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

 

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