The Supreme Court of Appeal recently handed down judgment in the case of Attachmate Corporation v Minister of Water and Environmental Affairs (20 May 2015). There are lessons to be learned for all those who are involved in the licensing of computer software.

The facts were that Attachmate, a US company, had signed a software licence agreement authorising the Department of Water and Environmental Affairs (DWE) to use certain software, with the idea being that DWE's employees would be able to access, via their own computers, data stored at the mainframe computer housed at the State Information Technology Agency (Sita). There was a separate maintenance agreement in terms of which Attachmate was obliged to support the software.

The licence fees payable by DWE were based on the number of computers on which the software was to be installed. The licence fee (R455 per computer) was heavily discounted, as was the maintenance fee (R204 per unit). Why? Because Attachmate believed that the low price would lead to it generating more business from Sita, seemingly making this deal something of a loss-leader. The number of computers agreed on was 300. Although Attachmate installed the mainframe component of the software, DWE's technicians were able to load the copies onto DWE's computers.

Therein lay the problem. As Judge Brand put it in his judgment, "[DWE] did not pay much heed to its express undertaking not to install more than the 300 copies." When Attachmate became aware of the fact that DWE had installed some 660 copies, it persuaded DWE to take out another 360 licences and maintenance contracts at the same (discounted) rates.

But that wasn't the end of the matter because, as the judge put it, "[DWE]continued, in rather cavalier fashion ... to make and install additional copies of Attachmate's software without its consent." Attachmate then tried to persuade DWE to pay the regular licence fee on the additional unauthorised copies, but this was never resolved. The judge said that the reason for this was"not that [DWE] was trying to avoid payment of licence fees, but that its affairs were in such disarray that it could not determine the number of unlicensed copies involved".

So, Attachmate enforced a clause of the contract (clause 11) that required DWE to submit to an audit. The audit, done by KPMG, determined that there were 1564 unlicensed copies of the software. Attachmate disputed this figure, saying that there was an unlicensed copy on every one of DWE's some 5000 computers, and demanded that DWE pay the "applicable licence fee" on well over 4000 illegal copies, and that it pay for maintenance contracts on all these copies too. The expression "applicable licence fee" came from clause 11, which read as follows: "If an audit reveals that you possess or at any time possessed unlicensed copies of the software, you will promptly pay Attachmate the applicable licence fee for such unlicensed copies."

The court basically had to decide what compensation Attachmate was entitled to. Attachmate was forced to concede that it couldn't prove the existence of more than 1564 unlicensed copies. However, what was the "applicable licence fee"? This term wasn't defined in the agreement. Attachmate argued that it shouldn't be the discounted fee, because "to apply the deeply discounted rate that had been negotiated with Sita ... would be to encourage non-compliance with the licence agreement".

The court disagreed with Attachmate. It said that Attachmate's claim that it could apply a higher fee (even if it was the company's standard fee) would have the effect of making clause 11 a penalty clause. The clause was, however, simply intended  to "facilitate proof of its claim for the damages it had suffered through unlicensed copying ... it was not intended to enhance the quantum of its damages claim". The judge went on to say this: "Even if I am wrong in my understanding of 'applicable fee', Attachmate only has itself to blame ... if it wanted to stipulate for its list price or its standard price or some other penalty in the situation contemplated by clause 11, I can think of nothing which prevented it from doing so."

Judge Brand further explained his thinking: "What the concept of 'an applicable licence fee' conjures up to me is a flexible, supple yardstick; a fee that varies in its application with reference to the circumstances of every case, including the identity of the licensee ... . Once a licence fee had been determined through negotiation between Attachmate and the licensee involved, I do not think the fee applicable to that licensee can be determined without any reference to the negotiated fee."

So, the damages that DWE had to pay were to be calculated on this simple basis: what would DWE have paid had it taken out a further 1564 licences, bearing in mind that it would also have been obliged to take out maintenance agreements on each one?

The lessons from this judgment are clear. If you're a software company, be wary of situations where you aren't in control of the process of loading copies of your software. And if you want the non-compliant licensee to pay a penalty, make this very clear in your contract. For those companies and organisations who use computer software under licence, you need to make sure that you take the software company's IP rights seriously, as well as your contractual obligations.

In companies with significant royalty and licence fee income, management of this stream of revenue often falls between finance, sales and legal departments. Royalty returns from self-reported relationships usually contain errors, with significant levels of under-reporting. This is not necessarily intentional but may result from misinterpretation of agreements, information gathering and system weaknesses, and general clerical errors.

The IP commercial team at ENSafrica works in collaboration with our Forensics team to address these issues in a way that is aimed at preserving, enhancing and maximising the long-term relationship between the licensor and licensee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.