A very reasonable royalty

reasonable royaly
11 Nov 2015

Major damages awards are rare in South African IP cases – we’ve certainly never seen anything like the US$1-billon that was awarded in the USA in a case involving Apple and Samsung. IP owners know this, and they generally litigate with little more in mind than an interdict (injunction); in other words, a court order that requires the infringer to stop infringing.

So, the recent copyright case of Quill Associates (Pty) Ltd v Randfontein Local Municipality and Westonaria Local Municipality (North Gauteng High Court, Judge Potterill, 15 September 2015) has attracted some attention. That’s because the amount the defendants were ordered to pay was in the order of R10-million (US$740 000 at the time of publication – the weak exchange rate doesn’t really do this justice).

The facts were that a software company granted a regional authority the right to use a computer program in terms of a written licence agreement. Sometime later, the software company orally agreed to a free extension of this licence to two municipal authorities that were linked to the licensee. Many years later, the licensee terminated the licence agreement, but the two municipal authorities continued to use the program without paying any fees. In order to achieve this, the municipal authorities needed to instruct a computer expert to override or by-pass a disable feature that the software company had inserted in the program – this was seemingly done by changing expiry dates and security keys, and it was done on two separate occasions.

Judge Potterill made short work of this. She said that the two municipal authorities had infringed copyright by reproducing the computer program and by making adaptations of it. She went on to say that the municipal authorities had acted knowingly, in that they had been aware of the copyright, and they had instructed a third party to infringe that copyright. The software company was therefore entitled to relief.

But what relief? The judge ordered that the program be removed from the municipal authorities’ computer systems, and that the software company be allowed to inspect the computer systems after removal, and again six months after removal. The judge also granted an interdict, preventing the municipal authorities from installing and using the program.

But what about financial compensation? Section 24 of the South African Copyright Act, 1978 deals with this. It says that a court can award damages, but damages will not be awarded if the defendant did not know of the copyright, and did not have reasonable grounds for suspecting that it subsisted. It says that a court can, in lieu of damages, award a “reasonable royalty”, and that a court can “direct an enquiry” for the purposes of determining the amount of damages or a reasonable royalty.

The judge felt that there was no need to direct an enquiry here. She took the view that a reasonable royalty could be computed quite easily and that the issue was what a notional licensee would have paid for the program. She said this: “It is akin to comparative sales being used to determine the market value of an expropriated property”.

Factors that the judge considered included the size of each municipality, and the number of consumers and users. The judge felt that a comparison of other municipal contracts was useful, as was evidence presented by the representative of the software company. The evidence of an expert witness presented by the municipal authorities, on the other hand, was of absolutely no use. The judge ordered the one municipal authority to pay R5 750 000, and the other R4 750 000, based on a reasonable monthly rate of R750 000.

The judge had some harsh words for the municipal authorities. She described their actions as being “indeed worrisome … fully knowing that there is a dispute over the licence they employ an entity to change the expiry date of the licence, not once but twice … this is not public administration governed by the values and principles enshrined in our Constitution.”

Regular readers of our articles will know that the South African Supreme Court of Appeal recently also had some harsh words for a public body that had either disregarded or completely overlooked copyright. In the case of Attachmate Corporation v Minister of Water and Environmental Affairs, a government department had been authorised to install a computer program on 300 computers, but ended up exceeding this number by 1564. The court ordered damages to be computed on this simple basis – what would the department have paid had it taken out a further 1564 licences? The court spoke of the fact that “the department did not pay much heed to its express undertaking not to install more than the 300 copies”, the fact that “the department continued, in rather cavalier fashion … to make and install additional copies of Attachmate’s software without its consent”, and  the fact that “its affairs were in such disarray that it could not determine the number of unlicensed copies involved”.

This latest judgment suggests that the courts are becoming more open to the idea that victims of IP infringement should receive financial compensation, and not simply an order that requires the infringer to stop infringing.

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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