Microsoft Corporation and Ors v CPL Notting Hill Pty Ltd and Ors (No.6)
[2019] FCCA 2192
•31 July 2019
FEDERAL CIRCUIT COURT OF AUSTRALIA
| MICROSOFT CORPORATION & ORS v CPL NOTTING HILL PTY LTD & ORS (No.6) | [2019] FCCA 2192 |
| Catchwords: PRACTICE AND PROCEDURE – Application to amend defence and file cross‑claim. |
| Legislation: Competition and Consumer Act 2010 (Cth), Sch 2; ss.18; 21; 236 Copyright Act 1968 (Cth), ss.43B; 47B; 115 |
| Cases cited: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27 CaasonInvestments Pty Ltd v Cao (2015) 236 FCR 322; [2015] FCAFC 94 CPL Notting Hill Pty Ltd v Microsoft Corporation (No.2) [2019] FCA 223 Kraft Foods Group Brands LLC v Bega Cheese Ltd (No.6) [2018] FCA 1277 |
| First Applicant: | MICROSOFT CORPORATION |
| Second Applicant: | MICROSOFT PTY LTD (ACN 002 589 460) |
| Third Applicant: | MICROSOFT REGIONAL SALES CORPORATION |
| First Respondent: | CPL NOTTING HILL PTY LTD |
| Second Respondent: | WEI LI |
| Third Respondent: | CPL DISTRIBUTION PTY LTD |
| Fourth Respondent: | WANG JIN |
| File Number: | SYG 1205 of 2016 |
| Judgment of: | Judge Baird |
| Hearing date: | 29 July 2019 |
| Date of Last Submission: | 28 July 2019 |
| Delivered at: | Sydney |
| Date of judgment: | 31 July 2019 |
| Date of publication of reasons: | 16 August 2019 |
REPRESENTATION
| Counsel for the Applicant: | Mr A Fox of Counsel |
| Solicitors for the Applicant: | Mr G Hansen, Harris & Company |
| Counsel for the Respondent: | Mr G Clarke QC and Mr P Wallis of Counsel |
| Solicitors for the Respondent: | Mr S Smith, S Smith & Associates |
THE COURT:
Disposition of Respondents’ Application in a Case
DISMISSES the Application in a Case dated 19 July 2019 filed by the Respondents.
ORDERS that the Respondents pay the Applicants’ costs of and incidental to the Application in the Case and the hearing on 29 July 2019.
VACATES paragraphs PT2, PT3, PT6, and PT8 to PT14 inclusive of the Orders made 27 June 2019 and in lieu thereof the Court makes the directions set out in paragraphs PT2, PT3, PT6, and PT8 to PT14 below.
GRANTS liberty to restore on 3 days’ notice.
RESERVES costs of today.
EXTENDS time in which to seek leave to appeal to 4.00 pm 15 August 2019.
THE COURT DIRECTS THAT:
Pre-trial Directions
Statements of facts and issues and chronology
PT2.On or before 4pm on 1 August 2019, the Respondents are to serve their response to the documents referred to in order PT6 of the Orders.
PT3.On or before 4pm on 5 August 2019, the parties are to jointly file and serve:
(a)consolidated (i) statements of facts, and (ii) statement of issues (including a schedule of amounts claimed and ranges of quantum sought by the Applicants);
(b)a consolidated chronology,
indicating, respectively, those events and facts and issues agreed, disputed and/or for which they contend a different characterisation.
Agreed Bundle
PT6.On or before 4pm on 7 August 2019, the Applicants are to file and serve, and provide a copy by email to Chambers, a consolidated list of documents in the "Agreed Bundle" proposed between the parties further to compliance with PT4 and PT5 of the Orders, such list to indicate which documents are admitted by consent and which are objected to, and on what grounds.
Objections to affidavits and statements
PT8.On or before 4pm on 9 August 2019, the parties are to exchange draft lists of objections to affidavits and statements, if any, indicating the paragraphs and the grounds of each objection.
PT9.On or before 4pm on 14 August 2019, the parties are to endeavour to resolve any objections to affidavits and statements, and are to file and serve lists of outstanding objections, if any, notifying any paragraphs not to be read.
Witnesses
PT10 On or before 4pm on 6 August 2019, the parties are to notify each other of the witnesses that they require for cross-examination and give an indication to the other party of the time that they anticipate the cross-examination of each witness will take, bearing in mind the allocated hearing time and also bearing in mind the total number of witnesses.
Submissions
PT11.On or before 4pm on 7 August 2019, the Applicants are to file and serve, and provide to Chambers, an outline of opening submissions, limited to 25 pages, and a list of authorities (providing hyperlinks to each authority) in accordance with Federal Court practice note GPN‑AUTH 'Lists of Authorities and Citations Practice Note'.
PT12.On or before 4pm on 14 August 2019, the Respondents are to file and serve an outline of opening submissions, limited to 25 pages, and a list of authorities (providing hyperlinks to each authority), in accordance with Federal Court practice note GPN-AUTH, 'Lists of Authorities and Citations Practice Note'.
Trial timetable
PT13.On or before 4pm on 14 August 2019, the Applicants are to file and serve a provisional trial timetable and a list of witnesses to be cross-examined and a list of witnesses who wish to appear by video, as agreed with the Respondents.
Court Book
PT14.On or before 4pm on 15 August 2019, the Applicants are to provide to Chambers and serve on the Respondents:
(a)a hard copy and an electronic copy of the Agreed Bundle (prepared pursuant to the above orders);
(b)a joint bundle of authorities in Part A, each printed double-sided and paginated.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 1205 of 2016
| MICROSOFT CORPORATION |
First Applicant
| MICROSOFT PTY LTD (ACN 002 589 460) |
Second Applicant
| MICROSOFT REGIONAL SALES CORPORATION |
Third Applicant
And
| CPL NOTTING HILL PTY LTD |
First Respondent
| WEI LI |
Second Respondent
| CPL DISTRIBUTION PTY LTD |
Third Respondent
| WANG JIN |
Fourth Respondent
REASONS FOR JUDGMENT
Introduction and summary
The final hearing in this proceeding is set down to commence before me on 19 August 2019 with an estimate of 3 to 5 days. The applicants, whom I refer to in these reasons as the Microsoft parties, rely on 19 affidavits made by 9 deponents. Presently they anticipate calling 6 or 7 of those deponents, one of whom is resident in Hong Kong. The respondents, whom I refer to in these reasons as the CPL parties, rely on at least 19 affidavits made by 7 deponents. I apprehend that presently they anticipate calling those 7 deponents.
The final hearing has been fixed since the first case management hearing before me on 6 March 2019, and was fixed having regard to the convenience of counsel then briefed to appear. It has been fixed further to the remittal of the proceeding to this Court upon the CPL parties’ successful appeal to the Federal Court of Australia from the decision and orders of a judge of this Court, the first trial judge, given ex tempore on 29 August 2018, at the conclusion of the first trial.
On 19 July 2019, the CPL parties filed an Application in a case seeking leave to file and serve an “Amended cross‑claim” dated 19 July 2019 (seeking by way of relief the further orders set out in a response also dated 19 July 2019), and leave to file an “amended defence” lodged electronically in the Court’s Registry on 5 July 2019. Leave in relation to the amended defence, as the Application in a case expressed it, was sought “if required” and nunc pro tunc (that is, in effect as of 5 July 2019). The CPL parties also sought orders that the cross‑claim be heard and determined at the same time as the Microsoft parties’ claim. Each of the response, form of cross‑claim, and amended defence was exhibited to the affidavit of Stephen Smith, the CPL parties’ solicitor, sworn 19 July 2019 in support of the Application in a case (Smith affidavit).
The amended defence is the second such named defence. The earlier amended defence was filed on 17 August 2018, shortly before the first trial. It added a clarifying amendment to [16A], added as [26(b)] non‑infringement contentions pursuant to s.43B or/and s.47B of the Copyright Act 1968 (Cth) (temporary reproduction exceptions to infringement), and added as [42(b)] and to [42A] an exception to infringement by operation of s.123 Trade Marks Act 1995 (Cth).
The cross-claim in respect of which leave was sought is styled “Amended cross‑claim” because it added further causes of action (and paragraphs [23] to [55]) to the form of cross‑claim dated 12 June 2019 lodged electronically in the Court’s Registry on 13 June 2019 and processed 18 June 2019 (June cross‑claim). Leave to progress that document was sought orally at a case management hearing before me on 27 June 2019, and refused by me in circumstances I describe briefly below.
I heard the Application in a case on Monday, 29 July 2019. Mr G Clarke QC and Mr P Wallis of counsel appeared for the CPL parties by video-link from Melbourne. Mr Fox of counsel appeared for the Microsoft parties. Mr Smith was cross‑examined by video‑link. At the conclusion of argument late in the day I indicated that I proposed by make orders on 31 July 2019, but would not be in a position to deliver reasons on that day.
On 31 July 2019, I made the orders set out above, dismissing the Application in a case. I also made orders varying the pre‑trial directions, having regard to certain defaults by the CPL parties in compliance with the then extant pre‑trial directions.
These are my reasons for dismissing the Application in a case.
Some procedural history
This proceeding was commenced in May 2016 by the Microsoft parties against the first and second respondents, respectively CPL Notting Hill, and Ms Wei Li (also known as Mabel Li). In August 2017 the first trial judge ordered discovery, and the first and second respondents then sought leave to appeal that discovery judgment to the Federal Court. That application for leave was dismissed by Robertson J on 24 November 2017.
On 11 September 2017, the Microsoft parties filed the Claim, and joined the third and fourth respondents to the proceeding, namely, CPL Distribution, and Mr Jin Wang. The CPL parties filed a joint defence to the Claim on 6 October 2017, and the joint amended defence to the Claim on 17 August 2018 (see above at [4]). It is those pleadings on which the parties relied at the first trial.
The proceeding was heard and determined by the first trial judge over 3 days on 27 to 29 August 2018 (see [2] above), and reasons delivered and orders made ex tempore by the first trial judge on 29 August 2018. An appeal to the Full Court of the Federal Court of Australia (constituted by O’Callaghan J) was allowed on 5 February 2019, and reasons published on 26 February 2019 in CPL Notting Hill Pty Ltd v Microsoft Corporation (No.2) [2019] FCA 223 (Appeal Reasons). The matter was remitted to this Court for re‑hearing, and docketed to me.
On 16 May 2019, I delivered interlocutory judgment in Microsoft Corporation & Ors v CPL Notting Hill Pty Limited & Ors (No.5) [2019] FCCA 1255 (May judgment). In the May judgment I determined the Microsoft parties’ application first, to further amend the amended application to seek compensatory damages against the second and fourth respondents pursuant to s.115(2) Copyright Act 1968 (Cth), and secondly, to add a further cause of action against all four CPL parties for liability for copyright infringement on the basis of joint tortfeasorship, which latter claim required amendment to the Further Amended Statement of Claim as well as the Amended application.
For present purposes, the relevant background to this proceeding is set out in the May judgment at [1] to [4], and in the Appeal Reasons. Also relevant are the conclusions I reached at [69] through to [71] of the May judgment in relation to the two forms of amendments sought by the Microsoft parties. I allowed the first amendment sought (see May judgment at [76]), but I did not allow the proposed second amendment to add a further cause of action. I was not persuaded that the interests of justice were better served in this case on remitter by allowing the Microsoft parties to add a new cause of action alleging liability for copyright infringement on the basis of joint tortfeasorship (see at [79]).
As is apparent from the May judgment, the application by the Microsoft parties to further amend the Amended Application and the Claim was vigorously opposed by counsel then appearing for the CPL parties, Mr P Bick QC and Mr W Newland. Counsel gave no indication that any change to, or expansion of, the CPL parties case was being considered.
27 June 2019 case management hearing and the June cross‑claim
On 27 June 2019, the matter was listed for case management to hearing, that is, pre‑trial directions, and on the question of costs following the May judgment. At that case management hearing, Mr C Truong QC appeared as senior counsel for the CPL parties, and sought leave to progress the June cross-claim (see above at [5]). The CPL parties’ application was brought without formal notice, save as appeared in their draft short minutes, and in written submissions lodged at 11:15pm on Tuesday, 25 June 2019. After hearing from Mr Truong QC and Mr Fox (appearing for the Microsoft parties), I rejected the application in relation to the June cross‑claim.
I directed the CPL parties by 5 July 2019 to file and serve a response to the Further Amended Application (dated 28 May 2019, filed further to the May judgment), and any amended defence consequential upon the amendment allowed to the Application. I made pre-trial directions, based on a draft provided to counsel shortly after 6 March 2019.
In relation to the rejected June cross-claim, I directed that (a) any application in a case for leave to proceed with, and rely on at the final hearing, the prayers for relief in the response dated 12 June 2019 and the June cross‑claim, (b) any affidavit in support, and (c) an outline of submissions, each be filed and served by 4pm on 19 July 2019. This timetable was set having regard to counsel’s availability. I listed any such application for hearing on 29 July 2019, at 10:15am.
I also listed for hearing on 29 July 2019:
(a)any application for orders for consolidation or that the present proceeding be heard together with any fresh proceeding filed in the Court (in the event that the CPL parties chose to proceed by way of a fresh proceeding substantially in the form of the June cross‑claim, rather than by way of cross‑claim), and
(b)any application to adjourn the final hearing.
As will be apparent, the Application in a case relates to a significantly changed form of cross‑claim than the June cross‑claim, and to an amended defence not before the Court on 27 June 2019. Specifically, none of the “implied licence argument” or the misleading and deceptive conduct and estoppel causes of action now sought to be propounded were then identified.
The scope of the existing proceeding (Claim and defence)
In broad and general terms, the proceeding concerns claims by the Microsoft parties against the CPL parties for copyright infringement, contravention of the Australian Consumer Law (ACL), and trade mark infringement. The following summary is drawn from the Claim and the defence relied upon by the parties at the first trial. I do not purport to provide a comprehensive or complete description of the parties’ contentions. Whilst I have had the benefit of the Appeal Reasons, I have not sought to reconcile my summation of the pleadings with his Honour’s critique of the reasons of the first trial judge.
The Microsoft parties allege that the CPL parties, without licence or authority, variously reproduced or authorised the reproduction of certain operating systems (being various “Microsoft Windows” computer programs, collectively the software) by the first respondent, CPL Notting Hill, pre‑installing the software on a number of newly built computers and selling at retail at least 39 of those computers with the pre-installed software to which each such computer a CPL party had variously (depending upon the respondent) affixed, or authorised the affixation of, a loose Certificate of Authenticity label (CoA or COA) printed with a unique product key comprising a 25‑character alphanumeric sequence, which product key was used to activate the software.
I understand the Microsoft parties to say that CPL Notting Hill was not licensed to activate or install the software on the new computers, and that the installation and the subsequent sale infringed their copyright. The Microsoft parties contend that loose COAs (with related product keys) were issued for use and affixation only onto refurbished computers under their Refurbisher Program, not on new computers, and issued only to certain persons and in certain circumstances, not being the CPL parties, or their activities. The Microsoft parties further contend that CPL Distribution, without their licence or authority, supplied some 1617 loose COAs to CPL Notting Hill, thereby permitting CPL Notting Hill to activate, install and operate the software on new computers, and that the third respondent thereby authorised copyright infringement and so infringed copyright, and the fourth respondent authorised the third respondent’s infringement.
At [31] of the Claim, the Microsoft parties allege that they have suffered loss and damage by reason of the acts (which may be summarised as the acts of installation, activation, sale and supply, and authorisation outlined above) of the CPL parties. At [32], the Microsoft parties allege that such acts were committed flagrantly and deliberately. The Microsoft parties then plead claims of contravention of s.18 of the ACL, and being knowingly concerned in such contraventions within s.232(1) of the ACL, and infringement of trade mark, arising from the matters pleaded in their copyright infringement claims.
In essence, the CPL parties say that pre-installation of the software was authorised, and that they have not infringed, or authorised the infringement of, copyright in the software. They rely on defences of authorisation, and of innocent infringement under s.115(3) of the Act, as well as the temporary reproduction exceptions provided by s.43B or/and s47B of the Act. In the defence they say (at [15]) that CPL Notting Hill is and was at all material times an OEM system builder authorised to sell Microsoft products, and that all products marked “Microsoft” sold by CPL Notting Hill were genuine products it was authorised to sell. They say (at [19B]) that they did not purchase CoA labels pursuant to the Refurbisher Program; that all CoA labels together with media acquired by them were bona fide and occurred in the ordinary course of business from businesses operating in the industry.
The CPL parties say that since about 2011 the Microsoft parties were aware of lost, stolen or unauthorised COAs, the usage of all the software is subject to the over‑riding right and ability of the Microsoft parties to activate or deactivate the software; that via the internet the Microsoft parties installed and activated, or failed to deactivate, lost, stolen or unauthorised COAs (e.g., variously at [18A], [19A], also see [19C] of the defence).
In summary, relevantly, the CPL parties say that the software can only be installed on a computer system where the Microsoft parties have facilitated and authorised the installation by acceptance of a COA and product key, an end user can only use the software where that has been done, or where the Microsoft parties have not disabled usage by failing to deactivate the software.
The CPL parties say (at [19C(c)-(e)]) that … (c) they were entitled to rely upon the Microsoft parties to ensure that (i) installation and activation of the software only occurred via product keys that the Microsoft parties had authorised an end user to be used; (ii) COAs and product keys that were not authorised were deactivated; (d) irregularly obtained COAs and unauthorised product keys were properly managed and deactivated; and (e) if the CPL parties did obtain any such COAs and product keys, they did so honestly and innocently in circumstances where the Microsoft parties activated and installed the software for the end user. Subsequent paragraphs of the defence then repeat the contentions outlined in the above paragraphs, contend that the acts of reproduction of the software were expressly licensed, set out the defence of innocent infringement,
Relevantly for present purposes, it was not in dispute that for many years prior to the impugned conduct, CPL Notting Hill had built and supplied at retail new computers pre‑installed with the software, and that it had acquired the software for such installation in the form of System Builder Packs from Microsoft authorised distributors. Those Packs comprised a COA printed with a product key, a copy of the software in disk form or other media, and a shrink wrap on the packaging known as a system builder licence. The relevant form of the system builder licence, however, was in dispute at the first trial (see Appeal Reasons at [21] – [22]), and on the Application in a case before me was identified as foundational to the case now sought to be made by the amendments.
Counsel retained by the CPL parties
Over the course of the present dispute (this proceeding, the application for leave to, and the appeal before, the Federal Court) the CPL parties have retained a number of counsel, including experienced intellectual property senior and junior counsel. Senior counsel variously engaged by the CPL parties to appear or to advise have comprised a roll-call of members of the Inner Bar, including experienced intellectual property law senior counsel, in the following order being Messrs R Webb SC, K Smark SC, S Stuckey QC (who signed the opening submissions relied on at the first trial), P Zappia QC (with him Mr A. McRobert), P Bick QC (with him, Mr W Newland), T Cordiner SC (briefed for a specific minor aspect), C Truong QC, and now Mr Clarke QC (with him, Mr P Wallis).
Mr P Zappia QC and Mr A McRobert appeared as counsel for the CPL parties at the first trial. Mr Zappia QC and Mr McRobert also appeared on the hearing of the appeal on 4 and 5 February 2019.
Mr McRobert appeared for the CPL parties before me on 6 March 2019 at the first case management hearing on remittal. As I have said, Mr Bick QC and Mr W Newland appeared to contest the Microsoft parties’ application to amend (which resulted in the May judgment). Mr C Truong QC then appeared at the 27 June 2019 case management hearing.
Mr G Clarke QC and M P Wallis, counsel appearing on the Application in a case, are newly‑retained by the CPL parties. Mr Smith’s evidence is that he received instructions to engage Mr Clarke QC on about 8 July 2019, and to engage Mr Wallis since about 12 July 2019. They are, respectively, at least the eighth senior counsel, and the third junior counsel briefed on behalf of the CPL parties.
The scope of the amendments proposed
Mr Clarke QC says that the cases now sought to be propounded by the CPL parties are made because new counsel have brought “fresh eyes” to the matter, and that they raise arguments critical to the CPL parties, indeed, the implied licence argument is potentially a “killer point”. On its face, the amended defence, and [1]-[22] of the cross‑claim were settled by Mr Truong QC. Thus, the “killer point” submission appears to be addressed to [23] – [55] of the cross‑claim.
Counsel cast the CPL parties’ Application to amend the pleadings on the basis that the Application must be allowed in whole: that is, that the Court should grant leave for the totality of the new text in the amended defence, and the totality of the cross-claim. There was no submission, and no suggestion, that the Court entertain the proposed amendments on a paragraph by paragraph basis (in respect of the amended defence), or, in respect of the cross‑claim, by cause of action.
The scope of the amendments – amended defence
The leave granted to the CPL parties on 27 June 2019 was amendment to the defence “consequential to the amendment to the Application” (which amendment brought the Application into conformity with the Claim, and the case submitted at the first trial). The Claim was unaffected. Mr Clarke QC, properly, did not characterise the amended defence as merely consequential upon amendment to the Application.
Notwithstanding the form in which the Application in a case is put, the CPL parties’ counsel in both written and oral submissions accepted that leave was required to file (and rely on) the amended defence.
Mr Clarke QC stated that the scope of the amendments sought in respect of the amended defence are principally confined to additions to [31]. Whilst the most substantial amendment is to [31] (adding subparagraphs (d) to (h), and a substantial Schedule A), amendments are also sought to [19C] (adding sub‑paragraph (f)), and an amendment to [33] consequential to the amendment to [31].
The CPL parties say that the amendments to [31] plead that the decision of the Microsoft Parties to activate and validate the software that the CPL parties installed on the computer systems of end users was made in the context of the Microsoft parties knowing that software was being leaked or lost from its Refurbisher Program, and electing not to take any action to block the activation and validation. The CPL parties argue that this context gives rise to the “implied licence” that is expressly and more expansively pleaded in the cross-claim at [23] and following. In the following paragraphs, I set out the specific amendments sought to the defence.
To the qualifications to the denial in [19C] is sought to be added sub‑paragraph (f) as follows:
[19C.]They deny the allegations contained in paragraph 19G subject to the following:
(a)a Microsoft Program can only be installed on a computer system where the Applicants have facilitated and authorised the installation by the acceptance of a GOA and Product Key via the internet to enable installation and usage of the Microsoft Program by the end user;
(b)an end user can only use a Microsoft Program where the Applicants have either installed via the activation a GOA and Product Key or have not thereafter disabled usage by failing to deactivate a Microsoft Program;
(c)the Respondents were at all material times entitled to rely upon the Applicants to ensure:
i.installation and activation of Microsoft Programs only occurred via Product Keys that the Applicants had authorised the end user to be used; and
ii.COA's and Product Keys that were not authorised by the Applicants were deactivated such that activation and installation of Microsoft Programs could not occur.
(d)irregularly obtained COA's and unauthorised Product Keys were properly managed and deactivated so as not to be capable of being used to activate and install Microsoft Programs;
(e)if the Respondents did obtain COA's and Product Keys for Microsoft Programs otherwise than via a MAR or MRR agreement they did so honestly and innocently in circumstances where the Applicants activated and installed Microsoft Programs for use by the end user;
(f)the activation of the Microsoft Program constitutes a representation to the end user and a representation to the Respondents that the copyright in the software was licensed and/or authorised by the Applicants.
The context of the amended defence amendments to [31] is provided by the Claim at [31]:
[31]The First Applicants have suffered loss and damage by reason of the acts of the First to Fourth Respondents.
Particulars
(a)Damages pursuant to section 115(2) of the Act.
(b)The Applicants reserve the right to provide further particulars of the Applicants' loss as a result of the reproduction and/or authorisation of reproduction and sale of Microsoft Programs by the Respondents.
In the form prosecuted at the first trial, the CPL parties’ defence at [31] to [31] of the Claim was as follows:
[31]They deny the allegations contained in paragraph 31 thereof and say further that:
(a)by the reason of the matters aforesaid they are entitled to rely upon section 115(3) of the Copyright Act1968, whereupon the Applicants are not entitled to claim the relief claimed;
(b)the Applicant in activating, installing or otherwise failing to de-activate unauthorised Microsoft Programs has failed to mitigate its loss and damage;
(c)alternatively, has not suffered loss as it received good consideration from the initial sale of the software from the party to whom it initially supplied the same.
The amendments adding [31(d) to (h)] are as follows:
(d)further and alternatively, since in or about 2012 the applicants have known of the leakage and/or loss of specific copies of Microsoft Windows 7 CoA’s through its refurbisher channel and notwithstanding this specific knowledge, the applicants:
i.activated and thereby authorised the installation of Microsoft Windows 7 and thereafter the usage thereof by end users to use Microsoft Windows 7;
ii.have not blocked or otherwise rendered unusable (instead have authenticated and activated) individual CoA’s which they knew to be leaked or otherwise sold by an authorised refurbisher or Third Party Installers (“TPI”);
iii.have not voluntarily recalled any individually CoAs;
iv.have not notified Microsoft Windows 7 system builders/retailers including any of the Respondents of the fact and identity of any leaked product keys that were sold by authorised refurbishers or TPI or that they were activating and authenticating software with leaked product keys;
v.have not otherwise notified Microsoft Windows 7 system builders/retailers including the Respondents that a Microsoft approved TPI, Budget PC Pty Ltd sold numerous stand-alone CoAs to companies associated with Felix Chen including Ever Success Pty Ltd, FTEV International Pty Ltd and LDS International Pty Ltd;
vi.have not terminated authorisation of an authorised refurbisher and/or a TPI who they knew were selling stand-alone CoA’s;
vii.continued to actively promote, market and distribute the software and associated CoAs through its refurbisher and TPI channel.
(“the conduct”).
(e)by reason of the conduct the Applicants authorised the end user to use and thereby licensed and authorised the Respondents to install the Microsoft Program;
(f)alternatively to (e) by reason of the conduct the Respondents changed their position, as they were entitled to, and relied upon the CoAs as being genuine unlimited CoAs so as to yield an authorised, licensed and unrestricted versions of Microsoft Windows 7 upon new computer hardware as would otherwise be authorised by the Applicants in the ordinary course of the Respondents’ business;
(g)in the circumstances and in the premises, the Applicants are estopped from asserting in this proceeding that the Respondents have breached the Applicants copyright entitling them to an award of damages;
(h)further by engaging in the conduct with full knowledge of:
i.the CoA serial numbers that were distributed to their authorised refurbisher and TPI;
ii.the identity of each Microsoft Windows 7 operating system CoA serial number and/or product key;
iii.the Applicants capability and capacity to block each Microsoft Windows 7 operating system, CoA and product key; and
iv.the fact that the Respondents were offering for sale and selling these Microsoft Windows 7 operating systems and CoAs and product keys-
the Applicants by neither alerting the Respondents nor disabling these CoAs and product keys when they had both the capability and capacity to do so, have thereby elected to waive their intellectual property rights in copyright associated with the Respondents usage of the CoAs and installation of Microsoft Windows 7 software.
Particulars
Particulars of the conduct are set out in Schedule A hereto.
Schedule A to the amended defence (which is duplicated as Schedule B to the cross‑claim), comprises instances of activation and validation of certain product keys contained in certain loose CoAs said to constitute implied representations that were misleading or deceptive. It comprises extracts of evidence given at the first trial by Ms Yip on behalf of the Microsoft parties relating to a COA label with a serial number ending in “874” (COA 874) and the validation process of product keys followed by the Microsoft parties, a confidential letter from the Microsoft parties’ solicitor to Mr Smith dated 24 August 2018, in response to a notice to admit, and the chain of sales of COA 874 forming part of the “test purchase” made 11 November 2015 pleaded in the Claim at [20].
Lastly, a consequential amendment is made to [33], adding: “and refer to and repeat the matters stated in sub‑paragraphs 31(d) to (h) above.”
Although not expressed as such conduct contended to give rise to authorisation, misleading and deception, unconscionability, and alternatively, estoppel and waiver contentions can be discerned in the amendments.
Relevant continuing paragraphs of the defence
The following paragraphs of the defence have remained the same in the earlier versions of the defence (2017 defence, filed 6 October 2017), and the defence relied on at the first trial (filed 17 August 2018):
20.Save that they admit CPL loaded un-activated software code for activation an installation remotely by the Applicants via the internet on new computer systems for sale in accordance with their licensing rights and entitlements as an authorised Microsoft OEM system builder (“the installation”) they deny the allegations contained in paragraph 20 thereof.
24.They deny the allegations contained in paragraph 24 thereof and say further that:
(a)the Applicants, remotely via the internet, activated and installed all the Microsoft Programs;
(b)the Microsoft Programs were not subject to the Refurbisher Program;
(c)the Microsoft Programs were not identified by the Applicant and were not able to be identified by the Respondents as being issued pursuant to the Refurbisher Program; alternatively
(d)the COA and product keys were wrongly or mistakenly assigned by the Applicants as being unrestricted and not issued for use pursuant to the Refurbisher Program; and
(e)the Respondents were not able to identify there being any limitation applicable to the Microsoft Programs such as being limited for use pursuant to the Refurbisher Program; and
(f)the Respondents genuinely believe the COA’s and accompanying CD’s it purchased from LDS International Pty Ltd were genuine Microsoft Windows7 Professional OEM, which belief was reinforced by the Applicants remotely via the internet, activating and installing of Microsoft Windows on machines for use by end users in conjunction with COA product keys.,
(see also paragraph [31], set out in these reasons at [40].)
Scope of amendments – cross‑claim
The cross claim is more expansive than the amended defence. It is briefly summarised by the CPL parties’ counsel in their written submissions at [9] and [10] (substituting references with the defined terms, and whilst the below refers to the first respondent, the cross‑claim is brought by all the CPL parties and I understood counsel’s submission to be put for all the CPL parties):
[9]… allegations of misleading and deceptive conduct, unconscionable conduct, implied licence and estoppel, all of which are substantially founded on a common factual basis, namely the applicants’ [that is the Microsoft parties’] licence terms and activation and validation processes.”
[10]… the implied licence pleading goes to the heart of the [Microsoft parties’] case. That case depends upon Microsoft Corporation [namely, the first applicant] proving the conduct by the [CPL parties] was unlicensed. The [CPL parties] at the [first trial] denied that the Microsoft parties had proven that, and raised an implied licence argument (albeit that that was not expressly pleaded). The [CPL parties] now seek to advance a positive defence that [Microsoft] impliedly licensed CPL to engage in the impugned conduct, thus removing the central plank of the [Microsoft parties’] case. The implied licence argument that the respondent seeks to agitate depends substantially on the provisions of two Microsoft documents: the System Builder License and the End User License.
I observe that first, “substantially founded” does not mean that the allegations are wholly founded on a common factual basis, but the different foundations are not immediately obvious; and secondly, the implied licence argument now sought to be raised as a “positive defence” depends “substantially” on the two documents. When the CPL parties were first aware of the two documents is a relevant factor to be considered in the exercise of the Court’s discretion whether to allow the amendments.
As will be seen later in these reasons, it became clear during the course of the hearing of the Application in a case that the CPL parties (specifically, the first and second respondents) were aware of these two documents at least by the first trial: it was accepted by counsel that the relevant end user licences (also referred to as EULAs) were in evidence at the first trial, and in the case of the system builder licence, CPL Notting Hill and Ms Li had expressly relied on the document (with clause 4) since 2016.
Paragraphs [1] to [22] of the cross-claim repeat the June cross-claim, and positively assert claims of misleading and deceptive conduct in contravention of s.18 of the ACL, and further or alternatively, unconscionable conduct within the meaning of s.21 of the ACL, and sought loss and damage. In large part these paragraphs are reflected in the misleading or deceptive conduct contentions subsequently introduced in the amended defence.
Mr Truong QC in short written submissions to which he spoke on 27 June 2019 described the June cross-claim which he settled (and which also comprises [1] to [22], and Schedules A and B of the cross‑claim the subject of the Application in a case) as alleging,
“in essence, that the [Microsoft parties] engaged in misleading or deceptive conduct and unconscionable conduct in:
(a)knowing of the trade of leaked or stolen product keys and certificates of authenticity (CoAs) from authorised distributors and third-party installers;
(b)not warning software resellers of or deactivating such leaked or stolen product keys;
(c)continuing to promote and licence the software through authorised retail and refurbisher channels;
(d)activating and authenticating software with leaked product keys and/or not blocking leaked, missing or stolen COA product keys;
(e)issuing these proceedings alleging infringement arising from use of leaked product keys from refurbisher channels.”
He submitted that there was almost complete factual overlap between the Microsoft parties' claims and the June cross-claim, in written submissions stating "The critical fact being the known sales of individual leaked product keys and CoAs".
Schedule A to the cross‑claim (and to the June cross‑claim) asserts that each of the Microsoft parties’ knowledge is to be inferred from:
(a)the alleged knowledge of the Microsoft parties from around 2012 of the specific identity of every single CoA lost or stolen, to where or whom they had been supplied by a third party software installer, and whether each specific CoA had been activated;
(b)the alleged monthly reporting obligations of refurbishers to Microsoft, contained in a Refurbisher Agreement (see reference or Refurbisher Program above at [22]) which were such as to enable Microsoft to identify loss or misappropriation of CoAs on a monthly basis, exemplifying a particular refurbisher, Budget PC, and that Felix Chen and his associate companies were not identified or nominated as persons to whom Budget PC could resell;
(c)further particulars contained in identified extracts from the affidavits and oral evidence under cross‑examination of two Microsoft parties’ witnesses in the first trial (Ms Yip and Mr Noble); and
(d)further particulars that may be provided after discovery.
Schedule B repeats Schedule A to the amended defence.
Additionally, [23] to [41] of the proposed cross-claim newly propound a form of implied licence (described by CPL Parties’ counsel as a “positive defence that Microsoft Corporation impliedly licenced CPL to engage in the impugned conduct”) which is said substantially to arise from the proper construction of the system builders licence and the EULA, and which terms are set out in the pleading (as to the documents, see above at [47]-[49], and further consideration later in these reasons). Additionally, alternative claims of “Misleading of deceptive conduct Estoppel” are set out at [42] to [55] of the cross‑claim.
In oral submissions, Mr Clarke QC described in detail the additions to the cross‑claim over the June cross‑claim. This exercise had the benefit of clarifying the considerable extent to which the claims now propounded are based on matters known to the CPL parties, or which could have reasonably been known to the CPL parties some considerable time ago.
The cross‑claim from [24] through to [27] describes that prior to 9 June 2015 (over a period of at least a decade), CPL Notting Hill purchased numerous Packs from certain authorised distributors of Microsoft software for installation on computer systems CPL Notting Hill assembled for sale to end users, described the Packs, statements on them, and terms of the shrink wrap system builder licence on the Packs. I have described the Packs in general terms above at [28]. The pleading then sets out terms accepted by opening the Pack. The pleading asserts that an end user licence (EULA) was referred to in the system builder licence, but was not included in the Pack.
At [30] and following, the cross‑claim alleges that the EULA were the terms on which CPL Notting Hill licenced end users. The EULA was asserted to be available on the internet, and following paragraphs set out certain terms of the EULA that require certain mandatory validation and activation. Consequences of the terms are then pleaded through [32] to [34] that the terms did not identify what would lead Microsoft to conclude that the product was not genuine or the software not properly licenced.
Paragraph [34] is as follows:
In these circumstances, on a proper construction of the System Builder Terms and End User Terms, CPL as the system builder was licensed to preinstall apparently genuine Windows 7 Professional software onto a computer system and to rely, as it did, on the activation and validation processes to prevent (either before or shortly after the end users were first able to access and use the software) any unlicensed use of the software by end users that may arise from any unknown error or fraud associated with the supply of the software to the systems builder, unless CPL had notice of such matters.
Paragraph [35] then contains allegations that certain CD‑ROM disks and COA labels received by CPL (which I presume is intended to be CPL Notting Hill) from Mr Felix Chen were genuine Windows product, that is, genuine software; and were received without any notice that there were any issues concerning whether CPL was licensed under the system builder licence or CPL or end users would be able to activate or validate the software under the EULA.
The import of the pleading at [35]-[41] is the implied licence argument that because Microsoft did not notify the CPL parties until the letter of demand in January 2016 that the conduct impugned under the Claim was not authorised or licensed, and end users were not prevented from using the software on the new computers they acquired from CPL Notting Hill and notifying CPL Notting Hill accordingly, the CPL parties did not stop the conduct. It followed that CPL was impliedly licensed by Microsoft upon the terms of the system builder licence and the EULA, and none of the CPL parties have infringed copyright in the software as alleged in the Claim.
The conclusion alleged at [41] is as follows:
In these circumstances, CPL was impliedly licensed by Microsoft Corporation upon the terms of the System Builder Terms and in the End User Terms to reproduce the Windows 7 Professional software using the Chen Materials and none of the Cross-Claimants have infringed Microsoft Corporations copyright in Windows 7 Professional software as alleged in the statement of claim.
As is evident from the above description of the central planks of the cross‑claim, the factual basis of the amendments are the terms of the system builder licence, the terms of the EULA, and the parties’ conduct – Microsoft Corporation’s licensing activities, that it activated and validated use of the software, and the CPL parties’ conduct historically before June 2015, and then thereafter in acquiring and using disks and COAs from Mr Chen, to build and sell certain software pre-installed computers.
Alternative claims are then pleaded based on allegations of Microsoft’s licensing, validation and activation practices, said to give rise to misleading and deceptive conduct, or give rise to estoppel.
I note here that Mr Clarke QC says that the proposed misleading or deceptive conduct and estoppel pleas arise directly from the Microsoft parties’ pleaded case, on the assumption that CPLs implied licence proposed argument does not find favour with the Court at trial. Mr Fox, however, submits that the misleading or deceptive conduct and estoppel claims make very serious allegations that the Microsoft parties’ licensing practices over many years contravene the Australian consumer law, which the Microsoft parties will be vigorously defending and which will undoubtedly add days to the case. They are not merely alternative, subsidiary claims.
The explanation proffered in the evidence on the Application in a Case
The evidence of Mr Smith
Mr Smith has been the solicitor for the CPL parties since the proceeding was commenced in 2016. He is a sole practitioner. Although he was a barrister for over 24 years prior to November 2011, and practised as a commercial and construction law barrister at the Victorian Bar, in respect of this proceeding, the import of his evidence under cross-examination was that he relied on the CPL parties’ counsel for advice and direction, including the amendments to the defence which were relied on at the first trial (settled by Mr Zappia QC and Mr McRobert).
In the Smith affidavit, Mr Smith said, in substance, as follows:
(a)the substance of the amendments to the CPL parties’ pleadings is to more fully articulate the reasons why the CPL parties say that they were licensed by Microsoft to engage in the activities in respect of which they are sued by the Microsoft parties, and relatedly, why they say that the Microsoft parties are estopped or otherwise prevented from putting forward a contrary position;
(b)the factual basis for these amendments was to some extent pleaded by the CPL parties in further and better particulars of their defence that they served in letters dated 22 November 2017 and 30 January 2018 (that is, the further particulars);
(c)he is informed by his clients and verily believes that on or about 31 May 2019, the CPL parties found six invoices in the police brief against Felix Chen that Budget PC, a company approved by Microsoft, had sold stand-alone refurbished COAs to companies operated or used by Mr Felix Chen (Ever success Pty Ltd and FTEV International Pty Ltd);
(d)his instructions were and remain that the CPL parties at no time had any dealings with either Ever Success or FTEV, however in or about early June 2019 (see also [72] below), the CPL parties and Mr Smith associated the six invoices with information contained in a page of the confidential exhibit to an affidavit affirmed by Mr Noble, on 28 March 2018 which I note was in evidence at the first trial;
(e)on or about 3 June 2019, the CPL parties’ then counsel, Mr Truong QC, found information on an article on the internet that Budget PC and its sole director had agreed to pay Microsoft $150,000 in damages for infringing Microsoft’s copyright, and admitted that it authorised the infringement of Microsoft’s copyright in Window 7 through its sale and supply of COAs outside the defined and authorised channel. This article, dated 23 November 2017, is titled: Aussie resellers pay Microsoft $200,000K in damages over copyright infringements. (2017 ARN article);
(f)the CPL parties were not in a position to comprehensively plead these matters at the first trial because in the opinion of Mr Smith, the Microsoft parties had not put into evidence what he believed was the applicable system-builder licence, and Microsoft had only provided limited discovery of the process by which the software was activated and validated by Microsoft;
(g)since the earlier trial, the CPL parties have engaged new counsel to represent them at the upcoming trial, namely Mr Clarke QC and Mr Wallis; and
(h)the additional affidavit evidence he envisages, will be directed primarily towards clarifying the respondents’ [that is, the CPL parties’] processes when installing and distributing the software generally, and the processes followed in respect of the software supplied to it (sic) by Felix Chen. (emphasis added).
The Chen materials
At the request of the Microsoft parties, a subpoena was issued to Victoria Police on 20 February 2017 and Police produced a copy of the full police brief in relation to Felix Chen (Chen materials), from whose companies the CPL parties say the impugned COAs were acquired. Mr Smith first inspected the documents produced in around mid-2017, and had a cursory look over the documents, which comprise some 10,000 pages. He obtained a thumb drive of the documents in mid-2017.
The CPL parties have had the Chen materials since around mid-2017, and have been free to inspect them. Certain of the Chen materials were in evidence at the first trial.
The CPL parties provided Mr Smith with certain documents (including from the Chen materials) in around 31 May 2019. Mr Smith says this was the first time he was asked to look at the six invoices from Chen materials which are relied on as an instigating fact for the proposed pleading. Thereafter, Mr Truong QC found the 2017 ARN article, the system builder licence which the CPL parties wish to propound was provided to Mr Smith by his clients around mid-June 2019, and he obtained a copy of the EULA on which the CPL parties seek to rely from the Microsoft website at that same time.
Whilst Mr Smith had considered a cross-claim before June 2019, he described June 2019 as “the watershed moment” leading to the proposed pleading as when the CPL parties and he went through and considered together the confidential exhibit, of the Refurbisher agreement, (which he had since March 2018), the admissions in the confidential letter, and the six Budget PC invoices.
The account given in cross-examination considerably expanded on the chronology given by Mr Smith in his affidavit.
Further particulars
To the account of the documents available to, and knowledge of the CPL parties should be added the further particulars (see [68(b)] above). The Microsoft parties’ solicitors sought particulars on 13 October 2017 to [19C], [20D], [22A], [24], [28E] and [31] of the 2017 defence. In their request in relation to [28E] Microsoft says it understood CPL to be asserting that CPL did hold a licence.
On 19 January 2018 further particulars were sought, including seeking identification of the “licensing rights and entitlements” referred to by the CPL parties in [20] of the defence. To that request, on 30 January 2018, the CPL parties replied:
The “licensing rights and entitlements of the respondents are as follows:
(a)CPL is Microsoft-authorised OEM system-builder. Therefore CPL is authorised to pre-install the OEM software onto a new computer system fully assembled by CPL or distribute unopened OEM software to other Microsoft system-builders. This can be seen in Microsoft OEM partner center licensing FAQ which was referred to in letter from Lovegrove Smith and Cotton [Mr Smith’s previous firm] to your office dated on 6 September 2016 which states: ...
Confidential Letter
A notice to admit facts filed 8 August 2018 by the CPL parties makes clear the proposition that the CPL parties sought to make that the Microsoft parties were aware prior to 2014 that the COAs referred to in [20D] of the Claim had been stolen or leaked from a Microsoft Party’s authorised replicator, or direct OEM or MAR. In response, the Microsoft parties provided certain admissions in the confidential letter (see at [43] above), the contents of which Mr Smith was permitted to disclose to the extent necessary to obtain instructions in relation to matters in issue in the proceeding. It is clear from this document that Mr Smith had available to him, and could have discussed with his clients well before the first trial, the validation process and the conduct which the Microsoft parties dealt with in relation to product keys at the time of activation. He did not give any satisfactory explanation why he did not obtain instructions on these matters before now.
The system builder licence issue
In the Appeal Reasons at [21] to [22] O’Callaghan J observed that the system builder licence in evidence before the first trial judge was not in force at relevant times, and Microsoft Corporation was not a party to it. The significant difference now identified before me between the system builder licence before the trial judge and referred to in the Appeal Reasons, and the version of the system builder licence which will be propounded should the amendment proceed, and the cross-claim be allowed, is clause 4 of each licence.
It was not in dispute before me that although the CPL parties argued limitations of the system builder licence at the first trial, and on appeal, they did not put forward any alternative system builder licence. Specifically, the CPL parties did not put in evidence the particular system builder licence which they now say was the one under which CPL Notting Hill operated (and I assume that the other respondents say they took the benefit of). I apprehend from the Annexure A to CPL parties’ submissions (referred to below at [88]-[89]) and oral argument that the CPL parties at trial argued that the Microsoft parties had put forward an irrelevant system builder licence, and that in the absence of the correct form of licence, the Microsoft parties could not establish that the CPL parties’ conduct was unlicensed.
Mr Clarke QC submitted that because the onus was on the Microsoft parties to establish that the CPL parties were unlicensed, it was not for the CPL parties at the first trial to put the correct licence into evidence.
This submission, however, confuses the ultimate onus borne by an applicant to establish its case, with the shifting evidentiary onus that may occur in the course of trial. Further, and centrally, the submission is in stark contrast to the CPL parties’ counsel’s written submissions that the CPL parties’ implied licence argument (by which I apprehend the implied licence argument raised in the cross-claim, but which counsel appears to argue can also be discerned in the amended defence), “involves the proper construction of the correct version of the system-builder terms and the end user terms”, that it “would be contrary to the interests of justice for the case to be decided in the absence of correct versions of the system-builder terms and the end user terms” and “that the interests of justice require that they be permitted to put forward primarily defensive claims that are based on the wording of the correct versions of the system-builder terms and the end user terms, as formulated by their new counsel” (my emphasis). That is, the CPL parties now say that they will lead evidence of what they say are the correct versions of the system builder licence and the EULA.
The evidence before me on the Application in a case is that as at 22 January 2016, and thus before the commencement of the proceeding, Ms Li (also known as Mabel Li), the second respondent, and sole director of CPL Notting Hill, contended in writing to Microsoft Corporation that CPL Notting Hill operated under the particular form of system builder licence which included the clause 4 the CPL parties now say is the relevant licence, being a licence to pre-install and distribute the software (and not a licence simply to distribute the software). Ms Li said in her email:
We did investigate with purchaser. Purchaser said they checked with supplier and checked the actual labels. Supplier confirmed that this is genuine Microsoft licence for Windows 7 professional. Supplier also told our purchasing staff that there is no restriction for selling these products. They said that if there is any restriction for selling this product, such OEM version of Microsoft products, there will be lots of conditions stated on the product (please see attached copy of conditions on OEM version product).
Ms Li attached a copy of the document to her email. It was headed “Microsoft OEM system builder license”. That is, the document that the CPL parties say is the “correct version” of the system builder licence, and contains the version of clause 4 which Mr Clarke QC assures me is “critical” to his clients’ case, has been available to (at least) the first and second respondents since January 2016, and was expressly relied on by Ms Li in CPL Notting Hill’s dispute with Microsoft concerning the very subject matter of the proceeding.
Mr Clarke QC in oral submissions in reply says that at the first trial his clients did not know that a comparison with what was in evidence (presumably a comparison with the licence Ms Li relied on) would demonstrate that the licence in evidence was the wrong one, and her lawyers did not pick up the difference in wording between the two forms of licence. He accepts, however, that the CPL parties expressly contended at the first trial that the licence in evidence was not a relevant licence, and that Mr Zappia QC made submissions to that effect. I do not have any explanation from Ms Li. I am left with the documentary evidence which I have referred to in the preceding paragraph, and which I accept. Whatever the CPL parties’ legal representatives were aware of, the email and attached licence demonstrates the knowledge and awareness of the “correct” version of system builder licence by those CPL parties since 2016.
In these circumstances, given that the CPL parties’ counsel contend that the “correct” version of the system builder licence is critical to the recent instigation of the cross‑claim and it is just that the CPL parties Application be allowed, I do not accept that the cross‑claim and the amended defence could not have been made earlier.
The EULAs were in evidence at the first trial
Whilst there were submissions made before me in relation to the relevant end-user licences or EULAs, it became apparent during the course of oral argument that EULAs were known to the parties at the time of the first trial, and that the difference between the parties was argument as to the relevance of the EULAs (or any particular EULA) and whether the CPL parties (or one or more of them) could rely on a EULA.
The parties submissions
CPL parties submissions
As I have noted above (at [33]), counsel for the CPL parties acknowledge that the proposed amendments were instigated by them as counsel newly retained by the CPL parties. In their written submissions, counsel states: “The factual and legal matters referred to there were not “overlooked” by previously counsel, but were raised by counsel coming to the case with fresh eyes.”
The CPL parties submit that the proposed cross-claim causes of action are all substantially founded on a common factual basis. They say the implied licence pleading goes to the heart of Microsoft parties case that an implied licence case was raised at trial, but was raised in a different way, and that new counsel seek to put new arguments in respect of the particular implied licence now sought to be pleaded.
Annexure A to the written submissions is entitled “Summary of factual and legal allegations and evidence before the initial trial judge relating to the issues of whether the [CPL parties] were licensed to reproduce the software, including by reference to the System Builder Terms and End User terms and the [Microsoft parties’] activation and validation processes”.
Counsel submit that a review of the pleadings, evidence, written submissions and oral submissions at the first trial (exemplified in Annexure A) demonstrate that the factual matters sought to be raised by the amended defence and the cross-claim "were substantially before the initial trial judge", and that "Indeed, the question of the nature and scope of any licence in favour of the [CPL parties] to reproduce the software was a central issue before the judge”, albeit they acknowledge “that the legal conclusions are somewhat different from those for which the [CPL parties] contended at the [first trial].”
In oral submissions, Mr Clarke QC says that the matters propounded in the cross-claim could have been put in the amended defence. He does not provide any satisfactory explanation why they were not. He says, that the cross‑claim is essentially a shield and defensive. From my consideration of the cross‑claim, however, the allegations cannot reasonably be so characterised. Further, the relief sought includes declarations of licence and estoppel, that the Microsoft parties have engaged in misleading and deceptive conduct and unconscionable conduct, and orders for recovery of loss and damage suffered pursuant to s.236 of the ACL. This loss and damage is not said to be limited to the amount of the Microsoft parties’ claim (or less).
Mr Clarke QC submits that to the extent CPL parties seek to rely on new facts, those facts are within the knowledge of the Microsoft parties and relate to the Microsoft parties’ own licence terms and processes. He says the connection between the issues in Microsoft’s claim and those sought to be tried by the CPL parties under the cross‑claim, and the amended defence are so strong and clear that that fact ought strongly to incline the Court to grant leave.
Mr Clarke QC accepts that it is not a case where the CPL parties are seeking to bring a pleading into conformity with the evidence and submissions, but contends that the CPL parties propound a new case of law and fact, all within the substance of the factual material available at trial. It is, rather, a more elaborate case that is being brought, properly pleaded, rather than on‑the‑run in argument at trial.
He says that the principles of Anshun estoppel are relevant. That is, if the Court does not permit the cross-claim to proceed, but the CPL parties are confined to launching a new proceeding, by the operation of Anshun estoppel, the CPL parties may well be shut out forever from advancing the claim. If, however, Anshun estoppel does not apply, and the amended cross-claim matters were tried in a separate proceeding after the determination of the Microsoft parties’ claims, and the prospect of inconsistent judgments would be real.
Mr Clarke QC accepts that if the amendments are allowed, the trial must be vacated. He submits that there is no urgency for the proceeding to be determined on a 19 August 2019 trial, that there will be relatively modest further costs on the parties and that there is no suggestion that the Microsoft parties will suffer substantial prejudice.
Counsel does not shy away from the fact that further evidence will need to be put on. He anticipates that that further evidence will come from one or more of the 7 witnesses for the CPL parties who had filed some 19 affidavits before the first trial. He foreshadows that further discovery will be sought (and I note that discovery is not available as of right in this Court).
As to the duration of any final hearing if the cross‑claim and amended defence were allowed, in oral submissions Mr Clarke QC said that the hearing would take between 7 and 9 days. Whilst that estimate was revised down a day in a communication to Chambers the day after the hearing, to a hearing totalling between 7 and 8 days, the heuristic nature of the estimate and revised estimate does not instil any confidence. I note that Mr Fox surmised that the trial estimate was conservative. Given the number of witnesses the parties presently propose to call on the case as presently pleaded, I consider the estimates optimistic.
Counsel submits that the amended pleadings have the beneficial effect of clarifying the issues before the Court in circumstances where the Microsoft parties bear the onus of establishing that the CPL parties did not have a licence to reproduce the software, and the CPL parties’ existing pleadings deny the absence of such a licence.
Mr Clarke QC urges the interests of justice between the parties on the rehearing demands that the CPL parties be permitted to ventilate the matters set forth in the amended defence and the amended cross‑claim. I observe that this submission is made directly contrary to the submissions previous counsel for the CPL parties strongly urged on the Court at the April 2019 hearing when opposing the Microsoft parties’ application for leave to amend the pleadings.
In short, Mr Clarke QC says that the amendments have been instigated by counsel bringing fresh eyes to the matter, the amendments are critical, that the amendment is potentially a killer point, and the issue is fundamentally important to the CPL parties. He says the pleadings were not adequate at trial and it is unjust to CPL to have the case frozen before the trial judge. He accepts that it is true that the CPL parties are seeking to have the advantage of the re‑hearing, but it is the Court’s task to quell the controversy before the parties and not just to favour Microsoft.
Microsoft parties submissions
Mr Fox, counsel for Microsoft, submitted that the present case is one where CPL has had a sufficient opportunity to plead its case, and it is too late for any further amendment of its defence or the introduction of a new cross-claim, both of which carry the consequences that further evidence is intended to be led, plus further discovery, and the dates for the retrial will need to be vacated.
Mr Fox submitted that the Court’s dismissal of Microsoft’s application to introduce a new joint tortfeasorship claim for copyright infringement (see the May judgment), has the consequence that the same result should follow in the present case, particularly where the present application has far greater consequences to the conduct of the proceedings, which present application is brought, in effect, on the eve of the trial.
In sum, Mr Fox submitted that:
(a)the proposed amendments are a new case and are substantially of a different order to the amendments refused in the May judgment when Microsoft sought to add a joint tortfeasor claim, although the proposed amendments include arguments advanced at the first trial;
(b)the Microsoft parties will be unfairly prejudiced if the amendments are permitted. The consequences of the amendment are far greater for the conduct of the proceeding than were raised by the Microsoft parties’ earlier amendment application. These include that the trial dates must be vacated, and further discovery and evidence will be sought;
(c)it is unclear what or how extensive the further steps will be that are envisaged will need to be taken in the proceeding, what evidence will be marshalled, what further discovery might be sought, and whether or not further amendments or particulars will be provided. Only general indications are given as to the additional discovery and further evidence. This brings further uncertainty to the future conduct of the proceeding;
(d)with respect to the amended defence, this is not a case where the CPL parties seek to add further particulars regarding contentions already pleaded, or to align the defence with the way the case was conducted at the first trial. Rather, the CPL parties seek to advance a more expansive defence, not limited to evidence at the first trial, or to the case submitted at the first trial;
(e)as the schedule A to the amended defence demonstrates, including by its reference to further particulars, the CPL parties were aware of the factual basis for the proposed amended pleading (in particular, its “implied licence defence”, whether characterised as a shield in defence or a sword in the cross‑claim) at the first trial, but did not take any steps to amend its defence to include any of the further particulars, or to propound a cross‑claim;
(f)accordingly, the CPL parties could readily have taken the steps now proposed, including seeking discovery and marshalling further evidence prior to the first trial, if that were truly regarded as necessary;
(g)as to the cross-claim, it is an extensive and expansive pleading. It cannot sensibly be characterised as a simple derivative action to the defence raised in the amended defence. The CPL parties do not explain why it was not made earlier. It is a new claim brought too late;
(h)the CPL parties have not provided an adequate explanation for their delay in seeking amendments to the amended defence and bringing the cross-claim. Their counsel’s explanation that the amendments were “instigated by counsel newly‑retained” is inadequate. The explanation provided by Mr Smith is insufficient, and unsatisfactory;
(i)the procedural history of the matter reveals a strong basis for refusal; and
(j)if the amendments are allowed, it is inevitable that the hearing date will require to be vacated, and in that case, the May judgment ought to be revisited.
Mr Fox submits the prejudice to the Microsoft parties, is clear. The case is expanded – it is doubled – a two-week trial where there was previously to be a 5‑day trial. There is at least an entitlement on Microsoft’s part to have the case heard and determined in an efficient and economical way.
In relation to the cross-claim, very serious allegations are made. They are not solely defensive, indeed the substantial case made out in the cross-claim is not contained in the amended defence. The cross-claim is brought as a sword. The cross-claim makes serious allegations about the way the Microsoft parties’ have conducted their licencing arrangements, and makes a series of allegations about Microsoft’s conduct, leading to allegations of misleading and deception of end-users, and also of entities in the position of CPL Notting Hill, namely OEM suppliers and system builders.
The cross-claim is significant in magnitude and scope, requiring new evidence and further discovery. Problems with the cross-claim currently start with [24], which, without particulars, adverts to a history going back possibly a decade or more as broadly constituting a course of conduct.
Relevant legal principles and provisions
In the May judgment at [17] – [20] I set out relevant statutory provisions and relevant Federal Circuit Court of Australia Rules (2001). For completeness, reference should also be made to Part 28 of the Rules which governs cross‑claims and their conduct. The objects of the Rules are stated in r.1.03. They reflect similar objectives to those found in s.37M of the Federal Court of Australia Act1976 (Cth).
The principles applicable to the application to amend the pleadings have been articulated in the leading case of Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; see also the decisions of the Full Court of the Federal Court in Cement Australia Pty Ltd v ACCC (2010) 187 FCR 261; [2010] FCAFC 10, and Tamaya Resources Ltd (in Liq) v Deloitte Touche Tohmatsu (A Firm) (2016) 332 ALR 199; [2016] FCAFC 2.
In Aon the plurality said at [111] and [112]:
[111]An application for leave to amend a pleading should not be approached on the basis that a party is entitled to raise an arguable claim, subject to payment of costs by way of compensation. There is no such entitlement. All matters relevant to the exercise of the power to permit amendment should be weighed. The fact of substantial delay and wasted costs, the concerns of case management, will assume importance on an application for leave to amend. … this Court’s earlier recognition of the effects of delay, not only upon the parties to the proceedings in question, but upon the court and other litigants. …
[112]A party has the right to bring proceedings. Parties have choices as to what claims are to be made and how they are to be framed, but limits will be placed upon their ability to effect changes to their pleadings, particularly if litigation is advanced. That is why, in seeking the just resolution of the dispute, reference is made to parties having a sufficient opportunity to identify the issues they seek to agitate.
Expanding upon the above statements of principle in Aon, and drawing on the decisions I have listed above, matters relevant to determining whether the present application ought be permitted and which are to be weighed in the balance may be summarised as follows, noting that the considerations listed below are not to be considered each in isolation, and may overlap:
(a)The nature and importance of the amendment
The moving party is not required to say that it will fail without the amendment. It is sufficient that the amendment is of substance, not frivolous, and presents a real case warranting serious attention;
(b)The extent of delay
Much may depend upon the point the litigation has reached relative to a trial when the application is made
(c)The costs associated with it, and the prejudice that may follow and that which may be shown
As the High Court in Aon said at [99] and the Full Court reiterated in Tamaya at [152], costs is not a panacea that heals all.
(d)Whether there has been sufficient opportunity to plead, or whether the application comes too late, having regard to the other parties and other litigants awaiting trial dates
These matters overlap with the considerations at (b) above.
Also relevant are considerations of case management of the Court’s business, and the impact of adjournment and later hearing upon other litigants (see Aon at [114], and Tamaya at [122] – [123]).
(e)The explanation proffered
The explanation must be in good faith, and should include when the party became aware of the matters the subject of the proposed amendments, and the circumstances giving rise to the amendment. The explanation is that of the party, but it need not be given by the party.
However, as the Full Court observed in Tamaya at [155], “it must be borne in mind that the explanation required is that of the moving party, not merely their solicitor or counsel. The client may very well know of matters relevant to the explanation for delay which are not known by the lawyers.”
(f)The risk posed to the hearing date is not irrelevant (see Tamaya at [107])
(g)Whilst the Court has a discretion, that discretion is not at large (see AON at [89], Tamaya at [121] – [124])
(h)What is just and fair and in the interests of justice.
At this juncture it is appropriate to record that the CPL parties’ counsel say that in Aon, the amendments were sought by applicants, at the trial, and that different circumstances pertain to defendants. They urged the Court to allow the amendments, preferring the decision of the Full Court in CaasonInvestments Pty Ltd v Cao (2015) 236 FCR 322; [2015] FCAFC 94 at [19]-[21], and of O’Callaghan J in Kraft Foods Group Brands LLC v Bega Cheese Ltd(No.6) [2018] FCA 1277 at [12].
They say that there is no pressing need for the proceeding to be tried on 19 August 2019, and they can be ready for a trial later in 2019. I note that the impact of the vacation of the hearing date, and the proposal that the Court relist the matter for at least 7-8 days later in 2019 does not have regard to the expectations of other litigants whose cases are already listed for hearing. However, Mr Clarke QC assured me that the CPL parties did not seek to “jump the queue”.
Consideration and conclusions
I consider that the delay is considerable and that the CPL parties have had more than a fair opportunity to amend their case. The first time that the prospect of an amended defence and a cross‑claim was raised before me was on 27 June 2019. The possibility was not disclosed at the first case management hearing on 6 March 2019, nor in the course of the CPL parties’ vigorous opposition to Microsoft’s application for leave to amend heard on 3 April 2019. In comparison to the amendments then opposed, the pleadings for which the CPL parties now seek leave are substantial and complex.
Whilst the CPL parties’ defences at the first trial may have been directed to innocent infringement and quantification, it is apparent from the Annexure A to the CPL parties’ submissions that both an express and an implied licence were argued before the first trial judge, although the implied licence argument put before the first trial judge is not that now sought to be made. The CPL parties were aware since well before the first trial of the factual basis for its proposed implied licence defence, whether advanced in the amended defence or potentially in the amended cross‑claim.
Further, as to the delay, and the explanation for the delay in the evidence before me on the Application in a case:
(a)the evidence establishes that since 22 January 2016, Ms Li, the second respondent, has been aware of, and sought to rely on, a system builder licence which contains the clause 4 which Mr Clarke QC now says is critical to the CPL parties’ proposed cases. As its sole director, Ms Li’s knowledge is to be imputed to CPL Notting Hill.
Given that the system builder licence was also raised in the Appeal and referred to by O’Callaghan J in the Appeal Reasons, I find that the explanation why it is only now that the licence is seen as critical, that the necessity for discovery of that licence arises, or production of documents concerning that licence, unsatisfactory;
(b)the Chen materials (the police brief relating to Felix Chen subpoenaed from Victoria Police) have been available to the CPL parties, and electronic copies in the CPL parties’ possession, since mid-May 2017. The evidence is that the six invoices now considered relevant were only identified to Mr Smith on about 31 May this year. No explanation has been provided as to how the invoices were identified, or by whom, or, indeed, when.
It appears that the May judgment was a trigger for the CPL parties, or at least the legal advisors, to look at the police brief. Given that there are some 10,000 documents, to identify a particular six invoices in two weeks does not provide any explanation why that was not done previously, if indeed, it had not been done. No satisfactory explanation has been provided why no earlier search was made, or, if a search was undertaken and the documents identified, why they were not provided to Mr Smith earlier than 31 May 2019. I consider the explanation offered by Mr Smith deficient. Mr Smith could not satisfactorily explain how it came to be that the six invoices were suddenly discovered in May 2019 when the thumb drive of the Chen materials had been in his clients’ possession for two years, since May 2017.
The documents are in electronic form. I consider that it is reasonable to expect that the Chen materials could have been subjected to a simple search of terms of interest. I find the absence of explanation from the CPL parties on this matter unsatisfactory;
(c)the information in the 2017 ARN article has been identified as a relevant factor leading to the recent formulation of the amended pleadings. The article refers to Microsoft computer reseller businesses operating in or near Melbourne, the same metropolitan and surrounding area in which CPL Notting Hill and CPL Distribution operate. Given these matters, I consider that it is reasonable to assume that the subject matter of the article – Microsoft settling with computer reseller businesses locally - would have been of interest to the CPL parties before June 2019.
Whilst senior counsel’s search of the internet in June 2019 provides an explanation for the recent consideration of the 2017 ARN article, no satisfactory explanation has been given whether or not the CPL parties were aware of the subject matter of the article earlier, or why, with reasonable diligence, they could not have become aware of the information before June 2019. I find the absence of explanation from the CPL parties on this matter unsatisfactory;
(d)further, given that several senior counsel have been retained by the CPL parties overtime, I consider that the lack of explanation why the prospect of aligning a defence of an implied licence with what was said at the first trial has not been considered until now unsatisfactory. In any event, even now, alignment is eschewed.
I consider that the following matters are also relevant:
(a)the CPL parties’ defence at trial at [24(a) – (f)] adverts to factual matters which in broad terms encompass contentions now expanded on in the amended defence and in the cross‑claim. Those contentions were set out in the 2017 defence. The elements of the Microsoft parties’ conduct sought to be relied on to give rise to the implied licence argument have been articulated by the CPL parties’ legal representatives since the provision of the further particulars and thus by 30 January 2018;
(b)over the history of this matter the CPL parties have briefed 7 senior counsel, including counsel experienced in intellectual property, and who are not alleged to have been negligent;
(c)it is now anticipated that the hearing of the retrial will take at least 7 or 8 days, considerably more than the days previously anticipated, and on which basis I set the matter down for hearing in March this year.
As is apparent from the above, weighing up the matters I have set out in these reasons, I consider that the CPL parties have had more than a reasonable opportunity to propound the matters pleaded in the amended defence and the cross-claim. I am not satisfied that the explanation for the delay is sufficient. It appears to me that the CPL parties were well aware of the matters which they now rely on to found the cross-claim and the amended defence, and that their explanation of the delay in articulating the amended defence, and the cross-claim at best rises no higher than that galvanized by the May judgment the CPL parties changed their approach and revisited their defence and the materials that had been in their possession since well before the first trial, and retained further sets of counsel.
Whilst I accept that the CPL parties have recently engaged new counsel I do not consider that that is a sufficient explanation for the delay, or that the claims now sought to be made could not reasonably have been made earlier and, at the very latest, prior to opposing the Microsoft amendments on 3 April 2019.
In the circumstances of this proceeding, which I have described in these reasons, the detailed pleadings that have been filed, and the matters argued on appeal that are disclosed in the Appeal Reasons, I do not find the explanation that with fresh eyes a fresh approach suggests itself persuasive. The engagement of new counsel is an insufficient explanation for the delay in these circumstances.
Further, I am not persuaded that the likelihood of an amended defence or a cross‑claim which raised implied licence, misleading and deceptive conduct and estoppel arguments arising from conduct which in broad terms was pleaded in [24] of the defence (that is, as at October 2017), could not with due diligence have been considered by at least one of the 7 previously retained senior counsel, experienced in intellectual property or commercial law in the course of acting for the CPL parties.
The proceeding has been on foot since 2016, and all CPL parties involved since September 2017. A number of counsel have had the opportunity to consider the CPL parties defence and their cases over time. The issue of an implied licence was raised at the first trial over a year ago. Even now, no attempt has been made now to formally align the defence to the submissions made at trial concerning an implied licence. The CPL parties have chosen not to take that course. Rather than seeking to align evidence, submissions and pleading, the CPL parties now seek to expand the case.
I am prepared to accept that the amended defence and the cross‑claim may be arguable, and I accept that Mr Clarke QC considers the implied licence argument is potentially a “killer point”. The matter, simply put, is that newly-retained counsel advise a different strategic direction to that argued in defence at the first trial, and the instigation of the cross-claim, and that different approach is made three years after the proceeding commenced, after the proceeding has been tried and argued on appeal, and shortly before trial.
I accept Mr Fox’s submissions as to the seriousness to the Microsoft parties of the allegations made in the amended pleadings. However, that amendments may raise serious issues tends to the amendment being of substance. This may be relevant as to timing of the application to amend, and as to costs and expense. The consequences of allowing the amended defence and cross‑claim would be to require yet further pleadings in response, and potentially in reply, further evidence and further discovery, none of which has been identified with any certainty, and the taking of an indeterminate number of further steps as a likely consequence, inevitably extending the time until hearing, the duration and complexity of that hearing, and the costs to the parties. I do not consider that the prejudice to the Microsoft parties is of no import, or that a costs order will suffice.
Weighing in the circumstances all the above matters, where the proceeding has been on foot since mid-2016 against at least two of the CPL parties, and in the light of the deliberate decisions taken by the CPL parties’ and their legal representatives as to the conduct of their case, and the conduct of the proceeding (including in March accepting a hearing date, in April opposing the Microsoft parties’ application to amend, and in late June, and then in mid-July, propounding different versions of amendments) I do not consider that allowing the Application in a case best serves the interests of the administration of justice and fairness as between the parties, or having regard to the broader considerations of other litigants, the Court, and the public.
Because the case sought to propounded (that is, including the amended defence and the cross‑claim) will require a hearing of at least 7 to 8 days duration, and realistically I consider is likely to take longer, the consequence of vacating the trial will be that the hearing does not take place, at the earliest, until this time in 2020, unless I vacate other matters that are listed for hearing, and disadvantage other litigants in this Court. I do not consider that the other litigants in this Court would have justice done to them if I were to take that course. That too tends against allowing the amendments.
For these reasons, I dismissed the application.
I certify that the preceding one hundred and twenty-four (124) paragraphs are a true copy of the reasons for judgment of Judge Baird
Associate:
Date: 16 August 2019
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