Tuesday, 26th February, 2013

Victory for F&P Finance in computer software copyright and trade secrets case

Fisher & Paykel Finance Ltd was successful in its defence to claims of copying and misuse of confidential information arising from a system integration and data migration project.  

In the High Court decision Fisher & Paykel Finance v Karum [2012] NZHC 3314, Justice Rodney Hansen held software processing logic is not protected by copyright in New Zealand and minor incidents of inspection of code, without the intention to appropriate protected information, was not a breach of confidence in the context of this type of project. While the decision also concerned other claims, this article focuses on the intellectual property law issues, and the complex facts giving rise to the litigation are considerably simplified.

The case of Fisher & Paykel Finance v Karum

After two interlocutory hearings in 2007 and 2008 the case went to trial in October 2011.  Due to the number of witnesses (19) called to give the necessarily complex evidence, it ran for 8 weeks making it probably New Zealand's longest IP trial. It was only the second software copyright case to go to trial and was the first for software trade secrets. The case was also unusual in that there were three post-trial hearings (relating to Karum's standing to sue). 

In 2004, Fisher & Paykel Finance (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. FPF secured a source code licence from Karum to temporarily continue to operate CMS on RFS mainframes while FPF 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.

Breach of Confidence

For his decision on breach of confidence, Hansen J applied the three tests originally laid down in the 1969 English case Coco v Clark [1969] RPC 41, and which had been adopted by the NZ Court of Appeal in AB Consolidated v Europe Strength Food [1978] 2 NZLR 515 and in Norbrook Laboratories v Bomac Laboratories [2004] 3 NZLR 49. He held that the CMS source and object code had the required quality of confidence and that this code had been supplied to FPF in circumstances importing a duty of confidence. However, he took a different view in respect of codes, flags and indicators used in the CMS system which Karum alleged were part of the processing logic. In relation to the third Coco v Clark test of whether there had been unauthorised use of Karum's confidential information to the detriment of Karum, he held that "having regard to the scale, duration and complexity of the project" any incidences of inspection of the CMS code by FPF were few, "none involved a deliberate attempt to appropriate protected information and none resulted in detriment to Karum" at [266]. He also found that inspection of CMS code by FPF was permissible where it was solely for the purpose of ascertaining the relevant business rules of RFS which had been loaded into CMS by RFS and not by Karum.

Infringement of Copyright

Because Karum's claim of infringement related to CMS "processing logic" and not program code, the judge traversed the idea-expression dichotomy and the English software copyright cases dealing with this.  He noted at [177] that the TRIPS Agreement (which New Zealand had ratified) by Article 9(2) provided that "Copyright protection shall extend to expressions and not to ideas, procedures, methods of operation or mathematical concepts as such". He also referred at [178] to the EU Software Directive 1991/250 where recitals 13 and 14 made it clear that ideas and principles which underlie any element of a program, including the program logic and algorithms, are not protected.

Hansen J then referred with approval to the judgments in the English cases Navitaire v Easyjet Airline [2004] EWHC 1725 (Ch), Nova Productions v Mazooma Games [2007] EWCA Civ 219 and SAS Institute v The World Programming [2010] EWHC 1829 (Ch) which held that copyright did not extend to software functionality or general ideas underlying the programs.  He decided that FPF had not copied the CMS processing logic and "product data" as claimed, but only the business rules reflected in those elements. He held FPF was free to copy business rules because they were not protected by copyright.

Licensee Estoppel

Karum had argued that FPF was estopped from putting it to proof of subsistence and ownership of copyright in CMS because of the acknowledgments contained in the CMS software licence to FPF. Hansen J rejected this on the basis that Karum's claim was for infringement of copyright and not breach of the licence and applied the Court of Appeal decision in McCathie v McCathie [1971] NZLR 58 which held estoppel by deed or other instrument binds parties only on claims under the instrument.

 

This was New Zealand's first copyright case on "non-literal" infringement and the judge's decision is a welcome clarification of how far this sort of claim can be taken. More specifically, so far as computer software is concerned, the English law excluding protection for business logic, processing logic and program functionality has now been applied in New Zealand.

AJ Park represented Fisher & Paykel Finance in this case. The team was led by litigation partner Kim McLeod and Ken Moon.

Karum has appealed this decision to the Court of Appeal. 

A link to the full judgment can be found here.

An edited version of this article appeared in NZ Lawyer, 22 February 2013, Issue 202.