A guarantee of non-infringement for software supplies to Australian “consumers”?

From 1 January 2011 software will be characterised as goods for the purposes of the consumer guarantee provisions of the Australian Consumer Law (ACL).  Suppliers of software will likely amend their standard licence terms to mitigate the risk of unlimited liability for losses suffered by Australian “consumers” as a result of the software infringing a third party’s IP rights.

Who does this affect?

The new laws raise issues for all software licences with Australian end-customers where either:

  • the software is “of a kind ordinarily acquired for personal, domestic or household use or consumption”; or
  • the amount paid or payable for the software is $A40,000 or less.

Those end-customers are taken to be “consumers” by the ACL, even if they are multinational corporations or government entities well-equipped to negotiate to protect their interests.

What has happened?

As we explained here, under current laws the supply of software can be treated as a supply of goods (for example, when the software is sold on DVD) or as a supply of services (for example, when the software is supplied through a digital download mechanism).  That is going to change from 1 January 2011 when the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth) commences.  That legislation replaces Part V Division 2 of the Trade Practices Act, which operates to imply non-excludable conditions and warranties into contracts for the supply of goods and services to “consumers”, with a new regime of consumer guarantees.  Under the old regime, consumers had remedies under contract law for breach of the non-excludable conditions and warranties.  Under the new regime, consumers will have statutory remedies and the consumer regulator, the ACCC, will be able to take action on behalf of consumers.

One of the amendments that will come into effect is that computer software will be taken to be “goods” for the purposes of the ACL.  One consequence is that the guarantee as to undisturbed possession will apply to the supply of software to a consumer (s 52 of the ACL).  This is one of the consumer guarantees in relation to which a supplier cannot limit their liability (s 64A of the ACL).

How do the consumer guarantees treat  IP infringement?

In Microbeads v Vinhurst Road Markings [1975] 1 WLR 218 the English Court of Appeal held that Microbeads had breached the warranty of quiet possession implied into a contract by operation of the Sale of Goods Act when they sold road marking equipment to Vinhurst Road Markings.  The breach occurred because a couple of years after Vinhurst purchased the machines, a third party commenced proceedings against Vinhurst alleging that the use of the machines infringed the third party’s patent.  In the sale of goods dispute between Microbeads and Vinhurst, the Court of Appeal assumed the validity of the third party’s patent and that use of the machines by Vinhurst infringed the patent.  In those circumstances, the court found that Vinhurst’s quiet possession of the machines had been disturbed because the use of the machines could be restrained and a court might order delivery up if the infringing machines to the patent holder.

The basic principle in s 52(1) of the ACL is that a consumer has the right to undisturbed possession of the goods.  This principle applies to goods supplied by way of hire or lease, but only for the period of the hire or lease: s 52(4).  However, the ACL also contains a concept of a “supply of limited title”, and if there is such a supply, a modified guarantee will apply.  A supply of limited title (see s 51(2)) exists:

“if an intention that the supplier of the goods should transfer only such title as the supplier, or another person, may have:

(a) appears from the contract for the supply; or

(b) is to be inferred from the circumstances of that contract”.

In those circumstances the modified guarantee (found in s 52(3)) is that:

“the following persons will not disturb the consumer’s possession of the goods:

(c)  the supplier;

(d) if the parties to the contract for supply intend that the supplier should transfer only such title as another person may have ‑ that other person;

(e) anyone claiming through or under the supplier or that other person (otherwise than under a security, charge or encumbrance disclosed to the consumer before the consumer agreed to the supply)”.

Software suppliers will, clearly, be interested in seeking to characterise their software licences as supplies of limited title.  If they could succeed in that endeavour, there would be no statutory guarantee that the consumer’s possession of the goods would be undisturbed by claims from third party IP owners.

If you asked an IP lawyer whether a supply of software involved a transfer of title, the likely response would be that title only transfers if the transaction involves an assignment of the IP rights subsisting in the software.  Software licensing transactions rarely involve an assignment of IP from the supplier.  Rather, they almost always consist of a simple grant of a non-exclusive licence.

Software suppliers seeking to rely on the “supply of limited title” concept will need to identify some “goods” the title to which will be transferred as part of the transaction.  The most likely candidate is the electronic file that contains the copy of the software.  Whether the software is distributed on a tangible medium such as a DVD or through a digital download mechanism, the end-customer will receive an electronic file.  Presumably such a file would be characterised as “goods” for the purposes of the ACL.  If the licence provided that the licensee is entitled to possession of that file, and also provided that the supplier intends to transfer only such title as the supplier has in that file, the supplier would have a reasonable argument that the transaction involved a “supply of limited title”.  Most software suppliers would need to amend their standard software licences to take advantage of this argument.  The vast majority of the licences provide that the software is “licensed, not sold”, which is inconsistent with the idea that the licensor is transferring title to a particular electronic file.

How might the market respond?

It will be interesting to see if suppliers of software with a material customer base of Australian “consumers” seek to amend their licence terms before 1 January 2011.  Some software suppliers already bear the risk of unlimited liability for third party IP infringement, and for them there will be no material incremental impact.  But it is usually only the very largest software suppliers who take this approach, because they have robust procedures in place to mitigate the risk of launching a product that contains infringing code.  The majority of software suppliers seek to limit their liability for infringement of third party IP rights, and they will need to decide whether they are prepared to bear the risks imposed by the new regime.  One category of software suppliers likely to be particularly affected by the new regime is suppliers of open source software, because their software is typically supplied free of charge or for a nominal fee, with the result that their Australian customer base will consist almost entirely of “consumers” for the purposes of the ACL, even if they focus on the enterprise market.  Many such suppliers are likely to be impecunious and not worth suing.  But some open-source software suppliers have material assets to protect, and they will be justifiably concerned about the potential impact of these reforms on their business.

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