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Protecting Software in a Digital Age

 

Protecting Software in the Digital Age

(Published in Law Society Journal of NSW September 2014. Revised version published in Australian Commercial Law Tracker October 2014)

Grant Hansen

 

 

In the seminal case on damages for software infringement, Autodesk v Cheung (1990) 171 IPR 69 Justice Wilcox observed that:

one matter which is, in my opinion, relevant, is the difficulty computer program owners face in trying to protect their copyrights. Computer software is easy to duplicate, distribute and conceal. Particularly in a case where a person is supplying computer programs as an adjunct to other equipment, and is therefore not advertising the supply, infringements may be difficult to detect. And, when they are detected, proof of the facts may be a substantial task

Autodesk v Cheung involved a physical sale of counterfeit software, installed on PCs by a system builder. The case predates the distribution of software using internet connections. In the “digital economy” software can be downloaded and activated by an end-user without dealing with physical product. Much of this activity - such as sales on platforms such as eBay and downloads from sites which advertise their purpose -  remains visible. Other transactions using peer to peer technologies are more difficult to detect.  Software copyright owners invest considerable effort in seeking to promote authorised use of their software.

 

To see what is at stake one has only to consider the fate of the recorded music industry. From 1999 to 2013 music sales in the US dropped from US $14.6 billion to US $7 billion (reference RIAA website). While the development of subscription models such as Spotify now means that end users are at least prepared to pay something for their music, that outcome has been a pyrrhic victory for owners of music copyrights who now receive as royalties a proportion of a much smaller pie than before. Instead of paying twenty or thirty dollars for a CD the consumer can pay ten dollars a month for virtually every CD ever made. That is good for consumers but the long term effects on creative output remain to be seen. Certainly, anecdotal evidence suggests that musicians now make their money by touring rather than by selling recordings.

 

“Channel” and “End-user” Infringement

Software infringement manifests in two principal ways: “channel” and “end user” infringement. Channel infringement involves the sale of unlicensed software and or the means of activating and using software (typically, on the internet, by sale of product keys that permit activation of downloaded software). Channel infringement can be dealt with using test purchases to gather evidence of infringement. Liability is therefore generally not in issue. Running such enforcement programs cost effectively and identifying the quantum of infringing sales remain a major challenge but generally speaking software developers have been fairly successful in closing down illicit channels of distribution.

 

A more difficult challenge is posed by commercial end user infringement.

 

In 1988 major software copyright owners formed the Business Software Alliance. Members include most major software developers and include Microsoft, Autodesk, Adobe and Apple Siemens etc Baseplan etc. The BSA is an industry initiative that operates throughout Asia, Europe and North and South America. Software owners in each jurisdiction have formed country committees which administer a compliance programme in that jurisdiction. Members pay subscription fees and agree that the proceeds of enforcement are paid to the BSA to fund further enforcement and education.

 

The big markets for enforcement work are not surprisingly in the developing economies of Asia where non-compliance rates frequently exceed 50 per cent.

 

Australia may lead the world in downloading unlicenced versions of Game of Thrones but our surveyed non-compliance with software is average for a developed economy, about 21 per cent valued at US$743 million in a 2013 (reference BSA Global Survey 2014).

 

The remit of the BSA is to promote authorised use of software by end-users. It is a feature of software enforcement that where one product is being infringed normally several others are as well.

 

Motivated Informants

Obtaining evidence of end user infringement is of course the major challenge. Infringers rarely spontaneously confess. Unlike channel infringement there is no public nexus - no point of sale  - where evidence can be obtained. The BSA in Australia therefore usually acts on information received. Informants come forward for a variety of reasons - to claim a reward; to get even with an employer they feel has treated them poorly; and because they do not agree with using unlicensed software for profit.

 

The use of motivated informants is an unusual feature of an essentially commercial jurisdiction and of course great care is required in assessing the reliability of the information provided. Generally speaking however, by assessing the consistency and specificity of the information and comparing that with publicly available information it is possible to form an accurate view of the informant’s reliability.

 

The BSA always gives the Respondent an opportunity to produce evidence of that it was in fact licenced (contrary to the information received). If evidence of licencing is not forthcoming the BSA then seeks to reach an appropriate negotiated settlement

 

If that is not possible the affected BSA members have a choice between commencing proceedings (based on the evidence provided by the informant) or making an application for preliminary discovery.

 

Preliminary Discovery

 

Preliminary discovery is a highly technical jurisdiction under rule 7.23 of the Federal Court Rules. It  requires evidence, at the time of the application, that: the Prospective Applicant:

 

i) may have the right to obtain relief in the Court from a Prospective Respondent;

 

ii) after making reasonable enquiries, does not have sufficient information to decide whether to start proceedings ;

 

iii) reasonably believes that:

 

(a) the Prospective Respondent has or is likely to have, or has had or is likely to have had, in its control, documents directly relevant to the question whether the Prospective Applicants has a right to obtain the relief; and

 

(b) .inspection of all of the documents sought by the Prospective Applicants ;

would assist in making the decision to commence substantive proceedings.

 

This requires evidence from an appropriate decision maker within the Prospective Applicant. Given that prospective applicants are typically large multi-national corporations with complex internal delegations of authority careful consideration is necessary. In Telstra Corporation v. Minister for Communications (no. 3) [2007] FCA 1567 the prospective applicant failed because the evidence going to the Prospective Applicant’s reasonable belief was from a person with insufficient authority to make the decision to commence proceedings.

 

Nor is preliminary discovery available when the Prospective Applicant has formed the view that it does have a right to obtain relief. See Gibson v. ANZ Banking Group Ltd (VSC Gobbo J. No 10670/91).

 

Clearly there is a tension here between having a reasonable belief that information may be held by a Prospective Respondent which will assist in making the decision to commence proceedings (which entitles the Prospective Applicant to preliminary discovery)  and actually having a belief that  a cause of action exists (in which case preliminary discovery is not available). The more reasonable the belief that the Prospective Respondent may have information that assists in the decision to commence proceedings, the more likely it is that the Prospective Applicant will be found to actually believe that it has a cause of action.

 

Commencing Proceedings

For this reason, if sufficient evidence is held to permit the particularisation of at least one instance of infringement as required by rule 34.35 of the Federal Court Rules, the better course is to commence substantive proceedings and to then obtain an order for discovery pursuant  Division 7.3 of the Federal Court Rules. Such orders are however not made as of right; it is necessary to persuade the Court that the Respondent has documents within its control that are directly relevant to a real issue in dispute.

 

Nevertheless, Courts do routinely make discovery orders in copyright infringement matters because the quantum of infringement is usually a real issue in dispute and can most reliably be addressed using the Respondent’s business records.

 

Whenever software is installed on a computer a record of that installation, including the time and date of the installation is created and stored on the computer’s permanent storage medium. Those records can be accessed and reproduced in a written form. If the records show an installation and the respondent does not have a corresponding licence then liability for that instance of unlicenced reproduction can be established.

 

Traditionally in copyright matters, the respondent’s first line of defence was to put the applicant to proof of their title to the copyright in question. This does not happen in software cases because of the presumptions as to ownership under s129A of the Copyright Act . Providing the owner asserts its ownership on the software using the copyright symbol © ownership is deemed to be established unless disproved by the Respondent.

 

Software created in a country which is a signatory to the Berne Convention for the Protection of Literary and Artistic Works 1886 or the Universal Copyright Convention Geneva 1952 receives the full protection of Australian law by virtue of the operation of the Copyright (International Protection) Regulation 1969 made pursuant to s 184 of the Copyright Act.

 

Evidence

More often than one might expect however, the quality of information provided

by an informant is astonishingly good and includes internal documents and screenshots of network files disclosing the existence of “crack files” or internal emails containing admissions of the use of illegal software.

 

Older readers will remember when ephemeral communications were by telephone or even, incredibly, face to face. In those times the litigators’ task was much harder. In the digital age, the email is truly the litigator’s friend.

 

The question arises however, can use be made of internal documents obtained by an employee or consultant, perhaps covertly, which incriminate the employer?

 

Section 138 (1) of the Evidence Act (Cth) 1995 provides that evidence obtained

“improperly or in contravention of an Australian law” is not to be admitted unless the desirability of doing so outweighs the undesirability of admitting such evidence Section 138(3) sets out matters the court can take into account such as the probative value of the evidence and the gravity of the contravention and the difficulty of obtaining the evidence without “impropriety”.

 

The first question is whether there is in fact any impropriety in the way evidence has been obtained from the Respondent. Sections 126 A to 126E of the Evidence Act 1995 (NSW) create “protected confidences” but internal office communications are not within these categories. Sections 117 to 131 of the Commonwealth evidence Act deal with privileged communications but again these do not include internal office communications. Such documents are however business records and admissible pursuant to s69 of the Evidence Act.

 

Even if a contractual provision purports to prohibit the disclosure of an incriminating document, it would remain potentially admissible by virtue of s138 (1)[ of the Evidence Act and at common law.

In National Roads & Motorists Assn v Whitlam [2007] NSWCA 81, Campbell JA (with whom Beazley JA and Handley AJA agreed) observed in relation to confidential information” that is not subject to a statutory privilege,  the usual approach of the court is, that it is more important that such evidence (if relevant)  be used in the administration of justice rather than that the confidence be protected.

The common law position is clear enough. The authorities established that the public interest in the disclosure (to the appropriate authority or perhaps the press) of “iniquity” will always outweigh the public interest in the preservation of private and confidential information. In Allied Mills Industries v Trade Practices Commission 34 ALR 105 at 127 Sheppard J quoted with approval Wood VC in Gartside v Outram (1856) 26 LJ (Ch) 113, (at 114): “The true doctrine is, that there is no confidence as to the disclosure of iniquity. You cannot make me the confidant of a crime or a fraud, and be entitled to close up my lips upon any secret which you have the audacity to disclose to me relating to any fraudulent intention on your part: such a confidence cannot exist.”

 

Allied Mills concerned breaches of the Trade Practices Act. There is no doubt that that logic would also apply to breaches of the Copyright Act, many of which breaches are also potentially punishable by fines and imprisonment. (see ss132AC and following of the Copyright Act) Commercial infringement (reproduction), sale of and possessing infringing copies for a commercial purpose are all criminal offences.

 

As a practical matter however this issue rarely needs to be tested. Once the applicant knows a specific document exists its production can be required by a notice to produce pursuant to rule 20.35, subject only to the recognized categories of privilege. If the document is not found by the respondent or is “lost” then the extant copy in the informant’s possession will, subject to s138 of the Evidence Act be admitted into evidence.

 

Indeed, the temptation to destroy evidence is significantly reduced by the Court’s power to strike out a defence in situations where evidence has been destroyed. In such cases it will be open to the Applicant to make an application for an order under rule 16.21(f) of the Federal Court Rules) to strike out the defence. See Moody Kiddell & Partners Pty Ltd v Arkell [2013] FCA 1066 and Palavi v Queensland Newspapers Pty Ltd [2012] NSWCA 182).

Damages

Generally speaking, the major legal issue in most software cases is assessment of damages. Typically that is done by applying what is known as the “licence fee test”. That is based upon an inference that the Court may draw that a respondent, when presented with a choice between paying the licence fee and not using the software would have paid the necessary licence fee; see Autodesk Australia Pty Limited v Cheung (1990) 171 IPR 69 and Microsoft Corporation & Ors v Ezy Loan Pty Limited & Anor (2004) 69 IPR 54.  Damages are payable irrespective of whether there has been any belated legalisation.

In Autodesk Inc & Ors v Ginos Engineers Pty Ltd & Anor [2009] FMCA 14 at [109], His Honour, FM Lloyd Jones held (in respect of the licence fee test) that in that case “the proper measure of damages is the retail price that would have been paid by the respondents had they obtained the licences they were required to. If the respondents had purchased valid licences, they would have purchased them at the retail, not the wholesale, price.

 

Compensatory damages are however just the beginning. Section 115(4) of the Act provides that the Court is empowered to make to make an award of additional damages under section 115(4) of the Act where the Court is satisfied that it is proper having regard to the following:-

(a) the flagrancy of the infringement;

(b) the need to deter similar infringements of copyright;

(c) the conduct of the defendant after the act subsequent to infringement or after an allegation of copyright infringement;

(d) whether the infringement involves the conversion or work or other subject matter from hardcopy or analog form into digital or other electronic machine readable form;

(e) any benefit to have accrued to the defendant by reason of the infringement; and

(f) all other relevant matters.

The deliberate infringement of copyright for gain constitutes deliberate and flagrant conduct (see Microsoft Corporation v PC Club Australia Pty Ltd [2005] FCA 1522 at 223 per Conti J).

The availability of additional damages is a powerful incentive for respondents to settle software infringement claims at an early stage. Awards of multiples of the compensatory damages are routine. Post detection conduct is one of the factors a Court can have regard to in awarding additional damages.

Authorisation

The other great incentive for respondents to settle is the concept of authorisation under s36 (1) of the Copyright Act. Notwithstanding the High Court’s decision in Roadshow Films Pty Ltd v iiNet Ltd (2012) 95 IPR 29, company directors still have the requisite control to be exposed to personal liability where their company has engaged in infringing conduct. That can be the case even when the director had no actual knowledge of the infringement.

 

In University of New South Wales v Moorhouse (1975) 133 CLR1 the High Court found that authorisation included “countenance or acquiesce”. In Microsoft Corporation & Ors v PC Club Australia & Ors [2005] FCA 1522 at paragraph 277 Conti J applied the Moorehouse to directors of a private company observing:-

"As directors in office of PC Club at all material times, neither Ms Lee nor Mr Fang can escape liability ...for the same quantification of s115(2) damages for infringement of copyright. By virtue of their respective appointments...and their full time...employment...each of them must be taken to have authorised the infringing conduct of PC Club."

 

In APRA v Jain (1990) IPR 663, a decision of the full Federal Court, Mr Jain was the CEO of the proprietor of Old Windsor Tavern but he left the day to day running of the tavern to an employee. The Court found at 671): "Mr Jain knew that music would be performed at the tavern, but did not concern himself  with the actual pieces of music which would be performed."

 

Mr Jain was found to have authorised infringements even though "he did not concern himself with the actual pieces of music which would be played."

 

 

Conclusion

 

So while software infringement remains easy to carry out and hard to detect, copyright owners are not without their resources. The surveyed rate of software infringement (though not its value) has been dropping steadily. Notwithstanding this the BSA’s recoveries have increased in each of the last three calendar years.

 

 

 

 

This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.
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