You paid for it - but do you own it, and can you protect your investment?

By Peter Knight.

Key Points:
It is not enough to get an assignment of IP or even a promise of confidentiality. It is not even enough to get delivery of source code and other design documents. Investors in new product design must think carefully about protecting their investment by using effective "non-compete" clauses in well-designed contracts.

Telephonic Communicators International Pty Limited v Motor Solutions Australia Pty Limited [2004] FCA 942 (21 July 2004) is a warning to anyone who is developing valuable intellectual property to make sure ownership and protection of the IP has been sorted out. In this case, Telephonic Communicators International Pty Limited ("TCI") failed in an attempt to prevent a company which had developed software for it giving that software (or something very similar) to a competitor.

Background

TCI was a developer of various hardware and software products used for training car salesmen, and this included certain hardware and software for recording telephone calls (for teaching good telephone skills). TCI's owners did not themselves have the required computer skills, but had the knowledge and expertise required in respect of sales-training techniques, so they engaged one of the respondents, Scribe, to develop the necessary software and hardware in 1996. TCI instructed Scribe in precisely what was required, and Scribe wrote the code. The arrangements between the parties were never clearly documented – certainly, there was no assignment in writing of copyright as required by section 196(3) of the Copyright Act 1968 in respect of any assignment of copyright.

In June 2002, TCI learnt that Scribe had agreed to supply one of the products developed by Scribe, E-call24.com, for TCI to another company, Motor Solutions Australia Pty Limited ("MSA"). Legal proceedings in the Supreme Court ensued. The legal proceedings in the Supreme Court were resolved by a settlement deed dated 15 January 2003 which, although very oddly worded, made clear that TCI became the owner of the copyright in the E-call24.com software.

Scribe's employee Mr Murray formed another company, Logea, which was not bound by the agreed settlement in the Supreme Court and said that he had "rewritten" the E-call24.com software in order to create a new product which did exactly the same thing, called "Phone Wizard". Logea duly supplied this product to MSA.

The question before the Federal Court was whether the making and selling of the Phone Wizard product after 15 January 2003 was an infringement of the copyright belonging to TCI in E-call24.com. There was a question regarding the ownership of the copyright before that date, but the absence of any assignment in writing and the inability on the part of TCI to prove any agreement to bring an assignment into existence (Mr Murray would apparently have been prepared to sign it, had it been created) made this an impossible proposition.

Decision of the Federal Court

The difficulty facing the Court was one of evidence. The software of each of Phone Wizard and E-call24.com was written by Mr Murray using a software development tool called "Delphi", which produced Pascal code. To prove that Phone Wizard infringed the copyright in E-call24.com, TCI had to establish that the Phone Wizard software took a "substantial part" of the E-call24.com software.

The code of each of the products appeared to be different, yet each product did substantially the same thing in the same way. Infringement of copyright in computer software need not be proved by "literal" copying – that is word-for-word identity – but may be established by the taking of the sequence and logic of the code of the original, in the same way that the copyright in a play or a screenplay for a film may be infringed by another play or film which takes the same characters and sequence of events but uses different words.[1] On the other hand, merely adopting the "ideas" behind a work, and then creating your own, is not an infringement of copyright.

While there was no doubt that Mr Murray had access to the E-call24.com source code, the question was whether he copied, even subconsciously, a substantial part of E-call24.com in creating Phone Wizard.

As a result, to prove infringement, TCI engaged an expert, a research fellow and software engineer from the University of South Australia, Mr George, to make a side-by-side comparison of the logic of the two programs.

Unfortunately, Mr George appears to have been hampered somewhat in preparing his evidence because he was not provided with complete sets of all relevant software – including the software with which each of Phone Wizard and E-call24.com were meant to interact – and indeed was not able to actually operate either program. As a consequence, he was unable to identify what use particular files with which he was supplied might serve. He did establish that large sections of the code of each of Phone Wizard and E-call24.com were identical or nearly identical, but he was unable to say whether that came about because of the simple fact that both programs performed the same functions and were both written using Delphi, or whether this similarity came about by copying, or subconscious copying, on the part of Mr Murray. Mr George observed that the two programs were similar, but it seems he might have been saying this simply because they performed the same functions. His evidence was simply inconclusive.

Notwithstanding the finding of the Court that 28 percent of the lines of code of the TCI program was to be found in the Phone Wizard program, and that "there are large numbers of lines of code which are not only the same, but which are more or less in the same sequence"[2], the Federal Court decided against TCI. On a separate issue, it is noted that TCI was also unsuccessful in adducing sufficient evidence that the functionality of the training programs which TCI taught Scribe were confidential or secret, so TCI could not make out a claim of breach of confidence.

Comment

TCI's problems prior to 15 January 2003 were undoubtedly caused by its own failure to look after its own interests during the creation of the E-call24.com software and related products, and stand as an object lesson for all creators of new products using contractors to assure ownership of intellectual property in writing, and to consider the entry into appropriate restraints of trade.

In some ways, the Court was hampered in coming to its decision by the lamentable state of law in respect of infringement of copyright in computer programs after a string of very bad decisions of the High Court. The Court in this case, when trying to determine whether a "substantial part" of the E-call24.com software as required by copyright law, was prepared to overlook the large degree of physical identity between it and Phone Wizard, and the high likelihood of copying due to access, because it thought it had to find that what was copied was "essential" relying on the decisions of the High Court in Data Access and Autodesk "that in determining whether something is a reproduction of a substantial part of a computer program the ‘essential or material features of the [computer program] should be ascertained by considering the originality of the part allegedly taken'. This is to be assessed with ‘respect to the originality with which it expresses the algorithmic or logical relationship' which is the essential feature of a computer program."[3]

Similarly, the use of the notion of originality is misplaced here; in copyright law "originality" is concerned solely with authorship. It has never been required, and frequently rejected, that the worth or merit of what has been taken should be assessed.[4] Of course, there is a relevance to substantiality in certain cases of the amount of "labour, skill and judgement" shown by the author – this is particularly so when an author is re-using earlier materials not of his creation or where the subject matter is banal, in which case very exact copying may be required to establish infringement.[5] This may be relevant in a situation such as this, where a code authoring tool has been used, but to require in respect of the part of a computer program said to be taken consideration of "the originality with which it expresses the algorithmic or logical relationship" seems to require a consideration of inventiveness which is the proper domain of patent law, not copyright. Consideration of this here is questionable given that the author of both the original work and the alleged infringement was the same person.

In addition, the Court relied upon the same decision of the High Court in Data Access as well as Australia Video Retailers Association Ltd v Warner Home Video [6] to conclude that it must be established by the plaintiff in an infringement action that both the material said to have been copied and the resulting copy are "computer programs". The Court found that there was no evidence at all that the "relevant files" in this case were computer programs at all! [7]

While all this is troublesome , the fact remains that TCI had more than one occasion to get its relationship with the software developer right, and to put itself in a position to protect its investment, without going to court. In any project for software, website or other product development:

1. obtain an assignment of copyright, not only in all deliverables but working documents;
2. ensure delivery of all source code/design documentation, in both compilable and paper forms (the design documents, such as flow charts or entity diagrams can be very useful in dealing with problems such as those encountered by TCI); and
3. because, as the Telephonic Communications case teaches us, even these provisions will not be sufficient because of the unsatisfactory state of the law, consideration needs to be given about the terms of a reasonable "restraint of trade" clause in your contract under which, for a reasonable period of time, not merely the same, but similar, products will not be supplied to competitors – by the developer or by any related body corporate, dealer or other person associated with the developer.