Fisher & Paykel Financial Services Ltd v Karum Group LLC (No 2)
[2012] NZHC 240
•22 February 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2006-404-6646
NZHC [2012] 240
BETWEEN FISHER & PAYKEL FINANCIAL SERVICES LIMITED
Plaintiff
ANDKARUM GROUP LLC Defendant
Hearing: 14 December 2011
Counsel: AR Galbraith QC and JF Anderson for Plaintiff
JG Miles QC and ZG Kennedy for Defendant
Judgment: 22 February 2012
JUDGMENT (NO 2) OF RODNEY HANSEN J
This judgment was delivered by me on 22 February 2012 at 4.30 p.m., pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………………….
Solicitors:
A J Park (K W McLeod), P O Box 565 AucklandEmail: [email protected] (jess@[email protected]) MinterEllisonRuddWatts, P O Box 3798 Auckland
Email: [email protected]
Copy for:
Alan R Galbraith QC, P O Box 4338 Auckland 1140
Email: [email protected]
Julian G Miles QC (J F Anderson), P O Box 4338 Auckland 1140
Email: [email protected] / [email protected]
FISHER & PAYKEL FINANCIAL SERVICES LIMITED V KARUM GROUP LLC HC AK CIV-2006-404-
6646 [22 February 2012]
Introduction
[1] In this proceeding one of the causes of action in the counterclaim of the defendant (Karum) is that the plaintiff (FPF) infringed its copyright in a software programme known as CMS Software. CMS is an acronym for the credit management systems the software was developed to service.
[2] In the closing stages of the trial and since the hearing was completed on
13 October 2011, Karum has sought to address questions raised by FPF as to its standing to assert a claim to breach of copyright. In summary, Karum:
Sought leave at the hearing to call further evidence after closing its case. It was largely unsuccessful, though I permitted some limited further evidence to
be given.
Subsequently sought (and obtained) leave to file further submissions
concerning the interpretation of documents relied on to establish Karum’s
ownership of copyright in the CMS Software.
Then applied for leave to amend its counterclaim to plead in the alternative that Karum is the exclusive licensee of the CMS Software and, in the event that I find Karum to be the exclusive licensee, either granting leave under s
124 of the Copyright Act 1994 (the Act) to bring the proceeding in the absence of the copyright owner or to grant leave to join the copyright owner
as a party.
[3] The hearing of Karum’s leave application focused on the interpretation of the documents it relied on at the hearing to establish ownership of copyright in the software. It was agreed that I should make a finding on the interpretation issues arising with a further hearing on the application for leave to follow.
[4] Soon after the hearing, Karum advised that further evidence had emerged which it considers material to the interpretation issues. I granted leave to file the
evidence and to make further submissions on the effect of the evidence on the interpretation of the documents.
The documents
[5] The documents I am required to consider comprise a partnership agreement, a licence agreement and a dissolution agreement. The partnership agreement and licence agreement are closely related. The dissolution agreement followed the bankruptcy of two of the parties to those agreements.
Partnership agreement and licence
[6] The progenitor of the CMS Software was a retail information system (RIS) developed by PRJ&, a company formed in the United States by Mr Peter Johnson, the Chairman and Chief Executive Officer of Karum. Zale Corporation (Zale), then a large jewellery retail chain operating in the United States, agreed to licence, modify and maintain RIS. At trial two employees of Zale, Dale Williams and Paul Hart, gave evidence of developing a credit management software system. In 1988 Zale and PRJ& agreed to form a partnership to enhance, further develop and market the software developed by Zale.
[7] An agreement of general partnership was entered into on 28 July 1988 between a Zale subsidiary, ZRCM2 Inc, and Peter R Johnson & Associates Inc (the former name of PRJ&). The parties recorded in the recital their desire to pool their resources for the purpose of enhancing, further developing and marketing a retail credit management and marketing system (the “System”) that had been developed by Zale. Clause 1.2 of the agreement provides as follows:
1.2Purposes and Character of Business. The purposes of the Partnership shall be to enhance, further develop, market, lease, license, sell, maintain and otherwise deal with the System, whether directly or indirectly through one or more corporations, partnerships, or other entities, associations, alone or together with other individuals, corporations, partnerships, or other entities, and to engage in such business as shall be related or incidental thereto, and to do all other things necessary, advisable or appropriate in connection with the foregoing.
2.9Enhancements. In consideration for ZRCM2 granting to the Partnership an exclusive royalty-free license to the System which was developed by Zale, the Partnership agrees to provide to Zale or, at Zale’s request, to an affiliate of Zale a version of all new releases and enhancements to the System developed by or on behalf of the Partnership. Such version shall be delivered and installed at Zale’s main accounting location at no cost to Zale or any of its affiliates, as appropriate, and provided pursuant to a royalty-free and expense- free license. This royalty-free license shall be solely for the use and benefit of Zale or its affiliates and does not include the right to sublicense.
[9] Clause 8.2 deals with the effect of dissolution. It provides as follows:
8.2Effect of Dissolution on License Agreement and System. Upon the dissolution of the Partnership,
except as a result of the bankruptcy ofZRCM2, the License Agreement shall terminate and all rights to the System and all enhancements thereto shall revert to ZRCM2 * in accordance with the terms of the License Agreement,provided,however, that if ZRCM2 causes a dissolution of the Partnershippursuant to Section 8.1(g)then title to all enhancements to the System developed by the Partnership shall revert to PRJ and ZRCM2, Zale, Peoples and any of their affiliates shall have only a nonexclusive, royalty and expense free license to use such enhancements.
(* be)
[10] The deletions and the addition of the word “be” appear on the copy of the agreement produced in evidence. The changes are not initialled. It was suggested by Mr Galbraith QC that the changes may not have been made before the agreement was executed but added later as an aid to interpreting the clause when the partnership was dissolved as a result of the bankruptcy of ZRCM2. I consider that is the probable explanation for the alterations. Fortunately, it is not necessary to decide the issue as it has no effect on the question I am required to determine.
[11] The licence contemplated by the partnership agreement was entered into at a later date. An unsigned draft was produced in evidence, but it is accepted that it records the terms of the licence agreement entered into on or about 1 September
1988. The licence was granted by Zale, not ZRMC2 as contemplated by the
partnership agreement.[1] The partnership was the licensee.
[1] See cls 2.9 and 8.2 in [8] and [9] above.
A. Licensor has developed a retail credit management and marketing system (the “System”) and certain computer software documentation and other material to implement and complement the System (which System and documentation and other material are hereinafter together called “CMS”); and
B. Licensor is entitled to license CMS; and
C. Licensee desires to acquire an exclusive license to use, modify and prepare derivative works based upon CMS.
[13] Clause 1 provides as follows:
1. GRANT
1.1Licensor grants to Licensee a worldwide, perpetual, exclusive, royalty-free right and license to use, modify and prepare derivative works based upon CMS, subject to the terms and conditions hereof.
1.2The License hereby granted shall continue until terminated by court order, mutual written agreement of Licensee and Licensor, or a decision under Section 10 hereof that Licensee has committed a material breach of this Agreement.
1.3The License hereby granted shall include the right to transfer, assign, sublicense, or deliver CMS to any other person, firm or corporation without the prior written consent of Licensor.
[14] Clause 3 deals with the license fee, providing as follows:
3. LICENSE FEE AND PAYMENT
3.1The rights and privileges hereby granted shall be royalty- free.
3.2Upon request, Licensee shall provide Licensor or, upon further request, an affiliate of Licensor, a license to use any new release or enhancement of CMS upon Licensee’s standard terms and conditions for similar installations except that the license shall be royalty-free.
[15] Clause 7 of the licence makes provision for what would occur on termination, providing as follows:
7. TERMINATION
7.1Termination of this License shall occur only upon the finding by a Court or arbitrator that Licensee has committed a material breach of this Agreement and that such breach justifies such termination.
7.2In the event that the Licensee should go out of business, become bankrupt, cease to exist, or be unable or unwilling to fulfil the terms of this Agreement, the License for the software shall cease, and the Licensee, or its successors or assigns, shall immediately return to Licensor any and all copies of the software in any form whatsoever in their possession, or certify that such copies have been destroyed. A simple change of name shall not be sufficient to invoke the terms of this section.
7.3Termination of this License shall not extinguish any liability or continuing obligation under it.
7.4Upon the termination of this License, a new license shall be deemed to have been granted by Licensor or each of the partners of Licensee upon the terms and conditions of this License except that each of the partners shall be required to pay Licensor a reasonable royalty in respect of such license. In the event that the amount of such royalty cannot be agreed upon by the parties within six (6) months after such termination, the amount of such royalty shall be determined in accordance with the appraisal Procedures attached hereto as Exhibit A.
[16] Mr Miles QC submitted that, while the wording of the partnership agreement and licence may appear to evince an intention to grant a licence, there was in substance an assignment of the title to the original CMS Software to the partnership. In supplementary submissions he referred to the House of Lords decision in
Messager v British Broadcasting Co Ltd,[2] where the House of Lords found that an
agreement that granted a licence of performing rights was, on its true construction, an assignment. He submitted that the broad rights conferred on the partnership by cl 1.3 of the licence agreement are, similarly, in substance an assignment of title to the original CMS Software to the partnership. It is said that the rights conferred are effectively unlimited and do not contain the ongoing obligations usually imposed on licensees, such as payment of royalties or licence fees.
[2] Messager v British Broadcasting Co Ltd [1929] AC 151.
[17] I am unable to accept Karum’s interpretation of the documents. I consider
the words of the partnership agreement and the licence point unambiguously to an intention to licence. As Mr Galbraith pointed out, if the intention had been to assign,
Zale would have reserved to itself the right to continue using the original CMS Software. Without such a reservation, Zale would have no right to the continued use of the software. That would have been a glaring oversight in what is plainly a carefully crafted agreement. The license reserved to Zale the right to the continuing use of the software. By cl 3.2, which confirms cl 2.9 of the partnership agreement, it also gave Zale the right to use any new release or enhancement of the CMS Software. I agree with Mr Galbraith that this right constituted an important commercial benefit and answers Karum’s submission that the absence of a licence fee is inconsistent with an intention to licence.
[18] It was submitted that cl 7.1 and 7.2 are in the nature of a reassignment to Zale of the original CMS Software in the circumstances identified. I do not think that is the case. Clause 7.2 simply makes provision for the delivery up of copies of the software, which I am told is a standard clause in software licence agreements. Furthermore, cl 7.4, which provides for the deemed grant of a new licence to each of the partners and for the licensor to be paid a royalty, is utterly inconsistent with an assignment of the underlying copyright.
[19] Other terms of the licence expressly provide that Zale retains ownership of the software. For example, cl 2.3 provides that Zale will indemnify the licensee against any claims for infringement of copyright or other proprietary rights of any third party and to defend and pay any judgment in any suit brought against the licensee for alleged patent or copyright infringement. Clause 4.1 acknowledges that Zale has represented that CMS is proprietary and contains trade secret information which is “Zale’s exclusive property”.
[20] In my view, the partnership agreement and licence could not have been clearer in expressing an intention to licence. The terminology used is entirely appropriate to the legal effect of the document. I am satisfied that the parties intended that Zale should retain ownership of the original CMS Software.
Dissolution agreement
[21] On 21 January 1992, following the filing of bankruptcy proceedings against Zale and ZRCM2, a dissolution agreement was entered into. The parties were the partnership, the two partners PRJ& and ZRCM2, and Zale. After referring to the bankruptcy proceedings and to cl 8.1 of the partnership agreement providing for the partnership to be terminated on bankruptcy, the recitals continue:
Whereas, Zale is a licensee of and uses PRJ&’s RIS software for processing the data of its retail stores pursuant to a Software License Agreement dated July 22, 1988 (the “RIS License”). Zale is the licensor to the Partnership of the original CMS software used by the Partnership pursuant to a Software License Agreement dated September 1, 1988 (the “Zale License”). Zale also is a licensee of and uses the Partnership’s enhanced CMS software for managing the retail credit activities of its retail stores pursuant to a license agreement (the “CMS License”). Zale is a guarantor of the lease between the Partnership and its landlord for the real property which serves as the principal office of the Partnership;
Whereas, Section 8.2 of the Partnership Agreement provides for the termination and/or amendment of the Zale License upon the dissolution of the Partnership;
Whereas, in connection with the Bankruptcy Proceedings, Zale anticipates that certain of Zale’s retail divisions currently using CMS and RIS software may be transferred to third parties. It is essential to Zale that each division obtain the right to use the CMS and RIS software. The cost to such third parties of acquiring rights to use PRJ&’s RIS software would be great and could negatively affect the ability of Zale to realize full value for these divisions;
Whereas, Zale desires PRJ& to grant the right to use CMS and RIS software to each of the retail divisions which Zale transfers. Zale also desires PRJ& to make available CMS consulting and support to Zale and each of the retail divisions which Zale transfers at cost and to obtain later versions or updates and enhancements of the CMS Software at no additional cost;
[22] Clause 4 provides:
4. Licenses. As of the effective date of this Agreement:
a.Section 7.4 of the Zale License is amended to provide that: (i) the Zale License is terminated;
(ii) the Zale License is deemed to be two new licenses, one granted to each partner, on the terms and conditions of the Zale License, and
(iii) neither partner shall be required to pay Zale a royalty for the continued use of the original CMS software. Section 9.3(b) of the Zale License is deleted.
b.Section 8.2 of the Partnership Agreement and the CMS License is hereby amended and superseded by this Agreement to provide that PRJ&, ZRCM2, Zale, Peoples, or any permitted assigns shall have a perpetual, nonexclusive, royalty and expense free license to use the enhanced CMS software developed by the Partnership; provided that ZRCM2, Zale, Peoples, or any permitted assigns shall have the right only to use the enhanced CMS software in processing their own data and data of their subsidiaries and shall not have the right to commercially exploit the enhanced CMS software by granting sublicenses, processing data of third parties or otherwise. PRJ& shall provide any and all upgrades and enhancements of and/or additions to existing functionality of the enhanced CMS software which are or become part of the CMS Software to any of the foregoing through December 13, 1995 on a perpetual, nonexclusive, royalty and expense free basis. Zale and ZRCM2 acknowledge that such upgrades and enhancements are likely not to be operative in conjunction with software which has been modified, and that PRJ& will not be obligated to retrofit the same.
...
g. This Agreement supersedes the Partnership Agreement, the RIS License, the CMS License and the Zale License with respect to the rights of parties to use, sublicense or otherwise derive any value from software and, in the event of any conflict between the terms of this Agreement and the Partnership Agreement, the RIS License, the CMS License and/or the Zale License, this Agreement shall prevail.
[23] The recitals confirm that Zale is the licensor to the partnership of “the original CMS software” and is a licensee of the partnership’s “enhanced CMS software”. As earlier noted, its right to use any new release or enhancement of the CMS software had been secured by cl 2.9 of the partnership agreement and cl 3.2 of the licence. The recitals then record that because certain of Zale’s retail divisions that currently use CMS and RIS software may be transferred to third parties, it is essential to Zale that each division has the right to use the software.
[24] Clause 4a gives effect to cl 7.4 of the licence by granting a new licence to the original software to each partner on the terms and conditions of the original licence. They relevantly include the right to develop and exploit the software. By cl 4a(iii), the obligation in cl 7.4 of the licence to pay a reasonable royalty is deleted.
[25] Clause 4b grants to the named parties the right to continued use of the enhanced CMS Software while making it clear that PRJ& has the right to commercially exploit the enhanced CMS Software.
[26] Karum submitted that cl 4a “in substance” effects assignments of the original CMS Software. As the new licences are on the same terms and conditions as the original licence, that argument necessarily runs up against the multitude of reasons which tell against the Zale licence effecting an assignment. Clause 4a of the dissolution agreement does precisely what cl 7.4 of the licence anticipated would occur, except to dispense with payment of a royalty. The interpretation urged by Karum is contrary to the plain words of the agreement. It would, furthermore, as submitted by FPF, leave both partners able to deal separately with the same property right. That cannot have been what was intended.
[27] As elaborated in its further written submissions, Karum then argued that cl 4b effected an assignment of the CMS software as “a complete operative work”. It is said that the term “enhanced CMS Software” incorporates both the original software and the enhancements made by the partnership. There was, so it is said, an assignment of the CMS software in its entirety with a licence back to the Zale parties. For this interpretation there is reliance on subclauses (3) and (4) of cl 4d which provide:
(3) Each party shall maintain all proprietary information of the other party in strict confidence and take all reasonable steps necessary to ensure that such proprietary information is not disclosed to any other person other than the parties and their employees, agents and representatives, except as permitted herein. Zale and ZRCM2 shall take all reasonable steps necessary to ensure that no unauthorized person shall have access to PRJ&’s software and that neither PRJ&’s software nor any of the systems, ideas, methods of operation and information contained therein are reproduced, copied, printed, disclosed or made available by either of Zale or ZRCM2 or its employees, agents or representatives to any other person, firm or corporation, except as permitted herein. Either party shall immediately notify the other of any information which in any way suggests improper disclosure of confidential information of the other. (emphasis added)
(4) Zale and ZRCM2 each expressly agree that the remedy of damages for any breach of this paragraph herein contained will be inadequate and that PRJ& and its affiliates and successors shall be entitled to
injunctive relief upon proper application to prevent a breach of such convenants.
(Emphasis added.)
[28] For Karum it is said that the references to “PRJ&’s software” reflect the parties’ understanding that the software belonged to PRJ& and that the clause imposes the type of confidence obligations on Zale that would be expected of a licensee under a licence agreement. The right conferred upon PRJ& to obtain injunctive relief is said to be consistent only with PRJ& holding title to the software.
[29] In my view, the contention that cl 4b effects an assignment cannot stand against the plain words of the agreement. PRJ& and the named Zale interests are granted a licence. It is true that only PRJ& has the right to commercially exploit the software. But that goes only to distinguish the terms of its licence from those of the Zale entities.
[30] The provisions of cl 4d (3) and (4) can assist the interpretation of cl 4b urged by Karum only if the term “PRJ&’s software” imports ownership of the original software. But there is nothing in the agreement to indicate that is the intention. PRJ&’s software is not separately defined. It must take its meaning from the context. PRJ& was the owner of the RIS software and would also become the owner of any upgrades and enhancements carried out pursuant to cl 4b. Its rights in respect to the original CMS Software and the enhanced software are expressed to be as a non-exclusive licensee. There is nothing in the context to suggest that the use of the term PRJ&’s software was intended to extend or vary PRJ&’s rights as owner or licensee as created or recognised elsewhere in the agreement.
[31] The licenses granted under cl 4b are of “the enhanced CMS software developed by the Partnership”. I accept Karum’s position that what is licensed under cl 4b is not just the enhancements made by the partnership. The licenses necessarily include the original CMS software to the extent that it was incorporated in the software developed by the partnership.
[32] It follows that PRJ& is granted the exclusive right to exploit the enhanced
software. For Karum, Mr Miles submitted that PRJ&’s exclusive right to
commercially exploit the enhanced CMS Software is entirely consistent with an intention to assign ownership to PRJ&. But granting the right to commercially exploit a copyright work is not inconsistent with the retention of ownership to the copyright which, among other things, includes the right to restrain infringement. No new copyright rights arose in relation to the original CMS software that was incorporated into the software developed by the partnership. Copyright in the enhanced CMS software is limited to the enhancements. I was told that is the law in
the United States as well as in the United Kingdom and New Zealand.[3] However,
the copyright implications of my interpretation of the documents is not an issue which I am required to explore further at this stage.
Subsequent merger
[3] Section 103(b) 1976 Copyright Act (US); Copinger and Skone James on Copyright (16th ed) at7-
39; Section 14(2) Copyright Act 1994; Henkel KgaA v Holdfast [2007] 2 NZLR 577 at [37] (SC).
[33] The further evidence on which Karum seeks to rely is that, with effect from
30 July 1993, ZRCM2 merged into Zale. This is said to have the effect of leaving PRJ& as the sole and exclusive licensee of the original CMS Software. This is the consequence of:
(a) Zale being the surviving corporation following the merger and
ZRCM2 ceasing to exist;
(b)Clause 7.1 of the licence agreement which provides that the licence would cease upon the licensee ceasing to exist; and
(c) In any event, the licence to ZRCM2 being discharged by the merger of ZRCM2 into Zale by operation of the doctrine of merger of concurrent rights and liabilities.
Consequently, it is submitted, PRJ& became the exclusive licensee under cl 4a of the
dissolution agreement. Zale’s right, if any, remained limited to the ability to use the original CMS software.
[34] FPF questions whether the merger evidence has the effect contended by Karum. That is not, however, an issue that is appropriate for me to address at this stage. My ruling concerns only the interpretation of the documents. The merger and other events which post-dated the dissolution agreement have no relevance to that issue. They fall to be considered when the hearing of the application for leave is resumed.
Conclusion
[35] I conclude that:
(a) PRJ& and ZRCM2 were each granted licences of the original CMS
software pursuant to cl 4a of the Dissolution Agreement.
(b)PRJ& and the named Zale interests were granted licences to use the enhanced CMS software developed by the partnership on the terms set out in cl 4b of the Dissolution Agreement.
[36] The Registry is to arrange a telephone conference for the purpose of making directions to resume the hearing of the leave application.
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