Perry Group Limited v Pacific Software Technology Limited HC Hamilton CP55/01

[2001] NZHC 1096

IN THE HIGH COURT OF NEW ZEALAND
HAMILTON REGISTRY CP55/01

BETWEEN PERRY GROUP LIMITED
First Plaintiff

AND UNITED GAMING LIMITED
Second Plaintiff

AND PACIFIC SOFTWARE TECHNOLOGY LIMMITED
First Defendant

AND MICHAEL STEELE
Second Defendant

Hearing: 9 November 2001

Counsel: D L Marriott and T Mahood for Plaintiffs
T R J Jeffcott for Defendants

Judgment: 14 November 2001

RESERVED JUDGMENT OF RANDERSON J

Solicitors:
James and Wells, Private Bag 11907, Ellerslie, Auckland for Plaintiffs
IT Law, P O Box 37611, Parnell, Auckland for Defendants

Introduction

[1] The plaintiffs seek an interim injunction compelling the first defendant, Pacific Software, to return the source code for a computer software programme in which the plaintiffs claim copyright. Pacific Software resists the application on the basis that the plaintiffs have not established an arguable case and on the grounds that the balance of convenience and overall justice do not favour the grant of a mandatory injunction before the substantive issues have been resolved.

[2] Whether copyright in the disputed programme belongs to the plaintiffs or Pacific Software, depends substantially on whether the plaintiffs commissioned the work and agreed to pay for it in terms of s 21(2) of the Copyright Act 1994. If they did not, Pacific Software is entitled to ownership as the author of the work.

Background facts

[3] The second plaintiff, United Gaming, is a wholly owned subsidiary of the first plaintiff, Perry Group Ltd. United Gaming sells and services gaming machines operated under legislation administered by the Department of Internal Affairs. United Gaming also provides monitoring and meter reading services for the gaming machines to enable their owners to record all their financial activities. For that purpose, the plaintiffs utilise a computer database known as a Q and A system. Under this system, servicing and meter reading of the gaming machines has to be undertaken manually and the results are then separately audited.

[4] Arising from concerns expressed by the Department of Internal Affairs, the plaintiffs wished to develop and upgrade the existing system to provide electronic collection and processing of data with an automated and independent audit of money flow. A Mr S A Burkhart (employed by Perry Group as a systems manager/accountant) had previously engaged the services of the second defendant Mr Michael Steele of Pacific Software to develop software systems. After he moved to Perry Group Ltd, Mr Burkhart continued his business relationship with Mr Steele.
Software projects habitually proceeded between them informally without written documentation. Mr Burkhart maintains it was always understood that Perry Group was commissioning and would be paying for the work and that copyright in the programmes developed would belong to them.

[5] Pacific Software, is a family company in which Michael Steele and his brother, Mr James Steele, are shareholders along with other family members. Their parents are the company’s directors. The company undertakes both independent software development as well as commissioned work. Mr Steele defined independent development as being work financed by or through Pacific Software with no guarantee of deriving any revenue from it. On the other hand, he described commissioned development as work carried out at the request of a client and financed by it. In the first case, copyright would reside with Pacific Software while in the second, it would reside with the company commissioning the work (subject to any agreement to the contrary).

[6] While accepting that Pacific Software had undertaken commissioned development work for United Gaming on a number of previous occasions, he said the work undertaken in this case arose from his knowledge of United Gaming’s business requirements and the shortcomings of its existing systems which knowledge he had derived from performing other work for United Gaming. Mr Steele swore there was no request from or on behalf of United Gaming that the development be undertaken and there was no guarantee that the software, once developed, would be acquired by United Gaming. Mr Steele also stated that the product, if not accepted by United Gaming, could have been successfully marketed to other parties involved in the industry. He was only prepared to acknowledge the possibility that there had been some minor commissioned work after most of the independent development work was completed. This, he said, would not have amounted to more than about 15% of the total development.

[7] It is common ground that Pacific Software developed a Visual Basic/Access (VB/A) database to enhance the existing Q and A database. That work was carried out between March and October 2000 when the new system first became operational. Thereafter, some additional work was undertaken including bug fixing. It is not disputed that the development work was paid for by United Gaming.

[8] Later, Pacific Software began the development of an SQL database. There were on-going discussions between United Gaming and Pacific Software’s representatives about a possible joint venture for the development and sale of the SQL programme. When those discussions ultimately foundered, United Gaming demanded the return of the source code for the VB/A database but that request was refused.

[9] The plaintiffs then issued these proceedings on 1 October this year. While the substantive proceedings cover both the VB/A and SQL databases, I am concerned at present only with the former. The plaintiffs’ proceedings are brought in detinue and conversion.

Is there an arguable case that the development work on the VB/A database was commissioned by the plaintiffs?

Relevant law

[10] It is not in dispute that copyright may subsist in a computer programme: International Business Machines Corporation v Computer Imports Ltd [1989] 2 NZLR 395, 408-413. In terms of s 14 of the Copyright Act 1994, copyright is a property right that exists in original works including a “literary work” which is now specifically defined in s 2 to include a computer programme. Nor is it in dispute that the work undertaken to develop the VB/A database was such as to attract copyright protection. The real question is who owns the copyright.

[11] In that respect, subject to any agreement to the contrary, first copyright normally belongs to the author of the work (in this case Pacific Software): s 21(1). Where an employee makes the work in question, the first owner of the copyright is the employer: s 2l(2). Ownership of copyright in a commissioned work is controlled (subject to any agreement to the contrary) by s 21(3) which provides:

“21 First ownership of copyright

. . .

(3) Where-

(a) A person commissions, and pays or agrees to pay for, the taking of a photograph or the making of a computer program, painting, drawing, diagram, map, chart, plan, engraving, model, sculpture, film, or sound recording; and

(b) The work is made in pursuance of that commission,-
that person is the first owner of any copyright in the work.

. . .”

[12] It is well established that whether a work is commissioned is a question of fact to be decided in the circumstances of each case. No particular formality is required and a commission may be implied from the circumstances: Hansen v Humes-Maclon Plastics Ltd [1984] 1 NZIPR 557, 570 and Alwinco Products Ltd v Crystal Glass Industries Ltd [1985] 1 NZLR 716, 719-720 (CA).

[13] In the latter, the Court of Appeal was prepared to find the necessary commissioning and agreement to pay for the work as a matter of implication from the correspondence and the understanding which the author had of the position as evidenced by certain steps which it had taken. In P S Johnson and Associates Ltd v Bucko Enterprises Ltd [1975] 1 NZLR 311, 317, Chilwell J accepted that it was not necessary to apply strict contractual conceptions to the equivalent section of the 1962 Act. Drawing on the Shorter Oxford English Dictionary, His Honour held that a commissioning is equivalent to an order for work to be done or to empowering or entrusting someone with a particular duty, coupled with the necessary agreement to pay for the work. Ordinarily, the necessary elements of a commissioning (including the agreement to pay for the work) must pre-date the making of the work at issue: Plix Products Ltd v Frank M Winstone (Merchants) Ltd [1984] 1 TCLR 176, 195-196.

This case

[14] The accounts given by Mr Burkhart and Mr Michael Steele on this issue differ markedly. Mr Burkhart’s evidence is supported by an affidavit from Mr B R Moore, United Gaming’s general manager. Mr Michael Steele’s brother, James, has also filed an affidavit, mainly in an effort to explain certain alleged concessions as to copyright.

[15] The version of events given by Messrs Burkhart and Moore is that Pacific Software was commissioned to undertake the development work in March 2000. It was agreed and understood from the beginning, consistently with all previous arrangements made with Pacific Software, that United Gaming would pay for the work. Mr Burkhart says he remained in constant communication with Mr Michael Steele, advising him of United Gaming’s specific objectives and the required outcomes for the project. He maintains he remained in control of the development.

[16] Although development work commenced in March 2000, the first invoice was not rendered by Pacific Software until 31 July. It was for an amount of $7050. It is evident from Pacific Software’s detailed time records that this invoice covered work designated as “Development” or “Data Shaping” over the period 24 March 2000 to 31 July 2000. The first entries on 24 March and then on 30 March are instructive. The entry on 24 March was:

“Created database and develop prototype schema, added files and setup (sic) relationships. Created new VB project, copied across code and components from existing projects and customised for Ugl settings, tested loading of explorer, created UserControl’s for customers, locations, machines and contracts, tested project.”

[17] This indicates that the first development work was undertaken on 24 March and occupied just over two hours. Amongst other things, it involved customising the software to meet United Gaming’s particular requirements. This was followed up by a meeting with United Gaming staff on 30 March. The time sheet record for that date (against the reference “Consultancy”) reads:

“Meeting with UGL accounting staff to analyse current systems in place specifically usage of Q+A to provide side and machine tracking and use of Prophet job costing module to process service orders etc. Worked through short-comings of system and oppourtunies (sic) to develop integrated package to remove process double-handling and optimise process flow. Talked in depth about stock control issues and inter-company invoicing etc.”

[18] Plainly, United Gaming staff were already closely involved in assessing the inadequacies of the existing system and the requirements for the upgraded system.

[19] The time sheet record for 12 April shows that Pacific Software copied the existing Q and A data and imported it into the new database. A few days later on 16 April, the time records show that Pacific Software created “table records from Q and A data, tested and enhanced”. Mr Burkhart says the transfer of United Gaming’s existing data into the new database would not have been contemplated if the development work had not been commissioned by United Gaming on the basis that it would own the copyright. I agree it is most unlikely that United Gaming would have taken that step except on the basis of commissioning and paying for the work.

[20] In May and June, there were a number of entries in Pacific Software’s time sheets relating to Data Shaping. These entries commence with a meeting on 24 May with Mr Burkhart and another United Gaming staff member. The entry on that date shows there were discussions about the operation of the new database and a study of options. The entry on 31 May indicates that further corrections were made to a spread sheet supplied by Mr Burkhart and these were imported into the new database. On 6 June, the records show that Pacific Software downloaded the latest Q and A database and two days later on 8 June, there were further discussions with United Gaming on certain functions of the database. On 22 June, there was a meeting with Mr Burkhart “regarding strategy and technology platform for proposed integration of UGL database and roll out of PDA interface to reps”. I will return to discuss this meeting shortly.

[21] During July, there are entries indicating further development work was undertaken. By 13 July there was reference in the records to “final testing of project” and the following day a meeting with Mr Burkhart to discuss the results of an earlier meeting with other United Gaming staff. The records indicate that they “worked through areas of interface requiring attention and ability to update interface to better allow bulk punching of data”. Further development work continued over the next few days and on 19 July the time records state:

“Polished over all functionality of project for demonstration by SB [Steve Burkhart] to service reps. . . .”

[22] In the last week of July there was further development and Data Shaping work involving meetings with Mr Burkhart on at least two occasions and correction of errors in the system.

[23] The picture is one of constant liaison between the staff of United Gaming and Pacific Software. Data from the old system was transferred to the new, additional functions were developed, tested, and problems solved. Then on 31 July, Pacific Software invoiced United Gaming for all the Development and Data Shaping work undertaken during the March to July period.

[24] Thereafter, the following accounts were rendered for development work:

31 August 2000 $6431.25

30 September 2000 $1025.00

1 December 2000 $1600.00

[25] With one or two minor exceptions, these invoices related solely to the development of the VB/A programme. The time records for these later periods show a similar pattern of regular meetings with Mr Burkhart, the creation of additional functions, the testing of new code, and the ironing out of difficulties after installation.

[26] Mr Michael Steele’s version of events is that the development of the new software was commenced on his own initiative and without any request by or on behalf of the plaintiffs that any development work be undertaken. His evidence was that although Mr Burkhart was aware of the development, there were minimal discussions concerning the details. That evidence is simply not borne out by an examination of Pacific Software’s own time records.

[27] Mr Steele also says there was never any understanding that Pacific Software would be paid for the development work. Because Mr Moore had reservations about the general direction of the plaintiffs with regard to its computer technology, Mr Steele says there was no guarantee that the new software would be deployed or even accepted by him. He says further that while a copy of the new software was supplied by Mr Burkhart and installed on his machine, he was not sure whether Mr Burkhart would be able to convince Mr Moore that United Gaming should proceed with the system. In particular, Mr Steele refers to a meeting on 22 June 2000 which he had with Mr Moore and Mr Burkhart in which he says Mr Moore finally committed United Gaining to proceeding with the new software. Although there was no documentation of the arrangements, “the implication was that a licence of similar arrangement would apply”.

[28] Again, the defendants’ own time records do not support this version of events. The record of the meeting on that day (quoted in paragraph [20] above) does not refer to any decision being made to proceed, nor to any discussion of licence arrangements. By that time, development was well under way and had only been achieved through close co-operation and the provision of information from United Gaming. The initial stages has also involved the setting up of a new server in United Gaming’s Auckland premises, copying the Q and A data, and customising the new programme for United Gaming’s purposes.

[29] The value of development work invoiced after 22 June exceeded the value of work prior to that date but Mr Steele is only prepared to concede a small amount of commissioned work after 22 June customising the software to United Gaming’s requirements. That is not supported by the time records nor the value of invoiced work.

[30] Mr Moore has sworn that the commissioning of the development of the database was given in March 2000, prior to the commencement of the work. He emphasises in his affidavit that the gaming industry is complex, highly regulated, and involves a large number of different entities with differing functions and roles. It would not have been possible for Pacific Software to have developed the database without detailed information and input from United Gaming personnel. The time records show that this process occurred throughout the March to December 2000 period.

[31] My conclusion is that the plaintiffs have established a strongly arguable case that the development work for the VB/A database was indeed commissioned in March 2000 and proceeded over the ensuing nine months under the close direction and control of Mr Burkhart. While Mr Moore had some initial reservations about the feasibility of the development being undertaken by Pacific Software, his evidence is that he nevertheless did authorise the commissioning of the work in March. That construction of events is strongly supported by Pacific Software’s own time sheet records and the invoices rendered to and paid by United Gaming for the whole of the development work in that period.

[32] The plaintiffs’ case is further strengthened by a series of acknowledgements by Pacific Software that copyright in the VB/A database belonged to the plaintiffs. The first was contained in material which Mr Michael Steele sent to Mr Burkhart on 29 September 2000 about a joint venture between Pacific Software and United Gaming. It was proposed to incorporate a new company to provide software to the gaming industry. The proposal was outlined in a document prepared by Pacific Software which recorded that the intellectual property for the new company would be purchased from United Gaming “based on the cost of development to date for the UGL project”.

[33] There was a second acknowledgement in heads of agreement prepared by Mr James Steele for the proposed joint venture. The capital requirement for the joint venture company was to include the funds required to buy the software and intellectual property which had to that date been invoiced to United Gaming by Pacific Software amounting to $13,500. This would equate approximately to the amount invoiced to 31 August 2000.

[34] The third acknowledgement was in an Email dated 5 April 2001 sent by Mr James Steele to Mr Burkhart and copied to Mr Michael Steele. Mr James Steele was discussing some “legal points” arising from the proposed joint venture documentation. He raised an issue about the transfer of intellectual property from United Gaming to the joint venture company. He observed that the issue had been covered in the joint venture agreement but was not sure whether that would necessarily bind United Gaining and inquired whether a one page agreement would be needed between United Gaming and the new company directly. He invited Mr Burkhart to indicate his thoughts on the matter and to draft any necessary agreement after discussion with Mr Michael Steele.

[35] In early May 2001, there were further Emails between the parties. Mr Moore sent an Email to both James and Michael Steele on 1 May. The Email discusses the issue of transferring intellectual property rights to the joint venture company. Various financial arrangements were detailed on the understanding that the new company would pay approximately $60,000 over a three year period to United Gaming for purchasing the ownership rights in the software.

[36] It seems there was a meeting a few days later referred to in an Email from Mr James Steele to Mr Moore dated 6 May which was copied to Mr Burkhart and Mr Michael Steele. In this Email, Mr Steele summarises points he understood were discussed and agreed at the meeting, including the consideration to be paid by the joint venture company to United Gaming “for all ownership rights and intellectual property relating to the software and systems”. This constitutes a fourth acknowledgement of ownership of copyright.

[37] Mr James Steele sought to explain these acknowledgements on the basis that he had drafted the various documents and Emails without reference to his brother and that they represented his “mistaken understanding” about whether United Gaming had commissioned the software, a matter which he had not discussed with his brother until a meeting on 12 April 2001 with Mr Moore. He says it was not until after that meeting that he became aware the project had not been commissioned by the plaintiffs.

[38] I find it difficult to accept Mr Steele’s evidence in these respects. It is quite evident that all of the relevant documentation was copied to Michael Steele and the May Emails occurred after the meeting of 12 April 2001 when Mr Steele says he first became aware that there had not been a commissioning by the plaintiffs. Notwithstanding that advice, the correspondence continued to acknowledge copyright was owned by United Gaming.

[39] Mr Jeffcott for the defendants submitted that the acknowledgements were irrelevant and that the Steele brothers may not have understood the legal position. I am not persuaded by that submission. Mr Michael Steele has been in the business of developing software since at least 1992. Mr James Steele is a chartered accountant employed by a substantial firm and purported to draft the agreements, including consideration of what he described as “legal points”. I regard it as unlikely that, between the two of them, they were unaware of the legal position. They were experienced in business matters and the acknowledgements continued over a period from September 2000 to May 2001. It was only after the joint venture proposal negotiations broke down that Pacific Software began asserting it owned the relevant copyright.

[40] The facts do not support the suggestion that Pacific Software may have initially embarked on the project on its own initiative and not received approval to proceed until June or July 2000.

The causes of action

[41] Mr Jeffcott submitted that conversion and detinue were not available in the case of a computer programme citing St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481. While it may be true that the source code itself is expressed in the language of an algorithm or formula and is commonly stored electronically, I am not disposed to permit a technical argument (as to whether the source code constitutes a chattel) to stand in the way of the plaintiffs’ claim at this preliminary stage. Copyright is a property right recognise by statute and if necessary, I would permit the plaintiffs to amend their pleadings to include a cause of action for copyright infringement.

Balance of convenience

[42] In accordance with the conventional principles, I now consider where the balance of convenience lies in the context of the overall justice of the case. That will involve a consideration of the adequacy of damages as a remedy and the relative inconvenience to each side depending on whether an injunction is granted or refused.

[43] I accept that the principles relating to interim mandatory injunctions are much the same as those for interim prohibitory injunctions: see the helpful discussion by Fisher J in Telecom New Zealand Ltd v Clear Communications Ltd (1997) 6 NZBLC 102, 325; 102, 335). But, mandatory injunctions prior to trial may have a greater potential for injustice if they disturb the status quo, especially if they could effectively determine the substantive proceedings. It is for these reasons that interim mandatory injunctions are not commonly granted.

[44] The plaintiffs’ concerns focus on the delay which would result in exploiting commercial opportunities for the database if an interim injunction were refused with the result that the plaintiffs could not effectively proceed until after the substantive hearing. Mr Burkhart’s evidence is that converting the VB/A database into SQL format (which would be necessary to exploit the business opportunities) would take approximately two months. However, to develop a similar database from the beginning would take significantly longer - perhaps up to twelve months. He estimates the value of these commercial opportunities to be substantial. The total market for all gaming machines in New Zealand could yield a net profit of $800,000 per annum. That figure needs to be treated conservatively because there is nothing to suggest that the plaintiffs would be likely to secure the entire market. There is a concern that other commercial organisations will develop similar systems unless the VB/A database is fully developed and commercialised before the substantive hearing.

[45] Effectively, the plaintiffs wish to have full and unhindered access to the VB/A database so that it can be developed to exploit the commercial opportunities outlined. They do not have any objection to Pacific Software retaining a copy of the source code for the database but, of course, if the defendants wish to take steps to develop and exploit it, they do so at their own risk.

[46] I gave the defendants the opportunity to file an affidavit as to their ability to meet damages if an injunction were refused. I have since received an affidavit indicating that Pacific Software had net assets at the end of June 2001 of some $750,000. However, the great bulk of those assets are intangible (presumably intellectual property). The only tangible assets are trade debtors of $110,000 and a bank balance of the order of $160,000. Against that, there are current liabilities of $57,000 and term liabilities of approximately $300,000. Mr Michael Steele has no significant personal assets or liabilities.

[47] The defendants have not adduced any evidence as to losses which would flow if the interim injunction were granted in favour of the plaintiffs. No doubt the defendants wish to exploit the opportunity to develop the database but it is accepted that they (like the plaintiffs) could develop a suitable database from the beginning if required.

[48] Mr Burkhart deposes that the combined turnover of the plaintiffs for the last financial year was approximately $35 million to which United Gaming contributed approximately $15 million. Although no balance sheet has been produced for either of the plaintiffs, I am satisfied that the plaintiffs are able to meet damages for any losses which might reasonably be sustained by the defendants if the injunction were granted.

[49] One further factor is that the defendants have offered an undertaking not to deal in, market, or distribute the VB/A source code or any derivative of it, including the SQL database until the determination of the substantive proceedings. As well, the defendants have offered to continue the supply of current services to United Gaming although no price has been agreed for those services.

Conclusion

[50] Standing back and looking at the overall justice of the case, I am persuaded that this is one of those relatively uncommon cases where an interim mandatory injunction should be granted. The plaintiff’s case is particularly strong, even overwhelming. On their case, they have commissioned and paid for the very work which the defendants are now refusing to deliver. The plaintiffs are entitled to have the opportunity to develop the database without undue delay if that can be achieved without risk of serious injustice to the defendants.

[51] I am not satisfied that the defendants would necessarily be able to meet damages for the plaintiffs’ losses pending the substantive hearing should an interim injunction be refused. On the other hand, I am satisfied the plaintiffs would be able to meet any losses which the defendants might reasonably sustain pending trial should an injunction be granted. There is nothing to prevent the defendants proceeding to develop their own database in the meantime, provided of course they do not infringe any copyright belonging to the plaintiffs.

[52] Conscious of the difficulties identified by the Court of Appeal in Leisure Data v Bell (1988) FSR 367, 372, the interim order should be subject to conditions designed to ensure that the defendants’ position is not unduly prejudiced pending trial.

Orders

[53] Accordingly I make the following order:

Until further order, an interim injunction shall issue against the first defendant, its servants or agents compelling them forthwith to deliver up to the plaintiffs the source code of the Visual Basic/Access database subject to the following conditions:

(a) The plaintiffs shall keep a copy of the source code in the form in which it exists at the time it is delivered up and shall keep a full record of all changes made thereto pending the substantive hearing.

(b) In the event of any changes or development of the source code being undertaken on the plaintiffs’ behalf by a third party, the plaintiffs shall ensure that contractual arrangements are made to ensure that the copyright in the work thereby created shall vest in the plaintiffs.

(c) The plaintiffs shall not without the written consent of the defendants, assign, charge, or fetter such copyright until the conclusion of the trial or the further order of the Court.

(d) In the event of the Court finding on the trial of the proceeding that the copyright in the database belongs (wholly or in part) to the defendants, the plaintiffs shall assign the copyright in the database to the defendants (including any changes or improvements thereto) in such proportions and on such conditions as this Court shall direct including a condition requiring the defendants to compensate the plaintiffs (to such extent as the Court directs) for the value of any improvements made to the database subsequent to the delivery of the source code to the plaintiffs.

(e) The plaintiffs shall prosecute this proceeding to a hearing with all due diligence and expedition.

[54] I record that the plaintiffs have filed an undertaking as to damages and in the event of a finding by the Court that the defendants are entitled (wholly or in part) to copyright in the source code, the defendants may seek to establish and recover any losses which they may sustain as a result of the grant of this order including damages or an accounting for profits.

[55] The plaintiffs having succeeded, they are entitled to costs on a 2B basis.

[56] Counsel are to confer and submit memoranda within 14 days of this decision detailing a timetable for the conclusion of any further interlocutory steps. I also reserve liberty to apply in case there are any further issues arising.