Do you have to pay for a software license when you buy the business –

It’s not an uncommon scenario: the client has bought a business, but some mission critical software is outdated and the license is not transferable except on payment of a fee. What do you do: Pay the fee or “save” the money and keep using? Thawley J found that the licensor’s consent to some time to evaluate options meant Shepparton Partners (SPC) had an implied license but thereafter infringed. Injunctions and $1,162,428.80 damages flowed.

I am guessing pretty much everyone in Australia at some point or another has experienced SPC’s canned fruit, vegetables or maybe fruit juices.

some facts

To run its business, SPC Ardmona (SaleCo) used QAD’s enterprise resource planning ERP software. It used the ERP software for everything: for sales orders and inventory management, procurement, manufacturing planning and control, service and support project management, distribution and finance. SaleCo had a perpetual license, but it was not transferable. SaleCo also paid an annual maintenance fee, which was paid up to 31 July 2019.

The version SaleCo used was the 2008 version. In 2018, however, QAD had approached SaleCo with a proposal to upgrade to the new, current 2017 version. SaleCo’s IT personnel agreed with the proposal but the price was high that agreement required sign-off by SaleCo’s ultimate owner – Coca-Cola Amatil.

Coca-Cola Amatil had decided to sell the SPC business and didn’t want to spend that money. The sale eventually went through in June 2019 to SPC. Before the purchase went through, QAD had written to SaleCo and SPC stating it would consent to the transfer of the license provided 3 conditions were met:

  1. Payment of a transfer fee of $424,392 and a maintenance fee for the next year of $177,816;
  2. Execution of an appropriate transfer agreement and a new license agreement
  3. Satisfaction of conditions 1 and 2 before 30 June 2019, otherwise the offer was automatically withdrawn.

There was also a quote to upgrade to the new, current cloud-based version of $755,000 per annum (although the amount seems to have been negotiable).

SPC, however, considered the QAD 2008 version was not “fit for purpose” although not “useless” and persuaded QAD it needed more time to consider its options. By letter dated 27 June 2019, QAD extended the time for acceptance initially to 31 July. There were further meetings, discussions and email so that ultimately the time for acceptance was extended until November 2019.

In November 2019, QAD suspected that SPC was likely to go with a different vendor. It wrote to SPC pointing out it had had 5 months to make a decision and decision was required. SPC wrote back saying that responsibility for paying the transfer/licence fee was the responsibility of Coca-Cola Amatil or SaleCo.

SPC continued to use the QAD 2008 software until 28 September 2020 when it implemented Microsoft Dynamic 365 as its ERP software.

Even after 28 September 2020, however, SPC continued to use the QAD 2008 software for “non-production purposes” such as extracting historical information for quality control or financial reasons. Amongst other things:

  • before the changeover to Microsoft, SPC used the software in “day to day” use;[1]
  • SPC made modified or customized copies of the QAD 2008 software including “test and development reproductions”;
  • after the changeover to Microsoft, it made an ‘historical copy’ of the QAD 2008 software on a different server;
  • it also made “back-up” copies on its servers.

It appears that SPC expected it would need to keep using the QAD 2008 software for “non-production purposes” for another seven years.

An implied license

Thawley J held (one would think largely uncontroversially) that the various ways SPC continued to use the QAD 2008 software involved reproductions of the whole or substantial parts of the software.

However, in the period from 27 June 2019 to SPC’s November letter,[2] SPC had an implied license to use the software so use in that period was not infringing. The implied license arose from the 27 June 2019 letter and the course of conduct between the parties until November.

Infringement and damages

Use after that period was not licensed and therefore infringed.

Thawley J awarded QAD $662,428.80 in compensatory damages and an additional $500,000 by way of additional damages.

The $662,428.80 amount was the transfer fee plus a maintenance fee for one year plus GST. Given the compensatory nature of damages under s 115(2), that was the loss QAD suffered.

Additional damages were appropriate as SPC at all times knew it needed QAD’s consent to the transfer of the license and that it was its responsibility to obtain that consent. Consequently, its infringement was flagrant. Also there was a need for deterrence.

Cross-claim against the vendors

SPC did run a cross-claim against Coca-Cola Amatil and SaleCo arguing that they had breached the business purchase agreement by failing to pay QAD the transfer and license fees.

These claims were said to arise essentially from the vendors’ obligations to use “best endeavors” to obtain a transfer of the license and do whatever they legally could, including rendering all reasonable assistance, to permit SPC to have the benefit of the license of the QAD 2008 software. There were also obligations on SaleCo to hold its rights in the assets of the business on trust for SPC.

The wording of the business purchase agreement was perhaps not as clear as it could be: it did make specific provision that the vendors did not have an obligation to pay fees and charges for certain key assets.

In the result, however, Thawley J concluded there had been no breach of their obligations by the vendors. At all times, the managing director of SPC knew that payment of the transfer and maintenance fees would be SPC’s responsibility. A key indicator of this had been the fact that all negotiations with QAD were undertaken throughout the enitre period by SPC. Coca-Cola Amatil and SaleCo were never involved.

If you are a software vendor in this sort of situation, you may need to be careful about the terms you let the new owner evaluate your software. In the end, it wasn’t a financial problem for QAD because it was only intended to charge a one-off fee. If the fee had been time based, say annual, it could have lost out. Purchasers and vendors also need to be clear about whose responsibility it is to pay the fees. Even if it were the vendor’s responsibility, the purchaser in SPC’s position was the one directly liable for infringement. An indemnity, or claim for breach of contract, would not be much help if the vendor has disappeared or distributed its assets after completion.

QAD Inc v Shepparton Partners Collective Operations Pty Ltd [2021] FCA 615 (Thawley J)

  1. Day to day use involved users connecting to the software using a user name and password. The QAD 2008 object code on SPC’s application software was then loaded into the server’s RAM and the code stayed in RAM until the server was shut down or (more likely) the user logged off: [79] ?
  2. Or possibly 10 December 2019 when QAD formally notified SPC the license was terminated. ?