Why software infringers settle

28 Feb Why software infringers settle

The recent decision of the Federal Court in PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) [2020] FCA 137 is of interest to software owners because it provides a rare insight into the mind of a respondent to an allegation of software infringement and the factors which influence the respondent to settle.

Such insights are rare because usually they are protected by solicitor client privilege and never see the light of day.

In late 2016 Harris & Company represented Microsoft Corporation in a claim against PC Case Gear – a large Victorian system builder. That claim related to some 4000 unlicensed installations of Windows operating systems on computers built by PC Case Gear. PC Case gear had acquired loose certificates of authenticity from a third party and used the product key on those certificates to activate Windows operating systems on machines it had built. The certificates were then affixed to the machines it sold, giving the consumer the impression that Microsoft had licenced the installed Windows operating systems.

In fact, Microsoft had never licenced PC Case Gear to so install those operating systems and the installations  were therefore unlicensed and prima face in breach of the Copyright Act. PC Case Gear paid $250,000 to Microsoft in settlement of the claim.

PC Case Gear then sued its insurance broker for negligence in having failed to advise it to take out insurance against inadvertent copyright infringement.

In finding that the broker had been negligent, and that PC Case Gear had suffered loss as a result, the Court also had to consider and find that PC Case Gear acted reasonably in reaching the settlement it had reached with Microsoft. If PC Case Gear had acted unreasonably in doing so, the loss may not have been caused by the alleged negligence.

The court therefore had to hear evidence as to why PC Case Gear had settled, and this is what permits the insights into the decision making process of a well advised Respondent.

At paragraph 162 the Court observed:

The evidence regarding the reasonableness of PCCG’s settlement with the Microsoft claim relevantly included the following:

(a ) Microsoft made an initial claim against PCCG of approximately $700,000 (based on a retail price of $178 per unit and the infringement involving 4,000 Windows licences);

(b) PCCG had no defence to Microsoft’s allegation that PCCG had infringed Microsoft’s copyright;

(c) the only issue in dispute between Microsoft and PCCG was whether or not a court would find that PCCG, whilst subjectively unaware it was infringing Microsoft copyright, would nonetheless be found objectively to have acted unreasonably. As explained, this issue relates to PCCG’s entitlement to the defence under s 115(3) of the Copyright Act, which was extracted above at [50]. This issue informed the substance of the negotiations between Microsoft and PCCG’s lawyers.

At paragraph 164:

[PCG witness] explained that PCCG decided to accept the settlement, based on advice, because of:

(a) the reduced quantum of the settlement sum (compared to the initial amount    demanded by Microsoft);

(b) Microsoft’s apparent willingness to take similar disputes to trial;

(c) the costs associated with undertaking the trial;

(d) the risk  a court would find against PCCG; and

(e) the consequent risk that Microsoft could have determined that PCCG was no longer able to sell Microsoft’s products.

What is striking here is that notwithstanding the weakness of PC Case gear’s legal position (it is worth observing that the s115(3) defence which was the only issue open for argument would still have entitled Microsoft to an account of profit) the operative cause of the settlement was the perception of Microsoft’s apparent willingness to take similar disputes to trial

This is the operative factor because the other reasons stated simply do not arise otherwise. No trial, no costs, no risk of losing.

This suggests that a well-designed compliance programme must include the option of taking the dispute to trial.

The irony is that, if the programme has that option, it probably won’t be necessary to exercise it.