If you purchased a business and the sale included all of the business’s computers, would it be reasonable to expect to be able to use the software installed on those computers?

In the recent matter of QAD Inc v Shepparton Partners Collective Operations Pty Ltd [2021] FCA 615, the Federal Court ordered Shepparton Partners Collective Operations Pty Ltd (‘SPC’) to pay $1M+ in damages to software company QAD Inc (‘QAD’), after finding that SPC had infringed copyright after purchasing the business from Coca-Cola Amatil (‘CCA’) without having secured a transfer of the relevant software licence agreement.

• After the sale QAD required payment of a fee as a condition for its consent to transfer the licence, which SPC refused to pay.
• SPC denied that it had infringed copyright, claiming that it had an implied licence from QAD to use the software.
• SPC cross-claimed against Sale Co 1 Limited (‘SaleCo’) and CCA on the basis they had failed to use their ‘best endeavours’ to secure a transfer of the licence agreement.

The Facts

In 1991, Sale Proprietary Co 2 Limited (‘SaleCo 2’) acquired a perpetual and non-transferable licence for the QAD Software.

Since 2005, CCA conducted a business involving the processing and sale of agricultural food products under brands including SPC and Goulburn Valley (‘SPC Business’).

• CCA held all the shares in SaleCo;
• SaleCo owned the SPC Business and all the shares in SaleCo 2; and
• SaleCo 2 held the QAD licence.

In 2018, QAD recommended that CCA upgrade the software licensed to SaleCo 2, as it was operating on an outdated platform - however the approval was not forthcoming, as consideration was being given by CCA to selling the SPC Business.

In 2019, SPC expressed interest in acquiring the SPC Business. SPC was aware that QAD’s software was critical to the continued operation of the SPC Business, but the outdated software was compromising the SPC Business. SPC also knew that the licence agreement could not be assigned or transferred without QAD’s consent.

Despite this, in June 2019, SaleCo 2 sold the SPC Business to SPC for $40 million, without any serious discussion surrounding transfer of the software licence. After the sale, QAD offered to license the software to SPC if it paid a transfer and maintenance fee. SPC argued that no fee was payable as the responsibility fell to CCA, and continued to use QAD’s software.

Federal Court decision

There was no dispute that the software is a ‘computer program’ within the meaning of s 10(1) of the Copyright Act 1986 (Cth). The parties also agreed that SPC’s use of the software constituted reproductions of it.

The Court found that QAD had granted an implied licence on the basis that it knew SPC needed the software for the business to function. However, the implied licence was conditional on SPC either upgrading or paying the transfer fee. Once SPC indicated its unwillingness to do either, the licence ended.

In relation to the cross-claim, the Court found that SaleCo was not obliged to a pay a reasonable transfer fee to QAD. In the context of the whole agreement, the Court found that the parties did not intend for SaleCo to pay a substantial transfer fee under a best endeavours obligation in order to secure the transfer of a contract for SPC’s benefit.

The Court also found that CCA’s obligations to use ‘best endeavours’ did not extend to requiring CCA to negotiate in circumstances where it knew that SPC both wanted to and was pursuing negotiations with QAD, and where SPC had not requested any assistance from CCA.

Further, even if CCA should have negotiated in the absence of any request and in potential conflict with SPC’s negotiations, there was no evidence that such negotiation would have improved the position.

QAD’s claim against SPC was made out, while SPC’s cross-claim was not.

Damages

The Court awarded $662,428.80 (incl. GST) - the amount SPC would have paid to secure a transfer of the licence, together with a year’s maintenance fee.

Due to the flagrancy of SPC continuing the infringement throughout the conduct of the proceedings, the Court also awarded $500,000 in additional damages to QAD as a deterrent.

Takeaways

The matter of QAD Inc v Shepparton Partners Collective Operations Pty Ltd [2021] FCA 615 acts as an important reminder to conduct comprehensive due diligence to ensure all licences for software systems are properly transferred.

Whilst software licences may be implied following the sale of business, this case demonstrates that if the continuation of a licence is conditional upon either paying a transfer fee or negotiating new terms, it will cease if those conditions are not met.

If you have a query relating to any of the information in this article, or would like to speak with a member of Holman Webb’s Technology Law, or Intellectual Property Protection Groups, please don’t hesitate to get in touch today.