INTELLECTUAL PROPERTY INFRINGEMENTS & RELATED TORTS IN COMPUTER SOFTWARE, ELECTRONIC DATA & TRADE MARKS

Tort has been used for many centuries to protect the person and personal interests in property. Financial, economic and trading interests have more recently been brought within the realm of tort, which continues to develop, albeit with a degree of contention.

Perhaps the most common of intellectual property infringement, copyright infringement has long been considered a tortious act¹⁾. The common law doctrine of joint tortfeasors may be applicable to copyright infringements where two or more parties have acted in a joint enterprise, although the doctrine would not apply if the actions of the parties had only individually assisted or contributed to an act causing damage²⁾. Procuring or directing the commission of a tort makes the procurer or director personally liable³⁾. Other basis of liability also apply pursuant to the concept of “authorisation” under Section 36[1] of the Copyright Act 1968 (Cth⁴⁾).

A corporation can only act through natural persons, such as its employees. If an employees commits a civil wrong while acting within their scope of employment, the corporation will be vicarious liable. A corporation can be primarily liable, in some cases where acts or omissions of senior management personnel are attributed to the corporation. These people are seen to be part of the corporation's directing mind and will, rather than acting on behalf of the company. The state of mind of those who direct the company will be deemed to be that of the company for the purposes of determining liability in cases involving a mental element, such as knowledge of copyright infringing activities⁵⁾.

To allow directors to be sued as joint tortfeasors together with their company erodes the protection supposedly afforded by the separate legal identity of the company by allowing plaintiffs to pierce the corporate veil. This is of particular significance to directors of small private companies, for whom the protection of the corporate veil may have been the main purpose of incorporation. In general, a director must have procured or given their authority for the commission of the infringement rather than merely being a director⁶⁾. This limitation provides a degree of protection to directors who merely fail to properly investigate copyright infringing activities committed by another director. The Federal Court have indicated that the test should be the “directed or procured” test⁷⁾ rather than the “making the conduct the director's own” test.

In the Federal Court appeal, King & Rylands v Milpurrurru, Marika, Payunka and The Public Trustee for the Northern Territory⁸⁾ King and Rylands were two out of three directors of a company, Beechrow Pty Ltd ( “Beechrow” ), which had been found guilty at trial of infringing the copyright in artistic works created by various aboriginal artists. At trial the company directors had also been found guilty of infringing copyright by importing the carpets for sale, and/or authorising such conduct. Bethune, the third company director, had stated at trial that King and Rylands had not been involved in the management of Beechrow and had not been aware of the illegal importation until being served with court documents. After being served, King and Rylands took no efforts to verify that Beechrow had ceased to import the infringing carpets or to become informed about the continuing activities of Beechrow in relation to the carpets and at trial it was found that the degree of indifference shown by their inaction was such that authorisation or permission by them for the conduct of Beechrow should be inferred.

On appeal, King and Rylands were successful. It was found that although they may have breached the duty owed to Beechrow in failing to make enquiries with respect to Bethune's statements and this breach facilitated the illegal importations it did not thereby follow that they authorised the illegal importation and were liable to the artists.

In Microsoft Corporation v Auschina Polaris Pty Ltd & Ors⁹⁾, Steven Lagos, a company director of Palm Beach Pty Ltd ( “Palm Beach” ) was found to have infringed Microsoft's copyright following Palm Beach's importation of unlicensed copies of Microsoft programs into Australia. It was found that Lagos knew that if the copies had been made in Australia they would have constituted an infringement of copyright and that he had authorised or procured the infringement. It was ordered that he had to personally pay Microsoft the value of the unlicensed programs without any deductions to be allowed for the purchase price and other pre-sale expenses.

Similarly, in an earlier matter (in which the “making the conduct the director's own” test was used), G.M. (North Melbourne) Holdings Pty Ltd v Young Kelly Pty Ltd¹⁰⁾ the Court found that copyright subsisted in a map which had been developed using hexagons to calculate the fee charged for courier services. One of the directors of Young Kelly Pty Ltd ( “Young Kelly” ), Noel Young ( “Young” ), had worked for G.M. (North Melbourne) Holdings Pty Ltd ( “G.M.” ) before resigning to establish a rival courier firm. A map based upon the G.M. map, which had been prepared by an artist engaged by Young, was found to infringe the copyright subsisting in the G.M. map. It was found that Young, who had taken the map from G.M., authorised its reproduction, and implemented its use by Young Kelly was personally liable for the copyright infringement. Another director, Kelly, who allegedly had nothing to do with the development and use of the map, was found not to be personally liable for copyright infringement. Advances in technology are seeing products being designed that will allow for better identification of those making infringing copies and the Internet allows for infringing copies to be distributed to multiple recipients with little effort. If a company authorises another to make an unauthorised copy, which is subsequently reproduced, it will be responsible for such copying as a joint tortfeasor. Corporations and their directors need to be aware of and guard against copyright infringements, which are becoming easier to detect and often resulting in increasingly onerous damages being awarded.

Often in conjunction with copyright infringements, but more commonly in cases of trade mark infringements, a possible action in tort for passing off will exists, where the defendant has made a claim that another party's goods are his own, with a result that the other party suffers a loss. The circumstances must involve a misrepresentation being made by a trader, in the course of a trade, to a prospective customer of the other trader.

Actions for negligent misstatement as to the capacity and suitability of software and hardware solutions being sold are also an important consideration for vendors of these systems when dealing with customers who have little or no knowledge of the technical specifications of such products. In determining whether an action for misstatement may be brought, the following issues ought to be considered¹¹⁾:

• the advice must be required for a purpose, either specified in detail or described in general terms;
• the purpose must be made known, either actually or inferentially, to the advisor at the time the advice is given;
• the advisor must know, either actually or inferentially, that the advice will be communicated to the advisee, either as a specific individual or as a member of an ascertainable class in order that it should be used by the advisee for the known purpose;
• it must be known, either actually or inferentially that the advice will probably be acted upon for that purpose without independent advice or inquiry;
• the advice must be so acted upon to the detriment of the advisee

Also the following issues should also be considered to determine whether a duty of care exists in relation to misstatements¹²⁾:

• The purpose for which the statement was made;
• the purpose for which the statement was communicated;
• the relationship between the advisor, the recipient of the advice and any third parties;
• the size of the class to which the recipient of the advice belongs;
• the knowledge and experience of the advisee;
• whether the advisee was reasonable to rely on the advice.

The matter of Chippendale Printing Co Pty Limited v Spunaline Pty Limited¹³⁾ saw an award of damages of $26,000 and legal costs to Chippendale Printing Co Pty Limited ( “Chippendale” ) resulting from a supply of software and hardware which did not live up to the promises of Spunaline Pty Limited ( “Spunaline” ). A director of Chippendale, having no knowledge of computers, engaged Spunaline to provide a computerised solution to calculate and record estimates and invoices for print jobs. A director of Spunaline was known to be an expert in the area of costing for print jobs and claimed to have knowledge of computers. It was made clear that the supplier would have to assist Chippendale in implementing the computerised system. The supplied hardware and software failed to provide the capabilities Spunaline had claimed they would (and as a side issue the supplied software and manuals appear to have been unauthorised copies). The director of Spunaline and Spunaline were both found to have engaged in misleading and deceptive conduct.

Negligence is another tortious action that needs to be considered, particularly in relation to customised software as the value of computer programs and the associated stored data becomes increasingly significant. Questions such as: who is responsible for backing up data and the customised software; who is to check the integrity of the backup; who is responsible to monitor the adequacy of the capacity of the hardware to store the required data must be asked to determine whether there has been contributory negligence on behalf of the customer in cases where a failure of the backup or loss of data due to the capacity of the system being exceeded.

Commonly, a supplier will be providing hardware and or software for the use by a customer with little or no knowledge of information technology other than that required as an end user. Is it negligent for a supplier to assume no responsibility in relation to the technical maintenance required? All computers need regular attention to be given to tasks such as backing up, removing redundant files, tuning the system for optimal performance and checking integrity of files. If not, loss of data and an inefficient system are likely to occur. Ideally, the customer would designate a systems operator who is responsible for performing or supervising these tasks, but should the supplier ensure that the appointed person has adequate skills and up to date information available?

In the designing of software, the supplier needs to consider a range of issues which could include, by way of example only and without limitation, the need to warn of low hard disk capacity which may prevent actions such as the creation of new files to store data and the need to inform users of the significance of such warnings and the required action to be taken to avoid loss of data. Where the supplier is not retained to carry out maintenance of the system and the customer appoints its own staff member(s) to perform same, is the customer assuming the responsibility thus protecting the supplier from claims of negligence?

In the matter of Civic Transport Services Pty Ltd v Wacher Pty Ltd ¹⁴⁾ it was found that Civic Transport Services Pty Ltd ( “Civic” ) was responsible to ensure that the backups of its data and customised software were successful and capable of restoration back onto the hard disk. Civic had suffered loss of data following complications with the operation of its customised software together with exceeding the storage capacity of its hardware. The employee of Civic designated to take backups of the data and customised software, had failed to check whether such backups were adequate over the course of some five years.

Although complicated by questions of liability due to an alleged novation of a support contract, questions such as whether the hardware technician should have verified the backup before deleting the data and source code from the hard disk were examined by the court.

It was found that the tape size used to backup the data was inadequate resulting in failure of the backup procedure. Civic raised arguments that there should have been a message displayed during the backup procedure which would indicate that the magnetic tape was full so that the back up could be incomplete and that the supplier ought to have ensured that the tapes used were of sufficient size. Did the supplier owe a duty of care to Civic in designing the backup program and advising of any reason why the backup program might fail having regard to the reliance by their client, which reliance was known and the supplier's knowledge that no other backup was made? The Court found that reliance on their supplier's advice was not a satisfactory discharge of Civic's responsibilities as a computer owner for the use and management of its computer system as Civic was aware of the danger of loss in terms of the system and its business should the computer system fail and the stored data and software be lost.

When the question of a backup of customised software was considered, there was a difference in opinion between the expert witnesses as to who ought to be responsible to backup a customised version of software normally available in an uncustomised state. In examining industry practice, the court considered it to be prudent for a software supplier to keep an up to date copy of the licensed customised software but that it did not owe the customer a duty of care to do so.

It is likely that the question of negligent advice will be re-examined by the courts in relation to computer hardware and software in relation to Year 2000 faults and this area of tortious actions should be monitored to determine any changes in court's attitude in regard to the obligations of the software and hardware supplier.

The rapid expansion of the Internet as a publishing medium has seen and is likely to continue to produce new developments in torts such as defamation and invasion of privacy that need to be monitored by corporations when formulating their data protection policies; e-mail usage policies and their control of materials published on the Internet.

The civil remedies for copyright infringement include the following:

• injunction¹⁵⁾;
• account of profit¹⁶⁾;
• damages for infringement¹⁷⁾;
• additional (or exemplary) damages where the infringement is of a particularly flagrant character¹⁸⁾;
• damages for conversion or detention of infringing copies¹⁹⁾;
• delivery up of infringing copies²⁰⁾; and
• ex Parte relief for protection of evidence offered by Anton Piller orders.

These remedies are similar to those afforded to other forms of intellectual property and torts.

With such a wide scope of remedies available, a joint tortfeasor may find themselves in the unenviable position of being the only tortfeasor able to satisfy the judgment obtained. Where a corporation and its directors are sued as joint tortfeasors, should the corporation be forced into liquidation, the director's assets will then be at risk for the portion of the judgment left unsatisfied.

At common law, a release of a joint tortfeasor has the same effect as a judgment, so that the compromise resulting in the release of one or more joint tortfeasors in return for payment of a portion of the amount due, precludes the plaintiff from pursuing his remedy for the balance against the other joint tortfeasors. However, a release is to be distinguished from a covenant not to sue. Such a covenant given to one joint tortfeasor does not discharge the others. If at all possible , a court will interpret a compromise entered into with a joint tortfeasor as merely a covenant not to sue that one tortfeasor, rather a release, which discharges all of the joint tortfeasors²¹⁾.

Alternative protection for Intellectual Property rights also arise out of the Trade Practices Act 1974 (Cth) ( “TPA” ), in particular through the consumer protection provisions of Pt V, Div 1. These provisions, particularly ss 52 and 53, prohibit corporations from engaging in conduct that misleads or deceives or is likely to mislead or deceive. These provisions of the TPA may be invoked by any party and may enable competing traders to enjoy protection that would otherwise require an action in passing off or copyright and design laws, or alternatively, registration of a trade mark. The threshold to obtain protection under the TPA is lower than those required for traditional means of intellectual protection, so a move towards greater use of TPA actions may be seen in the future.

On the other hand, corporations must ensure that the protection afforded by intellectual property rights is not used to anticompetitive effect as such activity may fall foul of the TPA's restrictive trade practices provisions, particularly contained in Pt IV.

The obvious answer is the prudent directors of a corporation will ensure that the activities of the corporation are carefully supervised so as to minimise the possibility of an intellectual property infringement occurring. However, human endeavour will always have a tendency, particularly in commerce, to lead to activities being undertaken that fall into the “grey” areas of the law.

Registration of domain names presents a useful example. Encouraged to a degree by the expansion of trade onto the Internet, many individuals have sought to register domain names in Australia that closely resemble the trade mark or trading name of a foreign entity with the hope that that entity may want to expand its activities into Australia and so might want to acquire the domain name for themselves. The fact that a corporation has registered a business or company name in Australia cannot constitute a defence to an action for passing off, particularly if by reason of business operations conducted outside Australia, another entity has acquired a reputation with a substantial number of persons who would be potential customers were it to commence business within Australia²²⁾.

Corporations and their directors need to carefully consider their exposure to claims of intellectual property infringement and execute appropriate agreements with the owners of the intellectual property or modify their actions so as to be considered non-infringing. This can be important in the area of computer software because data may be replicated with great ease and sometime unknowingly in many different forms of media. Unless expressly permitted by a software licensing agreement, the back up and use of a backup copy of software licensed by a corporation may be considered to be a copyright infringement.

Reform to copyright laws in relation to computer software are being suggested in the Copyright Amendment (Computer Programs) Bill 1999. If the Bill is adopted, an owner or licensee of a software program will have far greater opportunity to take backup copies of software that might otherwise be currently considered to be a copyright infringements. For example, not all software licences allow the licensee to make a backup copy of the software. The Bill suggests amendments which would permit the making of a reproduction of a non-infringing copy of the program for use in lieu of the original copy, if the original copy is lost, destroyed or becomes unusable, provided that making a copy does not involve modification of the program and the licence to the original copy has not expired or has been terminated.

Until such time as this Bill is enacted, corporations need to ensure that their intellectual property licenses provide adequate opportunity for the protection of data and customised software

Intellectual property infringement is becoming increasingly easier to commit and correspondingly increasingly difficult to police. In the area of computer software and electronic data, intellectual property rights have assisted rapid development to occur by allowing suppliers to meet development costs with what some consider to be exorbitant licensing fees.

Corporations and their directors need to make regular audits of their intellectual property assets and usage to ensure that the corporation is not engaging in, or allowing its employees and agents to engage in activities resulting in intellectual property infringements.

While legislative amendments are being proposed around the globe to meet the new challenges presented by the need for intellectual property protection, the flexibility of development in the area of tort is likely to see new approached being adopted to existing torts and new torts being developed to make up for the inadequacies in legislation and the slow speed of legislative reform in this area.

STEVE WHITE
WHITE SW COMPUTER LAW
NOVEMBER 1999

www.computerlaw.com.au

© White SW Computer Law 1999

This article is a guide only and should not be used as a substitute for proper legal advice, readers should make their own enquiries and seek appropriate legal advice.