CCH Australia Ltd v Accounting Systems 2000 (Developments) Pty Ltd
[1991] FCA 111
•27 MARCH 1991
Re: CCH AUSTRALIA LIMITED (also cross-respondent) and CASTLE DOUGLAS PTY.
LIMITED
And: ACCOUNTING SYSTEMS 2000 (DEVELOPMENTS) PTY. LIMITED (also first
cross-claiment); ACCOUNTING SYSTEMS 2000 PTY. LIMITED (also second
cross-claiment) and GREGORY STOKES
No. G334 of 1989
FED No. 111
Copyright - Computer
(1991) AIPC para 90-801
20 IPR 555
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
0'Loughlin J.(1)
CATCHWORDS
Copyright - Computer programs - whether documents amount to an assignment of copyright - whether additional work (legitimately performed) sufficient to constitute a material change to original computer program - or whether second computer program still a reproduction or adaptation of the first - purported assignment of second computer program to the applicants - was assignor in a position to assign any copyright - question of whether warranties and whether they attract s.52 of the Trade Practices Act - preliminary questions answered.
Computer - programs - see above.
HEARING
ADELAIDE
#DATE 27:3:1991
Counsel for the applicant and cross-respondent: Mr D. Catterns
Solicitors for the Applicant and cross-respondent: Rosenblum and
Partners
Counsel for the 1st, 2nd and 3rd Respondents and
1st and 2nd Cross-Claimants: Mr J.M. Ireland
Solicitors for the 1st, 2nd and 3rd respondents
and 1st and 2nd cross-claiments: Worthington Storey
JUDGE1
Introduction and Preliminary Facts
The first-named applicant, CCH Australia Limited ("CCH"), is a publisher of legal, accounting and other professional works; in 1988 it also had a computer software division called "CCH Solvware". Castle Douglas Pty. Ltd. ("Castle Douglas"), the second applicant, was jointly acquired by CCH and the first respondent, Accounting Systems 2000 (Developments) Pty. Limited, as a joint venture company in circumstances that will be described in due course; however CCH had the power, at shareholders' level, to control Castle Douglas. It will be sufficient to refer to the two applicants collectively as "the CCH group" without distinguishing between their respective rights and responsibilities.
Both the first and second respondents, Accounting Systems 2000 (Developments) Pty. Limited and Accounting Systems 2000 Pty. Limited, were companies that carried on business as computer software developers; the third respondent, Gregory Stokes, was a director of both those companies. In his affidavit that was sworn on 8 May 1990, Mr. Stokes explained that the second respondent was "formed in 1984 to provide software, hardware and services "(sic)" to both the public accounting and commercial markets" and that three years later, in 1987, the first respondent was incorporated "to develop public accounting software to complement the Unitax software sold throughout Australia". In most circumstances it will not be necessary to distinguish between the two companies and hence I will refer to them collectively and individually as "AS 2000".
In late 1987 Mr. Stokes had discussions with representatives of Focus Business Systems Pty. Ltd. ("Focus"), a company that was also involved in the same industry, concerning the proposed purchase or use by AS 2000 of Focus' accounting software package. Those discussions culminated in the execution of an agreement dated 4 December 1987 (Ex. R1), the parties to which were Focus and the first respondent. Although this agreement referred, in paragraph 1, to the "purchase of source code for Focus Business Software" and although paragraph 2 authorised AS 2000 to "represent the purchased software as the property of Accounting Systems 2000 to the Public Accounting and Tax Agent Market", it is clear that the arrangement that was made between these parties in December 1987 did not pass - and was not intended to pass - copyright in any program or in any source code from Focus to AS 2000. On the contrary, the right of use given to AS 2000 was directed primarily to resales by it to the "Public Accounting and Tax Agent Market"; the agreement expressly provided for the payment to Focus of a licence fee in the event of "the resale "(by AS 2000)" of Focus Business Software to markets other than the Public Accounting and Tax Agent Markets". In my opinion, the payment to Focus of such a licence fee was wholly incompatible with the proposition that there was an absolute assignment of any proprietary or other rights. Clause 4, inartistically expressed as it is, supports this conclusion. Its terms relate, by necessary implication, to an undertaking from Focus in favour of AS 2000:-
"The purchased software will not be made available to other organisations targeting the Public Accounting and Tax Agent markets as a significant part of their operations."
The restriction that was thereby imposed on Focus indicates that Focus could continue to sell the Focus Business Software to markets other than the "Public Accounting and Tax Agents markets" and supports the proposition that Focus retained its proprietary and other rights.
In his affidavit sworn on 8 May 1990, Mr. Stokes stated in paragraph 8 that it was his "understanding" that AS 2000 would acquire from Focus "the General Ledger and Accounts Receivable Software" which in the following paragraph was described as the FBS V1.3 program; that latter term came to be used regularly during the course of the trial to describe the product that was the subject of the contractual arrangement between Focus and AS 2000. AS 2000 duly received a copy of the FBS V1.3 source code from Focus and, by July 1988, it was marketing an AS 2000 developed version of FBS V1.3 program. Indeed, by December 1988, some 50 copies of its program had been marketed - the then current version being called the AS V2.1E program.
In late 1988 and early 1989 Mr. Shanahan, the manager of CCH Solvware, negotiated a series of agreements with Mr. Stokes of AS 2000. One such agreement, Ex. A21, related to the sale by AS 2000 to CCH of the copyright in Unitax; "Unitax" was defined in that agreement as meaning "the computer software... licensed for use in the preparation of income tax returns...". No issue arises about the sale of this copyright but the name "Unitax" does appear from time to time. These proceedings are concerned with other agreements between the same parties that were executed about the same time; these latter agreements dealt with certain products that were described as the "Accounting Products". The first of these, ("the assignment agreement" Ex. A8), dated 23 December 1988, dealt with the purported assignment by AS 2000 to Castle Douglas of the copyright in the "Accounting Products". That term was defined in the agreement as meaning -
"... the software products owned by the Assignor and intended for use by accounting practitioners and known as the 'Client Accounting System', the 'Office Management System', and the 'Client Management System'..."
The term also included -
"... all Associated Documentation, all other related and ancillary documents, programs and other supplementary material."
The expression "Associated Documentation" was also defined: it included -
"... all operating manuals, user manuals, programming manuals, modification manuals, flow charts, drawings and software listings."
The assignment agreement, Ex.A8, contained in sub-clause 3.1 a series of warranties, including warranties that AS 2000 was "the sole beneficial owner of the copyright in the Accounting Products" and that it was "entitled to assign such copyright to the Assignee" (i.e. to Castle Douglas). In consideration of the assignment Castle Douglas agreed to allot to the first respondent 200,000 "B" class ordinary shares of $1 each in its capital.
On the same day, 23 December 1988, a second agreement ("the Consultancy Agreement" EX.A7) was executed; the principal parties were CCH and the first respondent. In that agreement the first respondent agreed, for a period of two years, to supply CCH with its services as a consultant in all fields of software research, development and design. In a schedule that tabulated the several services that were to be performed by the first respondent, specific reference was made to -
"... the modification and further development of the software products known as 'Unitax' (of which the Principal '(i.e. CCH)' is the proprietor) and 'Client Accounting System', 'Office Management System' and 'Client Management System' of which the Principal is the licensee."
The reference, last mentioned, to CCH being the licensee of the three Systems derives from a third agreement dated 3 January 1989, Ex. A9, pursuant to which Castle Douglas granted a non-exclusive licence in the "Accounting Products" (as earlier defined) to CCH. For the sake of completeness it should be mentioned that there were three further agreements that were executed by the parties on 3 January 1989: (Exs. A10, A11 and A12). These documents need not be considered in detail for the purposes of these proceedings; it is sufficient to state, as a generalization, that they placed a value of $750,000 on the copyright in the Accounting Software Products known as the "Client Accounting System" the "Office Management System" and the "Client Management System". They also spelt out in detail the operation and duration of the intended joint venture between the CCH group and AS 2000.
The claim that has been made by the CCH group in these proceedings is that, subsequent to the execution of the various agreements, it became apparent that the Accounting Products had been developed from the Focus FBS V1.3 program. This factor, so it was said, was not known to the CCH group at the time when they executed the agreements in December 1988 and January 1989.
Subsequent to the execution of the agreements Focus went into liquidation and such rights as it had in the copyright in the FBS V1.3 program vested in another company, Adept Business Systems Pty. Ltd. ("Adept"). The CCH group have complained that the money spent or intended to be spent on the acquisition, development and promotion of the Accounting Products would be wasted or, at least, jeopardised if a third party (such as Adept) could restrain the use or the sub-licensing of the program for the Accounting Products by the CCH group or if the group did not own the program exclusively. The claim continued that it was essential for the group to acquire and hold copyright in the program so that they could, in turn, sell the software as purchased, or, the software as purchased and developed, to their customers.
Mr. Shanahan sought from Mr. Stokes evidence or assurances that Focus and Adept did not have and would not have any claim against the CCH group in respect of its ongoing development and marketing of the Accounting Products. As neither was forthcoming to Mr. Shanahan's satisfaction, the CCH group ceased marketing the Accounting Products and thereafter instituted these proceedings on 23 June 1989.
The CCH group have pleaded that prior to the execution of the various agreements, AS 2000 knowingly made false representations to the applicants, and that the making of those representations constituted, within the terms of s.52 of the Trade Practices Act, misleading or deceptive conduct entitling the CCH group to rescind each of the agreements to which they are parties. It has been pleaded, first, that the Accounting Products were either reproductions in a material form or adaptations of the whole or a substantial part of the Focus FBS V1.3 program: next, that copyright, or alternatively, part of the copyright, in the FBS V1.3 program continued to be owned by Focus or some other party (e.g. Adept): and finally, that the licence or consent of Focus or its successors in title was required before the CCH group could set about its business of developing and marketing the Accounting Products. Specifically therefore, it has been pleaded that the warranties as to copyright contained in the assignment agreement of 23 December 1988 (Ex. A8) were false.
2. Questions for DeterminationOn 24 November 1989, the Court made orders directing that certain preliminary questions be determined before trial. The questions that were originally identified have since multiplied and now number twelve. The first four are directed towards one subject - the warranties contained in the assignment agreement of 23 December 1988 (Ex. A8); they also raised, as an incidental matter, a question of rectification. As typed, sub-para 3.1.(c) of Ex. A8 provides:-
"3.1 The assignor warrants that: ...
(c) there is no claim or potential claim against the Assignor of any person whomsoever for infringement or breach of copyright in respect of any or all of the Accounting Products." (Emphasis added)
Initially, a separate question had asked whether the word "of" should be replaced with the word "or" but during the course of argument, the parties agreed that this question should be answered in the affirmative and that an order for rectification should be made. Although it will not therefore be necessary to address this issue further, I will nevertheless list all the questions in their form as agreed by the parties. The first four questions are as follows:
"1. Whether as at 23 December 1988: a) the first respondent was the proprietor of certain accounting software products being computer programs known as the 'Client Accounting System', the 'Office Management System' and the 'Client Management System' ('the Accounting Products' and the 'computer programs' respectively); b) the first respondent was the sole beneficial owner of the copyright in the Accounting Products; c) the first respondent was entitled to assign the copyright in the Accounting Products without the consent of any person whomsoever; and
d) there was no claim or potential claim against the first respondent of any person whatsoever for infringement or breach of copyright in respect of any or all of the Accounting Products.
2. Whether the agreement dated 23 December 1988 being Exhibit MS2 to the affidavit of Martin Joseph Shanahan sworn on 24 January 1990 in these proceedings '(i.e. the assignment agreement: Ex.A8)' ought to be rectified by deletion of the word 'of' first occurring and the insertion in its place of the word 'or' in sub-clause 3.1(c) thereof.
3. If the answer to question 2 is in the affirmative, whether, as at 23 December 1988 there was no claim or potential claim against the first respondent or any person whatsoever for infringement or breach of copyright in respect of any or all of the Accounting Products.
4. In the event that all or part of the questions 1 or 3 above is answered negatively, whether the respondents or any of them knew the true state of affairs as at 23 December 1988."
Although the fifth question also deals with events surrounding the execution of the agreements in December 1988 - January 1989, it is directed to the state of knowledge of AS 2000 about the beliefs and intentions of the CCH group. It asks:-
"5. Whether as at December 1988 or January 1989 the respondents knew that:
a) it was the intention of the first applicant to grant licences in Australia to any persons to do acts comprised in the copyright in the Accounting Products and the computer programs;
b) the applicants believe that the second applicant would be entitled, following the execution of the agreements referred to in paragraph 5 of the statement of claim, to grant to any person whatsoever a licence to do any act comprised in the copyright in the Accounting Products or any of the computer programs without the licence or consent of any other person; c) the applicants believed that the second applicant would be entitled following the execution of the agreements referred to in paragraph 5, to grant an assignment of the copyright in the Accounting Products or any of the computer programs to the first applicant without the licence or consent of any other person; and
d) the applicants believed that, upon the assignment of the copyright in the Accounting Products or the computer programs by the second applicant to the first applicant, the first applicant would have the right to grant an assignment of such copyright to any persons whatsoever without the licence or consent of any other person."
The sixth question reverts back to the warranties as contained in the assignment agreement (Ex.A8). It asks, effectively, whether contractual warranties that are incorrect or wrong can constitute misleading or deceptive conduct for the purposes of s.52 of the Trade Practices Act:-
"6. If the answer to any of the questions 1,3 or 4 above is in the negative, whether the giving of the written warranties pleaded in paragraph 6.1(a) to (d) or in the alternative 6.1(a) to
(da) of the statement of claim or any of them is as a matter of law capable of constituting misleading conduct within the meaning of s.52 of the Trade Practices Act."
The remaining six questions can be dealt with as a group. First, they address the issue of Copyright and ask alternative questions about reproduction and adaptation; they also question the need for the consent of Focus or its successor in title. Next, they question the respondents' knowledge on these subjects and conclude by asking whether the respondents were under any duty to inform the applicants of such knowledge as they possessed on those subjects. Mr. Catterns, counsel for the CCH group, claimed that the last six questions were directed towards the subject of "misleading conduct by omission". The specific questions are as follows:-
"7. Whether the computer programs and the Accounting Products are reproductions in a material form of the whole or a substantial part of computer programs which together form a suite of programs known as Focus Business Systems Version 1.3 ('the Focus Program').
8. Whether in the alternative, the computer programs and the Accounting Products are adaptations of the whole or a substantial part of the Focus Programs.
9. Whether copyright, or in the alternative, part of the copyright in the Focus Programs was in December 1988 and January 1989 owned by Focus Business Systems Pty. Limited or some person other than the first respondent.
10. If the questions No. 7,8 and 9 above are answered in the affirmative, whether, by reason of the matters set out in paragraphs 7, 8 and 9 above the licence or consent of Focus Business Systems Pty. Limited or its successors in title or some other person was required before the respective applicants could do any of the acts referred to in sub-paragraphs 5(a) to (d) above.
11. Whether the respondents knew each of the matters referred to in paragraphs 7 to 10 above.
12. Whether the respondents were under a duty to inform the applicants of the matters referred to in questions No. 7 to 10 above."
Computer Programs and Copyright Law
In Australia, copyright law is, with a few minor exceptions, governed by the Copyright Act 1968 (Cth)("the Act"). The nature of copyright in original works is described in sub-s.31(1) of the Act; as these proceedings are directed predominantly to questions that relate to computer programs (which, as will be seen, are included in the definition of "literary work" in sub-s.10(1) of the Act) it will be sufficient to identify only those provisions of the Act that refer to copyright in a "literary work". Subsection 31(1) of the Act, so far as material, provides as follows:-
"For the purposes of this Act, unless the contrary intention appears, copyright, in relation to a work, is the exclusive right:
(a) in the case of a literary ... work, to do all or any of the following acts:
(i) to reproduce the work in a material form;
(ii) - (v) ...
(vi) to make an adaptation of the work;
(vii)..."
As was earlier indicated, the expression "literary work" is defined in sub-s.10(1) to include:-
"(a) ...
(b) a computer program or compilation of computer programs."
In the same subsection, "computer program" is given an extensive definition; it means:-
"... an expression, in any language, code or notation, of a set of instructions (whether with or without related information) intended, either directly or after either or both of the following:
(a) conversion to another language, code or notation;
(b) reproduction in a different material form; to cause a device having digital information processing capabilities to perform a particular function."
The term "material form" and the word "adaptation" are also defined in sub-s.10(1). "Material form", in relation to a work or an adaptation of a work, is defined to include "any form (whether visible or not) of storage from which the work or adaptation, or a substantial part of the work or adaptation, can be reproduced". The word "adaptation" is given various meanings by the Act in relation to different fields of literary work and musical work. In its application to a computer program "adaptation" means:-
"... in relation to a literary work being a computer program - a version of the work (whether or not in the language, code or notation in which the work was originally expressed) not being a reproduction of the work;" (para 10(1)(ba).
The word "version" is not defined in the Act; however, Dyason v Autodesk (1990) 96 ALR 57 is authority for the proposition that where used in the definition of "adaptation", the word bears "its ordinary and natural meaning as a special form or variant of something" (per Lockhart J. at p 64; see also Sheppard J. at pp 82-3 and Beaumont J. at p 105). At the same page, Beaumont J. added:-
"The version in question must be a version of 'the work', that is to say, a version of the expression of the relevant set of instructions."
Although there are several references to the subject of reproduction in the Act neither that word nor any of its derivatives is defined. However, it is important to note that reproduction of a work does not have to be total or complete; para 14(1)(b) of the Act provides that a reference to reproduction of a work shall be read as including a reference to a reproduction of a substantial part of the work and the same principle is extended to an adaptation and a copy of a work.
What amounts to reproduction was explained by Gibbs C.J. in Computer Edge Pty. Ltd. v Apple Computer Inc. (1986) 161 CLR 171 at p 186 in these terms:-
"The notion of reproduction involves two elements - that the infringing work sufficiently resembles the copyright work and that it was produced by the use of the copyright work. ... The former element requires that there should be 'a sufficient degree of objective similarity between the two works': see Francis Day and Hunter Ltd v Bron (1963) Ch 587 at p 614; Lend Lease Homes Pty. Ltd. v Warrigal Homes Pty. Ltd
(1970) 3 NSWR 265 at p 273; S.W. Hart and Co Pty. Ltd. v Edwards Hot Water Systems (1985) 159 CLR 466 at p 472".
Section 36 of the Act deals with the subject of infringement. It provides as follows:
"36(1) Subject to this Act, the copyright in a literary... work is infringed by a person who, not being the owner of the copyright, and without the licence of the owner of the copyright, does in Australia, or authorises the doing in Australia of, any act comprised in the copyright".
In Dyason v Autodesk (supra) the Full Court considered not only the question of reproduction but also the more fundamental problem of what is a computer program for the purposes of the Act. That case dealt with a computer program, called AutoCAD, that had been developed by Autodesk. The AutoCAD program could not be operated unless the particular computer terminal was fitted with the "AutoCAD Lock". Copying of the AutoCAD program by legitimate purchasers of the program was encouraged by Autodesk but the program could only be used on a computer fitted with the AutoCAD Lock and the distribution of those locks was strictly controlled. The appellants developed a device called Auto-Key which could be used to activate the AutoCAD program without the AutoCAD Lock. At first instance, the learned trial Judge held that the AutoCAD Lock (in combination with that part of the AutoCAD program called Widget-C that received signals from the lock) and also the Auto-Key were, each, computer programs within the definition of "literary work" in the Act. He further concluded that the appellants had infringed Autodesk's copyright, holding that "the whole of the function of the AutoCAD lock has been reproduced in a material form by the Auto-Key lock". Sheppard J. pointed out on appeal:-
"It will have been observed that his Honour placed great reliance on the expression 'to perform a particular function' in the definition of 'computer program'. He said that it was the same function which was the essential aspect of each lock. He also said that function had a particular importance in the definition of a computer program and regard must be had to this concept of function in considering the question whether there was a sufficient degree of subjective (sic) similarity between the two locks. That conclusion is, as counsel for the appellants submitted, central to his Honour's reasons for his conclusion that there was a reproduction of the program contained in the AutoCAD lock." (pp 80-81)
Lockhart and Sheppard JJ. agreed (p 61 and p 78) that the Widget-C program and the AutoCAD lock constituted an integrated system and that the two in combination answered the description of a "computer program" within the meaning of that expression as defined in sub-s.10(1) of the Act. Beaumont J. considered it unnecessary to decide that point (p 105) but all three members of the Court were unanimous in concluding that there had been no reproduction or adaptation by the appellants of the AutoCAD program.
Sheppard J. said that the learned trial judge had incorrectly concluded that "the functions of the two programs being the same, there was a reproduction and thus an infringement" (p 81); he considered that his Honour had placed undue emphasis on the word "function", pointing out that in a consideration of the defined meaning of "computer program" the governing word was "expression". Sheppard J. then said:-
"The expression may be in any language, code or notation and it must be of a set of instructions. The later words of the definition referring to a device having digital information processing capabilities performing a particular function are intended only to qualify the expression 'set of instructions' so as to set the limits of what it is that the set of instructions is to apply to. It follows that I cannot derive from the use of the word 'function' in the definition the significance which his Honour derived from it. Once one reaches this conclusion, the approach taken by his Honour ceases to be valid and one has to consider the question whether there has been the reproduction of a substantial part of the program afresh. In my opinion there is not for the reason that, as counsel for the appellants submit, the only similarity between the two locks is the fact that they perform the same function. There is no other similarity of any consequence." (p 82)
Lockhart J. said on the same subject:-
"Copyright in computer programs resides in the expression of a set of instructions which cause a specified device to perform a particular function; but copyright does not reside in the function of the device itself". (p 65)
Infringement of a literary work, being a computer program, will occur when there is an unauthorised act; one such act can be the reproduction of work in a material form (sub-para 31(1)(a)(i)); another can be the adaptation of the work (sub-para 31(1)(a)(vi)). And, any reference to reproduction or adaptation extends to the reproduction or adaptation of a substantial part of the relevant work (para 14(1)(b)). What is substantial for the purposes of the Act is determined on a qualitative basis rather than a quantitative basis (Ladbroke (Football) Ltd v William Hill (Football) Ltd. (1964) 1 All ER 465 per Lord Reid at p 469; per Lord Pearce at p 481); S.W. Hart and Co. Pty. Ltd. v Edwards Hot Water Systems (1985) 159 CLR 466 per Gibbs C.J. at 474).
4. Source Code and Object CodeTo enable the issues in these proceedings to be understood it is necessary to make some reference to the language of computer science. That task was undertaken by Gibbs C.J. in the Apple Computer case (supra), and the following extracts from his judgment appearing at pp 178-179, are of material assistance:-
"A computer program is a set of instructions designed to cause a computer to perform a particular function or to produce a particular result. A program is usually developed in a number of stages. First, the sequence of operations which the computer will be required to perform is commonly written out in ordinary language, with the help, if necessary, of mathematical formulae and of a flow chart and diagram representing the procedure. ... Next there is prepared what is called a source program. The instructions are now expressed in a computer language - either in a source code (which is not far removed from ordinary language, and is hence called a high level language) or in an assembly code (a low level language, which is further removed from ordinary language than a source code), or successively in both. Sometimes the expression source code seems to be used to include both high level and low level language. ...
The source code or assembly code cannot be used directly in the computer, and must be converted into an object code, which is 'machine readable', i.e., which can be directly used in the computer. The conversion is effected by a computer, itself properly programmed. The program in object code, the object program, in the first instance consists of a sequence of electrical impulses which are often first stored on a magnetic disc or tape, and which may be stored permanently in a ROM ('read only memory'), a silicon chip which contains thousands of connected electrical circuits. The object code is embodied in the ROM in such a way that when the ROM is installed in the computer and electrical power is applied, there is generated the sequence of electrical impulses which cause the computer to take the action which the program is designed to achieve. The pattern of the circuits in the ROM may possibly be discerned with the aid of an electron microscope but it cannot be seen by the naked eye. Obviously, the electrical impulses themselves cannot be perceived. However the sequence of electrical impulses may be described either in binary notation (using the symbols 0 and 1) or in hexadecimal notation (using the numbers 0-9 and the letters A-F), and it is possible to display the description on the visual display unit of the computer, and to print it out on paper. ... It will have been seen from this account that a program exists successively in source code and in object code, but the object code need not be written out in binary or hexadecimal notation in the process of producing and storing the program."
The conversion of the source code into the object code was the subject of comment by Lockhart J. in Dyason v Autodesk (supra). His Honour said:-
"This illustrates the wide connotation to be attributed to the word 'version' in the definition of 'adaptation' in s.10. Paragraph (ba) was introduced by the amending Act and is designed to cover many possibilities. A clear case is where the adaptation is from one code to another; for example, from source code to object code." (p 64)
What were the Programs?
I have stated my conclusion that Focus did not assign the copyright in the FBS V1.3 program to AS 2000 in December 1987. What then was the proper classification or identification of the AS V2.1E program in December 1988? Bearing in mind that AS 2000 had spent 12 months working on and developing the product was it nevertheless a reproduction or adaptation of the FBS V1.3 program? Or was it so materially different from that program that there was no "sufficient degree of objective similarity between the two works" so as to constitute reproduction - or again, was it so materially different that one could not say that it was "a special form or variant" of the FBS V1.3 and hence it was not a version or an adaptation of that program?
It was common ground that the Focus program comprised a total of 99 files. The first proposition that was advanced by Mr. Catterns, counsel for the applicants, was to the effect that each of the 99 files was a separate work (i.e. a separate computer program); to support that argument he pointed to the evidence which established that some of the Focus files were, after twelve months, wholly unchanged; of these he said that copyright could not have vested in AS 2000. Other files might have been changed to a measurable degree but they remained, so he said, a reproduction or adaptation of the Focus equivalent. Finally he acknowledged that some of the files in the AS V2.1E program were "new" and thus, so he would concede, copyright in respect of them would subsist in AS 2000. Although such a clinical approach has an appeal, it did not accord with my understanding of the evidence from those who worked in the computer industry. The impression that I gained was that the witnesses were talking of a program that was made up of numerous component parts. I therefore prefer and accept Mr. Cattern's alternative proposition: that the FBS V1.3 program was, in itself, an entire computer program as was the AS V2.1E program.
Mr. Catterns had also suggested that it would be necessary to consider separately the AS V2.1E program (sometimes called the General Ledger Package V2.1E) from the AS 2000 "Office Management System". This proposition derives from a passage in the evidence of the respondents' witness, Mr. Evans, a computer analyst and programmer. He had formerly been a director of Focus and was involved in the negotiations with Mr. Stokes which led to the execution of the agreement of 4 December 1987 (Ex.R1). In 1988, after Focus began experiencing financial difficulties, Mr. Evans did some contract work for AS 2000. His evidence on this subject appears at p 214:-
"Is this right that the most important work you did when you were contracted to AS 2000 was in developing the office management system?---That is right. And what percentage of that product did you write or did you write part of it?---Well, as I understood I wrote the vast majority of it since I believe there was work done on it after I left - after I had finished the contract so it is difficult for me to say exactly what percentage I did. But you, by the time your consultancy finished the office management system was in a developed state, was it?---Yes, it was in a useable state.
Yes. In addition to that you gave some advice on structural changes to the general ledger program?---That is true. Did you get down to the level of writing code for that?--- Not a single line.
No. Now, have you looked at the source code of the program as developed by AS 2000?---Only very superficially."
As I understood his argument, Mr. Catterns was advancing the proposition that AS 2000 could not have assigned copyright in the "Office Management System" to CCH because copyright was vested in Mr. Evans as the author of the program. This proposition was neither particularised in the pleadings nor sufficiently explored in evidence to rebut the prima facie presumption that Mr. Evans was in the "employment" of AS 2000 "under a contract of service" so that sub-s.35(6) of the Act would operate to vest copyright in AS 2000. My finding on this subject is that the "Office Management System" was part of the AS V2.1E program but that it had its origins in or was derived from the Focus FBS V1.3 program. I have already explained that AS 2000 spent time in 1988 working on and developing the FBS V1.3 program; in my opinion, the "Office Management System" was an aspect of that development.
6. InfringementMr. Ireland, counsel for the respondents, argued that when making a comparison of the source codes of two computer programs, it was essential to have regard to the whole of each source code and not - as was the case here - to a selection that was made subjectively by the applicants' expert witness, Mr. Grouse. When giving his evidence, Mr. Grouse explained that he had deliberately examined only 29 of the 99 files from the Focus program comparing each of them with its counterpart in the AS 2000 program. His method of comparison was to take each line in turn from the source code of the 29 Focus files and search for the same or a similar line in the relevant source code of the AS 2000 program.
Exhibit A5 was compiled by Mr. Grouse for the purposes of this case. It contains the source code of the 29 Focus files and it is colour coded to throw up the comparative results of his examinations. Hence, red lines in Ex.A5 indicate that those lines are exactly reproduced in the AS 2000 program; his evidence was that the red lines represented 3907 lines out of a total of 6917 lines (see Ex.A23), amounting to a reproduction of approximately 56%. I do not understand this mathematical assessment to be disputed by the respondents. Mr. Grouse's comparison also revealed that 2058 lines (30%) of the source code from the 29 files in the Focus program were not reproduced in the AS 2000 program and it was his claim (which was disputed by the respondents) that the remaining 952 lines (14%) were "close copies".
Whether regard is had only to the 56% exact copying or whether regard is had to the total of exact copies and Mr. Grouse's choice of close copies (i.e.70%), Mr. Ireland argued that, by failing to make a total comparison of all 99 files, Mr. Grouse was deficient in his exercise and in his assessment; hence, said Mr. Ireland, Mr. Grouse's evidence could not, as a matter of fact, constitute grounds for holding that there had been any infringement of copyright. The basis of this submission was that each individual file of source code, when compiled into object code depended on other similarly compiled files in order that any function of a particular program could be operated; no function, so he said, could be operated on the strength of one file alone. Therefore, in Mr. Ireland's submission, only the whole of the source code constituted a "set of instructions" within the meaning of the Act, and nothing less than a comparison of the whole of the source code could justify findings in relation to infringement of copyright.
This submission does not stand up to analysis, for two reasons. First, it is contrary to the evidence, including the evidence of the respondent's expert witness, Mr. de Ferranti. He explained (at p 241) that the two computer programs comprised several functions (as an example of a function he mentioned the preparation of a budget). When he was asked in cross-examination whether all 99 files would be required at any one time to work together to perform a single function, he answered:-
"No, it would cause an intolerably slow program if it had to use all..."
Secondly, and assuming that only the whole of the source code constitutes a "set of instructions", this does not deny the worth of Mr. Grouse's evidence. Mr. Grouse, in effect, analysed a portion of this "set of instructions" and found a certain percentage of copying in that portion. That this portion may not in itself enable a program to be operated is not relevant. There is no dispute that the whole of the source code does enable the program to be operated. Mr. Grouse's evidence is simply that a sample of that source code reveals a certain percentage of copying.
The particular circumstances of one case or the particular contents of one source code might necessitate the comparison of the whole of one source code against the whole of another source code, but that was not necessary in this case. This finding does not, of course determine the matter. One can liken this issue to a statistical sample. Having established, as a matter of principle, that the circumstances of the case permit statistical sampling, it still remains necessary to examine how the sampling was conducted before relying on the statistics and before drawing any conclusions from them.
Mr. Ireland next challenged the inclusion of "comment" lines in the comparisons that had been made by Mr. Grouse. A "comment" line is one which appears as part of the source code but which appears for the limited purpose of informing or instructing the operator; a "comment" line is not converted to the object code. In fact, Mr. Grouse, in cross-examination, was prepared to concede that 2 of the 99 files of the Focus program, identified as "GLACCTMN" and "GLCOMPFM", were wholly comments in that, although they were part of the source code, they were never converted by the computer into the object code. Nevertheless, as the respondents' witness, Mr. De Ferranti said, in agreeing with Mr. Grouse, such "comments" are "a very important part of the program" (p 240). To suggest that such comments do not fall within the definition of a computer program because they are not instructions which "cause a device having digital information processing capabilities to perform a particular function" (e.g. the production of the object code) is to overlook the restrictions on the use of the word "function" that were imposed in Dyason v Autodesk (supra). But in my opinion there is a stronger reason for rejecting this argument. The definition of "computer program" specifically acknowledges that the relevant "expression... of a set of instructions" (which I take, in this case, to be the source code) may have "related information". My assessment of the evidence is that "comment" lines are related information; they therefore come within the definition of "computer program"; it was therefore proper for Mr. Grouse to use them when performing his comparative examinations.
Mr. Ireland next argued that Mr. Grouse's methodology was suspect. He pointed to evidence from the respondents' witnesses, including Mr. De Ferranti, to the effect that the correct method of comparison was to take complete statements or sequences in the source code rather than individual lines in isolation. Mr. Grouse answered this criticism by agreeing with it but added that such a comparison did not alter his opinion that the AS 2000 program was a substantial reproduction of the Focus program.
It is clear that AS 2000 spent much time and effort in developing and improving the Focus program in 1988. But that fact alone will not prevent a finding of infringement. In Blackie and Sons Ltd. v Lothian Book Publishing Co. Proprietary Ltd. (1921) 29 CLR 396 Starke J. found that the defendant had infringed the plaintiff's copyright notwithstanding -
"... that the defendant's book was the result of some independent knowledge and considerable labour, research and skill on the part of Professor Brereton." (p 400)
His Honour went on to point out that it was still possible, "owing to ignorance of the copyright law or carelessness" that the defendant made more use of the plaintiff's book than could be justified. Both books were annotated copies of Shakespeare's "Henry the Fifth" and both were destined for the "education" market. Starke J. listed, in general terms, those parts of the defendant's work which were not copied from the plaintiff's book - such as the plan and arrangement of the book and the text of the play - and likewise listed those parts which were either copied or taken "under a colourable disguise". His Honour commented at p 403 that the "quantity of notes taken (was) not very considerable"; nevertheless he was still able to find that the appropriation of the plaintiff's labour and research was "substantial and material" (p 404).
The facts in these proceedings are materially different from those in Blackie and Sons Ltd. v Lothian Book Publishing Co. Proprietary Ltd. (supra). For example the work performed by AS 2000 on the Focus program in 1988 was legitimately performed. What is at stake here is not the right of AS 2000 to perform that work but rather, the consequences of it having performed the work. Mr. Evans, the computer analyst and programmer, was convinced that the consequence was "a new product developed solely by AS 2000": (para 11 of his affidavit sworn on 7 May 1990). I do not doubt that he honestly holds that belief. In fact, the final determination of this matter has been made the more difficult because I believe that all the witnesses who expressed opinions on the comparative aspects of the two programs did so honestly and to the best of their ability. But at the end of the day I have concluded that I must prefer the opinions of Mr. Grouse to those of the respondents' witnesses. I have come to that conclusion for two reasons. First, I am overwhelmed by the extent of the exact copying (that is not a quantitative statement; the extent is so great that it takes on a qualitative mantle). And if to that, there is added some part only of the close copying, the case for the applicants is the stronger. In some of the files the extent of the copying was extreme; for example, 7 of the 29 files showed copying ranging from 82.2% to 100%. The respondents would prefer to emphasise that all but 1 of the 99 files had some changes or alterations but it is necessary to bear in mind that those changes or alterations can range from minor modifications to new works. To the extent to which they might be minor modifications, the Privy Council said in Interlego A.G. v Tyco Industries Inc. (1989) AC 217 at 256:-
"In the nature of things the original drawings come to be reproduced, probably many times, and updated from time to time as minor modifications are made in design or methods of manufacture. To accord an independent artistic copyright to every such reproduction would be to enable the period of artistic copyright in what is, essentially, the same work to be extended indefinitely."
This, in turn, leads me to the second reason for rejecting the respondents' witnesses. In my opinion they have concentrated too much on the work done by AS 2000 in 1988 and too little on the extent to which original Focus work was retained in the AS 2000 program. No amount of new or additional work will compensate for the retention of a substantial and material part of the Focus program. (Ladbroke (Football) Ltd. v William Hill (Football) Ltd. (supra) Blackie and Sons Ltd. v Lothian Book Publishing Co. Proprietary Ltd. (supra).
I am satisfied that my acceptance of Mr. Grouse's evidence justifies, and leads to, the finding that the AS V2.1E program was a reproduction (and if not a reproduction, then an adaptation) of the FBS V1.3 program. Hence, AS 2000 did not own and was not able to assign copyright to the CCH group without the assistance of Focus or, more likely, Adept. The further conclusion is that, as the CCH group did not acquire copyright or any other proprietary rights, it was unable to reproduce, adapt, licence or sell any of the Accounting Products that were the subject of the assignment agreement (Ex.A8).
7.1. The First Three QuestionsIn my opinion the substantial degree of reproduction means that AS 2000 could not be regarded as having any proprietary or other rights in the Accounting Products. It follows therefore that sub-questions 1(a), 1(b) and 1(c) must all be answered in the negative. These answers, in turn, must mean, in my opinion that there was, at the least, a "potential claim" - perhaps against the first respondent - perhaps against the CCH group - for infringement. Hence, to match the language of Question 3, the answer must be - "No". As it was agreed that an order for rectification should be made, Question 2 is to be answered affirmatively and it is not necessary to answer sub-question 1(d).
7.2. Question 4 - The true state of affairsAs at 23 December 1988 when AS 2000 executed the assignment agreement (Ex.A8) in favour of the CCH group it knew that its AS V2.1E program had been developed from the Focus FBS V1.3 program. I reject Mr. Stokes' evidence when he says that he was not aware that some of the original lines of Focus' source code still remained in the AS 2000 program (p 169). Even though he was not , as he said, "a technical person", the extent of the retained lines is just too great to accept such a disclaimer. But the rejection of Mr. Stokes' evidence on this subject does not advance the matter greatly. Although I am also satisfied that AS 2000 knew that the AS 2000 program retained a substantial number of lines from the source code of the Focus program, it does not follow, and I am not satisfied, that AS 2000 knew in December 1988 that its efforts throughout that year were insufficient to constitute the AS 2000 program a work that was materially different from the Focus program. In particular, I am not satisfied that AS 2000 knew that their efforts amounted to no more than a reproduction or adaptation of the Focus program.
It is true that Mr. Stokes acknowledged in cross-examination that he had never mentioned Focus by name or by association during his discussions with Mr. Shanahan. But this does not justify a sinister inference; his failure to mention Focus is as consistent with his belief that Focus had assigned its rights with respect to the Focus program as it would be consistent with a premeditated plan to hold back from the CCH group the history of Focus' involvement. Mr. Catterns criticised this section of Mr. Stokes' evidence. It is true that AS 2000 made two further but inadequate attempts to perfect an assignment of copyright in the Focus program; but those attempts were not necessarily consistent with a guilty conscience. Such conduct is equally consistent with the actions of an honest man who, discovering that he had failed to assign copyright, did the best he could to remedy his fault. I am not prepared to draw the adverse inference that Mr. Catterns sought; I am not therefore prepared to attribute any sinister motive to AS 2000 by virtue of the failure, during the course of negotiations, to inform the CCH group about Focus and its involvement. This leads me to conclude that this question should be answered in the negative - the respondents were not aware of the true state of affairs as at 23 December 1988.
8. Question 5 - The respondents' knowledgeEach of the four sub-questions must be answered affirmatively. Each issue was put to Mr. Stokes in cross-examination (pp 165-167) and he agreed that he knew of each of these matters; it was, of course, common ground that his state of knowledge was also the state of knowledge of the two corporate respondents.
9. Question 6 - Contractual Warranties - s.52 of the Trade Practices ActMy earlier findings have meant that AS 2000 wrongly warranted that it was "the sole beneficial owner of the copyright in the Accounting Products"; it also wrongly warranted that it was "entitled to assign such copyright to the assignee".
Clause 3.1(c) of the assignment agreement (Ex.A8) is now to be read as follows:-
"The Assignor warrants that:- ...
(c) There is no claim or potential claim against the Assignor or any person whomsoever for infringement or breach of copyright in respect of any or all of the Accounting Products." (Emphasis added)
As rectified, it is, first, a warranty by AS 2000 (the Assignor) that at the time of the execution of the assignment agreement there was no claim against AS 2000 for breach of copyright in the Accounting Products. That warranty, expressed in those terms, was probably accurate because of the rights that inured to AS 2000 under its agreement of 4 December 1987 with Focus (Ex.R1). However the stumbling block is the reference to a "potential claim" and the reference to a person other than the assignor. Considering what it was that the CCH group intended to do by way of marketing the program and bearing in mind that AS 2000 knew of those intentions, it was most inappropriate to warrant that there was no "potential claim" against "any person whomsoever for infringement or breach...". Upon my analysis there may well be a potential claim by Focus or Adept against the CCH group.
It is true that I have found that AS 2000 acted innocently. But there is no need for knowledge on the part of the person or company engaging in the relevant conduct (Hornsby Building Information Centre Pty. Ltd. v Sydney Building Information Centre Ltd. (1977-1978) 140 CLR 216 at 228; Parkdale Custom Built Furniture Pty. Ltd. v Puxu Pty. Ltd. (1981-1982) 149 CLR 191 at 197). Innocence can not turn inaccurate warranties into accurate ones.
Subsection 4(2) of the Trade Practices Act provides that:-
"... a reference to engaging in conduct shall be read as a reference to doing or refusing to do any act, including the making of, or the giving effect to a provision of, a contract or arrangement, the arriving at, or the giving effect to a provision of, an understanding or the requiring of the giving of, or the giving of, a covenant."
The breadth of this provision is such that the word "conduct" would embrace the giving of warranties in an agreement and if those warranties were inaccurate at the time when they were given then such conduct could be capable of constituting misleading or deceptive conduct within the meaning of s.52.
It is not necessary that a warranty amount to a formal representation; there are no formal boundaries to the interpretation of the word "conduct". Lockhart J. (with whom Burchett and Foster JJ. agreed) pointed out in Henjo Investments Pty Ltd. v Collins Marrickville Pty. Ltd. (1988) 79 ALR 83 at 93:-
"Misleading or deceptive conduct generally consists of representations, whether express or by silence; but it is erroneous to approach s52 on the assumption that its application is confined exclusively to circumstances which constitute some form of representation."
The conclusion that I have reached is that the giving of the warranties that were referred to in the statement of claim can, as a matter of law, be capable of constituting misleading conduct within the meaning of the Trade Practices Act.
10. The last six questionsEach of these can now be addressed and disposed of in summary form. My primary finding is that the AS 2000 program was a reproduction of the Focus program; as a result question 7 should be answered in the affirmative. But if I am wrong and the AS 2000 program does not amount to a reproduction, then it was an adaptation and so question 8 should also be answered affirmatively. As I have concluded that there was no assignment of any proprietary or other rights by Focus to AS 2000 in December 1987 it follows that copyright in the Focus program was, twelve months later still owned by Focus - or, at least, some person other than the first respondent. Question 9 is therefore answered affirmatively.
These three affirmative answers mean, in terms of question 10, that it was necessary that the licence or consent of Focus or its successor in title (e.g. Adept) was required before the CCH group could grant licences or assignments with respect to the copyright in the Accounting Products. Be that as it may, for the reasons that I have given with respect to the state of knowledge of AS 2000 (when answering question 4) I do not believe that AS 2000 was aware of the matters that have been canvassed in the last four questions. That therefore means that the answer to question 11 is in the negative. As the respondents did not know of those matters they could hardly have been under a duty to inform the CCH group of them. Question 12 need not therefore be answered.
11. Conclusion.The answers to the twelve preliminary questions are as follows:-
1. (a) - No
(b) - No
(c) - No
(d) - Not necessary to answer.
2. Yes
3. No
4. No
5. (a) - Yes
(b) - Yes
(c) - Yes
(d) - Yes
6. Yes
7. Yes
8. Yes
9. Yes
10. Yes
11. No
12. Not necessary to decide.
I will now stand the proceedings adjourned to a date to be fixed to give counsel an opportunity to consider these answers and reasons. I reserve to all parties liberty to speak to the orders that should be made as a consequence of the publication of these reasons.
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