Racing & Wagering Western Australia v Software AG (Australia) Pty Ltd
A recent decision of the Full Court of Australia’s Federal Court demonstrates how important it is for licensors and licensees of business critical software to make sure that their licence agreements clearly spell out the scope of the rights granted to the licensee.
The decision is also of interest because it is one of the few cases in which a Court has looked at section 47F of the Copyright Act 1968 (Cth). That section provides that a software licensee does not infringe the copyright in the licensed software if the licensee reproduces or adapts the software for the purpose of testing the security of the original copy, or investigating or correcting a security flaw in, or vulnerability to unauthorised access of, the original.
The software licence agreement
Software AG (Australia) Pty Ltd (SAG) granted Racing & Wagering Western Australia (RWWA), a perpetual, non-transferable and non-exclusive licence to use a software system (System):
- on a single machine (RWWA’s mainframe computer);
- at a designated location (RWWA’s office in Osborne Park, Perth); and
- solely for the internal administration of RWWA’s business or the processing of its own data.
The agreement also stated that RWWA was not permitted to:
- permanently or temporarily move the System or install it at any location other than the designated location;
- allow any third party to operate the System on its behalf as part of any outsourcing, facilities management or similar arrangement; or
- copy, reproduce or adapt the whole or any part of the System except as permitted by clause 12.3 of the licence agreement.
Clause 12.3 was central to the case, because it authorised RWWA to copy the System (in object code only) for archival or emergency restart purposes. The meaning of the phrase ‘emergency restart purposes’ was a key issue considered by the primary judge in the original trial and the Full Court on appeal.
How did RWWA use the System?
In addition to using the System as installed at the designated location for its business purposes, RWWA and its disaster recovery contractor, Kaz Technology Services Pty Ltd (Kaz):
- made a copy of the System, by a process known as disk mirroring (DR Copy); and
- kept the DR Copy at a disaster recovery site operated by Kaz.
On several occasions, off-duty RWWA staff (but not Kaz personnel) ran tests using the DR Copy at the DR site. RWWA accepted that the DR Copy was ‘installed’ on the mainframe at the DR site during the tests.
SAG’s claim
In summary, SAG claimed that the RWWA’s ‘back up rights’ under the licence agreement only entitled it to make backup copies of the distribution tapes on which the System was initially supplied to RWWA. SAG claimed that RWWA was required to pay it additional licence fees for making the DR Copy and running the tests.
It follows that if RWWA had breached the licence agreement its use of the DR Copy would have infringed the copyright in the System.
RWWA’s claim
The case came to trial because RWWA sought declarations from the court that, in summary:
- its use of the DR Copy as described above did not breach the licence agreement; and
- in any event, its use of the DR Copy was permitted under sections 47C and 47F of the Copyright Act 1968 (Cth), which provide defences to infringement of the copyright in computer programs in certain circumstances:
- in the case of section 47C, if a backup copy of the program is made and is used only to store and/or use the backup in lieu of the original being lost, destroyed or unusable; and
- in the case of section 47F, if a reproduction or adaptation of a computer program is made to the extent reasonably necessary to test, in good faith, the security of the original copy or of a computer system or network of which the original is a part.
The result
The combined effect of the judgments at first instance and on appeal was as follows:
- RWWA’s did not breach the licence agreement when it made the DR Copy and stored it at the DR Site.
- It was necessary to interpret clause 12.3 of the licence agreement , which permitted RWWA to make a copy for ‘emergency restart’ purposes, with commercial common sense.
- ‘Emergency restart’ means the same thing as ‘disaster recovery’.
- As RWWA did not did not breach the licence agreement when it made the DR Copy and stored it at the DR Site, common sense required clause 12.3 to be read as permitting testing of the DR Copy (even though the clause itself only refers to making the copy). The reason for this was that clause 12.3 would be rendered pointless if the DR Copy could not be tested to make sure that it was suitable for emergency restart purposes.
- In addition, RWWA was permitted to make the DR Copy because of section 47C of the Copyright Act, because the DR Copy was a copy of the original System and was made for the purposes permitted by the section (re-use if the original is lost, destroyed or unusable).
- The primary judge held that RWWA was also permitted to test the DR Copy, not only under the licence agreement, but also under section 47F of the Copyright Act.
- The Full Court agreed that the testing was permitted by the licence agreement but did not agree that it was permitted under section 47F.
- They held that section 47F only permitted testing of the original copy of the System, not the DR Copy. In addition, the section permitted the testing of the System against interferences or abuses such as hacking and viruses, not, as the primary judge found, testing the DR Copy to ascertain whether the System itself would remain operative if the original were destroyed by some catastrophic event at the head office of RWWA.
Conclusion
The key lesson from this case is that parties to a software licence agreement need to make sure that all permitted uses, and restrictions on use, of the software are clearly spelt out.
If there are ambiguities in the wording, a court will impose what it regards as a common sense interpretation, which may not align with what one or other party assumed was the correct reading of the agreement.
The defences to infringement of the copyright in computer programs set out in Division 4A of the Copyright Act, are likely to be given a restrictive reading by courts. This means that software licensees should make sure that their rights to use the software for back-up and testing purposes are clearly spelt out in the licence agreement.
During the trial, there was evidence that a SAG operations manual stated that SAG’s licensees were permitted to install the software on a backup system for disaster recovery testing up to 5 times a year at no cost. This conflicted with the interpretation of the licence agreement put forward by SAG during the proceedings and would not have assisted its case. This highlights how important it is for licensors to make sure that their licensing policies and operational dealings with licensees are aligned.
by Paul Noonan and Margarita Varigos