any legislation (and both the parties and the court below were agreed software was intangible), the definition of ‘goods’ in the Sales of Goods Act itself would seem to be one avenue to pursue.  Its definition of ‘goods’ is ‘all personal chattels other than things in action and money …’. And legal dictionaries define ‘chattels’ personal as ‘movable, tangible articles of property’.

Nevertheless, at [30]–[31] Gloster LJ did agree that there was useful case-law authority under the Sale of Goods Act in St Albans City and District Council v International Computers Ltd, where Sir Iain Glidewell had expressed the view that a software program was not goods when it was not contained on a physical disk.

5.         Gloster LJ noted at [52] that in Your Response v Datateam Business Media it was held there was a distinction between data and the physical medium on which it was contained and that a database did not amount to goods and therefore could not be the subject of a lien. A simpler example than a database might be a just completed scientific research paper in the form of a Word document residing on the researcher’s computer. Would anyone think that Word document was goods?  

Gloster LJ agreed with counsel for the appellant that there was an analogy between software and an electronic database and was persuaded Your Response was a relevant authority.

New Zealand Law

At [54] Gloster LJ, in considering the arguments for the respondent, did express some reservation that a holding that software was not goods would run counter to legislation in New Zealand and Australia, which she thought had somewhat far-sightedly taken into account the increasing prevalence of intangible/digital products. It is submitted that any concern Gloster LJ may have had about following a different path was unwarranted, at least so far as New Zealand legislation is concerned. There was little to admire in the legislative process which made software goods. The driving force behind the Consumer Protection (Definitions of Goods and Services) Bill 2001 was largely political rather than keeping the law in tune with modern technology. The aim of the amending legislation was primarily to overturn a decision of the High Court in Electricity Supply Association v Commerce Commission (1998) 6 NZBLC 102,555 which, not illogically, had held that electricity was neither goods nor services and therefore not subject to the Consumer Guarantees Act. The primary amendment was to make electricity goods so that its supply would be subject to that Act. ‘Software’ seems to have been thrown into the amended definition of goods in case a court might hold otherwise to the detriment of consumers.

The report back to Parliament from the Commerce Committee and the debate on the Bill’s third reading in the House indicated that few if any politicians understood the issues with software. Unfortunately it seems that what little thought was given to it was restricted to supply on tangible disks.

One of the four Acts which received an amended definition of ‘goods’ was the Sale of Goods Act. Gloster LJ noticed the amended definition of ‘goods’ for this Act read ‘goods … includes … (c) “for the avoidance of doubt” … computer software.’ This text is bizzare in view of New Zealand’s tax court Case T8 (1997) 18 NZTC 8, 197 having held only a few years before that software, being intangible, was not goods. As did the NZ High Court[5] in relation to another software tax issue the year after the 2003 legislative amendments. The New Zealand Law Society’s submissions to the Commerce Committee that the Sale of Goods Act should not apply to software because it was licensed and not sold were rejected by that Parliamentary committee.

In short, the Court of Appeal should have no concerns about side-stepping New Zealand legislation in reaching its decision that software was not goods.

EU Law – Sui Generis Approach

At [64],[66] and [67], Gloster LJ refers to the later EU Consumer Rights Directive 2015 which specifies a new category of contract for the supply of ‘digital content’ – in addition to sales of goods contracts which are confined to the supply of tangible moveable items. She concludes: ‘a contract for the supply of software electronically is classified as a contract for the supply of digital content, a new category of contract …’. She notes that for the purposes of her conclusion that ‘the legislature opted to create a sui generis obligation – the supply of digital content – rather than widening the meaning of “goods”.’

Gloster LJ concludes that this ‘novel legislative solution’ is apposite and it is for the EU and the UK Parliament to appropriate this new category for further reform rather than the courts bending the meaning of ‘goods’.

In fact the EU ‘digital content’ category probably came from the earlier EU Commission Proposal for a Common European Sales Law COM(2011) 635 (CESL), which unfortunately was withdrawn in December 2014 . Article 5 in that Proposal defined three different forms of transactions to be covered by the CESL. Only two need to be considered here. The first is ‘sales contracts’ which were defined in Article 2(k) to mean contracts under which the seller transfers ‘the ownership of goods’ to another person, and ‘goods’ was defined in Article 2(h) to mean ‘any tangible movable items’. The second distinct transaction type was ‘contracts for the supply of digital content’ and ‘digital content’ was defined in Article 2 to include software.

It will be seen that a contract for the supply of computer software was not a sales contract under the proposed CESL. This is a clear recognition that a sales contract is not the appropriate classification for a contract for the supply of software and most importantly Article 5(b), unlike the Consumer Rights Directive referred to by the Court of Appeal, had made it clear that this is the case even when it was supplied on a tangible medium.

Conclusions

For the digital age, centuries old legal categories and classifications of ‘things’ are out of date. For both commercial law and personal property law the ancient ‘binary’ categorisations into which things in the digital world are now either forced into by legal fictions or left outside without any legal recognition are repeatedly being shown as inadequate and in urgent need of updating.

As is clear from the decision of the Court of Appeal in The Software Incubator, a law which recognises the subject matter of mercantile contracts as being only either goods or services is now inadequate. The Court of Appeal decision that software is not goods stops software from being locked into the ancient binary category system created at a time when pure intangibles such as software could barely be imagined. A third sui generis category in keeping with the digital age is required and if the courts will not or cannot create one then legislatures must do so. A category like ‘digital content’, irrespective of whether it is supplied online or on tangible media, would overcome the concern expressed by Gloster LJ at [51] about a lack of logic in making the legal status of software depend on the medium on which it was delivered. The Court of Appeal (at [67]) admirably adopts this approach and looks forward to national legislatures and the EU continuing to implement a sui generis category rather than bending the meaning of ‘goods’. It is the least of all evils to leave software in a mercantile legal limbo until this reform is completed.

A similar approach should be taken in relation to personal property rather than clinging to the two categories long ago formulated as choses in possession and choses in action. This binary characterisation leaves out intangibles that are not legal rights – ‘pure intangibles’. It is suggested retaining choses in possession and replacing the old choses in action category with three categories, namely (i) pure intangibles, (ii) legal rights in personam, and (iii) legal rights in rem. Quite apart from accommodating software such a revision removes the illogicality of a property category which currently merges rights in rem, such as copyright, with rights in personam such as debts, into the choses in action category.

While modernising the limitations of the goods/services dichotomy may require legislation as suggested by Gloster LJ, there seems no reason why the courts themselves cannot undertake the required modernisation of the structure of personal property when presented with an appropriate case. In National Westminster Bank v Ainsworth [1965] AC 1175 at 1247, Lord Wilberforce stated a right or interest could be admitted into the category of property provided it was ‘definable, identifiable by third parties, capable in its assumption by third parties and have some permanence or stability’. 

Ken Moon is a Consultant at AJ Park Law Limited, Auckland



[1] Argued at some length in Moon, ‘Revisiting UsedSoft v Oracle: Is Software Property and Can it Be Sold?’, CRi 4/2017, 113.  In addition the CJEU decision on licences versus sales was contrary to the decision of the High Court (Technology and Construction Court) in London Borough of Southwark v IBM UK Ltd [2011] EWHC 549 (TCC) delivered the year before the UsedSoft decision.

[2] Goode on Commercial Law, (4th ed, 2010), 213, a paraphrasing of s.2(1) of the Sale of Goods Act 1979.

[3] For even literary creations: Donaldson v Beckett (1774) 17 Parliamentary History col. 953.  For confidential information: Boardman v Phipps [1967] 2 AC 46 at 128 per Lord Upjohn; and in the High Court of Australia: The Federal Commissioner of Taxation v United Aircraft Corporation (1944) 68 CLR 525.

[4]  See CJEU answers to a referral from the High Court and decision of the Court of Appeal in SAS Institute v World Programming [2013] EWCA Civ 1482.

[5]  Erris Promotions Ltd v Commissioner of Inland Revenue [2004] 1 NZLR 811, see Moon, ‘Software: Tangible or Intangible?’, C&L Vol 18, Issue 2 2007.

Published: 2018-06-22T13:00:00

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