Stephanie McHugh and Emma Halliday

SPC damages bill a lesson in the limits of implied software licences

Stephanie McHugh and Emma Halliday

14 July 2021

IT Licensing

The Federal Court recently ordered food giant Shepparton Partners Collective Operations Pty Ltd (SPC) to pay over a million dollars in damages to a software company in a case that serves as an important reminder to conduct comprehensive due diligence to ensure licences for critical software systems are properly transferred.

Copyright infringement of unlicensed software

In the case, QAD Inc v Shepparton Partners Collective Operations Pty Ltd [2021] FCA 615, software company QAD Inc (QAD) alleged that SPC infringed the copyright in its enterprise resource planning software by continuing to use it after purchasing a business from Coca-Cola Amatil (CCA), without securing a transfer of the relevant software licence agreement. QAD required payment of a fee to transfer the licence, which SPC refused. SPC denied any infringement, claiming it had an implied licence to use the software.

Use of software following acquisition

From 1991, Sale Proprietary Co 2 Limited (SaleCo 2) used QAD’s software under a non-transferable licence agreement. Since 2005, CCA conducted business under brands including “SPC” and “Goulburn Valley” (SPC Business). CCA held all the shares in Sale Co 1 Limited (SaleCo), which owned the SPC Business and all the shares in SaleCo 2.

QAD recommended that CCA upgrade the software licensed to SaleCo 2, as it was operating on an outdated platform, however CCA approval was not forthcoming.

In early 2019, SPC expressed interest in acquiring the SPC Business. SPC was aware that outdated software was being used and that the business could not function without it. It was also clear that the licence agreement could not be transferred or assigned without QAD’s consent. Despite this, the sale proceeded for around $40 million, without any serious discussion about properly transferring the software licence.

SPC continued to use QAD’s software after it purchased the SPC Business. Following the sale, QAD offered to license the software to SPC if it paid a transfer fee and maintenance fee. SPC argued that no fee was payable because the responsibility fell to CCA, and continued to use the software, even after proceedings were brought by QAD.

Limits of implied licence

The software was a “computer program” and therefore a form of literary work under the Copyright Act 1968 (Cth), and use of the software by SPC constituted reproductions of it.

While the Court agreed that QAD granted an implied licence by virtue of the fact that it knew SPC needed the software for the business to function, that licence was conditional on SPC paying the transfer fee or upgrading the software. Once SPC signalled its clear refusal to do either, the licence ended. From this point, SPC continuing to use the software constituted copyright infringement.

Significant award of damages to QAD

The court awarded QAD $662,428.80 (inc GST) for loss stemming from the infringement, being the cost of the transfer fee and a year’s maintenance fee.

Given the flagrancy of SPC continuing the infringing conduct after the commencement of proceedings and throughout the trial, the Court also awarded $500,000 in additional damages to QAD as a deterrent.

Key takeaways

The case highlights the importance of undertaking in-depth due diligence when acquiring assets and confirming appropriate licence transfers are effected—particularly when critical IT infrastructure is involved. Licences to use software may be implied following the sale of a business, however if the continuation of a licence is conditional upon paying a transfer fee or negotiating new terms, it will cease if these conditions are not met. As evidenced in this case, courts will not look favourably upon flagrant and unlicensed uses of software, particularly during infringement proceedings, and is willing to award additional damages as a deterrent.

Need assistance?

If you need advice on licence transfers or general due diligence undertakings for your business, please contact a member of Thomson Geer’s National Intellectual Property team for a confidential discussion.

Authors

Stephanie McHugh | Associate | +61 3 8080 3554 | smchugh@tglaw.com.au

Emma Halliday | Law Graduate