Cortis Exhaust Systems Pty Ltd v Kitten Software Pty Ltd

Federal Court of Australia|2001-08-28|Before: Tamberlin J

INTRODUCTION 1 On 28 January 1997, the applicant ("Cortis") entered into a Deed of Assignment ("Deed") with the respondents (who will be individually referred to as "Kitten", "Milson" and "Cook") for the assignment of some assets (but not the goodwill) of Kitten's business. The assigned assets included copyright in certain computer software, confidential information, a list of existing users of the Kitten software together with operational and other manuals and promotional materials. The assignment did not include the Kitten name. Cortis claims that the respondents have breached the Deed and have also infringed the applicant's copyright in the manuals supplied with the software and a logo. It also claims that the respondents have engaged in misleading or deceptive conduct within s 52 of the Trade Practices Act 1974 (Cth) ("the TPA").

factual setting 2 The factual background of the matter is as follows. Cortis was incorporated approximately fourteen years ago to purchase an existing business engaged in the repair and manufacture of motor vehicle exhaust systems. The Managing Director of Cortis is Mr Peter Carbone ("Carbone"). In 1991, a new division of Cortis was established and Cortis acquired distribution rights to the accounting software package marketed under the name SIM (Service Industry Management). SIM had been developed by Milson and Cook, who are shareholders and directors of Kitten, specifically for use by businesses engaged in the automotive service industry. It had been developed using programming tools known as Clarion, which were not capable of being used to create applications which would operate in operating systems other than DOS. Carbone first met Milson in about 1990, when Cortis was negotiating to acquire distribution rights in respect of the SIM software. The division of Cortis responsible for marketing the SIM software traded under the name "New Age Business Systems". This name had been used by an earlier business with which Milson had been associated. Between 1991 and 1996, Cortis distributed the software system in various forms including SIM LITE (a reduced version) and SIM MOS (a multi-user system). There were regular enhancements and modifications to the SIM program during this period. 3 In 1995, Microsoft "Windows 95" was released in Australia. Milson was aware from press reports that Microsoft was developing further versions of Windows which would not be able to run DOS applications. They would use what is known as a full 32 bit operating system rather than the DOS 16 bit system. Windows had advantages over DOS as an operating system in that it was more stable and user-friendly. Milson, at that time, formed the view that applications which ran on DOS would eventually become obsolete. In about 1994, he began teaching himself how to program in Windows. He also started to modify the SIM program so that it would run on Windows. He experienced difficulty in both of these attempts. Over the next two to three years, Milson remained unable to get SIM to operate effectively in the Windows environment. While he was able to get the program to run, it crashed "every 5 minutes". In about September 1996, Milson and Cook commenced discussions with Carbone for the sale of the SIM software and other assets to Cortis. It was proposed that Cook would work with Carbone to assist him with existing users of the SIM software. Her services were to include assisting with online help and the development of the next version of SIM (Version 7), which was due for release in about 1997. 4 On 18 December 1996, Cook and Milson sent an offer by facsimile to Carbone which reads as follows: "RE: SALE OF KITTEN SOFTWARE THE SALE OF KITTEN SOFTWARE, INCLUDES SIM AND SIMLITE SOURCE CODE, CUSTOMER DATABASE AND THE GOODWILL. PAPER SALE AT COST. MANUALS AT COST. SIM AND SIMLITE NAME AND COPYRIGHTS. DISK LABELS KITTEN SOFTWARE NAME. SALE PRICE $60,000." 5 There ensued some discussions between the parties. Subsequently, it was decided not to include the goodwill or the Kitten name in the final agreement. Mr Kevin Sturgiss ("Sturgiss"), the Manager of Cortis, prepared a draft agreement on or about 21 January 1997. It is not clear what happened to this document. By 2.00 pm on Friday 24 January 1997, which preceded the Australia Day long weekend, a draft Deed of Assignment had been prepared by Mr Michael Staunton ("Staunton"), the solicitor for Cortis. There was then a series of facsimiles between Staunton, Carbone and Sturgiss during that afternoon. There is a dispute as to precisely what was the sequence of events but I am satisfied that by 5.00 pm on Friday, Sturgiss and Carbone had received a final draft which they each found satisfactory. 6 The evidence of Sturgiss, which I accept, was that on the evening of 24 January 1997 he visited the home of Milson and Cook, who lived at Casula, with a copy of the final draft prepared by Staunton. Sturgiss said that he had a discussion with Milson and Cook about the draft and left a copy of the draft with them. This is disputed. However, for reasons which I give later, I prefer Sturgiss on this point. On Tuesday 28 January 1997 Sturgiss, Carbone, Milson and Cook attended the offices of Cortis at Bankstown. Carbone, Milson and Cook signed the faxed copy of the Deed received by Cortis from its solicitors on 24 January. I find that the document executed was in the form in which it was left with Milson and Cook on 24 January without any significant changes having been made or discussed. The individual parties executed the Deed and the corporations executed under common seal on that day. 7 After the Deed was executed, Milson and Cook handed over to Carbone and Sturgiss five floppy disks which contained a copy of the complete SIM system together with three disks containing the SIM LITE system and a further disk containing modifications for the production of the SIM MOS variation. Milson and Cook also provided to Carbone and Sturgiss a "hardware lock" device necessary for the production of copies of SIM software. Approximately two weeks later, Cook began working at the Cortis offices at Bankstown. She brought with her two computers which were subsequently purchased by Cortis. The computers contained the Kitten customer list for the SIM software products. Up to May 1998, Cook used the computers to carry out software development of the SIM system. Cook printed out a copy of the customer list which was placed in a filing cabinet in her office. This list contained all the users at that time of the SIM system and the SIM MOS system as well as all the users of the SIM LITE system up to 1995. Cook continued to work at the applicant's office at Bankstown until May 1998. She worked on the development of Versions 7 and 8 of SIM which were respectively scheduled for release on about 1 July 1997 and one year later. She also provided telephone support for customers of Cortis who used the SIM system and instructed other members of the Cortis staff on the development and operation of SIM. Initially she was paid $800 per week, but this amount was increased six months after the commencement of her employment to $1,000 per week.

The deed of assignment 8 The Deed is dated 28 January 1997. It is made between Cortis, Kitten, Milson and Cook. The relevant parts read as follows: "RECITALS A. Kitten is the absolute owner of the unencumbered copyright in the Works. B. JM&IC are the sole directors and shareholders of Kitten and are the original authors of the Works. C. Kitten and JM&IC wish to assign their ownership of the copyright in the Works together with all rights and benefits arising under any agreement with Existing Users in respect of the Works to New Age who wishes to accept such ownership and assignment on the terms and conditions contained in this Deed. … OPERATIVE PROVISIONS 1. DEFINITIONS 'Confidential Information' means the Works, related documentation (including but not limited to operational manuals and promotional material), flow charts, drawings and all parts, copies and modifications and or amendments thereto and the design of the Works and any information relating to the Works which is designated as confidential information but excluding any information which is or becomes part of the public domain through no wrongful act or omission of Kitten and or JM⁣ 'Existing Users' means customers who have been and or are currently licensed by Kitten to use the Works or any part of the Works; 'Intellectual Property Rights' means any and all patents, copyright, registered design rights and or trade secrets subsisting in, constituted by or associated with the Works; 'Purchase Price' means sixty thousand dollars ($60,000.00); 'Works' means the software products and documentation set out in the First Schedule of this Deed. 2. ASSIGNMENT In consideration of the Purchase Price paid to Kitten by New Age, in accordance with this Deed, Kitten and JM&IC assigns absolutely to New Age:- 2.1 the entire copyright throughout the world and all other rights of a like nature now subsisting or conferred in respect of the Works by the law in force in any part of the world including all renewals and extensions; 2.2 by way of assignment of future copyright the copyright and all other rights of a like nature from time to time belonging to Kitten and or JM&IC which may be conferred or may subsist in any alterations or additions to the Works and any and all renewals and extensions thereof; 2.3 any and all common law rights and remedies in relation to the Works available to Kitten and or JM&IC at the date of this assignment; and 2.4 all rights and benefits arising under or in connection with contracts, agreements, licences or other arrangements between Kitten and Existing Users in respect of the use of the Works 3. PAYMENT AND TRANSFER OF WORKS 3.1 New Age will pay the Purchase Price to Kitten by cash and or unendorsed bank cheque on execution of this Deed. 3.2 On receipt of the Purchase Price Kitten and JM&IC will immediately deliver to New Age: a. the Works specified in the First Schedule; b. all Confidential Information and Intellectual Property Rights; c. an up-to-date list of Existing Users; and d. all operational and other manuals and promotional material being held by Kitten and or JM&IC in respect of the Works. 3.3 If requested by New Age then Kitten and JM&IC will prepare and execute a letter to all Existing Users advising the Existing Users that the Works have been transferred to New Age and introducing New Age and the services provided or to be provided in the future by New Age in relation to the Works. The content and form of the letter shall be approved by New Age. … 5. PERFECTION OF ASSIGNMENT … 5.2 The parties covenant and agree to mutually co-operate with each other to the extent necessary to ensure that all Existing Users are properly informed of this assignment and introduced to New Age and to enable as many Existing Users as possible to take up upgrade and or support agreements with New Age in respect of the Works or any new or modified versions thereof. … 7. RESTRICTION ON COMPETITION … 7.2 Kitten and JM&IC agree that in consideration of the payment for the assignment and the employment of Irene Cook by New Age as set out in this Deed Kitten and or JM&IC will not for a period of three (3) years develop for themselves and or any third party software products which perform the same or similar functions as the Works such that it would directly compete with the market for the Works. 8. CONFIDENTIALITY 8.1 Kitten and JM&IC will treat as confidential all Confidential Information. 8.2 Kitten and JM&IC shall not disclose to any third party or use for their own purposes any Confidential Information nor shall they permit or authorise the use of any Confidential Information by any other person without the prior written approval and consent of New Age until such time as the Confidential Information becomes part of the public domain by method other than breach of this Deed. 8.3 Kitten will take all reasonable steps and precautions to prevent any of its officers, employees, servants, agents, contractors and or sub-contractors or any other person having access to the Confidential Information. … 9 The Deed also provided that New Age would employ Cook for a period of six months. There was a covenant that Cook would use her best endeavours to assist New Age to understand and/or modify and enhance the Works as required by New Age and to upgrade, convert and transfer all existing users of the Works and customers of New Age using the Works, and in general to ensure the smooth assignment of the copyright in the works and intellectual property rights to New Age. 10 The Fist Schedule to the Deed defined the Works to include an electronic copy of all source codes in respect of the SIM software and related programs; the latest compiled electronic version of the source code; all existing hard copies and an electronic copy of the manuals and labels in relation to the SIM software and related programs; an electronic and hard copy of the names and addresses of all existing users and copies of all existing contracts, agreements, licences and other written agreements between Kitten and existing users in respect of the SIM software; an electronic and hard copy of the names and addresses of all dealers; the hardware locks used in connection with the registration of use of the SIM software and related programs; and all existing promotional material used in connection with the software programs. 11 In about mid-April 1998, Carbone met with Milson and Cook at a coffee shop near the Cortis office in Bankstown. A heated discussion took place. The discussion concerned a proposal by Milson to develop a Windows 1995 version of the SIM system to be distributed by Cortis for around $100,000, which Carbone did not accept. Shortly thereafter, Carbone wrote to Milson and Cook in these terms: "Dear John and Irene, Thank you for your proposal, I presented it to my accountant and legal advisers and they were all to the opinion that we could not accept your proposal in its current form. Three points were not accepted which constituted you main proposal. 1) Cost of production of windows version to the company would be twice as much as a contract proposal and quote we have received. 2) All companies in our group sole owned by my family we have no partners. 3) New Age Comes [sic] under the umbrella of Carbone Enterprises a wholly owned family thrust [sic] 4) Carbone Enterprises has more than $500,000.00 invested in New Age Business Systems. We have for approximately 12 months been talking to Jeff Mason (a Clarion Writer) who we have used before regarding producing Windows version of SIM; we have asked him to trial for three Months [sic]. If in the next 4 months we feel that he is not capable of producing than [sic] this is our counter proposal. 1) We form a company as per your proposal 2) Peter & Frances Carbone hold 60% of shares in new company 3) New company is only a producer 4) All transaction [sic] of new company (Sales) must go trough [sic] New Age Business Systems 5) On success of new company Mr. John Milson and Ms Irene cook [sic] are appointed directors of Mytrade Pty Ltd with 10% share holding 6) Mr. Milson & Ms Cook with the assistance of others (possible Mr. Mason) will produce SIM-Windows version under the control of Mytrade Board. 7) Regular reports and contact must be made with Mr. Peter Carbone re progress 8) Mytrade will pay subcontractors and all general fees for the development of program 9) The new company pays Mr. Milson and Ms Cook wages. These are only suggestions, the other way would be for you both to make an offer to buy New Age Business Systems or Mytrade, and we will listen to offers. John & Irene this is pure and simply a business decision as I expressed several times I number you both as friends and I hope we will still remain so." 12 On 4 May 1998, Cook ceased working for Cortis. On the same day, Jeff Mason ("Mason"), who was named in the letter, began work for Cortis on the preparation of DOS SIM Version 8. Soon after he commenced working for Cortis, Mason operated the computer which had been used by Cook during her employment with Cortis and noted that the source code for the licensing program for SIM was not on the computer. The licensing program itself had been written so as to prevent its use after 30 June 1998. As a consequence, the licensing program which supported the Cortis data base could not be modified because the source code was absent. Mason also had difficulty in accessing data and noted the deletion of other files. He had to set about installing his own licensed version of the Clarion 2 Personal Developer program for DOS to remedy some of the problems. He then found it necessary to write an additional software program to allow Cortis to license SIM users as a result of the date limitation outlined above. These problems caused delays in the release of SIM Version 8. From May 1998 to March 1999 he worked for Cortis exclusively on producing Version 8. He said that if he had not been required to work on the DOS Version of the SIM upgrade from 7 to 8, he would have been able to complete the Windows 95 version of SIM before the first week in May 1999. According to this evidence, there was an estimated delay of fifteen months in releasing the New Age Window's 95 version of SIM. 13 On 29 May 1998, Cortis sent out a circular to "All SIM licence holders and users" stating that Cook had no authority to sell, maintain or licence SIM software. On 3 June 1998, Kitten sent out a letter saying that the association between Kitten and New Age had ended and that, as from that date, Kitten was not responsible for any software supplied by Cortis. There was a subsequent circular by Cortis on 15 June 1998 asserting, among other things, that it had acquired rights to all stationery; and Kitten sent a circular on 20 June 1998 announcing it was working on new Windows software. The present proceedings were commenced on 26 June 1998. 14 In November 1998, Version 8 of the SIM DOS program was released. "ServiceMaster", which was the Windows 95 program of Kitten, was released in May 1999. However, many copies of ServiceMaster had been pre-sold before its completion and release in May 1999. The first sale of the ServiceMaster program in its early stage (beta) of development was on 21 August 1998. There are in evidence letters written in June 1998 by Cook, on behalf of Kitten on Kitten's letterhead, to customers of Cortis stating that the versions of the SIM range of products used by them were written by Milson and Cook of Kitten. These letters stated that Kitten had taken legal advice and that customers could get support for their software and could purchase paper from Kitten. Other letters written to customers in June 1998 are to the effect that Kitten was currently developing its "5th Generation System" under the Windows platform and offered technical and support service at a fee of $350 per year for those who wished to take advantage. These prices were $50 lower than the New Age price for support of SIM. There is evidence from Sturgiss seeking to clarify the position. In a letter dated 29 September 1998, Sturgiss asserted to customers that any purchase of SIM or associated software from Kitten was an infringement of copyright.

Applicant's submissions 15 Cortis contends that the ServiceMaster Windows 95 product is competitive with the Kitten DOS SIM product which New Age had acquired. It says that there is no significant distinction between a DOS based market and a Windows based market and it points out that Milson has admitted that Kitten's product was competitive with SIM DOS. Cook, who was targeting existing SIM users, knew the extent to which ServiceMaster took away existing SIM users and that Kitten was affecting the volume of business that New Age could attract for the SIM product. The correspondence with existing SIM users in June 1998, it is said, makes this clear. 16 Cortis contends that clause 7.2 of the Deed imposed a restraint for a three year period in respect of the development of any product "which perform the same or similar functions as the Works such that it would directly compete with the market for the Works". It is submitted that the ServiceMaster product is such a competitor and was first sold in August 1998, only 18 months after the assignment. Cortis says that it suffered a loss of existing users. A comparison has been carried out between the list of users handed over by Cook to New Age in February 1997 and a list of customers provided on discovery by Kitten. In over 75 per cent of cases, the Kitten users are the same as those customers secured for the DOS SIM product by New Age. 17 The second basis of claim is copyright infringement. It is said that in relation to both the ServiceMaster Operating Manual and the SIM logo there were infringements of the copyright entitlements of New Age. These copyrights, it is said, were assigned to New Age under the 1997 Deed. It is said that the ServiceMaster Operating Manual is a substantial reproduction of the original work within s 88 of the Copyright Act (1968) (Cth). It is submitted that what has been copied is the arrangement of topics and the general layout of the manual and that there has been some textual copying in identical language. It is therefore claimed, on the authority of Nationwide News Ltd v Copyright Agency Limited (1996) 65 FCR 399, that there has been infringement of what is referred to as the "[p]ublished edition copyright" of Cortis, even if there has not been substantial copying of identical or similar text. 18 The third claim by Cortis is that there has been misleading and deceptive conduct on the part of the respondents. This takes the form of misrepresenting the ServiceMaster product as an "upgrading" of the SIM product, which it was not. It is said that Cook, on behalf of Kitten, was in a unique position to solicit sales of ServiceMaster from existing users of SIM products because of her long contact and continuity with those customers. It is said that the misleading statements include assertions that ServiceMaster was Kitten's "5th Generation System" and references in correspondence to addressees as "Dear Customer", which implied that they were existing customers of Kitten whereas in fact they were customers of New Age. The substance of the submission is that the ServiceMaster product was sold by the respondents as an upgrade of the SIM Software distributed by New Age, which it was not and that this deceptive conduct was aimed to and did secure sales to the detriment of New Age in a critical period during the second half of 1998 when Version 8 of the New Age product had been delayed by the peremptory departure of Cook. 19 I now turn to consider the submissions and, in so doing, I will take into account submissions advanced by the respondents.

The deed of assignment 20 The respondents claim that when they executed the Deed they were unaware of the terms of the restraint of trade provision. In substance they say that it was their belief that there was no clause preventing them from developing and marketing a Windows 95 based program. Because the clause was not understood to be in the Deed in the drafts they had seen, it is contended that the applicant had engaged in unconscionable conduct. 21 In order to make out a case of unconscionable conduct, it is necessary to show that one party has unconscientiously taken advantage of a special disadvantage in the other party's position in relation to the transaction or dealing in question: see Blomley v Ryan (1956) 99 CLR 362 at 415; Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 at 489; Louth v Diprose (1992) 175 CLR 621 at 630 ff; C G Berbatis Holdings Pty Ltd v ACCC [2001] FCA 757 at [70]. In the present case, I have concluded that there has not been shown to have been any disadvantage between the parties in relation to the assignment. Nor is there any evidence of any unconscientious conduct on the part of Cortis in relation to the formulation and execution of the Deed. There can be no suggestion of duress or undue influence on the evidence. Nor is there any evidence of misleading or deceptive conduct by way of misrepresentation or otherwise in relation to the presentation and execution of the Deed. 22 Notwithstanding conflicts in the evidence, I am satisfied that the Deed in fact executed was the Deed of Assignment set out in Exhibit A as being two facsimile transmissions of 24 January 1997 sent at 16.23 and 16.42 respectively. The former transmission consisted of eleven pages which set out the agreement itself. The later transmission set out the First Schedule as finally drawn in accordance with the instructions of Cortis. I am also satisfied that Carbone requested Sturgiss to take that document to Milson and Cook at Casula on the evening of 24 January 1997. I also accept the evidence of Sturgiss that on that evening he visited the home of Cook and Milson with a copy of the draft document. Milson agreed that Sturgiss came to the Casula house when he was there but could not be specific as to the date. He said that Sturgiss gave the Deed to Cook who "looked at the front of it but did not appear to read it" and that he "looked at it briefly". He claimed that this document did not contain any restriction or restraint on the respondents as to writing, developing or selling a Windows 95 based accounting software. Milson conceded in cross examination that he expected that the document would include some form of provision which would restrict him from entering into competition with New Age in a DOS market place. Although he said he did not read the Deed, he anticipated it would allow him to bring a new product to the market and sell it to Carbone. In this respect, he agreed that his expectation was not based on anything said by Sturgiss. 23 Cook recollected that before 28 January 1997 Sturgiss visited her home and she and Milson read the document. She did not recall whether Sturgiss left a copy of the document although she said she saw a draft of the document which she signed. She said she may have retained a copy. The document which was executed on 28 January 1997 in fact contained her initials on every page including the First Schedule and she agreed that she brought the initialled document to the meeting on 28 January. I am satisfied that the document she brought to the meeting was left with Cook and Milson over the long weekend preceding the meeting. 24 I do not accept that the respondents were unaware of the restraint of trade clause in the Deed. They had ample opportunity to read it and get legal advice. They may not have read it fully, but I do not accept that there was any conduct on the part of the applicant which would justify the setting aside or varying the terms of the Deed. On its face, it is clearly a solemn document executed under seal and common seal and the respondents must have been aware of the need and importance of reading it carefully.

Restraint of Trade 25 Clause 7.2 is the restraint of trade clause. It provides that the respondents will not for "three years develop for themselves or any third party software products which perform the same or similar functions as the Works such that [the product] … would directly compete with the market for the Works". 26 The respondents submit that this clause is void as being an unreasonable restraint of trade. They point to the unlimited geographical application of the covenant. They also point out that the restriction is on the development of any software products and is not confined to the sale, marketing or distribution of such products. They say that, if read literally, the clause would prevent the respondents from working towards the sale of any software product which would perform the same or similar functions well after the expiry of the three year period. They also say that the restraint period is excessive and that the amount of the consideration for the assignment, namely $60,000, is relatively insubstantial when compared with the revenue likely to be generated by sales of the product. It is also submitted that the provision is too wide because it is sought to be applied to products in the Windows 95 market, which is a different market to that for DOS products. The respondents submit that the clause should be read down to prevent the marketing and sale of accounting software for the automotive trade which is based on a DOS platform for a period of eighteen months within Australia. 27 In the present case, there is an express restraint of trade clause and it is not necessary, appropriate or possible to imply further restraint of trade provisions or requirements. The decision in Trego v Hunt [1896] AC 7, which was cited by Cortis, has no application because the goodwill of the business has not been assigned in this case. The goodwill of a business is indivisible: see Commissioner of Taxation v Murry (1998) 193 CLR 605, at 618, where Gaudron, McHugh, Gummow and Hayne JJ said: "It follows that the sale of an asset of a business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business. … Unless a business is transferred to the person to whom an asset of the business is transferred, the transfer of the asset does not transfer any part of the goodwill of the business." In the present case, there has been a sale of some assets of the business but the goodwill has not passed: cf Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468. 28 The Restraints of Trade Act 1976 (NSW), s 4, provides that a restraint of trade is valid to the extent to which it is not against public policy whether it is in severable terms or not. Subsection 3 empowers the Supreme Court to order that a restraint may be valid to such an extent that it is not against public policy as the court thinks fit. As a consequence of s 79 of the Judiciary Act (1903) (Cth), the laws of NSW are binding on the Federal Court and, as a result, the Federal Court can exercise the power conferred on the Supreme Court pursuant to s 4 of the Act: Australian Securities and Investment Commission v Edensor Nominees Pty Ltd (2001) 177 ALR 329 at 334 and 349 per Gleeson CJ, Gaudron and Gummow JJ with whom Hayne and Callinan JJ agreed; see also Justice Sackville, "The Re-emergence of Federal Jurisdiction in Australia", delivered to the NSW Bar Association and ACT Bar Association Regional Conference, Gerringong, 14-15 July 2001 at 7-12. 29 I consider that the restriction on the "development" for themselves or any third party of software products is too wide and that the provision should be read down. As drafted it would prevent research, consideration or formulation of products to be marketed beyond the three year period. This would unduly stifle the enhancement and production of competing products to perform similar functions. The intent of the clause is to prevent the marketing, sale and distribution of software products which would directly compete with the Works. I think that the restraint on the respondents developing software products for themselves travels beyond what is reasonable. Assuming that the restraint is read down, I consider that a period of three years is reasonable, bearing in mind that it could be envisaged, as at January 1997, particularly having regard to the frustration and difficulties expressed by Milson in endeavouring to develop a Windows program up to that date, that it may well be three or more years before a satisfactory development of a Windows 95 automotive accounting program could be achieved. Indeed, the official release of the ServiceMaster product was not until May 1999. Although the intent of the clause is clear, it is inappropriate to speak in terms of direct competition with the "market" for the Works. Rather, in my view, it was intended to prevent competition between the products within the market. In my view, the clause should be read down pursuant to s 4 of the Restraints of Trade Act 1976 (NSW) to have the effect of restraining the marketing, sale and distribution of software products which perform the same or similar functions as the Works which would directly compete with the Works for a period of three years from the date of the Deed. 30 The evidence referred to below makes it clear that the Windows product, although using a different platform, was a product which performed similar functions and directly competed in the market with the SIM DOS software the subject of the assignment. In that respect, the marketing, sale and distribution of ServiceMaster constituted a breach of cl 7.2. The sales evidence that 75 per cent of customers for ServiceMaster were customers for SIM DOS shows a loss of sales attributable to the marketing of what was obviously a more attractive ServiceMaster product. The Windows 95 platform for ServiceMaster does not bring the product into a new market but makes the product more competitive within the existing market.

Breach of copyright 31 Clause 2 of the Deed provides for the assignment of copyright in respect of the Works. This includes the logo for SIM (Exhibit D) which is written in a digital style. Underneath the word SIM (Exhibit D) appear the words "SERVICE INDUSTRY MANAGEMENT" in large white block capitals. In the ServiceMaster CD pages, which install the ServiceMaster program, there are icons on the pages in evidence (Exhibit O) with the letters SIM in similar script but with some difference in the colouring of the lettering and a black background with a series of white spots. There is no reference in the wording on the ServiceMaster screen to "SERVICE INDUSTRY MANAGEMENT". Milson said that he designed the original SIM logo used for SIM DOS in conjunction with the SIM software. The "design" took him about four minutes. He said that part of the design accidentally got into his Windows program unnoticed when he was trying to make a Windows version of DOS SIM in the early days but "unfortunately" this was left on the installation page of ServiceMaster for some period of time 32 In my opinion, the logo embodied in the CD does not amount to a breach of copyright. It is not in my view significantly similar. There are differences in background colour. The logo in the ServiceMaster CD includes a black background with white spots. There is no use of the words "SERVICE INDUSTRY MANAGEMENT". There is nothing particularly distinctive or original, in my view, in the digital form of the letters "SIM". Milson said that he drew up the original pre-1997 logo in about four minutes. The evidence indicates that the logo did not embody any significant work or skill in its generation. It represents a slight effort on Milson's part. Milson said that when he discovered the letters SIM on the installation file he pulled it out immediately. He considered that there was a violation of Carbone's "trade mark" but alleged that it had been fixed up "some time ago". 33 I am not satisfied that the pre-1997 SIM logo was a sufficiently substantial work to attract copyright. It was a "trivial" work: see E & Skone James et al, Copinger and Skone James on Copyright, 1991, 13th ed at [2-10]. Nor am I satisfied that there has been any infringement of that copyright by any 'copying' of it. I think that the differences outlined above preclude any argument of copying or reproducing. Moreover, the evidence does not establish that any damages flowed or could be significantly attributed to the use of this logo. Although the Court does not need evidence as to any one being misled or confused, the absence of evidence provides some support for the conclusion that the significance of the "SIM" logo was trivial. 34 Cortis further submits that there has been a breach of what has been sometimes described as "[p]ublic edition copyright" by the ServiceMaster Manual, both electronic and printed, produced by Kitten: see Nationwide News Pty Ltd v Copyright Agency Limited (1996) 65 FCR 399 at 418. This submission turns on the provisions of s 88 of the Copyright Act (1968) (Cth) which, at the relevant time, provided: "For the purposes of this Act, unless the contrary intention appears, copyright, in relation to a published edition of a literary … work … is the exclusive right to make, by a means that includes a photographic process, a reproduction of the edition." (Emphasis added) When this section applies, it is not necessary to establish substantial textual similarity. For example, it is sufficient if there is substantial similarity in lay-out, typography or format. 35 The respondents refer to the observations of Sackville J in Nationwide News, at 418, where his Honour, after referring to s 88, said: "… in the case of a published edition copyright, what is protected is not a particular collocation of words or musical notes, or a photographic representation. Published edition copyright protects the presentation embodied in the edition. This form of copyright … protects such matters as typographical layout. However, it also protects other aspects of presentation, such as juxtaposition of text and photographs and use of headlines. … It is clear that layout is often extremely important in attracting readers to read a particular story or magazine. It is also clear that the choice of layout, typ size, headings and colour is a skilled operation. Published edition copyright thus protects the product of skill, labour and judgment in presenting material in an edition. …" 36 On the basis of these observations, the submission is that the ServiceMaster Manual infringes the copyright of Cortis in the SIM Operators Manual, which was the subject of the Deed. It was not, nor could it have been, strongly pressed that there was in any sense a substantial copying of the textual material in the SIM Manual. The similarity of text and use of material, taking into account its relative importance, could not be said to amount to a substantial copying. However, it is said that the general layout, presentation, headings, and arrangement of topics in the ServiceMaster Manual, taken together, amount to a breach of the public edition copyright of Cortis in the layout, heading and other formatting features of the SIM Manual. 37 In my view, there is no substance in this submission because the similarities in these aspects, having regard to the overall ServiceMaster Manual, are not significant. They are such headings as one might expect to find in any operating manual dealing with a similar subject matter without any copying. The headings and layout relied on have been highlighted by Cortis and they refer to such basic matters as "Job Invoicing", "Manufactured Items", "Stock Database", "Stocktake", "Purchase Orders" and the like, which would be necessary in any manual dealing with the type of automotive accounting software system here in question. The existence of such layout and headings are incidents of the nature of the product itself. 38 I am therefore not satisfied that there has been any infringement or copying shown on the evidence in relation to the SIM Manual. Furthermore, the evidence does not establish that the ServiceMaster Manual was produced by means including a "photographic process" of the SIM Manual, as required by the terms of s 88. This is an essential element in the application of s 88. See the Second Reading Speech in Parliament where the then Attorney-General, the Hon Nigel Bowen QC, MP, speaking of a proposed provision in the same terms as s 88, said: "There is also a completely new category of protection for published editions. Modern printing processes have made it very easy for a printer to copy, by photographic means, a published edition of a work. Thus, a publisher who has gone to great trouble and expense to produce an edition of a work, say, of Shakespeare's plays, by using special type and a well designed layout has no protection under existing law against a printer who photographically reproduces his edition. What is proposed in the Bill is to give a publisher the exclusive right to make, by means including a photographic or similar process, a reproduction of the published edition of a literary, dramatic, musical or artistic work." (Emphasis added) There is no evidence as to whether a photographic means was used in producing the ServiceMaster Manual. On its face, it appears not to be produced by a photographic process. 39 For the above reasons, I do not accept the arguments of Cortis that there has been any infringement of copyright in the present case.

Trade Practices Act s 52 - misleading OR deceptive conduct 40 I am satisfied that there has been deceptive and misleading conduct on the part of the respondents in relation to the promotion, marketing and sale of the ServiceMaster product. 41 The evidence indicates that on or about 20 June 1998 Cook, on Kitten Software letterheads, wrote to persons who were customers of New Age stating that the versions of the SIM range of products were written by Milson and Cook of Kitten and that Kitten had over ten years experience in writing software. This letter indicates that Kitten has taken legal advice and that the customer can take support for their software and purchase paper from Kitten. These letters treat and refer to addressees as customers of Kitten when at the time they were not. They were in many cases customers of New Age. 42 The evidence of Sturgiss in his affidavit of 6 July 2001 is that he has examined all the invoices discovered by Kitten in respect of its sales between 1998 and 2000. He has compared lists of the customers of the respondents who were existing customers of Kitten as at 28 January 1997 and these disclose that, as at that date, 156 out of a total of 209 customers who took the ServiceMaster product from Kitten were customers of Cortis. This is in the order of 75 per cent of customers. Furthermore, the letters reinforce the impression of a long association between Milson and Cook and the SIM range of products with which the addressee was familiar. These letters were clearly designed to induce addressees to deal with Kitten by taking support and buying from Kitten in relation to the automotive accounting software package. 43 Other correspondence of the same date indicates that Kitten is soliciting persons again addressed as "Dear Customer" to "register an interest" in Kitten's 5th generation system under the Windows 95 platform. This reinforces the impression created by the former correspondence and builds upon a relationship with the addressee of a commercial nature. The correspondence is calculated to lay the ground for sales of the Windows 95 product and to take advantage of a suggestion of continuity. There is also in the second letter an offer of invoice and statement paper which is one of the assigned items in the Deed. There is reference to an annual charge of $350 for phone support, which undercuts by $50 the corresponding charge made by New Age for the SIM product. When the combined effect of the two letters is taken into account, the correspondence creates a false and misleading impression. In addition, there is a later circular signed by Cook and Milson of 27 August 1998, again addressed "Dear Customer", which suggests past dealings, reinforces the respondents' association with the DOS based SIM, and informs customers of their Windows 32 bit platform which, it is said, was "about to be launched". In fact, ServiceMaster was not launched until May 1999. The letters seek to advance the case for buying ServiceMaster in place of the old DOS based range, which was said to have less power and fewer functions. 44 The evidence shows that Kitten, through Cook, first invoiced a "sale" of the ServiceMaster product in August 1998. This was a sale to Diesel Pump and Injector Service for the amount of $1,500. Ms Cook said that she began to solicit orders and arrange payments for ServiceMaster from about August 1998 but that the product was not actually released until May 1999. The evidence is that a substantial number of sales were effected for the unreleased product and that no final product was released until about May 1999. Most customers, it appears, got their ServiceMaster program during or after May 1999. Numerous Kitten invoices during the period from August 1998 to September 2000 refer to "SIM to SM (ServiceMaster) Conversion" and to an "Upgrade from SIM to SM". This is some of the evidence as to the basis on which ServiceMaster was promoted. 45 It is apparent from the evidence that, from about June 1998, the respondents engaged in marketing the ServiceMaster product to customers of New Age with a view to obtaining commitments and payments which would necessarily have the effect of taking customers for the SIM product out of the market. This finding is reinforced by the pricing pattern of the ServiceMaster software and support, which was below the prices charged by New Age. 46 I am satisfied that as a result of the above conduct by Kitten in the marketing, promotion and sale of the ServiceMaster product to their customers after May 1998, Cortis succeeds in its case on the issue of deceptive and misleading conduct.

Causation 47 I am satisfied that, as a consequence of the misleading conduct, Cortis has suffered substantial loss and damage in the loss of prospective sales. I am also satisfied that the Deed was breached and that, as a consequence, Cortis suffered loss. It is apparent that ServiceMaster with the Windows 95 platform has perceived advantages over the DOS SIM product and that, within the automotive trade, a purchase or commitment to ServiceMaster would realistically mean that a purchaser would not take the competing SIM product. They are in direct competition having regard to their function and to the fact that sales have been taken up by businesses which were previously customers of New Age. The correspondence to 75 per cent of businesses in the two customer lists is a significant indication of the customer base that has been lost to Cortis.

DAMAGES 48 The applicant has not called any witnesses specifically with respect to damages. The claim for damages is based on an analysis of the sales of ServiceMaster products between August 1998 and 30 September 1999. The reason for the selection of that period is that in September 1999 a new company known as New Age Business Systems Pty Limited took over the New Age software accounting business from Cortis. There is dispute as to whether any loss at all was suffered by Cortis because it is said that, from the time Cortis claims it started incurring losses, the New Age business was carried on by another entity. However, I am satisfied from the evidence of Carbone that the entity which suffered the loss in the relevant period was Cortis and not another company, Mytrade Pty Limited, as submitted in address by Counsel for the respondents. 49 Cortis contends that the revenue actually gained by the respondents from sales of the ServiceMaster product in that period amounted to $153,723.50. Based on those figures, and the New Age price list, the Court has been given a list of the monies which it is claimed would have been obtained by New Age in respect of those sales if all the customers of Kitten had taken the SIM product in lieu of the ServiceMaster product. It is said that the total revenue lost to Cortis under this head is $132,267.50. However, if the revenue is attributed to sales to existing users only, that figure reduces to $94,337.50. There is a third heading which takes account of the conversion revenue of data if the ServiceMaster product had been sold. If the SIM product had been sold there would be a further reduction of revenue lost to $82,037.50. In my view, the lower figure of $82,037.50 should be taken as a starting point on the estimate of damages because the exercise involves existing customers and therefore does not require data conversion. 50 These figures represent the total revenue lost and no attempt is made to take into account costings or expenses in producing these products. Rather, reliance is placed on evidence that the incremental cost of producing software would be minimal once the original development costs have been absorbed. There is no evidence as to what these costs would be and the evidence on damages is left in a very unsatisfactory state. 51 The next claim is for loss of profits on sales of hardware which were made by the respondents in the above period. It is contended that these profits would have been made in the ordinary course by Cortis as an incident to selling the software. It is probable that some hardware would have been sold. From the total sales revenue on hardware sales by Kitten there is calculated a profit element which is said to be 40 per cent. Labour costs are taken into account and added back in so that the total of the loss of profit on hardware is claimed as $19,057.85. There is then a calculation from the invoices of the revenue which would have been obtained by Cortis in supplying support and applying its phone support rate of $400 per annum. This head of claim amounts to $7,200. The total amount of the claim is therefore said to be $158,524. In addition, it is submitted that this loss should not be the limit of recoverable damages and that the Court should also assess, by way of general damages, some compensation which makes allowance for a percentage of those damages ongoing in respect of a second year of revenue, on the basis that once the respondents had secured an existing customer, it was highly unlikely that the customer would return to New Age. Therefore, it is submitted that a global award of damages in the region of $250,000 should be made. 52 As Counsel for the respondent points out, this calculation of damages is general in the extreme. The greater point is concerned with revenue and can only afford a very rough guide to an appropriate figure. There are a number of assumptions made as to the behaviour of users and contingencies. As the High Court pointed out in The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, the duty of the Court is to make the best assessment it can as to loss. In my view, an appropriate way to approach the matter would be to limit the loss on the software product sales to existing users without conversion and to deduct a figure of $20,000 to make allowance for contingencies, assumptions and uncertainties together with an allowance for such expenses in producing those products, giving a figure of $62,000. 53 In relation to loss on hardware, I consider that an allowance must be made for contingencies as to such sales being made to allow for the effect of promotional skills, market conditions and similar uncertainties on sales by Cortis and that this claim should be reduced to $12,000. In relation to labour, I am satisfied that only a small amount should be made for that claim in the order of $2,000. With respect to support services, again allowing for contingencies and uncertainties, I would reduce this figure to $4,000. There is no guidance at all on the loss of revenue on a "global" basis and I make no allowance for that. Therefore, having regard to the above considerations, I think an appropriate award is a total amount of $80,000. 54 I make no order at this stage and I direct the applicant to bring in short minutes to give effect to the above reasons at a time to be arranged with my Associate.

I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.

Counsel for the Applicant: Mr J M Ireland QC Ms J E Stuckey-Clarke

Solicitor for the Respondent: Yandell Wright Stell

Trade Practices Act 1974(Cth)s 52

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