Tuesday, 26th August, 2014

F&P Finance successful in Court of Appeal in software copyright and trade secrets case

The Court of Appeal, in a recent decision, upheld the judgment of the High Court that Fisher & Paykel Finance (FPF) in modifying its own credit software had not infringed any copyright in Karum's CMS software. Nor had Karum proved a claim of breach of confidence where it had argued that FPF had incorporated Karum's trade secrets into its own software.

Karum's argument that it was entitled to take its claims to court rather than through an alternative dispute resolution procedure was also rejected. The Court of Appeal agreed with the High Court that FPF had not fraudulently induced Karum to enter such an arrangement by misrepresenting the procedure FPF was following in modifying its software.

Background

In 2004, FPF had purchased Retail Financial Services (RFS) from Farmers Trading Company, principally to acquire the business of 'Farmers Card', a private label credit card. The software supporting Farmers Card, called 'CMS' and written in COBOL, had been supplied by a California-based company, Karum, in 1994. 

The dispute between Karum and FPF first arose because Farmers' licence to use and modify CMS software had a condition preventing Farmers from transferring the licence outside the Farmers group. In a settlement of that dispute, FPF secured a licence from Karum to temporarily continue to operate CMS on RFS mainframes while it modified its own credit system software called 'Lending' (written in Ingres) to support Farmers Card functionality and allow the two business systems to be integrated.

Reasoning of the Court

In its decision, the Court of Appeal noted the extent of the trial in the High Court below - eight weeks with numerous expert witnesses - and the complexity of the case due to its technical detail and the 'novelty of the copyright claim'. The latter remark arose because Karum did not claim its CMS source code had been copied, but rather that non-literal design elements and logic had been copied by FPF. This article notes some of the significant reasoning of the Court on the claim of non-literal infringement of the CMS software.

Extending copyright beyond computer code?

The underlying factor in deciding whether copyright protection could extend to something beyond program code was observed by the Court to be the principle that copyright did not protect ideas, but rather protected the expression of ideas.  Because non-literal software elements might extend into the idea spectrum and because non-literal infringement had not previously been considered by New Zealand Courts, the Court used English and United States court decisions on non-literal software copyright infringement to guide the Court on the distinction between literal and non-literal elements of computer software and thus whether copyright could subsist in the latter as claimed by Karum. 

The Court noted the 1992 US case of Computer Associates v Altai which had affirmed that, in principle at least, copyright could extend beyond program code to cover software 'structure', provided that it did not extend to any ideas behind the structure. The US Court of Appeals also said 'structure' referred to 'the functions of the modules in a program together with each module's relationships to other modules'.

A similar view had been taken by the more recent English High Court in 2010 (and English Court of Appeal in 2013) in the case SAS Institute v World Programming. Significantly however, the New Zealand Court of Appeal observed that while the English courts had admitted the possibility of copyright protection for non-literal elements such as structure, there had been no cases where copyright had actually been so extended.

The Court also adopted the decision of the English High Court in Navitaire v easy Jet which held that software functionality may be replicated in another program because functionality is not protected by copyright as it lies on the ideas side of the line between idea and expression along with business rules.

In summarising the English and US cases, the Court of Appeal concluded that the scope of any copyright in non-literal software elements is constrained and that a plaintiff may likely find it difficult to distinguish expression from idea or to prove specified elements are not mere functionality or business rules.

Court conclusions

Applying this law to the elements Karum had claimed were copied by FPF, (namely character string displays of payment and delinquency calendars, and the use of 'buckets' for storing aged debt with payments being assigned to the bucket containing the oldest debt), the Court said that the CMS calendars and aged debt module were no more than mere functionality or business rules as the codes used to represent age of debt or payments as a proportion to debt were not distinctive and were not literary works whether taken singly or together.

The Court concluded its findings on copyright infringement by observing that for copyright to be infringed the Copyright Act required that a substantial part of the work must be copied.  In this case it said that even if any original expression in CMS software had been copied by FPF it was not a substantial part of the CMS software package.

AJ Park acted for F&P Finance in this case.  Kim McLeod and Ken Moon led the AJ Park team and counsel instructed by AJ Park were Alan Galbraith QC and Jane Anderson of Shortland Chambers.