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Time-limited SaaS subscriptions are not ‘sales of goods'

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In a recent legal decision, the High Court has ruled that time-limited software-as-a-service (SaaS) subscriptions do not qualify as ‘sales of goods’. The case in question, Kompaktwerk GmbH v LivePerson Netherlands BV [2024] EWHC 2278 (Comm), clarifies the legal position of SaaS agreements under the Commercial Agents (Council Directive) Regulations 1993 (1993 Regulations).

The Software Incubator Case

In the earlier EU case of The Software Incubator v Computer Associates, the Court of Justice established that a perpetual licence to use computer software was a ‘sale of goods’ for the purposes of the Commercial Agents Directive (Council Directive 86/653/EEC). This ruling raised questions about whether SaaS subscriptions, particularly those with time limits, and software delivered via a SaaS model would be classified the same way under English law.

The Kompaktwerk Case

The Kompaktwerk caseconsidered a reseller and referral arrangement between a SaaS provider and a reseller, and whether a time-limited SaaS subscription was a ‘sale of goods’ under the 1993 Regulations. If it did, then the reseller would be a commercial agent and would be entitled to commission and compensation upon termination of the arrangement.

High Court Ruling: SaaS as a ‘service’ not a ‘sale’

The High Court concluded that time-limited SaaS subscriptions do not meet the criteria for a ‘sale of goods’. The reasoning was based on two key points:

  1. Not a sale, more like a rental: Customers received a limited 12-month licence to use the software. Although there was an auto-renewal right, customers had to pay to trigger it. If payment was not made, the licence would not renew and the arrangement would end, so the software licence was not perpetual and the customer did not have a permanent right to use the software.
  2. A service, not a good: The SaaS product was hosted on the provider’s servers, so required the provider to grant customers with access to use the software. This type of arrangement was considered a ‘service’ rather than a ‘good’. The court found that delivering software via a SaaS cloud-based model does not involve the transfer of ownership, but rather the granting of limited access to a service.

Implications for SaaS Providers and Agents/Resellers

This decision has significant implications for businesses involved in agency and/or reseller arrangements dealing with the reselling of SaaS subscription products. If time-limited SaaS subscriptions are considered ‘services’ rather than ‘goods’, then the 1993 Regulations, which protect agents in the sale of goods, will not apply. This is beneficial for SaaS providers, as they will not be subject to the commission and compensation requirements related to the sales of goods under the 1993 Regulations. However, it is a drawback for agents and potential resellers, who lose those protections when dealing with SaaS products.

The ruling could have a wider impact on other areas of legislation that make distinctions between goods and services. It also strongly suggests that software delivered via the SaaS model (whether time-limited or not) will be a ‘service’ and other legal principles regarding the sale of goods may not apply to the SaaS model.

The previous Conservative government proposed plans to abolish the 1993 Regulations and held a consultation process earlier this year. It remains unclear how the new Labour government will proceed with the consultation and its findings.

If you have any concerns about how this ruling or potential regulatory changes might impact your business, or if you would like to discuss any SaaS, reseller or agency arrangement, please contact a member of our Technology team.

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