Software patents: some recent international developments (and their repercussions for Australia)

Posted by Ella Biggs and Paul Kallenbach

Recent developments in New Zealand and the United States highlight some of the issues that arise in seeking patent protection for software and computer programs.

In Australia, software is a 'patentable invention' for the purposes of section 18 of the Patents Act 1990 (Cth), provided that it is:

• a manner of manufacture;
• novel and involves an inventive step when compared with the prior art base as it existed before the priority date of the claim;
• useful; and
• not the subject of 'secret use'.

Courts in Australia have found that software meets the requirements of section 18 if the invention has some practical or material effect, as recently reflected in the Federal Court's decision in Research Affiliates LLC v Commissioner of Patents [2013] FCA 71 (covered in a previous blog post).

However, impending changes to patent legislation in New Zealand, as well as uncertainties raised by recent US Federal Court judgments regarding how to approach the patentability of software, may have future implications for software patents in Australia.

Legislative developments in New Zealand

New Zealand is in the process of updating its patent regime by replacing the Patents Act 1953 (NZ) (NZ Patents Act) with new patent legislation (Patents Bill).

Under the current NZ Patents Act, computer programs are patentable.  A Report of the Commerce Select Committee in 2010 advised the Government to remove the ability for computer programs to be protected by patent law.  There has been uncertainty in New Zealand regarding whether the Government would accept this recommendation.  This uncertainty was seemingly addressed on 9 May 2013, when the Commerce Minister, Craig Foss, released a supplementary order paper clarifying this issue, following intense pressure from the IT industry.

The supplementary order paper inserts clause 10A into the NZ Patents Act, which provides that 'a computer program is not an invention and not a manner of manufacture for the purposes of this Act'. An invention will be a 'computer program' where 'the actual contribution made by the alleged invention lies solely in it being a computer program'.

A range of factors will be considered by the courts in identifying the 'actual contribution' of the invention. These factors include: the substance of the claim and the actual contribution it makes, what problem the invention solves or addresses and how it does so, the advantages of solving or addressing the problem in that manner, and any other matters the Commissioner or the court thinks relevant (clause 10A(4), Patents Bill).

The essence of this change relates to whether a computer program is capable of implementing a tangible effect, beyond its primary function as a computer program. The supplementary order paper compares two examples to illustrate this point: one is a computer program which contains a method for improving the performance of a washing machine.  In this circumstance, the actual contribution of the computer program is the new and improved way of operating the washing machine, and thus it is eligible for patent protection.  By contrast, a process for automatically completing legal documents, using conventional hardware (the novel aspect of the claim being the computer program itself) would be ineligible for patent protection.  In this instance, the actual contribution of the claim would lie solely in being a computer program, and the mere execution of a method within a computer does not allow the method to be patented.

It seems, then, that what constitutes an eligible patent claim under these changes will be dependent on whether the actual contribution of the patent lies outside of the computer or, if it affects the operation of the computer, that the contribution is not dependent on the type of data being processed or the particular application being used.  There appears be a requirement for an external or tangible effect of the computer program in order to qualify for patent protection, to which clause 10A(4) of the Patents Bill specifically refers the Commissioner and the courts in determining whether an invention will be considered a computer program.

Judicial uncertainty in the US

In CLS Services Ltd v Alice Corporation Pty Ltd, the Federal Court of Appeals (District of Columbia) was expected to provide a clear determination on the circumstances in which computer software would be patentable in the United States. However, the Court in this case did the opposite: the 10 judges of the Court authored five different judgments, all coming to different conclusions on the circumstances in which software will be eligible for patent protection.

In the US, eligibility for patent protection is based on whether the claimed invention is a new and useful process, machine, manufacture or composition of matter, or an improvement of an existing invention.  The court must be satisfied that the invention does not make a claim to a law of nature, a natural phenomenon or an abstract idea.  In this case, Alice Corporation had developed a computerised trading platform used for conducting financial transactions in which a third party settles obligations between the contracting parties to reduce settlement risk.  Alice Corporation sought patent protection over the software's systems and methods.

The Court delivered a divided opinion on a range of different issues.  In particular, the Court was conflicted regarding whether the computer software was more than an 'abstract idea' and eligible for patent protection.  One judgment (the Lourie judgment) found that the software was ineligible for patent protection as the claim did not more than articulate an abstract idea into computer language. That the software did no more than enable a process to be carried out more efficiently, or by a machine rather than a human, was not enough to make the claim eligible for patent protection.  Without doing more than stating a method or a process, and adding nothing of practical significance to the underlying idea, the software was found ineligible for patent protection.

In a judgment that accepted parts of the Lourie judgment but dissented in parts, the Rader judgment found the system claims eligible for patent protection and the method claims ineligible.  The main distinction between the Rader judgment and the Lourie judgment appears to be in the way the interaction between the computer and the computer program is analysed.  The Rader judgment found that the combination of the computer program and the computer itself had the effect of creating a new machine or outcome.  The abstract idea of avoiding financial risk was found to be integrated into a system utilising machines by the operation of the computer program, creating a new and practical effect.

Although there were various other bases for disagreement between members of the Court, this distinction between the two main judgments regarding the way computer programs interact with computers, and how to categorise this interaction, illustrates a fundamental issue in the application of patent law to software.  The inability of the Court to come to agreement regarding the way that computer programs should be categorised, whether as an abstract idea or as having the effect of creating a new machine or outcome, creates uncertainty in the IT industry regarding what software will be eligible for patent protection.

Potential ramifications for Australia

In Australia, software is currently eligible for patent protection.  In IBM v Commissioner of Patents (1991) 33 FCR 218, the Federal Court found that a method and apparatus for producing a curve image was patentable.  This finding was based on the production of the curve being a new application of mathematical methods to computers. 

This reasoning was applied in Research Affiliates LLC v Commissioner of Patents, where using a computer to create a weighted index of assets was found to be ineligible for patent protection.  The facts in this case were distinguished from the IBM case on the grounds that the steps of the patent could have been done manually, and that the role of the computer in the process of creating the weighted index was no more than the use of a computer for a standard purpose. To be eligible for patent protection, it appears then the court will need evidence of a practical application or effect which improves the use of the computer, rather than a computer being used to more efficiently fulfil a task that could have been undertaken by a human.

How the role of computers in producing the 'practical effect' of the patent is categorised will be critical to a finding of patent protection in Australia.

The New Zealand legislature has tried to address the confusion that may arise in making this determination by trying to specify the circumstances in which patent protection will (and won't) be available for computer programs.  Conversely, the US decision of CLS v Alice Corp exemplifies the uncertainty that can arise when a court is unable to clearly determine and articulate the role that computers play in implementing particular computer software.

These US and New Zealand developments highlight an area of potential confusion and uncertainty in Australian law, which software developers should watch with caution.

Termination for convenience clauses - be clear and be aware

Posted by Rosie Johnson and Paul Kallenbach

Termination for convenience clauses are a common enough feature of technology contracts.  But just how convenient are they when a party comes to exercise their termination rights under them?

What is termination for convenience?

Termination for convenience clauses are, as their name suggests, a mechanism that enables one party (or both parties) to a contract to exit the contractual relationship without having to have a reason for doing so.

There are two important things to understand about termination for convenience clauses (also commonly referred to as 'termination without cause' or 'termination at will' provisions).

First, in order for a termination for convenience right to arise, it needs to be expressly provided for in the contract.   Without such a clause, at common law, parties will generally only be able to terminate where there has been a repudiation of the contract; an essential term has been breached; there has been a sufficiently serious breach of an intermediate term; or the contract has become frustrated.

Second, there is still some uncertainty as to a party's contractual power to terminate at will under such a clause.   The case law demonstrates that an unsettled issue when a party exercises its right under a termination for convenience clause is whether that party must act in good faith in doing so.   The interpretation of the contract as a whole, including any restraints on the right to terminate for convenience, will be key factors when determining whether this good faith requirement applies.

Convenience

In Theiss Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd[1], Placer exercised its right to terminate for convenience. The specific clause in the contract was not qualified by an obligation of good faith, and the clause was, according to the Court, 'clear and unambiguous in providing Placer with an absolute and uncontrolled right to termination'. The Court seemed satisfied in this case that no requirement to act in good faith was necessary.

Similarly, in Starlink International Group Pty Ltd v Coles Supermarkets Australia Pty Ltd[2], the Court held that a requirement to act in good faith in exercising a right to terminate for convenience would be inconsistent with the broad terms of the termination for convenience clause where such clause was expressed in clear language and without restriction.   In that case, the clause allowed Coles to terminate 'at any time without a reason' by giving 45 days notice.   Again, no requirement of good faith was implied.

On the basis of these two cases at least, it appears that termination for convenience clauses are, as their name suggests, anything but inconvenient (that is, of course, unless you are on the receiving end of the termination notice).  Unfortunately, however, it appears that there are still some potential traps that can make the exercise of these clauses somewhat fraught.

Inconvenience?

In Kellog Brown & Root Pty Ltd v Australian Aerospace Ltd[3], it was successfully argued that the right to terminate for convenience may be subject to an implied term of good faith.   In that case, Australian Aerospace exercised a right to terminate for convenience in its contract with Kellog Brown.   The only catch was that the clause was exercised at a time when the parties were in the midst of a dispute resolution process, and Australian Aerospace appeared to terminate the contract after pre-empting the likely outcome of the dispute process and the possible success likely to flow to the other party.

Similarly in Sundararajah v Teachers Federation Health Ltd[4], there was found to be a serious question to be tried as to whether a termination for convenience clause could be activated in the absence of good faith.

An obligation to act in good faith will not necessarily be implied into all commercial contracts.[5] As with any implied term, it must satisfy a five part test:[6]

• the term to be implied must be reasonable and equitable;
• the term must give business efficacy to the contract;
• the term must be so obvious that it goes without saying; 
• the term must be capable of clear expression; and
• the term must not contradict any express term of the contract.

The precise content of the obligation to act in good faith is also unclear. We know from the case law that it is not an obligation to act in the interests of the other contracting parties, nor to subordinate the party's own legitimate interests to those of the other contracting parties.[7] We also know that the duty to act in good faith imposes an obligation not to act capriciously.[8]

So does the right to terminate under a termination for convenience clause need to be exercised in good faith?

In Apple Communications Ltd v Optus Mobile Pty Ltd[9], Apple entered into a distribution agreement with Optus for a term of three years.   Less than 12 months into the contract, Optus gave notice purporting to terminate under a termination for convenience clause in the agreement.   Prior to entering the agreement, Optus had concerns about its distribution arrangements and was contemplating a restructure which would cancel all contracts.   Apple claimed Optus had breached its implied term of good faith by not communicating to Apple that fact prior to entering the contract. Windeyer J found for Optus, noting that even though Optus had known about the issues, that does not necessarily mean they breached their obligations of good faith when they sought to terminate the agreement when there was 'a proper reason to exercise those rights'.[10]   His Honour went on to say:[11]

[b]usinesses as large as Optus must constantly be considering changes to their modes of operation and certainly could not be expected to disclose these considerations in a way which might make them public.

Implications

Termination for convenience clauses are often used in Australian technology contracts.  As with any clause in a contract, it is important that the right to terminate for convenience be very clearly expressed.  Unfortunately, it might not end there.  The case law shows that there is at least a possibility that an obligation of good faith may be implied in respect of the exercise of such a termination right. 

Whether this occurs will depend not just on the wording of the contract (considered as a whole), but also the circumstances surrounding the exercise of the termination right.   It would seem prudent, therefore, for a party wishing to exercise such a right to turn their mind to whether a good faith obligation might be implied having regard to such circumstances.

 

[1] (2000) 16 BCL 130.

[2] [2011] NSWSC 1154.

[3] [2007] VSC 200.

[4] (2011) 283 ALR 720.

[5] Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228.

[6] BP Refinery Western Port v Shire of Hastings (1977) 180 CLR 266.

[7] Sandararajah v Teacher's Federation Health Ltd (2011) 283 ALR 720.

[8] Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903 at [37].

[9] [2001] NSWSC 635 (Apple).

[10] Apple at [19].

[11] Apple at [19].

Corby family in the copyright spotlight

Posted by Cara Friedman, Nicole Reid and Paul Kallenbach

Image courtesy of renjith krishnan

The Federal Court of Australia has found in favour of Schapelle Corby's sister, brother and mother in relation to five photographs published in the book, 'Sins of the Father'.  The book – published by Allen & Unwin Pty Ltd (which was the respondent in the action) and written by journalist Eamonn Duff – attempts to portray Schapelle as a knowing participant involved in her father's drug trafficking.  Neither the publisher nor the writer of the book sought permission from the owners of the photographs to use the photographs in the book.

The law

Generally, the owner of copyright in a photograph is the person who took it (although there are exceptions that may apply where the photograph was commissioned for a private or domestic purpose or created under the terms of an employment agreement with the proprietor of a newspaper or magazine).   As a photograph is an artistic work in which copyright subsists, its owner has the exclusive right (amongst others) to reproduce it, or permit its reproduction, unless the owner grants a licence to another to do so or another person can exercise that right under one of the statutory licences or exceptions set out in the Copyright Act 1968 (Cth) (Copyright Act).

The person who took the photograph also has moral rights in the photograph, including the right to have his or her authorship attributed, unless a defence applies.

The issue

The Court held that the publisher did not have express permission from any of the copyright owners to reproduce the photographs in the book.  The relevant question for the Court was whether Allen & Unwin could reproduce the photographs without this express permission, given that express or implied permission had been given to others to reproduce the photographs for an earlier purpose.

Allen & Unwin withdrew its 'innocent infringement' defence (under section 115(3) of the Copyright Act) during closing submissions.  Nor did it try to argue that it had engaged in fair dealing for the purpose of reporting news.

The photographs

The relevant photographs were of Schapelle Corby and/or her mother, sometimes with others.   Two of them were taken by Rosleigh Rose, Schapelle's mother, who also owned a 25% share in the third photograph, as it had been taken by her late partner, of whose estate she was a 25% beneficiary.   The other two photographs were taken by Michael and Mercedes Corby, Schapelle's brother and sister, respectively.

The evidence was that three of the photographs were initially supplied for use in an article that Mr Duff was writing in 2005 for Fairfax media.  Buchanan J held that no licence existed for reproduction of these three photographs in the book.  Any lawful supply of the photographs (if at all) was limited to the context in which they were initially supplied (ie for use in the article).  His Honour held that the current use had no connection with the previously authorised purpose.

Nor did the Court find that any licence existed in relation to the fourth photograph, which was originally given to Schapelle's friend, who in 2005 had provided it to Mr Holland, a Fairfax photographer, in order to assist Schapelle's case.

In relation to the final photograph, the court found that even if it had been provided as a gift to Mr McHugh or Mr McCauley (the two men in the photo with Rosleigh Rose, who were both later convicted of drug dealing), this would be insufficient, without more, to constitute a licence for its reproduction in the book.

Buchanan J observed that 'the defence mounted was weak to say the least.'  Consent was sought neither by the author of the book, nor the publisher, for copyright clearance.  The Court noted that in these circumstances it was the responsibility of the publisher, not the author, to decide which photographs were reproduced in the book.

Moral rights

The court found that the applicant family members' moral right of attribution had been infringed in relation to four of the photographs, as Allen & Unwin had failed to attribute authorship to them.  There was no evidence to establish the defence (to moral rights infringement) that it was 'reasonable in all the circumstances' not to identify the author on the basis of industry practice (this was especially so given that authorship of some photographs in the book was attributed) or any other of the defences available in the Copyright Act.

Orders

The Court granted an injunction prohibiting Allen & Unwin from further reproduction of any of the five photographs, and ordered destruction of any copies of the book in its possession.

The Court did not assess compensatory damages on the basis of what the copyright owners may have accepted as a licence fee, as the evidence was that they would not have given permission to use the photographs in the book.  Instead, damages of $9,250 were awarded, based on the commercial significance of each photograph and its relevance to the central themes of the book.  For example, damages of $5,000 were awarded for infringement of the copyright in one of the photographs, due to its prominence on the back cover of the book and its focus on the relationship between Schapelle and her father, a central theme of the book.

Acknowledging the need for deterrence (both general and specific) and marking its disapproval of such 'flagrant disregard' for the applicants' rights, the Court awarded the applicants additional damages of $45,000.   It would appear that the Court's perception of the copyright infringement as a 'conscious, calculated business decision' by the publisher provided the necessary impetus for this additional damages award.

In relation to the four relevant photographs, the Court made only a declaration of moral rights infringement.   Neither damages nor an apology was ordered, as no loss – neither commercial nor personal – was considered to have resulted from the lack of attribution.   Schapelle's family members wanted no association with the book at all, including by being attributed as authors of the photographs.   Accordingly, Buchanan J labelled the moral rights infringement as 'more a question of form than substance'.

This case does not establish any new law.  It does, however, remind publishers that it is their responsibility to seek copyright clearance prior to publishing photographs, and not to rely on unwritten permissions granted to others, the scope of which is unclear and may not cover later uses.   It is also a rare case that considers moral rights issues (although the infringement issues were not considered in great detail), though it seems the conclusion here is that a finding of moral rights infringement may not help applicants obtain a larger award of damages.

All signs point to mandatory data breach notification in Australia

Posted by Elisabeth Koster, Amy Gibbs and Paul Kallenbach

It's been reported today that a confidential Exposure Draft Bill for an Australian mandatory data breach notification scheme has been released by the Federal Attorney-General's department to a limited number of key stakeholders.

This news comes in the wake of Commonwealth Attorney-General Mark Dreyfus's comments at this week's launch of Privacy Awareness Week 2013 that he believes there is 'a strong case to move to a mandatory scheme.'

Discussion paper

Former Attorney-General Nicola Roxon released a discussion paper in October last year seeking submissions on whether mandatory data breach notification laws should be introduced in Australia.

The discussion paper was published in response to the Australian Law Reform Commission's 2008 report on the state of the effectiveness of Australian privacy laws, which recommended the introduction of a mandatory breach notification scheme. Our earlier article on the discussion paper can be read here.

Recent developments

On Monday 29 April 2013 at the launch of Privacy Awareness Week 2013, the Attorney-General suggested that mandatory data breach notification laws were on the horizon. Mr Dreyfus said organisations involved in a data breach should inform affected parties in a timely fashion, noting that 'if there continues to be under-reporting of data breaches, or we continue to find out about them only through media reports, some would argue there is a strong case to move towards a mandatory scheme'.

Mr Dreyfus also commented that 'mandatory notification requirements may also act as an incentive for holders of information to secure it'.

The Exposure Draft Bill: what we know

It has since come to light that an Exposure Draft Bill entitled the Exposure Draft Privacy Amendment (Privacy Alerts) Bill 2013 was circulated by the Attorney-General's office to a limited number of key stakeholders this week.

Reports indicate that the following provisions have been included in the Exposure Draft:

• an organisation must notify the Privacy Commissioner in the event of a 'serious breach'. The notification must outline the nature of the breach, what information was compromised and advise of any remedial steps the affected parties should take;
• a breach will be considered 'serious' if an organisation fails to take reasonable steps to secure consumer information in accordance with the new Australian Privacy Principles, and if it exposes the affected consumer to a 'real risk of serious harm';
• an organisation must also notify the affected consumers of the breach. Additionally, the Privacy Commissioner may instruct the organisation to post a public statement to its website and inform media outlets of the breach; and
• the Privacy Commissioner may declare certain organisations as exempt from the new regulations if it is in the public interest to do so.

Although civil pecuniary penalties of up to $1.7 million have been introduced by the Privacy Amendment (Enhancing Privacy Protection) Act 2012 in the event of serious or repeated interferences with privacy by an entity, it is not yet known whether civil pecuniary provisions will be introduced for failure to comply with the new notification requirements.

What next?

Mr Dreyfus commented on Monday that the Government was still engaging in a consultation process in relation to any Australian data breach notification laws.

Although stakeholders will likely be given an opportunity to prepare submissions on the draft legislation once it has been publicly released, it appears clear that mandatory data breach notification may become a reality in the Australian privacy landscape.

We will provide a more detailed analysis of the Exposure Draft Bill once it has been released for public consultation and comment.