Avel Pty Ltd v Wells, J

Re: AVEL PTY. LIMITED; CAPCOM CO. LIMITED and TAD CORPORATION LIMITED
And: JONATHAN WELLS
No. G816 of 1991
FED No. 461
Intellectual Property
(1992) AIPC 90-901
(1992) 108 ALR 97
(1992) 23 IPR 353

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Sheppard(1), Lee(1) and Hill(1) JJ.

CATCHWORDS

Intellectual Property - copyright - parallel importation - circuit layouts - importation of eligible layouts for video games - eligible layouts containing substantial parts of computer programs, the copyright in which was owned by one or other of the appellants - whether importation of such eligible layouts constituted an infringment of appellants' copyright in computer programs.

Circuit Layouts Act 1989, ss. 5, 8, 11, 16, 17, 19 and 24.

Copyright Act 1968, ss. 37 and 38.

HEARING

SYDNEY

#DATE 30:6:1992

Counsel and Solicitors for Applicant: D.F. Jackson QC with R.J. Webb

instructed by Kemp, Strang and Chippindall

Counsel and Solicitors for Respondent: D.K. Catterns with J.V. Nicholas
for Respondent: instructed by Corrs Chambers

Westgarth

ORDER

THE COURT ORDERS THAT:-

1. The appeal be dismissed.

2. The appellants pay to the respondent his costs of the appeal.

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

JUDGE1

The appellants, Avel Pty Limited ("Avel"), Capcom Co Limited ("Capcom") and Tad Corporation Limited ("Tad") are the applicants in proceedings against the respondent, Mr Jonathan Wells ("Mr Wells") in which they sought, inter alia, an injunction against Mr Wells, restraining him, inter alia, from importing, selling or offering for sale certain electronic video games in kit form. The relevant games are referred to as "Carrier Airwing", "Final Fight", "Street Fighter II" and "Blood Brothers". Each of the game kits comprises a printed circuit board ("PCB"), into which are plugged certain memory storage devices, an operator's manual and certain stickers.

In relation to the game kits for the first three games, Capcom is the owner pursuant to the Copyright Act 1968 ("the Copyright Act") of copyright in three literary works being:

(a) the computer programmes contained in the memory storage devices in integrated circuit form which are fitted to the PCBs;

(b) the written materials contained in the operator's manuals included in the kit; and

(c) the written materials included on stickers designed to be placed on the exterior of the video game cabinet into which the PCB is installed for use.

Capcom is also the owner, pursuant to the Copyright Act, of copyright in artistic works being the drawings and diagrams contained in the operator manuals included in the game kits, and the drawings and diagrams reproduced on the stickers.
In respect of the Blood Brothers game kit, Tad is the owner, nter alia, of the copyright in literary works being the computer programmes contained in the memory storage devices in integrated circuit form fitted to the PCBs. Tad is also the owner of copyright in the written materials contained in the operator's manuals, the written materials included on stickers and of the artistic works being the drawings and diagrams contained in the operator manuals and reproduced on the stickers.
The present dispute concerns only the copyright in the literary works being the computer programmes.
Avel, which trades in Australia under the business name "Leisure and Allied Industries", imports these and other video games into Australia pursuant to exclusive distribution agreements entered into between it and Capcom or Tad, as the case may be. It is the exclusive licensee in Australia of the copyright in the computer programs; the Copyright Act, s.119.
It is not in dispute that Mr Wells imported for sale and sold kits for the four video games in question. These had been purchased by him in Japan.
But for the provisions of the Circuit Layouts Act 1989 ("the Layouts Act"), the import of the respective kits for the purposes of sale would constitute an infringement of the copyright of Capcom or Tad, as the case may be, having regard to the provisions of ss.37 and 38 of the Copyright Act: Interstate Parcel Express Co Pty Limited v Time-Life International (Nederlands) BV (1977) 138 CLR 534. Sections 37 and 38 of the Copyright Act as amended by Act number 174 of 1991, s.3, are in the following terms:

"37. Subject to section 44A, the copyright in a literary, dramatic, musical or artistic work is infringed by a person who, without the licence of the owner of the copyright, imports an article into Australia for the purpose of:

(a) selling, letting for hire, or by way of trade offering or exposing for sale or hire, the article;

(b) distributing the article:

(i) for the purpose of trade; or

(ii) for any other purpose to an extent that will affect prejudicially the owner of the copyright; or

(c) by way of trade exhibiting the article in public; if the importer knew, or ought reasonably to have known, that the making of the article would, if the article had been made in Australia by the importer, have constituted an infringement of the copyright.

38. (1) Subject to section 44A, the copyright in a literary, dramatic, musical or artistic work is infringed by a person who, in Australia, and without the licence of the owner of the copyright:

(a) sells, lets for hire, or by way of trade offers or exposes for sale or hire, an article; or

(b) by way of trade exhibits an article in public; if the importer knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright or, in the case of an imported article, would, if the article had been made in Australia by the importer, have constituted such an infringement.

(2) For the purposes of the last preceding subsection, the distribution of any articles:

(a) for the purpose of trade; or

(b) for any other purpose to an extent that affects prejudicially the owner of the copyright concerned; shall be taken to be the sale of those articles."

Gummow J, before whom the matter came at first instance, held that Mr Wells had not, despite the provisions of ss.37 and 38 of the Copyright Act, infringed the copyright of Capcom or Tad having regard to the provisions of s.24(2) of the Layouts Act and dismissed the application. The appellants appeal from his Honour's order.
The memory storage devices
For present purposes there are three types of memory device containing computer programmes which are fitted to the PCBs. These are known respectively as ROMs, EPROMs and OTPROMs. Each of these is an integrated circuit device, commonly referred to as a "memory chip". The electrical interconnection between the various integrated circuit devices is achieved by mounting them on the PCBs.
A ROM ("read only memory") chip retains stored data when unpowered or even removed from the microcomputer. It is specially produced with internal link points, either connected or not, thus defining the desired pattern of stored data at the time of manufacture. Accordingly, when it was necessary to produce ROM chips for a particular game, the relevant appellant would supply details of the desired data pattern to the ROM manufacturer who would incorporate this information in the manufacturing specification for that batch of ROM chips.
By contrast, the EPROM and OTPROM chips are programmable, that is to say they can be mass-produced by a specialist manufacturer, purchased by the game kit producer and programmed later by it as part of the manufacturing process for the game kit. Each of these devices stores data in the form of isolated areas of electrical charge. Charges are selectively induced by applying relatively high voltages to the chip in special programming equipment. An EPROM ("erasable programmable ROM") is so produced that the charge can be erased in preparation for reprogramming by shining high intensity UV radiation through a quartz window on the chip packages onto the chip surface. An OTPROM ("one time programmable ROM") will accept programming once only. It has no quartz window and once the programming charges are induced cannot be erased.
Each of the four games include graphic images which are generated whilst the game is being played ("graphics data") and sound effects, background music and other auditory phenomena ("sound data") together with the sound programme itself ("the sound programme") and the elements of the game ("the main programme"). By way of example, the game "Street Fighter II" involves eight EPROMs, each with a capacity of one megabyte for the storage of the main programme; twelve ROMs, each with a capacity of four megabytes for the storage of graphics data; one EPROM, with a capacity of 0.5 megabytes, for the storage of the sound programme; and two EPROMs, each with a capacity of one megabyte, for the storage of the sound data.
His Honour found that in the case of the graphics data for Street Fighter II, for example, graphic designers employed by Capcom produced various illustrations in graphics which were then converted by them into digital dot graphics and supplied to a memory chip manufacturer. That manufacturer mass-produced ROMs from a circuit layout incorporating that graphic data. The ROMs so produced were later fitted to the PCBs.
Where EPROMs and OTPROMS were required, unprogrammed memory chips ("blanks") were purchased from a memory chip manufacturer. In the research and development laboratory of the relevant company, the programme was copied from the object code on the hard disk of a microcomputer onto the blank by use of a device connected to the computer. The resulting "masters" were then used by the manufacturing departments of the corporation for the mass programming of the EPROMs or OTPROMs for use in the game kits.
The Circuit Layouts Act 1989
The Layouts Act was assented to on 22 May 1989 and, save for the provisions of ss.1 and 2 not presently relevant, commenced on 1 October 1990, being the date of proclamation. The Circuits Layout Bill 1988 was introduced into Parliament on 3 November 1988 in anticipation of the holding of a diplomatic conference in Washington held in May 1989 which adopted, on 26 May 1989, the Treaty on Intellectual Property in respect of Integrated Circuits drafted by the World Intellectual Property Organisation. That Treaty bound contracting States to secure intellectual property protection throughout their territory in respect of "layout-designs (topographies)". Australia has not yet signed the Treaty.
The commercial background to the adoption of the Layouts Act is to be found in the Second Reading Speech of the then Attorney-General, the Honourable Mr Lionel Bowen, to the Copyright Amendment Bill 1988 which was introduced at the same time (Hansard, 3 November 1988 p 2392). The Attorney-General noted that the Australian computer chip industry was small but nevertheless important and growing. Australian computer chips were used in a number of items including bionic ears, heart pacemakers and the conversion of sunlight to power. Australian specialised computer chips had found valuable overseas markets. On the other hand, Australia imported most of its chips, either inside consumer products or for installation in products actually made in Australia.
The different commercial interests of Australia are reflected in the two strands of thought which run through the legislation. The first gives what the Attorney-General (Hansard at 2399) referred to as "sui generis, copyright-style, protection". That protection enures for a period of ten years after the calendar year in which the circuit layout was first commercially exploited, but if that commercial exploitation does not take place within ten calendar years after the calendar year in which the layout was made, the protection comes to an end at the end of the period of ten calendar years after the calendar year in which the layout was made: see definition of "protection period" in s.5.
As the Attorney-General observed in the Second Reading Speech, a consequence of reforms both to the copyright law and the design law, following upon the Designs Law Review Committee Report of 1973, was that neither copyright law nor design law provided suitable protection to designers of computer chips. There was a necessity, therefore, for the question of appropriate protection to be separately addressed. This protection is granted in the Act to the owner of the "EL rights". The first owner of those rights is the person who makes an "eligible layout": s.16(1). The questions of who is the "maker" of an eligible layout and what constitutes the "making" of an eligible layout, are given some content by s.10 and in respect of joint makers, ss.14 and 15.
The expression "eligible layout" is defined in s.5 as meaning an original circuit layout, the maker of which was, at the time the layout was made, an eligible person or that was first commercially exploited in Australia or in an eligible foreign country. The expression "circuit layout" is defined in the same section as follows:

"'circuit layout' means a representation, fixed in a material form, of the 3-dimensional location of the active and passive elements and interconnections making up an integrated circuit;".

Section 11 makes the following reference to "originality":

"Without otherwise limiting the meaning of the word 'original' in this Act, a circuit layout shall be taken not to be original if:

(a) its making involved no creative contribution by the maker; or

(b) it was commonplace at the time it was made.

The category of "eligible persons" includes Australian citizens or persons resident in Australia, corporations incorporated in Australia, or individuals or companies from eligible foreign countries. Such countries are proclaimed by Regulation and include Japan.
An integrated circuit means (s.5):

"... a circuit, whether in a final form or an intermediate form, the purpose, or one of the purposes, of which is to perform an electronic function, being a circuit in which the active and passive elements, and any of the interconnections, are integrally formed in or on a piece of material;".

Finally, the expression "material form" is defined in s.5 in relation to a circuit layout as including any form of storage, whether or not visible, from which the layout, or a substantial part of it, can be reproduced.
The EL rights conferred by the legislation are the exclusive rights to copy the layout, directly or indirectly, in a material form, to make an integrated circuit in accordance with the layout, or a copy of the layout, and to exploit the layout commercially in Australia: s.17. "Commercial exploitation" of a circuit layout is taken to arise (s.8) if the layout, a copy of the layout, or an integrated circuit made in accordance with the layout, and whether or not the integrated circuit is incorporated in another thing is:

"(a) sold, let for hire or otherwise distributed by way of trade;

(b) offered or exposed for sale or hire, or other distribution by way of trade; or

(c) imported for the purpose of sale, letting for hire, or other distribution by way of trade."

The acts which are to constitute an infringement of EL rights are detailed in s.19 of the Layouts Act; and they include, without the license of the owner of the EL rights and during the protection period, the copying or authorising the copying of the layout in a material form; the making or authorising the making of an integrated circuit made in accordance with the layout and subject to the Layouts Act, the commercial exploitation or the authorisation of the commercial exploitation in Australia of the layout by a person who knows, or ought reasonably to know, that he or she is not licensed by the owner of that right to do so.
Innocent commercial exploitation, copying for private use, copying for research or teaching purpose, certain acts of analysis and uses for purposes of defence or security, do not constitute infringement: ss.20, 21, 22, 23 and 25. The Act contains as well, in Part III, provisions dealing with remedies for infringement of EL rights.
As the Attorney-General indicated in his Second Reading Speech, the new protection granted to the owners of EL rights was not to be "at the expense of proper availability of the product for use in machinery and consumer appliances". This points to the second strand of thought to be found in the legislation, designed to ensure that the importation of legitimate chips (whether or not incorporated in goods) could not be prevented by the owner of the rights. That second strand is to be found in s.24 of the Layouts Act, central to the present appeal. That section provides as follows:

"24.(1) Where:

(a) an eligible layout is commercially exploited, whether in Australia or elsewhere, by, or with the licence of, the owner of the EL rights in the layout; and

(b) a person acquires a copy of the layout, or an integrated circuit made in accordance with the layout, as a result of that commercial exploitation; it is not an infringement of the EL rights in the layout if the person commercially exploits the copy or the integrated circuit in Australia.

(2) In spite of section 37 of the Copyright Act 1968 and section 38 of that Act to the extent that section 38 applies to imported articles, where the commercial exploitation of an integrated circuit containing a copy or adaptation of a work (being an integrated circuit made in accordance with an eligible layout) is not, under this section, an infringement of the EL rights in the layout, that commercial exploitation is not an infringement of the copyright in that work unless the making of that copy or adaptation was an infringement of that copyright.

(3) Expressions used in subsection (2) that are used and defined in the Copyright Act 1968 have the same respective meanings in that subsection as they have in that Act."

Sub-section 24(1) has the effect, inter alia, of ensuring that there is no prohibition on parallel importing of integrated circuits made in accordance with an eligible layout. If an eligible layout is exploited by the making of an integrated circuit, such as a ROM, s.24(1) ensures that if the ROM chip is purchased overseas and imported into Australia for the purposes of sale, that act of importation would not be an infringement of the EL rights, nor would the sale in Australia of that chip infringe those rights.
Sub-section (2) is concerned with the situation where an integrated circuit may contain a copy or adaptation of a work entitled to protection under the provisions of the Copyright Act. But for the provisions of sub-sec.(2), the importation of such an integrated circuit for example, for the purposes of sale and the subsequent sale, while not infringing the EL rights (s.24(1)) would breach the provisions of either or both of ss.37 and 38 of the Copyright Act. This impediment upon the importation of integrated circuits into Australia for the purposes of sale or other exploitation and any subsequent exploitation is removed by providing that in such a case there will be no infringement of the copyright rights, unless the making of the copy or adaptation, which is contained in the integrated circuit, was itself an infringement of copyright. It is the proper interpretation of this sub-section which has given rise to the controversy between the parties.
The judgment appealed against
Before his Honour, the appellants submitted that s.24(2) of the Layouts Act applied only to a case where there was a commercial exploitation of an integrated circuit containing a copy or an adaptation of the literary work comprising one of the computer programmes and not merely a part thereof. This argument was rejected and was not the subject of submissions before us.
For the purposes of the second submission to his Honour and the only submission made to us, the appellants accepted that s.24(2) of the Layouts Act applied to the ROMs installed on the PCBs for the simple reason that the ROMs were manufactured in accordance with a circuit layout which incorporated the graphic data of the copyright work as elements of the layout. However, it was submitted that the EPROMs and OTPROMs stood in a different position because the relevant computer programmes were encoded subsequent to the production of the chips themselves by the makers of the particular video game kit as part of the memory of the chip and were not incorporated in the circuit layout from which the chips were made.

His Honour held that it was only when the relevant computer programme was copied from the object code in the hard disk of a microcomputer onto the EPROM or OTPROM blank creating a "master", then used in the mass programming of the EPROMs or OTPROMs, that there was first produced an original circuit layout being the master produced from the computer. After referring to the curious result which would seem to follow if s.24(2) operated differently depending upon whether the integrated circuits took the form of a ROM, EPROM and OTPROM as the case may be, when the evidence was that the three forms of circuits were interchangeable and the choice among them dependent only upon cost, his Honour continued:

"The debate concerns the phrase in sub-s.24(2), '(being an integrated circuit made in accordance with an eligible layout)'. That phrase supplies the link in the structure of sub-s.24(2) between the double character of the integrated circuit, as containing a copy or adaptation of a copyright work and as representing the exercise of EL rights. In my view, in this setting, an integrated circuit answers the description in question if at the time at which the operation of sub-s.24(2) is to be assessed (for example, in this case, importation into Australia) one can say of the integrated circuit that in the form in which it then stands it was 'made' in accordance with an eligible layout. Each EPROM and OTPROM which was fitted to the PCBs imported by Mr Wells was made in accordance with an eligible layout, being the relevant 'master' previously produced in the Research and Development Department of Tad or Capcom. That is so notwithstanding the use in the making of that 'master' and of the imported integrated circuits of 'blanks' purchased by Tad or Capcom from an integrated circuit manufacturer."

The appellants' submissions

The appellants submit that his Honour was in error in holding that the act of storing a computer programme on an OTPROM or EPROM constituted the "making" of a new circuit layout. It was submitted that on the evidence the programming of the blank OTPROM or EPROM neither altered or modified in any way the circuit layout in accordance with which the blank device was manufactured nor generated a new or different circuit layout within that blank device. Hence, it was submitted that neither Capcom nor Tad were the makers of a relevant circuit layout nor were they the owners of the EL rights, referred to in the Layouts Act, in the programmed OTPROMs or EPROMs.
The principal submission of the appellants was that s.24(2) of the Layouts Act applied only in respect of ROMs in which the computer programmes subject to copyright had been incorporated as features or elements of the eligible layouts in accordance with which they were manufactured. This was said to flow both from the words in parenthesis in s.24(2) and the object of the legislation. The words in parenthesis, viz: "being an integrated circuit made in accordance with an eligible layout" were intended to make it clear, it was submitted, that s.24(2) only applied in cases where the computer programme in the integrated circuit was part of the circuit layout in accordance with which the device had been made. The object of the Act was said to be to provide comprehensively for the rights of the maker of a circuit layout. Thus, s.24(2) operated to ensure that the maker of an eligible layout did not retain an additional protection under the Copyright Act arising out of any computer programme which might be included in the eligible layout. The loss of the copyright protection was said to be the price which the maker of the new circuit layout paid for the new species of monopoly right given to him by the Statute.
The first of these submissions, namely, that his Honour was in error in holding that Capcom or Tad ever became the owner of EL rights in any circuit layout in respect of the relevant EPROMs and OTPROMs, was accepted by the respondent who filed a Notice of Contention to the effect that the orders made by his Honour were supported by the proper construction of s.24(2).
Thus the parties were in agreement that an unprogrammed EPROM or OTPROM, as the case may be, was itself an integrated circuit made in accordance with a "circuit layout" by the respective manufacturer of the EPROM or OTPROM who offered it for sale to Capcom or Tad, as the case may be. The programming of the EPROMS or OTPROMS did not constitute the making of a new integrated circuit. There was also no dispute that the manufacturers of the EPROMS and OTPROMS in question were, at the time the relevant circuit layouts were made, "eligible persons" so that the original circuit layout satisfied the criteria for being an "eligible layout".
Having regard to the agreement of the parties, it is not necessary, for the purposes of this appeal, to consider the correctness of the appellants' first submission, or the respondent's concurrence with it.
Whether s.24(2) applied to the EPROMs and OTPROMs utilised by Capcom and Tad
The appellants' submissions find support, in our opinion, neither in the wording of s.24(2) nor in the apparent purpose of the legislation.
There is no warrant in the wording of sub-sec.(2) to confine the integrated circuits referred to in the sub-section to those where the process of manufacture of the chip has been in accordance with a circuit layout which involves, inter alia, encoded data of a copyright work. The words in parenthesis provide no foundation for this submission. Rather, when the sub-section speaks of the integrated circuit containing a copy or adaptation of a work, it refers to the storage in the integrated circuit of the work the subject of copyright or a copy or adaptation thereof. The word "containing" is an apt description of the function of storing data performed by an integrated circuit such as an EPROM or an OTPROM. If a more restricted operation of the sub-section had been intended it would not have been difficult to use words appropriate for that task. All that is required to satisfy the words in parenthesis is that the integrated circuit be one that is made in accordance with an eligible layout. When the sub-section speaks of the integrated circuit containing a copy or adaptation of a work, it extends to the retention in the integrated circuit of the work the subject of copyright or a copy or adaptation thereof. It is not required that an integrated circuit be made by the person who owns the copyright.
In the present case, the integrated circuits represented by the blank EPROMs and OTPROMs were made by the manufacturer of the respective chips in accordance with layouts no doubt originally made by them. Such layouts were, the parties agreed, eligible layouts. Thus, the words of sub-sec.(2) are literally satisfied. There are integrated circuits in the form of EPROMs or OTPROMs which contain (that is to say in which there are stored) copies or adaptations of works which are the subject of copyright protected under the provisions of the Copyright Act. The relevant circuits satisfy the description that they are made in accordance with an eligible layout and as the importation for purposes of sale or other exploitation does not constitute an infringement of the EL rights, in consequence, that importation and subsequent exploitation will not constitute an infringement of the copyright rights owned by Capcom and Tad.
Nor does this conclusion fit uneasily within the purpose of the legislation. Parallel importing of chips into Australia was not to constitute an infringement of EL rights: s.24(1). Since, however, the chips being memory devices might themselves hold or store works the subject of copyright, the free importation of chips commercially exploited outside Australia would be hindered if the provisions of ss.37 and 38 of the Copyright Act continued to apply to prevent the importation of the chip with the software embedded in it. Thus, sub-sec.(2) was concerned to remove the inhibition to parallel importing of chips which would otherwise stem from the provisions of the Copyright Act.
The purpose of sub-sec.(2) was not, as submitted by counsel for the appellants, to deal comprehensively with the rights of the maker of the circuit layout, or to ensure that there was no dual protection under the Layouts Act and the Copyright Act. Once it is acknowledged that the copyright and EL rights might be owned by different people, the appellants' argument loses considerable force. A chip, that is to say an integrated circuit, may embody two different subject matters of protection: a circuit layout and a copyright work. The subject of copyright protection, usually a computer programme, has protection only under one Act, namely the Copyright Act. The circuit layout itself has protection under the Layouts Act. A person importing a chip into Australia, having purchased it as a result of commercial exploitation abroad, does not obtain, as a result of s.24 or any other section in the Layouts Act, the right to reproduce the computer programme. So to do would remain an infringement of the Copyright Act. All sub-sec.(2) of s.24 ensures is that the commercial exploitation of the chip in Australia will not be hindered in such a case, provided that the making of the copy or adaptation of the work stored in the chip and otherwise the subject of copyright protection did not constitute a copyright infringement.
Accordingly, we are of the view that the appeal should be dismissed and that the appellants should pay the respondent's costs of it.

[1992] FCA 461

30 JUNE 1992