SaaS subscriptions – sale of goods for the purpose of the Commercial Agents Regulations?

In the recent case of Kompaktwerk GmbH v LivePerson Netherlands B.V the Commercial Court ruled that a time-limited SaaS subscription was not a sale of goods under the Commercial Agents (Council Directive) Regulations 1993 (Commercial Agent Regulations).

SaaS has heavily increased in popularity compared to the on-premises model of software in recent years. The emergence of SaaS products post-dates certain legislation relating to the sale of goods and services leaving open the question as to whether SaaS is a service or a good. This question becomes increasingly important when considering the Commercial Agent Regulations. Under the Commercial Agent Regulations, on termination of a commercial agent’s contract the agent may be entitled to the payment of commission and compensation as recognition for the goodwill they have assisted the principal in building. Such payments can be substantial. Prior to the case of Software Incubator, the Court’s view had always been that only tangible property could be classified as a ‘good’. Following Software Incubator in which the Court ruled that a perpetual licence for software did constitute a ‘sale of goods’, there remained uncertainty about how the courts would class the sale of a SaaS subscription. As a result, Kompaktwerk v LivePerson was a much-anticipated ruling.

Background

Kompaktwerk GmbH (Kompaktwerk) was engaged by LivePerson Netherlands B.V.’s (LivePerson) under a Master Partner Agreement (MPA) which included a referral agreement for Kompaktwerk to introduce or refer clients to LivePerson for potential sales of their SaaS product “LiveEngage”, and a resale agreement where Kompaktwerk purchased LivePerson’s products and resold them. Following LivePerson’s termination of the MPA, Kompaktwerk claimed it had been a commercial agent due to its involvement in the sale of LiveEngage, and that through this a sale of goods had occurred under the Commercial Agent Regulations. As a result, Kompaktwerk argued that it was entitled to commission and compensation under the Commercial Agent Regulations on termination of the MPA. The key question for the Court, therefore, was if there had in fact been a ‘sale of goods’ under the Commercial Agent Regulations as Kompaktwerk alleged.

Court ruling

In the judgment, the time limited nature of LiveEngage’s subscription was a central consideration. The perpetual nature of the software licence had also been a key factor in the Software Incubator case in 2021. Conversely, in Kompaktwerk v LivePerson, the subscription was for a limited, revocable licence which applied for a 12-month period and auto-renewed for successive 12-month periods, subject to payment. Therefore, there was no transfer of ownership rights nor a perpetual right to use the software, differentiating the case from Software Incubator. Consequently, the time limited subscription was determined as “akin to a rental and not a sale” by the Court and the customer subscriptions were ruled to be a service (instead of a good). The Court’s rationale was that the LiveEngage platform was a service provided and hosted by LivePerson. As a result, Kompaktwerk’s involvement in the sale of LiveEngage did not constitute a ‘sale of goods’ under the Commercial Agent Regulations; and Kompaktwerk was not entitled to compensation or commission awarded under the Commercial Agent Regulations.  

What is the impact?

This is a key ruling for any SaaS companies appointing agents, as it sets out the current position under English law that time-limited subscriptions of SaaS will not be considered a sale of goods under the Commercial Agent Regulations. Understanding what activity is covered by the Commercial Agent Regulations is crucial, due to their far-reaching financial implications as highlighted in this case.

Overall, Kompaktwerk v LivePerson emphasises the importance of distinguishing between a perpetual or time limited licence for SaaS products. However, this is the first case of its kind under English law and therefore SaaS providers should exercise caution. It will be interesting to see how the courts respond to future analogous cases. Further to this, on 16th May 2024, the Conservative government issued a consultation on the deregulation of the Commercial Agent Regulations. With the core argument being that following Brexit, a review was needed to verify if the regulations benefitted UK businesses. The consultation closed on 11th July 2024, and it remains to be seen if the new Labour government will act upon its findings.