Quanta Software International Pty Ltd v Computer Management Services Pty Ltd [2001] FCA 1459 (19 October 2001)

Last Updated: 22 October 2001

FEDERAL COURT OF AUSTRALIA

Quanta Software International Pty Ltd v Computer Management Services Pty Ltd [2001] FCA 1459

COPYRIGHT - Action for infringement of copyright - Computer software program - Ownership of copyright - No evidence as to creation of copyright - Whether ownership was admitted by respondent in dealership agreement - Whether respondent estopped from denying applicant's ownership - Whether acts done by respondent were done with the leave and licence of the applicant - Nature of appropriate relief - Whether Court should order an inquiry to take an account of profits earned by respondent in exploiting the program.

Copyright Act 1968: ss 31, 35, 115

Copyright (International Protection) Regulations: reg 4, Schedule 1

QUANTA SOFTWARE INTERNATIONAL PTY LIMITED v COMPUTER MANAGEMENT SERVICES PTY LIMITED

N 1093 of 2000

WILCOX J

19 OCTOBER 2001

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 1093 of 2000

BETWEEN:	QUANTA SOFTWARE INTERNATIONAL PTY LIMITED APPLICANT
AND:	COMPUTER MANAGEMENT SERVICES PTY LIMITED RESPONDENT
JUDGE:	WILCOX J
DATE OF ORDER:	19 OCTOBER 2001
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The respondent, Computer Management Services Pty Limited, be restrained from infringing, whether by itself its servants or agents, the copyright of the applicant, Quanta Software International Pty Limited, in the EUNICE computer software system by reproducing or adapting, or authorising the reproduction or adaption of, the said software system or a substantial part thereof except:

(a) with the licence of the applicant; or

(b) pursuant to the dealership agreement made between the applicant and the respondent on 12 November 1992.

2. The New South Wales District Registrar of the Court undertake an inquiry for the purpose of taking an account of the profits made by the respondent by its infringement of the applicant's copyright in the said software system.

3. There be liberty to apply in respect of such inquiry and for orders consequential upon completion of the inquiry.

4. The respondent pay to the applicant the amount of its costs incurred to date in connection with this proceeding.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 1093 of 2000

BETWEEN:	QUANTA SOFTWARE INTERNATIONAL PTY LIMITED APPLICANT
AND:	COMPUTER MANAGEMENT SERVICES PTY LIMITED RESPONDENT

JUDGE:	WILCOX J
DATE:	19 OCTOBER 2001
PLACE:	SYDNEY

REASONS FOR JUDGMENT

WILCOX J:

1 This is an action for infringement of copyright in a computer software program known as "EUNICE". Although infringement is denied, the parties are agreed about many matters. The result is that only three issues require determination by the Court. They are:

(a) whether the applicant is the "owner" of the copyright, within the meaning of s 115(1) of the Copyright Act 1968, and so able to bring an action for breach of copyright;

(b) whether acts admittedly done by the respondent, that admittedly fall within the acts specified in s 31(1)(a) of the Copyright Act, were carried out with the leave and licence of the applicant, and so were acts incapable of infringing any copyright held by the applicant; and

(c) if the applicant is entitled to succeed, the nature of any relief available to it.

The facts

2 The applicant, Quanta Software International Pty Limited ("Quanta"), is an Australian company. A substantial portion of its shares is held by another Australian company, Trilogy Corporation Pty Ltd ("Trilogy"). Trilogy is controlled by Errol Stanley Williams. At all material times, he has taken an active interest in the affairs of Quanta; but without managerial responsibility. Management was the task of Grant Friis who, until his death in March 2000, was general manager of Quanta.

3 On 2 February 1991 Quanta Holdings Ltd ("Quanta Holdings"), a New Zealand company, and Quanta executed a document entitled "Exclusive Perpetual Software Licence Agreement". The agreement related to a computer software system known as "EUNICE Software", which was said to have been "developed" by Quanta Holdings, and which included a number of integrated modules:

"accounts receivable, general ledger, accounts payable, inventory, purchasing, advanced inventory, import costing, sales analysis, PDE input, retail point of sale, order processing etc and cash book."

4 By cl 1 of the agreement, Quanta Holdings purported to grant to Quanta "an exclusive perpetual licence to use, copy, publish, translate, and sub-licence rights to its software system with respect to all countries except New Zealand". The agreement was to be "effective in perpetuity". Terms were agreed but it is unnecessary to state them. It is accepted by Mr Alex Gelbart, counsel for the respondent, that, if Quanta Holdings was the owner of the copyright under New Zealand law, the agreement was effective to make Quanta an "exclusive licensee" of copyright in the EUNICE software system within the meaning of the Copyright Act. In this connection the parties note that New Zealand is a country specified in Schedule 1 to the Copyright (International Protection) Regulations 1969, so reg 4 of those regulations makes the Australian Act applicable to a literary work first published in New Zealand.

5 There is no evidence as to the content of New Zealand copyright law. That being so, the appropriate course is for the Court to assume it corresponds in material respects with Australian copyright law. Mr Gelbart accepts that. Mr Gelbart also agrees the EUNICE software system is a "literary work", within the meaning of that term in the Australian Act. Also he agrees that Quanta Holdings must be regarded as the copyright owner, for the purposes of the assumed New Zealand law (and therefore Australian law), if the person or persons who authored the EUNICE software system did so pursuant to a contract of employment between that person, or those persons, and Quanta Holdings: see s 35(6) of the Copyright Act. However, Mr Gelbart points out there is no evidence as to the identity of the author or authors of the EUNICE system. Mr T Lee, solicitor for the applicant, argues this is unnecessary. He says the respondent has admitted (or, alternatively, is estopped from denying) Quanta's status as "owner" under the Australian Act. I will return to that issue.

6 On 17 October 1991 Quanta entered into a dealership agreement with a company called CMS-Software Services Pty Limited. That company may have been the present respondent, Computer Management Services Pty Limited ("CMS"), under an earlier name. Alternatively, it may have been associated with CMS. If so, it fell within the agreement's definition of "The Dealer" viz. "CMS-Software Services of 15 Bridge Street, Pymble NSW & other members of the CMS Group of Companies". However, it is not necessary to pursue those questions; the 1991 agreement was quickly superseded by a fresh agreement, made directly between Quanta and CMS.

7 It seems one reason for the second agreement was that CMS received performance complaints from persons to whom it had sold the EUNICE system. These complaints generated correspondence between CMS and Quanta in which there was discussion about the cause of the problems. Putting the matter broadly, CMS alleged design defects in the program while Quanta attributed the problems either to faulty installation or incompatibility between the EUNICE system and end-users' existing accounting programs.

8 This dispute was never resolved. However, the parties decided to make a second agreement, under which CMS would be able to acquire the source code for EUNICE. Apparently, it was expected this would assist CMS to resolve end-users' problems.

9 The second agreement was made on 12 November 1992. Clause 2 provided:

"Quanta hereby appoints the Dealer and the Dealer hereby accepts the appointment as a non exclusive Dealer of Licensed Programs upon the terms and conditions contained herein. This agreement replaces an existing agreement between the parties dated 17 October 1991."

The term "The Dealer" was defined as CMS "and other members of the CMS Group of companies".

10 The term "Licensed Program" was defined as:

"the computer software specified in Schedule 1 together with such other computer software as are from time to time made available or supplied by Quanta to the Dealer pursuant to the terms of this Agreement but excluding such computer software as may be notified by Quanta to the Dealer from time to time."

11 The Schedule referred to the EUNICE software system.

12 The agreement provided for CMS to forward orders to Quanta in respect of Licensed Programs. Orders were to be in writing and to include the end user's name and address (cl 6.1). Orders were subject to acceptance by Quanta, but acceptance was not to be unreasonably withheld (cl 6.2). Quanta was to make every reasonable effort to deliver the ordered program in accordance with the order (cl 6.3). Within 30 days of delivery, CMS was bound to pay for the program, the price being determined in accordance with a price list set out in Schedule 1 to the agreement. However, this obligation was subject to a discount in accordance with Schedule 3 (cl 12.3). The basic discounts set out in that Schedule ranged from 40% to 45%. Additional discounts were also available.

13 Clause 8.1 of the agreement provided that "Development Code purchased by Dealers must only be used for Development Purposes". The term "Development Code" was defined as meaning "the source computer programs from which the licensed programs are derived". "Development Purposes" was defined to mean "modify, enhance or add to the functionality of a licensed program already supplied to an end user".

14 Clause 16 of the agreement achieved some importance in the argument. It read:

"16.1 The Dealer acknowledges that any and all of the copyrights, trademarks, trade name, patents and other intellectual property rights used or embodied in or in connection with the Products are and shall remain the sole property of Quanta, and shall protect these rights.

16.2 The Dealer acknowledges that all information, data, drawings, specifications, documentation, software listings, source code, object code, object and source program listings or any copies, reproductions translations, adaptions, variations or modifications thereof which Quanta may have imparted or may from time to time impart to the Dealer relating to the Products is proprietary and confidential. The Dealer agrees that is [sic] shall use the same solely in accordance with the provisions of this Agreement and that it shall not at any time during or after termination of this Agreement, disclose the same to any third party, except in the course of normal Dealer activity, without Quanta's prior written consent.

16.3 Quanta shall indemnify the Dealer against any copyright, trademark, or intellectual property dispute involving Quanta's products, provided the Dealer has carried out his responsibilities under Clauses 13.1 and 13.2."

15 Following this agreement, Quanta made available to CMS a copy of the source code for the EUNICE software system. CMS used the source code for the purpose of rectifying problems encountered by end-users to whom it had sold the system. Code modifications made by CMS in order to assist one end-user were retained on its copy and passed on to other end-users. So the version of the source code held by CMS gradually diverged from that supplied by Quanta. This was despite the fact that Quanta, from time to time, supplied to CMS upgrades of the source code.

16 In 1996 Quanta carried out a major revision of the program. After some delay, caused by the fact that Quanta had unresolved money claims against CMS, the 1996 version (EUNICE V96) source code was supplied to CMS. This was done in return for a promise by CMS to pay Quanta a specific sum of money, being less than the amount that had previously been claimed by Quanta.

17 Richard St John Cross, chief executive officer of CMS, gave evidence about this payment which, he said, was the last payment ever made by CMS to Quanta. In his affidavit, Mr Cross deposed that he had a conversation with Mr Friis in July 1996 in which he (Mr Cross) said: "I am willing to make the last payment on the source code and thereafter CMS will have no claims on Quanta and Quanta will have no further claims for licence fees on CMS. If we cannot agree on this, CMS will have no alternative but to sue Quanta for non-performance". Mr Cross further deposed that Mr Friis made no specific response to what he had said. However, there was discussion about the amount of the payment. On the following day, Simon Allison, Quanta's company secretary, faxed a letter to Mr Cross. It read as follows:

"As per your meeting with Mr Friis on the 17^th July 1996 Quanta will provide you at regular intervals with updated source code provided you agree to confine its use to the development of your CMS Eunice, and that the source code is not used to offer or give support to any Quanta customers.

Please sign below and fax this agreement back to me on 317-3273."

18 Mr Cross signed and returned the letter to Mr Allison. It will be noted it said nothing about termination of the parties' obligations. On the contrary, it envisaged a continuing relationship between them.

19 During 1997 Quanta sent invoices to CMS for licence fee renewals. There was no response. In May 1998 Quanta's accountant wrote to Mr Cross about the outstanding claims. Mr Cross responded with a letter stating: "The invoices in question are for services that have not been supplied. Hence CMS has no intention of paying them."

20 It appears that, in about 1997, CMS decided to market EUNICE, as modified by CMS, under the name "UNISON". It did this without reference to Quanta and without offering any royalty or payment on UNISON sales. In his affidavit, Mr Cross said:

"Towards end of 1997 CMS had further advanced the development of CMS Eunice and was poised to commence a marketing effort. At that time I formed the view that it would be prudent to formalise and fully document the agreement reached on 17 July 1996. I recognised as a reality that to formally document our earlier agreement would not be a simple exercise nor a mere formality. I realised the possibility that Mr Friis would use the opportunity to obtain further benefit for Quanta. I expected that there would be further negotiations and that CMS would have to pay an additional price for the comfort of a formal document. With this in mind I approached Grant Friis towards the end of 1997."

21 Mr Cross said that, in preparation for his meeting with Mr Friis, he drafted for his own use a note of matters to be discussed. He annexed to his affidavit a copy of that note. Under the heading "Objective of Meeting", he wrote "To commence negotiation for a termination of the current agreement". Under the heading "Background", he said:

"- Original agreement said/implied a maintenance and ongoing support of and development of Eunice.

- You will know of the fights with Chris Collins and his failure to deliver.

- As a result CMS bought source code and have developed Eunice.

- Now at a cross roads.

- Strategic Planning Meeting Friday and Saturday. One of the decisions CMS has to make is Next Generation distribution."

Mr Cross then set out a number of "choices" and concluded: "Hence this meeting to see if there is a scenario which removes CMS from paying any more licence fees to Quanta."

22 Mr Cross also annexed to his affidavit a summary of the substance of the conversation with Mr Friis at the meeting. There was discussion about a possible joint venture, but no agreement was reached. Mr Cross' note ends with this "Conclusion":

"GF will see if he can make an offer to CMS for us to make a lump sum payment and be free of all future royalties and if so, how much. His NZ agreement may prohibit this. He promised to get back in time for the Strategic Planning Meeting to consider his offer this weekend."

23 The evidence also contains two drafts, on CMS letterhead, of a proposed agreement to amend the deed of 12 November 1992. These drafts each envisage a continuing dealership relationship, although with an increased discount allowable to CMS and CMS being entitled to rebadge EUNICE. Paragraphs 1 and 2 of the second draft are in these terms:

"1. CMS will rebadge EUNICE to be called UNISON. The principal differences between EUNICE and UNISON will be:

1.1 the inclusion of all the bug fixes that CMS has made to the EUNICE source code that was supplied by Quanta to CMS.

1.2 the inclusion of CMS owned modules.

1.3 A windows `look and feel', initially to part of the system, but over a nine month period to substantially all of the system.

1.4 A module of EUNICE will change to being a module of UNISON when ALL screens within the module have a windows look and feel.

2. It is recognised by both parties that since the original Quanta owned software was used as a basis for UNISON, then Quanta retains part ownership in UNISON."

24 In his evidence, Mr Cross conceded no new agreement was made; the negotiations came to nothing. Notwithstanding this, Mr Cross renamed the program as UNISON and supplied it to end-users under that name, making no disclosure of the supply to Quanta.

25 Expert evidence was led as to the differences between EUNICE and UNISON software. The major difference is that the latter system includes some modules that are not part of EUNICE. It is not necessary to go to the detail of the differences. It is conceded that UNISON is an adaptation of EUNICE, within the meaning of s 31(1)(vi) of the Copyright Act.

Ownership

26 The applicant's case in chief did not include any evidence about the creation of the EUNICE program. However, Mr Lee relied on documents in which, he said, copyright ownership was admitted. One of these documents was the agreement between Quanta and CMS of 12 November 1992; particular reliance being placed on cl 16.1. Mr Lee also drew attention to some CMS sub-licence agreements, with end-users to whom it supplied EUNICE software, in which it named Quanta as the owner of copyright in "CMS EUNICE modules".

27 During cross-examination, Mr Cross was shown a sub-licence dated 22 May 1999 in which it was stated the owner of copyright in "CMS EUNICE" modules was CMS. He said that was "quite clearly a mistake ... Quanta owned it." Mr Cross went on to distinguish between copyright in material originally delivered by Quanta to CMS, to which he conceded Quanta held copyright, and copyright in modifications made by CMS, which he thought CMS owned. Mr Cross went on to agree he had acted for ten years on the basis that Quanta owned copyright in the modules provided by that company to CMS. However, he said "in the last few days" he had developed doubts about that.

28 At a later stage of his evidence, Mr Cross agreed "the whole deal" between CMS and Quanta "was premised on the fact that the applicant had the copyright rights in Australia at least".

29 It seems to me that cl 16.1 of the agreement of 12 November 1992 contains a clear admission by CMS that Quanta is the holder of copyright in the software program. Contrary to a submission made by Mr Gelbart, the acknowledgment contained in cl 16.1 must be treated as a general admission, made for all purposes. It was obviously included in the agreement in order to obviate the necessity of Quanta proving its title aliter.

30 If I am wrong in regarding cl 16.1 as constituting an express admission of ownership, it seems to me CMS is estopped from denying Quanta's ownership. Quanta's ownership of the Australian copyright in EUNICE was a fundamental in the relationship between the two companies. Quanta acted over many years, including by supplying source code to CMS, on the basis that CMS conceded Quanta held copyright in the source code. It would have been foolhardy for Quanta to supply its source code to a potential competitor that did not acknowledge its copyright.

31 The first issue must be resolved in favour of the applicant.

Authorisation

32 I turn to the question whether Quanta authorised CMS to adapt the EUNICE software program (s 31(1)(a)(vi) of the Copyright Act), to reproduce the program (s 31(1)(a)(i)) or to enter into a commercial rental arrangement in respect of it (s 31(1)(d)).

33 An important feature of this case is that CMS was an appointed Quanta dealer in relation to the EUNICE program. This is not a case of a person having no relationship with the copyright owner carrying out acts that fall within the Copyright Act. Acts of adaption, reproduction and exploitation carried out by CMS under the authority conferred on CMS by the dealership agreement would not be acts of infringement of Quanta's copyright.

34 Notwithstanding Mr Cross' evidence that he and Mr Friis agreed, in July 1996, to terminate the dealership, I am satisfied this was not the case. I have four reasons.

35 First, the suggested agreement is inherently unlikely. The suggestion is that Mr Friis agreed to terminate CMS' obligation to make future royalty payments, and to allow CMS to exploit the EUNICE source code for its own benefit, without receiving anything in return other than payment of part of the moneys already claimed by Quanta from CMS in respect of past transactions.

36 Second, both Mr Williams and Mr Allison gave unchallenged evidence that they knew nothing of such an agreement. They both had daily contact with Mr Friis. Mr Allison occupied an office opposite that of Mr Friis and spoke with him many times each day. Quanta was a small company. Its interest in EUNICE was a significant element in its business. It seems unthinkable that Mr Friis would have failed to apprise Mr Williams and Mr Allison of any agreement to the effect suggested by Mr Cross.

37 Third, if such an arrangement had been made, it would surely have been confirmed in writing. There was a written exchange immediately after the meeting between Mr Friis and Mr Cross. But it confirmed only that Quanta would provide CMS with updated source code "at regular intervals" in the future, provided the source code was used only in connection with "your CMS EUNICE" and not to support Quanta customers. On Mr Cross' story, why would Quanta have undertaken an obligation to provide regular updates of the source code? And why would CMS, which had cut the link with Quanta in order to go its own way, have agreed to limit its use of the source code?

38 Mr Gelbart sought to extract some support to his case from Mr Allison's use of the qualifier "CMS" before EUNICE. However, there is uncontested evidence of a practice in the computer industry for dealers, with the acquiescence of distributors, to add their own name to a program brand name.

39 Fourth, and most significantly, Mr Cross' evidence is inconsistent with his subsequent conduct in negotiating with Mr Friis for a termination of the dealership. On his story, there was nothing to terminate; Mr Friis had already accepted that the dealership agreement was at an end and CMS was free to use the EUNICE source code for its own purposes.

40 My rejection of Mr Cross' evidence means that, after July 1996, CMS continued to be a Quanta dealer, in relation to EUNICE. It follows that CMS was entitled to sell copies of the EUNICE program in accordance with the terms of the dealership agreement of 12 November 1992. It was also entitled to use the source code, supplied to it pursuant to cl 8.1 of that agreement, for "Development Purposes"; that is, for the modification etc of a licensed program already supplied to an end user. It was not entitled to use the source code for the purpose of creating additional copies of the EUNICE program. Nor was it entitled to sell copies of the EUNICE program it had itself created; they were not copies provided by Quanta in accordance with cl 6 of the dealership agreement.

41 It is clear that CMS did use the source code for the purpose of creating additional copies of the EUNICE program, albeit copies containing CMS modifications and additions. CMS sold these additional copies to end-users, directly and without reference to Quanta. In carrying out those transactions, it did not act as a dealer, pursuant to its dealership agreement with Quanta, but as principal on its own account. The point is highlighted by the circumstance that, without permission from Quanta, CMS marketed these programs under a different name, UNISON rather than EUNICE.

42 To the extent that CMS carried out acts falling within s 31 of the Copyright Act in accordance with the dealership agreement, it did so with the leave and licence of Quanta; so it did not infringe Quanta's copyright. However, once it stepped outside the dealership agreement, such acts constituted an infringement of copyright.

43 It is clear that, from July 1996 onwards (if not before), CMS habitually acted outside the confines of the dealership agreement. Infringement is established.

Relief

44 This brings me to the third issue: the relief to which Quanta is entitled. Mr Gelbart says Quanta is entitled only to damages, calculated by reference to the licence fees it would have received from CMS if CMS had acted in accordance with the agreement. Mr Lee disputes this. He points out the action brought by his client is not one for breach of contract, but for infringement of copyright in relation to which it is entitled to an account of profits: see Colbeam Palmer Limited v Stock Affiliates Pty Limited [1968] HCA 50; (1968) 122 CLR 25 at 42. In that case (a trade mark case), Windeyer J went on (at 43) to discuss the possible difficulty of determining "how much of the total net profit which an infringer has made by sales of his goods is to be attributed to his selling them under another man's mark". He said:

"If one man makes profits by the use or sale of some thing, and that whole thing came into existence by reason of his wrongful use of another man's property in a patent, design or copyright, the difficulty disappears and the case is then, generally speaking, simple. In such a case the infringer must account for all the profits which he thus made."

45 That statement of principle was endorsed by Mason CJ, Deane, Dawson and Toohey JJ in Dart Industries Inc v The Décor Corporation Pty Limited [1993] HCA 54; (1993) 179 CLR 101 (a patent case) at 120-121.

46 This statement of principle applies to the present case. CMS made profits (presumably) by the sale, outside the dealership agreement, of the right to use the EUNICE software system, either under that name or the name UNISON. That which was sold became available for sale only because of CMS' wrongful use of the EUNICE source code. Perhaps the modifications and additions made to the program by CMS added to its attractiveness to purchasers; but without the wrongful act there would have been nothing to sell. Accordingly, CMS must account to Quanta for the profits it has made in connection with the sale of EUNICE software (under whatever name) other than pursuant to the dealership agreement of 12 November 1992.

Disposition

47 Quanta seeks an injunction restraining CMS from infringing its copyright in the EUNICE software by reproducing, or adapting or authorising the reproduction or adaptation of, the EUNICE software or a substantial part thereof without the licence of Quanta. I think it is appropriate to make an order in those terms, but subject to the further exclusion of acts performed pursuant to the dealership agreement of 12 November 1992.

48 I propose also to order that an inquiry be held by the Registrar for the purpose of taking an account of the profits earned by CMS as a result of its infringement of Quanta's copyright. There will be liberty to apply in regard to that inquiry and for consequential orders.

49 CMS must pay Quanta's costs incurred to date.

I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox.

Associate:

Dated: 19 October 2001

Solicitor for the Applicant:	Mr T Lee of Terence Lockyer Lee & Associates
Counsel for the Respondent:	Mr A Gelbart
Solicitors for the Respondent:	Peter C Prior & Co
Date of Hearing:	26 and 27 September 2001