Software licences: (the lack of) a legal qualification and case law

Traditional companies such as banks and supermarkets increasingly qualify as tech companies. Over the past decades, they have automated and digitised their processes with various ICT solutions. Recent developments in artificial intelligence (AI) indicate that the technology is advancing at a rapid pace.

Companies use ICT solutions developed by themselves, but also, and increasingly, systems developed by others. The amount of third-party software solutions in use within a company has grown along with automation and digitalisation. Many companies manage a robust portfolio of software licences. The relevance of the term ''software licence'' has thus gained considerable ground.

The legal framework around the term (software) licence has lagged behind its economic relevance. For example, the law does not define the term licence. In general, licence means a permission to do or use something. A software licence generally involves the use of a copyrighted work (the source code and/or object code). The Computer Programs Directive (Directive 91/250/EEC) gives (limited) substance to the definition ''computer program''. Most of the relevant questions for economic law, such as whether software is a "good" or a "thing", whether it can be sold (or only used) and whether a software licence may be freely resold, have been answered not by the legislator, but by the (European) courts.

An important judgment was the Beeldbrigade judgment in 2012. In this judgment, the Supreme Court of the Netherlands ruled that the purchase title (Title 7.1 of the Civil Code) applies to the purchase of standard software for a use not limited in time against payment of a certain amount. The fact that the purchase of software - also in purely electronic form - is equated to purchase and can also be sold was uncertain until then. For the buyer, this was a favourable development: the purchase regime offers the buyer better protection than general contract law (Book 6 of the Civil Code). The purchase title contains special provisions on non-conformity, obligation to complain and prescription, among others, which apply in both B2B and B2C relationships. In addition, the purchase title provides consumers with additional protection. For instance, the (non-)conformity regulation provides that not only the agreement (usually: the supplier's standard terms and conditions) determines which requirements the software has to meet, but that the buyer may expect the software to have the normal properties required for normal use - even if this has not been agreed on paper.

Since 2012, we have had to make do with only "crumbs" of property law clarification. In addition, the scarce case law is very casuistic. We discuss here a few judgments that clarified the qualification of a licence agreement relating to (standard) software:

• In 2016, the Amsterdam court ruled¹ that the purchase title does not apply to a software licence that is limited in time. In each case, the right of use was limited for the period of one year. It followed that no property had been acquired over which the acquirer could exercise actual power, leaving no room for a (parallel) application of the purchase title, according to the court.
• In summary proceedings concerning the joint development of software in 2017², the licence agreement was classified as a perpetual agreement. With regard to the duration, it had been agreed that it would transcend the various phases, had been entered into for the initial duration of 12 months and would be renewed for the same period each time if not validly terminated. Although a termination option was provided for here, a duration agreement may imply that the contract cannot be terminated just like that. In this case, the preliminary injunction court ruled that - despite the fact that the parties had terminated the cooperation - the licensee should, in the circumstances, be allowed to continue using the software for some time so that the licensee had time to have replacement software developed by another company.
• More recently, in 2022, the Court of Appeal of 's-Hertogenbosch confirmed the Beelbrigade judgment that the purchase title applies to the purchase of standard software. An addition was that the applicability of the purchase title is not affected by the fact that there is (some) custom software.³ This is relevant, because creating custom software indicates a service and therefore a contract for services rather than a purchase contract. The court additionally found - despite the fact that in this case software needed to be customized - that the software qualified as standard software, because the supplier had provided the software package to several companies and had not sufficiently demonstrated that more had been done than just relative adjustments for the customer.
• On an agreement to develop software, the Arnhem-Leeuwarden Court of Appeal⁴ ruled in 2022 that it was not a construction agreement. The court ruled that software is not a thing within the meaning of Art 3:2 of the Civil Code. Therefore, the agreed work did not concern the creation of a tangible construction, as Article 7:750 of the DCC requires for the construction agreement. In the above-mentioned judgment, the Court of Appeal of 's-Hertogenbosch left the door ajar for this ("In the opinion of the Court of Appeal, to that extent, this could (also) be (regarded as) a construction agreement."). The Arnhem court of appeal closes that door.
  

All in all, after decades, it is now finally clear that software is close to "thing" status and that the purchase regime applies (accordingly). However, case law still shows particularly little development where the interpretation and application of licence terms is concerned. This is not because no problems arise with them in practice. On the contrary. The multitude and diversity of licences, often poorly legible conditions, restrictive conditions that make normal use in fact impossible, hidden impossibilities to get rid of support and maintenance costs once they have been incurred: software licences contain numerous onerous clauses that in practice result in high-impact disputes. Both the quantity and the extent of disputes in practice are hardly ever reflected in legal proceedings. If it comes to legal proceedings at all, they are often settled at the last minute. As a result, the law has barely developed here.

A major reason why there is so little litigation on software licensing disputes is the dependency that typifies market relations in ICT. After all, using an ICT solution by definition creates a certain dependency, once more where such a solution supports core processes of the organisation. This soon touches on the continuity of the organisation, making organisations reluctant to afford a dispute with a supplier, let alone the escalation to legal proceedings with major risks, including the risk of not being able to continue with a product. This de facto dependency creates a firm position for the supplier, small or large - resulting in an imbalance between the parties. That imbalance is not lessened when there is little or no case law that can provide guidance on the interpretation and application of suppliers' terms and conditions.

At the same time, suppliers also have good reasons to be wary of litigation: an unfavourable interpretation of their standard terms of use can hit a supplier's business model hard - not only in the case in question but immediately for their entire market. For listed companies, a direct risk to their share price.

This stalemate is not at an end and means that we will probably have to make do with scarce case law for a while. Yet there is movement. The line that has been taken since the Beeldbrigade judgment and immediately afterwards European jurisprudence is continuing firmly. In all kinds of (European) legislative initiatives, software, software components in products and digital services are increasingly being lumped together. Competition authorities are also starting to consider the software market and the market relations between supplier and professional customers. Since 2022, for instance, the ACM has been focusing its pillars on healthcare. These developments offer an acceleration for legal development around software and software-related products, including the way software, the software licence – and potentially even the cloud subscription - are embedded into law.

(1) ECLI:NL:RBAMS:2016:6452.

(2) ECLI:NL:RBGEL:2017:5705.

(3) ECLI:NL:GHSHE:2022:3007.

(4) ECLI:NL:GHARL:2022:512.