UK: SAS Institute Inc v. World Programming Limited The ECJ Reference And Potential Implications For Software Licensors

Last Updated: 18 April 2011
Article by Zoe Bent

The proceedings between SAS Institute Inc ("SAS") and World Programming Limited, ("WPL") which led to an extensive judgment from Mr Justice Arnold in July 20101, have resulted in nine questions, principally relating to the interpretation of the Software Directive,2 being referred to the Court of Justice of the European Union ("ECJ").3

With the parties having now filed their written observations, the outcome of the reference may be anticipated later this year or early 2012.

The ECJ is expected to provide clarification not only on the scope of protection for computer programs in Europe, including whether "function" embodied in a literary work is expressly excluded from protection, but also the extent to which exceptions in Article 5(3) allow cloning of software.

The outcome of this latter aspect of the case will be of particular significance to the software licensing industry since the ECJ has been asked to consider whether, and if so to what extent, a competitor is entitled to observe, study and/or test another's software and to use the results to create replica, competing software. In the process the ECJ will almost certainly provide much-needed guidance on the extent to which software vendors will be able to limit the use of their software by contractual means.

Background Facts

SAS' analytics software, the SAS System, which has been developed over a period of some thirty-five years, comprises an integrated suite of programs which enables users to carry out various data-related processing activities.

The SAS System is licensed to customers to enable them to run business analytics application programs written in a highly sophisticated computer language known as the SAS Language.

WPL, perceiving a demand for alternative software on which to run SAS application programs, began developing rival software known as WPS in or about 2003.

WPS was developed by using SAS' highly detailed technical manuals and the learning edition of its SAS System (the SAS Learning Edition) as reference materials from which the essential features (or so-called "functionality") of the SAS System which identified and then replicated as closely as possible in WPS. Thus, the options and sub-options of each routine, their underlying formulae and algorithms, the way in which the procedures were combined and utilised within the SAS System, the default values, data file formats, and even the names allocated to the routines and procedures within the SAS System, were all gleaned from the SAS manuals and/or the SAS Learning Edition and then coded into WPS.

Two points should be noting from the outset however. First, WPL was not developing WPS to interoperate with the SAS System but rather to replace it. Second, there was no suggestion that WPL had ever had direct access to SAS' source code.

As a result of WPL's activities, SAS brought claims against WPL for literary copyright infringement and breach of licence.

Literary Copyright Claims in Brief

In terms of literary copyright, SAS made a number of claims, including that:

  • the use of the SAS manuals to create WPL's manual infringed literary copyright in the SAS manuals (the manual-to-manual claim);
  • the use of the SAS manuals to create WPS infringed literary copyright in the SAS manuals (the manual-to-source code claim);
  • the use of the SAS manuals to create WPS infringed literary copyright in various components of the SAS System software itself (the source code-to-source code claim). (This claim was based on the fact that notwithstanding WPL had no direct access to SAS' proprietary source code, the SAS manuals provided an indirect insight into the SAS System, various components of which WPL had copied).

Aside from the manual-to-manual aspect of the copyright claim, which SAS won at trial (and which, not relating to software, were governed by national law), these other copyright claims, all of which related to computer programs, are the subject of a number of questions which the High Court has submitted to the ECJ under the preliminary reference procedure.

The determination of these questions will depend primarily on the interpretation of Article 1(2) of the Software Directive4 which provides that:

"Protection...shall apply to the expression in any form of a computer program", but states that "Ideas and principles which underlie any element of a computer program, including those which underlie its interfaces, are not protected by copyright under this Directive".

The fundamental issues which the ECJ has been asked to address regarding Article 1(2) may be summarised as follows:

(1) to what extent, if any, does the law of copyright in Europe protect "functional" aspects of a computer program, including computer languages, data file formats, algorithms, mathematical formulae and the like, from being copied?

(2) to what extent does the law of copyright in Europe permit software vendors to protect their software from indirect copying – or, put another way – is copyright protection for computer programs limited to situations where there has been direct copying from the software source code?

The first of these issues focuses on what has been copied, whereas the second relates to how the copying has occurred. If the answer to first issue is that "functional" aspects of a computer program are not protectable in any event, (i.e. that specific elements of computer programs are automatically to be excluded from copyright protection by their very nature) then the second arguably becomes redundant, since there would be no circumstances in which the copying of "functional" elements could amount to copyright infringement, irrespective of whether they are copied directly from the proprietary source code or otherwise. If however "functional" aspects may be protectable, the key issue will then be whether licensing provisions can be utilised to prohibit indirect copying.

How the Article 1(2) issues are determined will not only be important from a copyright perspective but will potentially have important practical implications for software licensors, in particular, depending on how the licence-related aspects of the reference are determined.

The Licence Claim

SAS alleged that the use of the SAS Learning Edition to develop WPS5 was a breach of the relevant software licence terms, which, amongst other things, provided that the software was licensed for "non-production purposes only".6

Court's Findings on the Construction of SAS Learning Edition Licence

In construing the contractual terms, the Court concluded that the licence granted under the SAS Learning Edition agreement was non-transferrable and was personal to the individual "Customer" who clicked the "yes" button. The licensee was therefore the individual SAS employee who, in each case, accepted the licence agreement, not WPL7.

The Court also considered that whilst the term "non-production purposes" was unclear, on balance it was to be construed as precluding the use of the software for commercial purposes, (i.e. producing anything, including competing software, was therefore prohibited). Consequently, the uses made of the SAS Learning Edition were found to be contrary to the licence terms.

That however was not the end of the matter.

Impact of Article 5(3) of the Software Directive

WPL claimed that the uses made of the SAS Learning Edition in developing WPS were permitted since they fell within Article 5(3) of the Software Directive,8 which provides that:

a "person having a right to use a copy of a computer program shall be entitled, without the authorization of the rightholder, to observe, study or test the functioning of the program in order to determine the ideas and principles which underlie any element of the program if he does so while performing any of the acts of loading, displaying, running, transmitting or storing the program which he is entitled to do."

In essence WPL contended that Article 5(3) was to be construed as meaning that once lawfully acquired, a user was entitled to observe, study and test that software for any reason, including for reasons beyond the purpose(s) for which it is licensed. In this regard, WPL asserted that the words "...acts ...which he is entitled to do" in Article 5(3) referred to the kinds of acts, namely, loading, displaying, running etc, and not to their purpose. On that basis, WPL claimed that any provisions contained in the SAS Learning Edition licence which purported to restrict the acts of observing, studying or testing were void and unenforceable. In particular, having regard to the wording of Article 9(1) of the directive, which provides that: "Any contractual provisions contrary to Article ...5(3) shall be null and void."

Conversely, SAS claimed that the provisions of Article 5(3) constituted an avoidance of doubt provision rather than a substantive defence; which should be construed narrowly. Thus, a legitimate user is entitled to study, observe and test software but only where those activities are in-line with the intended purpose(s) for which the licence has been granted; and not for such purposes beyond that, which might otherwise prejudice the licensor's legitimate interests in the software. In this regard, SAS argued that the words "which he is entitled to do" in Article 5(3) referred to the overall purpose of the licence.

A Preliminary View on Article 5(3)

Pending the outcome of the reference, the English Court has given its preliminary views on both the Article 1(2) and 5(3) issues.

As to the Article 5(3) issues,9 the High Court takes the view that Article 5(3) should be interpreted as providing a positive defence to a claim to copyright infringement, rather than merely being a "for the avoidance of doubt provision."10

Moreover, the High Court, concurring with WPL's view, considered that the acts of observing, studying and testing should not be capable of being fettered by licensing provisions. The Court accepted WPL's reasoning on this point, that the subordination of such activities to terms imposed under a licence would mean that a licensor could prevent a program licensed for one purpose, for example academic purposes, from being observed, studied and tested with a view to creating an interoperable program.

In this context it is worth noting however, that in fact no aspect of the case related to interoperability:

  • WPS was not an interoperable but rather a replacement program to the SAS System;
  • whilst provisions exist within the Software Directive relating to interoperability, these are not provided under Article 5(3) but Article 6;
  • WPL did not raise any defence based on interoperability, under Article 6 or at all.

In any event, the Court's view was that copyright proprietors should not be able to override Article 5(3) by the use standard form licence terms since this would have the effect of circumventing its application, which would be contrary to the important public interest considerations underlying Article 5(3).11

The Court's preliminary view, subject to clarification from the ECJ, was therefore that the licence terms of the SAS Learning Edition were null and void to the extent that they made it an infringement for WPL to observe, study and test SAS' software to develop WPS.

Comment

Determining the Article 5(3) questions will no doubt require the ECJ to undertake a careful balancing exercise between the need to safeguard the interests of software vendors on the one hand, and the need to allow legitimate users to properly utilise licensed software on the other. The critical question is where will the ECJ choose to draw that line, and what will be the attendant consequences if it follows the English Court's preliminary view.

Certainly there is little, if any, guidance to be had from case law on the construction of Article 5(3) or indeed from the legislative history to the Software Directive itself. The issue is therefore wide open for judicial reasoning.

Whilst the English Court has rightly noted that there are important public interest objectives which necessitate the observance of the Article 5(3) exceptions, it is questionable whether its preliminary interpretation would result in shifting the balance too far in favour of licensees and whether in doing so, insufficient consideration has been given to another fundamental underlying objective of the Software Directive: to encourage and promote growth and legitimate competition within the software industry.

Whether software vendors will be able to rely on copyright law as an alternative means of protecting their work to licensing provisions in these circumstances depends upon the outcome of the copyright aspects of the same reference. If the ECJ concurs with the preliminary view of the trial Judge - that copyright protection in the case of computer programs is strictly limited to direct copying of source code or design - then where a competitor is able to glean the detailed contents and choices of a competitor's software, from whatever means, be it preparatory design material, detailed manuals or otherwise, there can be no question of an available remedy under copyright law. That of course would be a somewhat surprising result given that the Software Directive specifically copyright protection for preparatory design material.

The outcome of the Article 5(3) questions posed by the reference should at least clarify the extent to which licensees will be able to observe, study and/or test a competitor's software for the purposes of using the information to develop replica software, and, moreover, whether software vendors will be able to continue to protect their software from such activity, by contractual means.

Should the ECJ adopt the approach favoured by the English Court in respect of both the Article 1(2) and 5(3) issues, then software vendors will not only have limited options in protecting their work beyond cases of direct copying but there would no means through which they could protect their software from being emulated (in however much detail) through the incorporation of licence terms.

Finally, in the event that the ECJ concurs with the English Court's preliminary views on the construction of Article 5(3) it will be interesting to see how any such defence is attributed to the defendant, given the Court's finding that the SAS Learning Edition licence was personal to the individual employees, and not to WPL.

Footnotes

1 SAS Institute Inc v World Programming Limited [2010] EWHC 1829 (Ch) (the "Judgment).

2 Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs; as replaced by a codified version, European Parliament and Council Directive 2009/24/EC of 23 April 2009.

3 ECJ Case Reference: C-406/10.

4 Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs, subsequently replaced by a codified version, European Parliament and Council Directive 2009/24/EC of 23 April 2009.

5 At trial the Court ascertained that the uses made of the SAS Learning Edition included: (1) ascertaining the details of the operation of the SAS System; (2) comparing the performance of WPS with that of the Learning Edition in order to improve the relative performance of WPS; (3) to test WPS; (4) to ascertain the output to the log file; and (5) to ascertain format. See paragraph [289] of the Judgment.

6 A more detailed explanation of the licence terms for the various versions of the SAS Learning Edition licence can be found at paragraphs [271] to [273] of the Judgment.

7 Full details of the Judge's findings in this regard can be found at paragraph [280] to [283] onwards of the Judgment.

8 Article 5(3); as reflected in the Copyright, Designs and Patents Act 1988, section 50BA and 296A(1)(c).

9 The Judge's reasoning on this point is set out in full at paragraphs [291] to [315] of the Judgment.

10 Paragraph [311] of the Judgment.

11 Paragraph [312] of the Judgment.

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.

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