Fisher & Paykel Financial Services Limited v Karum Group LLC no.3 [2012] NZHC 794 (27 April 2012)

Last Updated: 16 May 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2006-404-6646 [2012] NZHC 794

BETWEEN FISHER & PAYKEL FINANCIAL SERVICES LIMITED

Plaintiff

AND KARUM GROUP LLC Defendant

Hearing: 26 March 2012

Counsel: AR Galbraith QC and JF Anderson for Plaintiff

JG Miles QC, ZG Kennedy and J Wilson for Defendant

Judgment: 27 April 2012

_{JUDGMENT (NO 3) OF RODNEY HANSEN J}

This judgment was delivered by me on 27 April 2012 at 3.00 p.m., pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date: ...............................

Solicitors:

A J Park (K W McLeod), P O Box 565 Auckland

Email: [e-mail] (jess@[e-mail]) MinterEllisonRuddWatts, P O Box 3798 Auckland

_{Email: [e-mail]}

Copy for:

Alan R Galbraith QC, P O Box 4338 Auckland 1140

Email: [e-mail]

Julian G Miles QC (J F Anderson), P O Box 4338 Auckland 1140

_{Email: [e-mail] / [e-mail]}

FISHER & PAYKEL FINANCIAL SERVICES LIMITED V KARUM GROUP LLC HC AK CIV-2006-404-

6646 [27 April 2012]

Introduction

[1] In judgment (No 2), delivered on 22 February 2012, I made rulings on the interpretation of documents relied on by Karum to establish its right to counterclaim for infringement of copyright. They were the first step to the determination of Karum’s application for leave to amend its counterclaim to plead, in the alternative, that it is the exclusive licensee of the software at issue in this case. Proceeding from those findings, I have heard further argument on whether the amendment should be made and on the admissibility of evidence which Karum seeks to adduce in support of its application.

[2] It is convenient to deal with the remaining issues in this order: (a) Admissibility of evidence.

(b) Whether Karum has an exclusive licence.

(c) Whether, in light of my findings on these issues, the application to amend should be granted.

Admissibility

[3] The admissibility issue arises out of an affidavit by Matthew Wayde Appel filed by Karum in support of its application for leave. Mr Appel is the Chief Administrative Officer of Zale Delaware Inc, the parent company of a group of companies, one of which, Zale Corporation (Zale), first developed the software. Mr Appel deposed to the circumstances in which the documents in issue were executed and referred to some of the key provisions. He went on to state Zale’s understanding of what the documents meant before recording its attitude to the proceedings.

[4] F&P complained that much of the affidavit was misleading and should be excluded because it recorded facts as matters of personal knowledge when F&P’s enquiries established that Mr Appel did not join the Zale group until May 2009. Of

greatest concern, however, was the evidence directed to the interpretation, intention and effect of the documents.

[5] It is unnecessary for me to address F&P’s objections in detail because the admissibility of the disputed passages is largely academic. I did not need to refer to Mr Appel’s evidence for the purpose of interpreting the documents. Had I done so, I would have ignored the plainly inadmissible evidence on the meaning of the agreements. The only passage that has continuing relevance is as to Zale’s current interest in and attitude to this proceeding, a matter on which it accepted he is entitled to give evidence on behalf of Zale, to which I will later refer.

Exclusivity

[6] Two arguments are advanced to support the contention that Karum is an exclusive licensee:

(a) That my interpretation of the documents entails a finding that Karum was granted an exclusive licence.

(b) Alternatively, the subsequent merger of the copyright owner and its subsidiary resulted in Karum acquiring an exclusive licence.

Exclusivity under dissolution agreement

[7] As already mentioned and discussed in more detail in judgment (No 2),1 the CMS software was first developed by Zale. In 1998, Zale and PRJ& (the predecessor of Karum) formed a partnership to enhance, further develop and market the software developed by Zale. A partnership agreement was entered into between a Zale subsidiary, ZRCM2 Inc, and Peter R Johnson & Associates Inc (the former

_{name of PRJ&). Zale granted a licence of the software to the partnership.}

1 At [6] et seq.

[8] Karum argued that the licence was, in substance, an assignment of the software. I rejected that contention.2 I found that the parties intended that Zale should retain ownership of the original CMS software.3

[9] In 1992, following the filing of bankruptcy proceedings against Zale and ZRCM2, the partnership was dissolved. An agreement was entered into (the dissolution agreement). Clause 4 relevantly provides:

4. Licenses. As of the effective date of this Agreement:

1. Section 7.4 of the Zale License is amended to provide that: (i) the Zale License is terminated;

(ii) the Zale License is deemed to be two new licenses, one granted to each partner, on the terms and conditions of the Zale License, and

(iii) neither partner shall be required to pay Zale a royalty for the continued use of the original CMS software. Section 9.3(b) of the Zale License is deleted.

b. Section 8.2 of the Partnership Agreement and the CMS License is hereby amended and superseded by this Agreement to provide that PRJ&, ZRCM2, Zale, Peoples, or any permitted assigns shall have a perpetual, nonexclusive, royalty and expense free license to use the enhanced CMS software developed by the Partnership; provided that ZRCM2, Zale, Peoples, or any permitted assigns shall have the right only to use the enhanced CMS software in processing their own data and data of their subsidiaries and shall not have the right to commercially exploit the enhanced CMS software by granting sublicenses, processing data of third parties or otherwise. PRJ& shall provide any and all upgrades and enhancements of and/or additions to existing functionality of the enhanced CMS software which are or become part of the CMS Software to any of the foregoing through December 13, 1995 on a perpetual, nonexclusive, royalty and expense free basis. Zale and ZRCM2 acknowledge that such upgrades and enhancements are likely not to be operative in conjunction with software which has been modified, and that PRJ& will not be obligated to retrofit the same.

...

[10] I found that cl 4a granted a new licence to the original software to each partner on the terms and conditions of the Zale licence, excluding the requirement to

2 _{At [17].}

3 At [20].

pay a reasonable royalty.4 I rejected the submission that cl 4a “in substance” effected

assignments of the original CMS software.5

[11] I found that cl 4b granted to the named parties the right to continued use of the enhanced CMS software while making it clear that only PRJ& had the right to commercially exploit the software.6 I found that the reference to enhanced CMS software in cl 4b included the original CMS software to the extent that it was incorporated in the software developed by the partnership.7 Accordingly, PRJ& was granted the exclusive right to exploit the enhanced software.8

[12] For Karum it is submitted that the licence granted to PRJ& under cl 4b is an exclusive licence, notwithstanding that Zale retained copyright in the original CMS software and that Zale subsidiaries had rights to use (though not to exploit) the software. Mr Miles QC said that the grant by Zale to PRJ& of the exclusive right to commercially exploit the enhanced software is an exclusive licence under the Copyright Act 1994. If so, Karum has the same rights and remedies in relation to an

infringement of copyright as if the licence were an assignment.9 It is submitted that

it makes commercial sense that Karum should be able to prevent third parties from commercially exploiting the enhanced CMS software in an unauthorised manner; and similarly, the right to sub-licence would be meaningless without a corresponding right to enforce that sub-licence.

[13] For F&P, Mr Galbraith QC submitted that the right to commercially exploit the software is not a right which may be the subject of an exclusive licence under the Act. Nor, he said, is it a right alleged to have been breached by Karum. He submitted further that the retention by Zale of rights in the original software under

_{cl 4a of the dissolution agreement told against the grant of an exclusive licence.}

4 _{At [24].}

5 _{At [26].}

6 _{At [25].}

7 _{At [31].}

8 _{At [32].}

9 Under the Copyright Act 1994, s 123.

Exclusive licence under the Copyright Act 1994

[14] “Exclusive licence” is defined in s 2(1) of the Copyright Act as:

A licence in writing, signed by or on behalf of a copyright owner, authorising the licensee, to the exclusion of all other persons (including the copyright owner), to exercise a right that would otherwise be exercisable exclusively by the copyright owner.

[15] By s 16, the owner of copyright in a work has exclusive right to do the following acts in New Zealand:

(a) To copy the work:

(b) To issue copies of the work to the public, whether by sale or otherwise:

(c) To perform the work in public: (d) To play the work in public:

(e) To show the work in public:

(f) To communicate the work to the public: (g) To make an adaptation of the work:

(h) To do any of the acts referred to in any of paragraphs (a) to (f) of this subsection in relation to an adaptation of the work:

(i) To authorise another person to do any of the acts referred to in any of paragraphs (a) to (h) of this subsection.

[16] The rights and remedies of an exclusive licensee are defined by s 123:

123 Rights and remedies of exclusive licensee

(1) An exclusive licensee has, except against the copyright owner, the same rights and remedies under any of sections 120 to 122P in respect of matters occurring after the grant of the licence as if the licence were an assignment.

(2) The rights and remedies of the exclusive licensee under any of sections 120 to 122P are concurrent with those of the copyright owner.

(3) In proceedings brought by an exclusive licensee pursuant to this section, a defendant may avail himself or herself or itself of any defence that would have been available if the proceedings had been brought by the copyright owner.

[17] The first issue arising for consideration is whether, as Karum submits, an exclusive licence may be granted even when the licensor reserves rights which are also the subject of the grant to the licensee. Karum’s submission relies on the following passage from Copinger and Skone James on Copyright:10

... Where the licensor reserves to himself rights which are also the subject of the grant to the licensee, the licence obviously is not exclusive. Where some rights are reserved, it will depend on the construction of the licence whether there is any overlap with the rights granted. It is possible that there can be such a thing as an implied equitable statutory exclusive licence which would entitle the licensee to call for a statutory exclusive licence in the same way as an informal assignee is entitled to call for a legal assignment. In order to establish an equitable statutory exclusive licence it would presumably have to be shown that the parties had agreed and that the licence should have the characteristics of a statutory exclusive licence, in particular that the licence should be committed to writing signed by the licensor and that the licensee should be entitled to bring infringement proceedings.

The statutory exclusive licence referred to in this passage concerns the the Copyright, Designs and Patents Act 1988 (UK). However, the part of the 1988 Act that applies to the rights and remedies of an exclusive licensee is drafted in the same terms as the Copyright Act 1994.11

[18] Copinger cites a decision of the Australian Federal Court, Sega Enterprises v Galaxy Electronics,12 where the grant of an exclusive right to exhibit films in games arcades, coupled with a reservation to enable the licensor to supply its own arcades, was held in strike out proceedings to be arguably capable of being a grant of an exclusive licence. The issue in that case was whether the licensor’s reservation derogated from the licensee’s rights so as to deny the licence the quality of an

exclusive licence. The licensee contended that the rights were divisible and that its subset of rights constituted an exclusive licence that met the statutory definition.13

The Court agreed, considering that the “transmissibility of copyright by assignment,

_{including partial assignment” logically applied to exclusive licences:}14

10 Copinger and Skone James on Copyright (16th ed, Thomson Reuters, London, 2011) at [5-208] (Copinger).

11 Both s 101(1) of the 1988 Act and s 123(1) of the 1994 Act state that an exclusive licensee has, except against the copyright owner, the same rights and remedies as if the licence had been an assignment.

12 _{Sega Enterprises Pty Ltd v Galaxy Electronics Pty Ltd (1998) 39 IPR 577, (Sega Enterprises).}

13 _{Which is not materially different from s 123(1) and (2) of the Copyright Act 1994.}

14 Citing the equivalent of the Copyright Act 1994, s 113.

The argument was that, in the context of a statute permitting limitation of assignments “in any way”, the definition of s 10 of an exclusive licence, expressed as a licence “to do an act”, should be understood as embracing an exclusive licence to do something falling within part only of a category of things the copyright owner might himself have done. It would be odd if the Act permitted an assignment of some “slice” of the rights of the copyright owner, but did not permit the assignee, the new owner of that slice, to grant an exclusive licence of it which, if it could be granted, would be treated by s 119 [which grants an exclusive licensee the right to sue] as conferring the rights of an assignee. Indeed, there would be some difficulty in reconciling that position with the terms of s 30, which provides that where, as a result of an assignment, different persons are the owners of a copyright in respect of its application to the doing of different acts, “the owner of the copyright, for any purposes of this Act, shall be deemed to be the person who is the owner of the copyright in respect of its application to the doing of the particular act or class of acts ... that is relevant to that purpose” ... The question may be asked, why would not “any purposes of this Act” include the purpose of the grant of an exclusive licence?

[19] Burchett J referred to PM Sulcs & Associates Pty Ltd v Detroit Deisel-Allison Australia Pty Ltd,15 in which Lehane J expressed doubt that an exclusive licence would require the assignment of an unlimited right, as opposed to one that related to limited circumstances or purposes. He noted that the parties had conceded that an exclusive licence could be established where an owner of copyright assigned or licensed only part of a right (e.g. an exclusive licence to reproduce for a limited purpose).16

[20] Burchett J also referred to Young & Anor v Odeon Music House Pty Ltd17 as authority for the proposition that the reservation to the owner of the copyright of “a carefully restricted right of supply” is not necessarily inconsistent with the grant of an exclusive licence. The plaintiff in that case had a licence to distribute in New South Wales sound recordings supplied to him, as well as the right to reproduce them in Australia under certain conditions. The Court considered the primary clause alongside the other provisions in the agreement, and concluded that though the licence covered narrowly defined rights, as Young was able to exercise those rights

_{exclusively, an exclusive licence was established by necessary implication.}18

15 PM Sulcs & Associates Pty Ltd v Detroit Deisel-Allison Australia Pty Ltd (unreported, 31

_{October 1997) at 9.}

16 Citing Lahore Copyright and Designs Intellectual Property Law in Australia (looseleaf ed, Butterworths).

17 _{Young & Anor v Odeon Music House Pty Ltd & Ors [1978] RPC 621.}

18 Ibid, at 630-631.

[21] An implied equitable statutory exclusive licence may accordingly arise even though the licensor has retained other rights associated with ownership of copyright. An exclusive licensee has the same rights and remedies (except against the copyright owner) as if the grant of licence were an assignment19, so that rights capable of being assigned may likewise be the subject of an exclusive licence.20 It follows that the “slice” of rights which a copyright owner may assign by partial assignment can also be the subject of an exclusive licence.21

[22] It remains to consider whether Karum’s right to commercially exploit the enhanced software is capable of being the subject matter of an exclusive licence.22 It can be if it is a right that would otherwise be the exclusive right of the copyright holder and there is no overlap between the rights retained by the licensor and those granted to the licensee.

[23] The right to commercially exploit the software is demonstrably one which is exercisable only by the owner. It includes the exclusive right to copy the work, issue copies of the work to the public and to make an adaptation of the work in terms of s 16(1)(a), (b) and (g). These are breaches relied on by Karum. As they are the exclusive rights of the copyright owner, they may be the subject of an exclusive licence.

[24] There is no overlap between rights retained by Zale and those granted to Karum. Zale retained only limited rights to the use of the software. It retained no rights which would permit it to commercially exploit the software.23

[25] The fact that Zale retains ownership of the copyright to the original CMS

_{software is not a bar to Karum suing as exclusive licensee. Its concurrent rights}

19 _{Copyright Act 1994, s 123(1), Copinger at [5-208] and cases cited therein.}

20 Copyright Act 1994, ss 2(1) and 123; Copinger at [5-208] “the rights granted by such a licence

must be such as to be capable of forming the subject matter of a valid assignment of copyright and, likewise, that whatever is capable of forming the subject matter of a valid assignment” and vice versa. See also [5-204]-[5-206], and Sega Enterprises.

21 _{Sega Enterprises, Copyright Act 1994, s 113.}

22 _{The requirement for the licence to be in writing is not in issue.}

23 See Judgment (No 2) at [25], [31] and [32].

simply require (as Karum seeks) that it obtain leave to proceed unless Zale is joined.24

Exclusivity following subsequent merger

[26] The alternative and, Mr Miles emphasised, secondary ground relied on by Karum to establish that it has an exclusive licence relies on the merger, following the dissolution agreement, of Zale and its subsidiary ZRCM2. By cl 4a of the dissolution agreement, the two partners, ZRCM2 and PRJ&, were each granted a new licence to the original software on the terms and conditions of the original

licence, excluding the requirement to pay a reasonable royalty.25 As the original Zale

licence was itself an exclusive licence, Karum submits that what remains following merger is an exclusive licence to PRJ& of the original CMS software.

[27] While beguiling in its simplicity, the argument is flawed. Mr Galbraith correctly identified the fallacy. As he said, the merger could not and did not change the status of PRJ&’s licence. As a result of the merger, PRJ& became the only licensee of the copyright in the original CMS software. But that did not convert its non-exclusive licence to an exclusive one. PRJ& became the sole licensee but not the exclusive licensee of the original CMS software.

Application to amend

[28] Rule 1.9 of the High Court Rules permits the Court at any stage of a proceeding to make any amendments to any pleading “that are necessary for determining the real controversy between the parties”. In addition to establishing that jurisdictional requirement, an applicant for amendment must surmount what the Court of Appeal in Elders Pastoral Ltd v Marr26 described as “the three formidable

hurdles” of showing that the amendment: 27

_{(a) Is in the interests of justice;}

24 _{Copyright Act 1994, s 124.}

25 _{See [6] of this judgment.}

26 _{Elders Pastoral Ltd v Marr [1987] NZCA 18; (1987) 2 PRNZ 383 (CA).}

27 At 385.

(b) Will not significantly prejudice the other party; and

(c) Will not cause significant delay.

[29] The amendment sought is to amend paragraphs 60 and 61 of the second amended statement of defence and counterclaim and to add an additional paragraph. The proposed redrafted paragraphs, showing deletions and additions, are as follows:

[30] As I have found that, contrary to what is pleaded in paragraph 60, Karum is not the copyright owner of the CMS software but is an exclusive licensee, the addition of the new paragraph 61 is necessary in order to determine the matters in issue. That does not, however, extend to the proposed addition of subparagraph (d) to paragraph 60 and the inclusion of subparagraph (h) in the proposed new paragraph

61. It was never part of Karum’s case that it had exclusive rights to issue copies of the CMS software to the public, whether by sale or otherwise. The case was not presented or argued on that basis and Mr Miles was being no more than realistic when he said that “he would not die in a judicial ditch” over the addition of those subparagraphs.

[31] The question then is whether, shorn of those subparagraphs, the amendments should be permitted having regard to the factors relevant to the exercise of the discretion.

[32] Subject to a consideration of the issues of prejudice and delay, I am satisfied that the interests of justice favour granting the amendment, notwithstanding the lateness of the application. If the amendment is not made, Karum’s copyright cause of action effectively falls to the ground. It advanced its case at trial on the basis that it was the owner of the CMS software in its entirety. If, as I have found, Karum is not the owner of the original CMS software, it cannot maintain major claims of infringement. It could have sought to prove ownership of copyright in the

_{enhancements developed by the partnership,}28 _{but that was not the way in which it}

28 Copyright Act 1976 (US), s 103(b); Copinger at [7-39]; Copyright Act 1994, s 14(2); Henkel

KgaA v Holdfast [2007] 2 NZLR 577 at [37]; and [32] of Judgment (No 2).

presented its claim. For practical purposes, Karum can establish its case for infringement of copyright only on the basis that it is the exclusive licensee.

[33] From the outset Karum was aware that its claim to ownership of the CMS software was disputed. F&P’s statement of defence to Karum’s counterclaim denied the claim to ownership. No further particulars were sought by Karum and it was not until F&P opened its case that Karum became aware of the basis on which ownership of copyright was disputed. This led to an application to call further evidence and

further applications after trial, including the application to amend.29

[34] Although Karum must shoulder responsibility for failing to scrutinise more carefully the basis for its claim to ownership of copyright in light of F&P’s denial, I do not think it has done anything which should deny it the right to have its copyright claim determined, provided that can be achieved without material prejudice to F&P. I do not think delay is a material consideration in this case. The proceeding was filed as long ago as 2006. It arises out of events which took place in 2004 and 2005. The further delay occasioned by the amendment is not significant against this background.

[35] Prejudice is said to arise from the proposed amendment because it denies F&P the opportunity to enquire into Zale’s ownership of copyright in the original software. Mr Galbraith said that, on the then pleadings, FPF did not need to concern itself with the issue of Zale’s ownership. Had the pleadings been appropriately amended before trial, FPF would likely have pursued discovery and/or interrogatories from Zale and conducted its cross-examination differently.

[36] Many of the suggested lines of enquiry which might otherwise have been pursued, such as the circumstances in which the relevant agreements were entered into and actions taken by Zale subsequent to the dissolution agreement, can have no relevance in light of my findings on the meaning and effect of the documents. Those which could or might conceivably have been pursued had Zale relied on an exclusive licence instead of a flawed claim to ownership, relate to Zale’s development of the

_{original software.}

29 See Judgment (No 2) at [2].

[37] I do not exclude the possibility that F&P may have conducted its case somewhat differently had it not felt able to rely on what it saw as a misconceived claim by Karum to ownership of the software. There is the theoretical prospect of prejudice arising as a result. I say theoretical because I have been given no reason to think that Zale’s claim to ownership of the original software could have been undermined. Such prejudice is insufficient to outweigh factors favouring the grant of leave.

[38] In order to counter any risk of prejudice, however, I would have been prepared to make the grant of leave conditional on F&P having the right to further relevant discovery, interrogatories and/or for the recall of witnesses, at Karum’s cost. Mr Galbraith advised that, given the additional delay and cost such steps would necessitate, were leave granted, F&P would not pursue discovery or other steps in the proceeding. Accordingly, F&P would not oppose an order under s 124 of the Act for leave to proceed without Zale being added as a party.

[39] Having regard to that concession, Zale’s limited interest in the software and the evidence of Mr Appel that Zale has no interest in the proceedings and does not wish to be involved, I propose to grant the application for leave to amend on the basis that Zale is not joined. I record, however, that if F&P wishes to review its decision not to pursue discovery from Zale or take other steps in the proceeding as a consequence of the amendment, it has leave to apply to do so.

Result

[40] The application to amend is granted so as to permit the amendments to paragraph 60 in accordance with the draft third amended statement of defence and counterclaim filed, excluding subparagraph (d); and to add paragraph 61 excluding subparagraph (h).

[41] Unless F&P advises by memorandum filed within 14 days of its intention to review its decision not to seek discovery or take further steps in the proceeding, I will proceed to determine the remaining substantive issues.

[42] F&P seeks full solicitor/client costs in relation to Karum’s post-trial applications, to be addressed discretely rather than reserved until the ultimate outcome of the proceedings. I consider that is appropriate. The issue may be addressed by memoranda, that of F&P to be filed within 28 days. Karum’s memorandum in response to be filed within a further 14 days.