Term of implied licence to use software
NOEMALIFE v INFINITT [2013]
The Court was asked to consider whether an implied royalty-free licence granted in relation to software which was used for the purposes of a services agreement, automatically continued after the agreement's initial period when it was extended.
Facts:
- In 2003 a company then known as Ferrania (F) entered into a services agreement (“Agreement”) with a customer, the Newcastle NHS Trust (T). The Agreement could be extended beyond its initial term of seven years in six month periods (seemingly for regulatory reasons) for up to a maximum of three years. Neither F nor T could unreasonably refuse a request for such an extension. The services to be provided included the provision by F to T of some software. F did not own the software, but it had an implied licence from its sister company which allowed it to use and exploit the software without any obligation to pay a royalty fee.
- Noemalife (N) later acquired ownership of the copyright in the software from F’s sister company. It was common ground that, under s90 (4) of the Copyright, Designs and Patents Act 1988, N was bound by the implied licence granted to F in 2003.
- In September 2010 the Agreement was extended by another six months. Later it was extended for a further two and a half years, to 30 September 2013.
- N argued that at the expiry of the initial term of the Agreement a new implied licence came into effect, a term of which was that F would pay a reasonable fee for the continued right to use and sub-license the software. F’s case was that the original implied licence extended to cover any period for which the Agreement was extended pursuant to its terms.
- The Court had to consider whether the original royalty free implied licence continued after the initial term of the Agreement and, if so for how long, or if not, whether a new implied licence was granted and on what terms.
Decision:
- Extension of Term
- Any agreed extension of the original term of the Agreement was a ‘change’ and, as such, it was governed by the contractually agreed mechanisms regarding the control of change. This included the obligation on both parties not to unreasonably withhold consent to any requested change.
- The Court decided that the original implied licence must extend to include any extension of the Agreement that F was contractually obliged to accept. As the first extension of six months was made in accordance with the terms of the Agreement ie it was a six month block, and there was no reason for F to reasonably refuse such an extension, the implied royalty free licence was found to have been automatically extended by six months.
- The Court commented that the additional 30 month extension was not made under the ‘contractual machinery’ of the Agreement (ie in a six month block and following the specified procedure). Therefore, F was entitled to refuse to agree to it without having to act reasonably. The original implied licence did not automatically extend to cover the second extension and F therefore needed a further licence from N to continue providing the software to T under the Agreement after 31 March 2011. Otherwise, T was infringing N’s copyright in the software during the second extension.
- Fee payable
- In fact, no fee was payable for the extension to the Agreement as no implied contract could be inferred from the conduct of the parties that any payment was to be made. If N had considered changing the basis of the commercial relationship, it did not give any indication to F that it proposed to charge a fee. It was clear that F assumed, quite reasonably, that the previous arrangements would continue.
- The judge stated that, “looking at the conduct and state of mind of each party, prior to 31 March 2011 there was nothing to put a reasonable businessman in the position of [F] on notice that he would be expected to pay for the software after that date”. Therefore, N did not have a contractual claim to a licence fee.
Points to Note:
- The case highlights the importance for businesses which need to use or sub-license software that they do not own outright (for example, as a component of a service they are providing), to ensure they have clearly documented the terms which govern the basis of their use and exploitation of the software and to ensure that they have the necessary rights for the full term of any services contract.
- Businesses who acquire copyright ownership will automatically be bound by licences granted by former owners of the copyright of which they have actual notice or of which they are deemed to have notice. That means it is important to undertake adequate due diligence to ensure that such licences do not significantly detract from the residual value of the copyright.
- The decision underlines the importance in this context of complying with the relevant contractual provisions. Because an extension of 30 months was made in one go, instead of in six month blocks in accordance with the terms of the contract, the implied licence was not deemed to have been automatically extended for this further period. The Court said that if the contractual mechanism had been followed to extend the Agreement in six month blocks then an automatic extension of the royalty free licence would almost certainly have applied to these extensions.
- End users of software must ensure that they have appropriate warranties regarding a supplier/service provider’s rights in relation to software. However, asking sensible questions regarding the ultimate ownership of software and the basis upon which a party enjoys rights to use or exploit software could be useful in identifying potential risks and avoiding problems in the future. In this case the customer does not appear to have suffered but it could easily have done so.