Software licences and the risk of copyright infringement

Do you rely on third party computer software to operate your business? Or are you perhaps considering purchasing a business which requires such software to operate?

A recent decision of the Federal Court provides a reminder to businesses that any unlicensed use of third party computer software can constitute copyright infringement under the Copyright Act 1968 (Cth) (Copyright Act). This can attract heavy penalties, as Shepparton Partners Collective Operations Pty Ltd experienced when it was ordered to pay more than $1 million in damages for using computer software without a licence[1].

Shepparton Partners Collective Operations Pty Ltd (Shepparton) purchased the SPC food business (known for processing and selling canned fruit and vegetables under brands such as ‘SPC’ and ‘Goulburn Valley’) in June 2019. Before purchasing this business, Shepparton knew the business relied on computer software which was owned by and licensed from QAD Inc (QAD), and that the software licence would not be transferred from the outgoing business owner (as licensee) to Shepparton without QAD’s consent.

A week before the business sale completed, QAD offered to give its consent to transfer the software licence provided Shepparton paid a licence transfer fee and maintenance fee (together, approximately $600,000) and signed a licence transfer agreement before the business sale completed.

At Shepparton’s request, QAD granted Shepparton a four-week extension to consider its options (which meant Shepparton had until the end of July 2019).

However, QAD’s extended deadline came and went, and Shepparton continued to use the software without a licence after purchasing the business. Four months later, in November 2019 (after ongoing negotiations), Shepparton told QAD it was neither willing nor required to pay a licence transfer fee because it considered it was not contractually required to do so.

QAD commenced copyright infringement proceedings against Shepparton in January 2020.

Copyright is the exclusive right to reproduce, publish, perform, communicate, or adapt categories of works (including computer programs) which are protected under the Copyright Act.[2]

There was no dispute that the computer software was protected under the Copyright Act, and that QAD owned the copyright in that software.

The Court also held that Shepparton had reproduced the software in various ways, including through day-to-day use of the software and by creating back-ups of the software. Without a licence, this reproduction constituted copyright infringement.

The issue before the Court was therefore whether Shepparton had an implied licence to reproduce the computer software.

The Court held that QAD had granted Shepparton an implied licence to use the software in June 2019 when it gave Shepparton a four-week extension to consider its options. Further, the Court held that given the parties were engaged in negotiations for several months, the implied licence remained in place as long as Shepparton was still considering its options, which included paying the licence transfer fee or upgrading to a new QAD system.

However, once Shepparton decided it would not pay the licence transfer fee (and notified QAD of this decision in November 2019), the implied licence came to an end.

The Court agreed with QAD’s argument that an implied licence may be conditional on a future event occurring, in the sense that if the event does not occur, the relevant party cannot rely on the implied licence. In this respect, the implied licence was conditional on Shepparton either paying the licence transfer fee or upgrading to a new QAD system. However, once Shepparton decided it would take neither of these options, the implied licence came to an end.

The Court ordered that Shepparton pay compensatory damages of $602,208 (excluding GST), being the amount Shepparton should have initially paid to secure a transfer of the licence together with a year’s maintenance.

The Court also awarded additional damages of $500,000 to reflect (among other factors) the flagrancy of the copyright infringement. This is because Shepparton continued to rely on the software for almost a year after telling QAD that it would not pay the licence transfer fee, and even continued to access the software during the Court proceedings.

If your business relies on computer software to operate, this case illustrates the importance of reviewing your software licence agreements to ensure you understand the terms on which those licences are held. If you do not hold an express licence to use such software, you risk exposing yourself to a claim of copyright infringement by the software company.

As we navigate the current boom in M&A in Australia, this also means businesses which are looking to acquire other businesses must ensure they carefully review all software licence agreements held in connection with the target business (by means of thorough due diligence) and ensure all such licences are transferred at or before completion of any business sale.

While it is possible that a software licence can be implied (in which case, you will avoid infringing copyright), this will depend entirely on your circumstances.

[1] QAD Inc v Shepparton Partners Collective Operations Pty Ltd [2021] FCA 615 (8 June 2021).

[2] Copyright Act 1968 (Cth) at ss 10, 31.

Author: Annika Beaty

Position: Associate

Practice: Transactions

This article provides general commentary only. It is not legal advice. Before acting on the basis of any material contained in this article, seek professional advice.

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