Nowadays a business could not operate without software, including accounting, CRM, project management, communications, and the rest.
But what happens if the business is to be sold to another entity?
Normally a business uses software under a copyright licence. It does not own the software outright.
If a new entity is to take over the business, they may need to take over the software licences.
Whether they can do this without additional payment will depend on the terms of each licence.
A licence may provide that it cannot be transferred without the consent of the licensor, who may require payment for the transfer.
This is a common term in intellectual property licences.
This happened in Shepparton Partners Collective Operations Pty Ltd v QAD Inc [2021] FCAFC 206 (19 November 2021).
Here, the Full Court of the Federal Court rejected an appeal by SPC about the amount of the $1.1 million damages bill that SPC had been ordered to pay by the trial judge: QAD Inc v Shepparton Partners Collective Operations Pty Ltd [2021] FCA 615 (8 June 2021).
Facts
SPC purchased from SaleCo the canned fruit and vegetables business that operated under brands including SPC and Goulburn Valley.
SaleCo’s subsidiary held a software licence from QAD, the copyright owner. The QAD software was critical for the business.
The QAD licence provided that it could not be transferred without QAD’s consent.
The managing director of SPC, Hussein Rifai, was aware of this requirement, but he also said that the software was not fit for purpose and he wanted time to assess what to do about it.
QAD made an offer to SPC to permit the transfer of the licence for a fee of $602,208 (excluding GST) including one year’s maintenance of the software.
The sale of the business was completed but the software licence was not transferred.
Rifai understood that QAD had extended the deadline for the transfer of the licence to 31 July 2019 and SPC continued to use the software.
The judge found that Rifai knew SPC could not use the QAD software without a transfer of the licence or QAD’s consent.
The 31 July deadline passed.
The parties discussed various software proposals, with QAD being aware that SPC may be looking at other providers.
However, no agreement was reached and QAD finally sued for copyright infringement.
SPC continued to use the software, even throughout the legal proceedings.
Decision
Computer programs are protected by copyright in Australia under the Copyright Act 1968.
The judge accepted that, whilst SPC and QAD were negotiating either for a transfer of the software licence or for an upgrade of the software, SPC had an implied licence to use the software.
However, once SPC advised QAD that it would not pay the transfer fee, this terminated the implied licence and SPC was infringing QAD’s copyright.
The trial judge assessed compensation to QAD in the amount of $602,208 (excluding GST), being the amount offered by QAD.
In addition, his Honour awarded QAD $500,000 in additional damages.
The Full Court of the Federal Court approved both these figures on appeal.
Additional damages
Additional damages are designed to punish the infringer and deter the infringer and others from infringing copyright. The $500,000 amount is high for additional damages.
The reasons for it being so high were:
· SPC’s infringement was flagrant. Rifai knew that the licence had not been transferred, knew that QAD required a transfer payment and knew that this had not been paid, but took a commercial decision to use the software without payment.
· SPC continued using the software against QAD’s wishes, even throughout the legal proceedings.
· SPC disregarded QAD’s rights and did not show any remorse.
· SPC received the benefit of being able to use the software without payment.
· A large sum was necessary for a substantial company such as SPC.
Take home points
· When buying a business, licences of the business software will normally need to be transferred. This means that the terms of each licence needs to be checked to see whether the licence is transferrable or whether the consent of the licensor is required.
· A purchaser who commences using the software without the consent of the licensor does so at its peril. Consent may involve a transfer payment or renegotiation of the licence terms. Continuing negotiations may imply a licence for the purchaser’s continued use of the software, but they should get this in writing.
· From a copyright owner’s point of view, it is important that every software licence contains a clause that the licensee cannot transfer the licence to a third party without the licensor’s written consent. This gave QAD its legal rights in this case.
· If a purchaser is using software of the purchased business and receives a legal letter requiring it to stop, it is highly risky to ignore this. If SPC had either stopped use of the software or paid for a licence, it would not have been up for $1.1 million in damages.
This article provides general information only and is not intended as legal advice specific to your circumstances. Please seek the advice of a lawyer.
