The Federal Full Court has dismissed an appeal by Shepparton Partners Collective Operations Pty Ltd (SPC) about an earlier ruling the business had infringed copyright through ongoing use of enterprise resource planning software by QAD Inc.
QAD contended SPC had infringed its software copyright by continuing to use its ERP program after the company purchased the SPC Ardmona business from Coca-Cola Amatil for $40 million in June 2019.
On appeal, SPC contended that Federal Court Justice Thawley had erred in assessing compensatory damages on the basis that QAD’s maintenance fee of $177,816 should not have been included in the damages set or should have been set on a net profit basis only. And subsequently a reduction in the additional damages.
Justice Thawley had awarded QAD $662, 428.80 in compensatory damages (the cost of the licence agreement transfer, and an annual maintenance fee) and $500,000 in additional damages due to the “flagrancy” of the infringement and to set a deterrent.
Full Court Justices Andrew Greenwood, Jayne Jagot, and Helen Rofe agreed SPC’s appeal must be dismissed.
The full court judges said that after SPC submitted to Justice Thawley the “proper counter-factual” was not SPC accepting QAD’s list price of $984,000, but SPC accepting the offer of 21 June 2019 (a total of $662,428.80), it is not now open to SPC on appeal to contend that the primary judge erred in accepting SPC’s case.
“In a case involving an evaluative assessment such as an award of damages, a party cannot be permitted in an appeal to assert error on the part of a primary judge who has accepted that party’s case.
“The reality is that in answer to QAD’s claim for compensatory damages in the sum of $984,000, SPC contended to the primary judge that the damages should be $602,208 (excluding GST) or $662,428.80 (including GST). SPC having done so, and the primary judge having accepted that submission, there is simply no error capable of being corrected on appeal,” the full court judges said.
SPC did not accept an offer from QAD on 21 June 2019, but the hypothetical avoidance of infringement would have involved SPC paying the total amount.
“In the hypothesised circumstances, where SPC did not accept the offer, it was not necessary for the primary judge to have inferred or, more accurately, speculated that QAD would have incurred a material hypothetical cost in providing the maintenance services and to have made an arbitrary deduction to reflect that cost. The primary judge did not err in not doing so,” they said.
Regarding the issue of reasonable foreseeability, SPC knew about the existing licence so therefore must have been able to reasonably foresee at least a real possibility that it too would be required to pay the fee for the maintenance service to be able to use the software. “That is sufficient to satisfy any requirement of reasonable foreseeability of the kind of loss in issue,” they said.
The full court judges said that even if SPC had succeeded in one or both of its compensatory damages’ challenges, it would have rejected its appeal in regards to additional damages because Justice Thawley had not suggested the connection between the two was quantifiable or proportional.
The Full Court judges dismissed the appeal.
Sale of SPC to Shepparton Partners Collective
In 1991, SPC Ardmona acquired a perpetual, and from QAD’s perspective, non-transferable licence for its software. It had a contract with QAD for maintenance and support services, which it had paid up to 31 July 2019.
In May 2018, QAD recommended to CCA it upgrade the software to the 2017 Enterprise Edition. The upgrade was “signed off” by SPC Ardmona’s head of IT Gareth Llewellyn but needed final approval from CCA’s CFO Martyn Roberts. That didn’t occur because by then, CCA was considering selling the SPC business.
When Hussein Rifai - now chair of SPC - was completing due diligence he learnt SPC Ardmona was running QAD 2008 SE as its ERP software.
Under cross-examination Rifai accepted that before signing the business purchase agreement on 2 June 2019, he had read the licence agreement and knew the licence could not be assigned or transferred without QAD’s consent, and that he knew there was a risk QAD would not consent.
QAD Victorian state manager Terry Bloom contacted Llewellyn saying the sale would mean a license transfer “at minimum”, which would cost roughly $520,000 with an annual maintenance of around $200,000.
On 14 June, CCA and SPC held an IT transition meeting, at which Rifai said the QAD software was not “fit for purpose”, but that he wanted to “limp along” with it until he had time to assess what he wanted to do with it and how long it would take.
On 21 June, QAD senior vice-president Asia-Pacific Stefan deHaar wrote to the three parties – SPC Ardmona, CCA, and SPC – saying the assignment or transfer of the licence agreement required QAD’s consent, which it would provide on three conditions. He referred to section 9 of the contract that stated as such: a transfer fee of $424,392 and a maintenance fee of $177,816 for the year starting 1 July 2019; the transfer documents and new license and maintenance agreements would need to be executed and all completed by the closing date of the sale; and if the conditions were not met, then QAD’s offer would be withdrawn and SPC would be required to purchase new licences at a cost of $984,059.12.
Rifai considered CCA was responsible for paying QAD to secure its consent to transfer the licence agreement, Justice Thawley said.
Justice Thawley added he was satisfied Rifai knew that “irrespective of whether SaleCo [SPC Ardmona] or SPC was responsible for the transfer fee – SPC could not use the QAD 2008 SE unless it secured either a transfer of the Licence Agreement or QAD’s consent to SPC using the software.” While he accepted Rifai thought he had QAD’s consent to use the software until 31 July 2019, ultimately SPC continued using the QAD software unlicensed for six months, which QAD said was copyright infringement.
Copyright Act infringements
Under the Copyright Act 1968, a computer program is a form of “literary work”. The Act provides that copyright in relation to a work (including a computer program) is the exclusive right to do certain acts in relation to that work, including the right to reproduce it in a material form. “Copyright in a work is infringed by a person who is not the owner of the copyright who does any act “comprised in the copyright” (including reproducing it in a material form) without the licence of the owner,” it says.
Justice Thawley said it followed, and SPC accepted, “that any reproductions made by SPC of any part of QAD 2008 SE will constitute copyright infringement unless SPC had a licence.
“The next issue therefore is whether there were reproductions. The remaining issue, if there were reproductions, is whether SPC had a licence.
“SPC ultimately contended it had an implied licence; it ultimately abandoned its earlier reliance on an express licence.”
Reproductions occurred in day-to-day use, test and development, historical copy, and back-up, Justice Thawley found, and had done so since 28 June 2019.
SPC argued it had an implied licence to reproduce QAD 2008 SE from 29 June 2019 until at least 10 December 2019.
Assessed objectively, the permission was that SPC could use QAD’s software pending SPC’s decision on whether to pay the amount of $602,208 (representing a transfer fee of $424,392 and a maintenance fee of $177,816) or selecting QAD as the provider of an upgraded QAD software solution, provided it was genuinely considering at least one of those options.
The implied licence here was conditioned on SPC either upgrading or paying the transfer fee. Once SPC decided it would do neither, the implied licence came to an end, Justice Thawley found.
Thawley made special mention about the extent of SPC’s use of the QAD software. Whilst as at 28 or 29 June 2019 there were around 214 frequent users and 6 infrequent users, on 26 March 2020 there were 225 users.
SPC commenced using Microsoft Dynamic 365 as its live ERP system on 28 September 2020, and used QAD 2008 SE as its live ERP system until then
Justice Thawley said SPC continued to use QAD 2008 SE after 28 September 2020 and continued to run it throughout the course of the proceedings, and even during the hearing, for “non-production purposes”. These purposes included extracting historical information for quality control or financial reasons.
At the time judgment was reserved, SPC was still running the software to extract data.
Damages sought
QAD sought compensatory damages of $984,059.12 for a yearly licence purchase.
Justice Thawley rejected a number of submissions made by SPC: that copyright damages is the depreciation caused by the infringement to the value of the copyright; that damages should reflect the period of time over which the copyright was infringed; and that a discount should be made to reflect the age of the software.
“QAD 2008 SE was being used in the SPC Business before transfer. The software continues to be used around the world. The software was sufficiently good for the SPC Business to make over $284 million in the financial year ending 28 June 2020, revenue which Mr Rifai admitted could not have been generated without using QAD 2008 SE,” Justice Thawley said.
Justice Thawley ruled damages of $662,428.80, as it was the amount SPC would have paid to transfer the licence and pay a year’s maintenance fee.
He did not accept Rifai’s evidence that SPC did not have the cash flow to pay the amount required by QAD, saying in light of the “many millions” it paid for the acquisition it was “fanciful” it could not pay roughly $600,000.
Justice Thawley raised the ongoing infringement by SPC. “Mr Rifai admitted that SPC used QAD 2008 SE without a licence because SPC considered it to be in SPC’s commercial benefit and accepted doing so as recently as February 2021. SPC evidently made no attempt to prevent its employees from using the software because documents produced on 15 April 2021 showed that SPC had continued to use the QAD Software since February 2021, including on multiple occasions during trial. Mr Rifai was prepared to use the software because it kept the business running.
“Mr Rifai accepted in cross-examination that, whilst SPC would use the software, SPC never intended to pay QAD any amount at any point for the ongoing use of it. The fact that, commercially, Mr Rifai had little choice other than to use the software does not make the infringement less flagrant; rather it explains the reasons why the infringement was so flagrant,” he said.
As such, a “substantial additional damages award is necessary to deter SPC from engaging in like conduct in the future,” he said.
Justice Thawley concluded, “There was no dispute that the SPC business could not have operated without use of the QAD Software. There was no dispute that SPC’s gross revenue of $284 million for the financial year ending 28 June 2020 could not have been generated without using QAD 2008 SE.
“I accept that a substantial award is appropriate by way of additional damages. The two most significant considerations are the flagrancy of the infringement and considerations of specific and general deterrence.
“I consider the appropriate award of additional damages to be $500,000.”
Case
(QAD Inc v Shepparton Partners Collective Operations Pty Ltd [2021] FCA 615; (2021) 159 IPR 285 (8 June 2021)) https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2021/615.html
Appeal
Shepparton Partners Collective Operations Pty Ltd v QAD Inc [2021] FCAFC 206 (19 November 2021) https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCAFC//2021/206.html
