McAfee Associates Inc v Nestor Pty Ltd t/as Doctor Disk

[1996] FCA 700

IN THE FEDERAL COURT OF AUSTRALIA                  ) 
  )  
NEW SOUTH WALES DISTRICT REGISTRY                )  No NG 473 of 1996
  )  
GENERAL DIVISION  )     

BETWEEN:  McAFEE ASSOCIATES INC  

Applicant

AND:  NESTOR PTY LIMITED

trading as DOCTOR DISK
  ACN 009 325 348

First Respondent

KIRKWOOD GUY WELLER

Second Respondent

Coram:           Davies J.
Date:              24 July 1996
Place:              Sydney

REASONS FOR JUDGMENT

This is an application for an interlocutory injunction.  The applicant is McAfee Associates Inc ("McAfee"), the business of which was earlier that of Mr John McAfee.  McAfee is a leading international supplier of enterprise-wide network security and management software.  It is based in Santa Clara, California.  Its software falls into two main categories, the first of which is security management software, including products called VirusScan, NetShield and BootShield.  These particularly deal with the protection of other software from viruses.  Further details are set out in paragraph 8 of the affidavit of Mr J.W. Barnes sworn on 11 June 1996.

The respondent, Nestor Pty Ltd, trades under the name of "Doctor Disk" and operates in the area of data conversion, data retrieval, scanning and media duplication.  It provides software licensees with software updates and technical advice, it provides a research facility and it presently has a bulletin board which clients may access upon using special pin numbers.

McAfee conducts its business through a number of agents who in turn sublicense users of McAfee Software.  Because of the nature of the McAfee products, it is necessary to update them frequently as changes in viruses and virus problems emerge.  McAfee therefore provides frequent updates.  These can be downloaded by licensees through a bulletin board system.  The arrangement that McAfee instituted with its agents was that any licensee could obtain a product from any agent, but that if a licensee purchased from a McAfee authorised agent in a particular country, then the client had an entitlement to support from that agent.

Doctor Disk became an agent of McAfee on 7 September 1990.  The "International Authorized Agent Agreement" ("the Agreement") is Annexure B to Mr Barnes' affidavit.  The products which were listed were VirusScan, VShield, Clean-Up and NetScan.  McAfee agreed to:

"1.Provide to Agent an initial, current version of product via regular ma service.  Faster delivery must be requested and paid for by Agent.

2.Provide Agent access via BBS to current versions of products.

3.Provide to Agent technical assistance via telephone, telefax, or BBS.

4.Adhere to the terms of the INTERNATIONAL AUTHORIZED AGENT SUMMARY."

The agent agreed to:-

"1.       Adhere to the terms of the INTERNATIONAL AUTHORIZED AGENT SUMMARY.

2.Keep McAfee Associates informed of problems, product issues, questions, report, as well as successes, so we can respond quickly and effectively."

No time limit was placed on the Agreement.  Accordingly, it could be determined by either party on reasonable notice or by both parties by agreement. 

The business in Australia developed reasonably well and Doctor Disk licensed many persons in Australia to use McAfee products.  In doing so, Doctor Disk used a form of licence that is annexed to the affidavit of Mr K.G. Weller sworn 15 July 1996.  It read, inter alia:-

"In support of this licence, McAfee Inc. hereby grants the Licensee right and title to use the product(s) up to the maximum number of computers specified for the period specified; and where Updates Support is specified above as forming part of this Agreement, Doctor Disk undertakes to support the product(s) by providing one disk copy of official updates thereof obtained from McAfee Inc. every second calendar month for every twenty five (25) machines hereby licensed and by providing free hotline support via the nearest Doctor Disk office covering use and installation of the product(s).

Doctor Disk also undertakes to maintain a Virus Research Centre operating in Australia throughout the term of this licence available to the Licensee on a reduced-fee basis in the event of virus-related data-loss and/or other damage to data or systems."

It seems that form of licence was not in fact the standard form of licence used by McAfee agents and, on 26 April 1996, Mr Barnes wrote to Doctor Disk in the following terms, inter alia:-

"I must inform you that this document wrongly grants title to the user and that your Licence Terms and Conditions are wrong to show that the licence is granted between Dr. Disk and the user, and therefore it may render the licence as invalid.  Please advise me whether in addition to this document you also supply the user with a standard McAfee licence agreement."

However, that letter came at a very late stage and McAfee had been aware for three years of the actual form of the licence that Doctor Disk was using. 

Despite the growth of the business in Australia, there were disagreements between the two parties and, on 24 April 1996, McAfee wrote to Doctor Disk saying, inter alia:-

"We will be moving the support of our entire client base in Australia to another source from yourself in the near future and will advise you of the details of this in the near future.

...

I confirm yet again that we have no interest in acquiring your company (reference my fax to you dated 19th March) and would remind you that the customers you refer to in your `contract base' are ours."

Doctor Disk responded to that on 30 April writing, inter alia:-

"8.Unless we can be shown due and reasonable cause or reason why our conclusions contained herein are amiss, the provision of which to our reasonable satisfaction I shall leave at this point entirely to you, our considered and decided intention at this point is to act as follows:

(i)We should interpret the whole range of moves and manoeuvres from yourself and your alleged organising agent from March 5th onwards as a deliberate and demonstrable attempt to destroy, damage, imperil and place in extreme jeopardy our share of the 6-year Joint Venture with McAfee to which we have made an approximately equal contribution;

(ii)Given this, we conclude that we should have no option but to cease this relationship with you, at your effective imperative and instigation;

(iii)We should consequently cease to deal, sell, support, maintain or otherwise work for your direct interests in this country, or any further on behalf of what was our joint client base in this country;

(iv)We should, out of consideration to the long-standing nature of our Joint Venture, provide you with a reasonable period (which we hereby set at 14 days from this date until close of business on Tuesday 14th May, 1996) during which you may perform either of the following:

(a)make alternative arrangements suitable to yourselves (as you have suggested you intend to do at a moment's notice in any event) as to the satisfaction of the current outstanding contracts and other arrangements with Australian McAfee users, either introduced to you by us, or `taken over' in good faith by us at your request in the cae of CFM clientele;

(b)deal and treat with us in a genuine attempt to settle and/or compose the grievances and other complaints expressed herein, which option does NOT include a provision or implication that we might be interested in, or would participate in, any further suggestion that we sort things out in some vague sort of way as they amble along, and which option if it were to be entertained would almost certainly require your presence (and probably Peter's) in Australia for a period of several days prior to the deadline specified above;

(v)On the assumption that point (iv), (b) above is not to your chosen course, then our Joint Venture agreement of six years standing will - at your entire instigation and cause - come to an end at the specified time of 5 p.m., Tuesday 14th May, in which event:

(a)We shall advise all of our joint clients (which now include, at your direct instigation, the bulk of former CFM clientele), the sum total of which amounts to some $7 million of future renewal prospect, of your intransigence and careless handling of their interests and yours and our contracted obligations to them, and specifically of your advice that Paradigm, a completely vaporous concern with no track record or industry knowledge or skill in this area, is your new designated source of comfort to them under your apparently wild plans;

(b)We shall institute alternative product chosen from amongst your - and hitherto our - competitors in both the anti-virus and network management areas, and shall indicate that we and our considerable infrastructure in this country will henceforth be placed to our/your former clients' benefit in providing one-to-one support and succour in their proposed conversion (under terms we shall settle and decide entirely between us and our future supplier, whomsoever that may be);

(c)We shall render invoice upon you for a number of specific matters (in which we reserve all rights to do so regardless of your response to this communication) including, but not restricted to: our extraordinary and hitherto unrecompensed support pattern for your ex-CFM licence and Box clients; the efforts expended over two years on our joint government/PE-64/Endorsed Supplier issues which were at all times encouraged and driven from afar by yourselves but at our entire expense, and recently rubbish-binned by a precipitate decision of yourselves; other various and sundry matters of which particulars will be forwarded shortly;

(d)We shall render claim upon you for the full value of our calculated share of the Joint Venture arrangement we had between us instituted, and which your actions and inactions of the last two month has effectively liquidated, or so threatens to liquidate that we cannot reasonably be expected to continue for our joint benefit a we have to date;

You correctly, in a sense, assert or at least appear at last to understand in your fax of April 26th, that this Joint Venture is fairly and squarely express in the jointly-owned operating contract we have issued to our clients for many years, in our effective capacity of Managing Partner of our Joint Venture;

..." (emphasis added)

McAfee replied on 3 May 1996, in the following terms, inter alia:-

"You have solely elected to terminate our business relationship as of May 14 and we regretfully accept such termination.  As you have requested, we will inform all of your McAfee customers as soon as possible of this change and how to obtain McAfee product and support from sources other than Dr. Disk.  Therefore, please provide a complete and accurate listing (on paper and in electronic form) of all McAfee customers with complete company name, contact name, address, telephone, fax, and other contact information to us by Friday, May 10." (emphasis added)

Doctor Disk wrote further, on May 5 1996, in response to that letter:-

"On the one matter of support of our existing licence contracts.  You have read our contract, issued in association with yourselves, and you will see that there are a number of firm and enduring commitments made therein by us.  Your own contribution to our jointly-issued contracts is pretty much fulfilled on day one, when your product is supplied up-front.

Our part of these commitments, however, endures for a future two years.  Under our other Terms & Conditions these licence contracts may not be cancelled, nor assigned, except by the individual consent and separate treaty of both the client and ourselves.

You therefore may not, and must not, without our consent, contact any of these clients as you indicate you will shortly do with any suggestion that their support requirements as originally contracted will be handled by any party other than ourselves.

For our part, we have no intention of permitting our other disagreements and disputes with you to impact upon our specific agreements with clients under contract to us, and we shall continue to support all these clients diligently for the remainder of the contract terms we have entered into.  We (and no doubt, our many joint clients) shall expect your full co-operation in this discharge, including full access to your own central technical resource.

Certainly we shall not sell further McAfee licence, upgrade or renewal after 5 p.m. on Tuesday 14th May.  Nor shall we support any clients you or any other party contracts after that date, nor continue to provide general benefits either of a technical or a market-support basis to the future of your products here, other than is consistent with our clear duty to fulfil our commitments to our contracted clients." (emphasis added)

Doctor Disk wrote again on 10 May to say, inter alia:-

"The contracts you and we have jointly entered into over the last 6 years with literally thousands of third parties, and against which both of us have banked significant amounts of money, are perfectly specific and precise.

They require us to continue the full pattern of support for periods of up to two years, and this we shall do.  We shall require your active and positive assistance and support as specified in my letter.  We shall tolerate no interference from you in the exercise of our duties.

In particular, we shall not tolerate any attempt to contact our clients, either directly or by way of public message, with a suggestion that we shall not diligently perform the balance of our duties under our contracts with them.  Remember, you are a party to the latter, along with us."  (emphasis added)

The point stated by Doctor Disk was that the contracts with existing licencees required it to continue the full pattern of support for periods of up to two years and this Doctor Disk would do.  That was the principal correspondence with respect to the contractual point. 

In early March 1996, McAfee had appointed The Paradigm Agency Pty Ltd ("Paradigm") as its master agent in Australia.  It has not been suggested that this appointment was inconsistent with the arrangement between McAfee and Doctor Disk, however it was certainly a matter which disturbed Doctor Disk.

Since 14 May 1996, Doctor Disk has continued to act as agent in the sense that it has continued to service its existing clients as previously it had done.  This is shown in an affidavit of Mr Graham Miller sworn 12 June 1996 and in an affidavit of Mr Glen Miller sworn 19 July 1996, which includes, eg., a press release of 14 May 1996 by Doctor Disk to the following effect: 

"Doctor Disk, Australia's leading anti-virus bureau will continue to support its entire McAfee customer base until the expiry of its currently valid contracts (i.e. up to May 1998).

This is despite assertions made recently by McAfee (UK) and by the local company `The Paradigm Agency' (appointed recently as a McAfee agent) that Doctor Disk will `cease to represent McAfee as of May 15th 1996.'

Doctor Disk, in association with McAfee has executed thousands of two-year contracts with major corporate and government clients, and with businesses large and small.

`We have no intention of allowing these customers to suddenly find themselves without the ongoing support they expected, and for which they have paid substantial sums,' said Guy Weller, Doctor Disk's Chief Executive Officer.

`We shall not be selling any more McAfee licenses from this point on,' said Mr Weller.  `The reasons for this are between us and McAfee, but they certainly have something to do with our perception of McAfee's apparent new policies on product support and local representation.

`But the support patterns we have put in place on McAfee's behalf will continue uninterupted [sic] and all McAfee clients which have signed with us will have the satisfaction of receiving the same level of support for the next two years (for the remainder of their licence terms) which they have enjoyed for the last six.'

..."

Another press release, on 25 June 1996, was to the same effect and there is an article in a magazine which is undated but which refers to Doctor Disk's "determination to continue providing technical support to its several thousand McAfee customers" and to the fact that Doctor Disk is now a distributor of the Sophos Sweep anti-virus software and "will progressively migrate its customers away from McAfee's product."

Finally, it might be noted that McAfee complains that, in addition to using its software and gradually moving its McAfee licensees away from the McAfee products, Doctor Disk has spoken disparagingly of McAfee products.  An example is a letter of 4 May 1996 which Doctor Disk sent out to its licensees which stated, inter alia:-

"You may have recently received or downloaded the latest McAfee VirusScan update (version 2.2.12/2.2.D).

Please note that as of Friday 31 May 1996, McAfee has withdrawn this update version.  It has been reported as generating system crashes and virus `false alarms'.

The subsequent version (v2.2.13 / 2.2.E) has not been released by McAfee and its successor, v2.2.14 / 2.2.F, has also been withdrawn.

If you have installed any of these update versions on your machines, you should delete it and replace it with version 2.2.11 / 2.2.C which you have previously received.

The next stable update version of the software released by McAfee will be distributed as soon as it becomes available.

We regret any inconvenience that this may cause."

It is not in dispute that the Agreement was terminated by reason of Doctor Disk's letter and McAfee's response.  However, Doctor Disk claims that the contractual arrangements between them were not terminated insofar as existing contracts with customers were concerned.  It was submitted that the termination of the relationship operated prospectively and not in derogation of rights already obtained.  It was submitted alternatively that the agreements with the licensees constituted tripartite agreements between the customer, McAfee and Doctor Disk, agreements which, it was said, would be specifically enforceable by any party.

It was submitted, further, that by reason of allowing Doctor Disk to enter into the contracts with customers, as it did, McAfee was estopped from denying that Doctor Disk continues to have a licence from McAfee such as is necessary to permit Doctor Disk to perform the obligations which it undertook under those agreements.  McAfee, for its part, puts the view that the Agreement terminated in May 1996, that the copyright licence arose solely under the Agreement and that Doctor Disk has had no rights other than those which existed under the Agreement between Doctor Disk and McAfee, which has now terminated.

It is not appropriate that I should discuss these competing claims.  Both points of view are arguable.  In a matter such as this, I have to look to see whether the applicant has shown a prima facie case, that is to say, a case which is reasonably arguable.  It seems to me that the case put by McAfee is a reasonably arguable case.  The matter therefore turns upon the balance of convenience. 

McAfee's case is that it would suffer irreparable harm to have Doctor Disk acting as its agent when it is not an authorised agent, when it is openly disparaging of McAfee and its products and when it is moving clients away to products that are not McAfee products.

Doctor Disk, for its part, takes the view that its reputation will be adversely affected if it is not able to continue servicing what it regards as its clients, the clients that it developed during the agency relationship, and if it is forced to break its contract with them.  Mr Weller said in his affidavit that the goodwill of Doctor Disk's business would be adversely affected.  He said also that there would be damage to the customers as delay could result in the loss of data and that the granting of the orders sought would deprive clients of Doctor Disk in areas such as Perth, Adelaide, Canberra, Brisbane and Melbourne of locally available support.

If one looks simply at McAfee and Doctor Disk, perhaps the harm that would be caused by the making of an order or the failure to make an order would be evenly balanced, for one company or the other will suffer loss by what occurs.  But in matters of this nature, I think, weight should be given to the fact that McAfee holds intellectual property rights which rely very much for their value upon support by the courts through injunctions should the copyright be infringed.  Further, in my opinion, it is in the interests of all the McAfee licensees, that is to say the users of the software, that they should be serviced by a firm which is an agent of McAfee and which has an interest in marketing and promoting McAfee products.  It does not seem to me that it would be in their interests to continue to be serviced by a firm which is not a McAfee agent.  On the
whole, therefore, I think that the balance of convenience favours the granting of the injunctions sought. 

I certify that this and the 10 preceding pages
are a true copy of the reasons for judgment herein of
the Honourable Justice Davies.

Associate:

Date:   24 July 1996

Counsel for the applicant:  T.J. Hancock

Solicitors for the applicant:  Mallesons Stephen Jaques

Counsel for the respondent:  D.M. Yates

Solicitors for the respondent:  Gilbert & Tobin

Date of hearing:  24 July 1996

Date of judgment:  24 July 1996