FEDERAL COURT OF AUSTRALIA

TRADE PRACTICES – Misuse of market power – Identification of relevant market – Whether existence of prescription data market established.

TRADE PRACTICES – Restrictive trade practices – contracts, arrangements or understandings – Software licence agreement – Construction – Whether agreement likely to have effect of substantially lessening competition – Whether exclusionary provision.

Trade Practices Act 1974 ss 45(2)(b), 46, 4E, 4D.

Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177, cited

Re Queensland Co‑op Milling Association Ltd (1976) 25 FLR 169, cited

Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158, cited

Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313, cited

IAN DAVID MORWOOD and COMPUTERAD AUSTRALIA PTY LIMITED v CHEMDATA PTY LIMITED, AMFAC PTY LIMITED, IMS AUSTRALIA PTY LIMITED, EDWARD LLEWELLYN CROOK, COLIN RAYMOND TREVENA, JOHN MICHAEL GREEN, PHILIP THOMSON, BRUCE MICHAEL McCONOCHIE, JAMES SUTTON HARRISON SENIOR, GWENDA MAY HARRISON, GRAEME PAUL HARRISON, ROBERT STANLEY RICHARDS, THE DUN AND BRADSTREET CORPORATION

NG 264 OF 1998

HILL, MOORE and SUNDBERG JJ

SYDNEY

18 NOVEMBER 1998

THE COURT ORDERS THAT:

1.             The appeal be dismissed.

2.             The appellants pay the respondents’ costs of the appeal.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

THE COURT:

BACKGROUND

The appellants (“Mr Morwood” and “ComputerAd”) sued the first respondent (“Chemdata”) for alleged contraventions of ss 45, 46, 52 and 53 of the Trade Practices Act 1974 (“the Act”).  They also sued the other respondents as persons knowingly concerned in the contraventions by Chemdata within s 75B of the Act.  Mr Morwood is a shareholder and director of ComputerAd.  The application was dismissed by Lockhart J.  The appeal is from his Honour’s decision.

THE ISSUES AT TRIAL

The allegations made in the further amended statement of claim include the following:

·               Since at least 1985 pharmacists in Australia have used computer software in the course of dispensing prescribed drugs (“dispensary software”).  By 1988 most pharmacists in Australia used software for this purpose.

·               There is and has been since 1985 a market in Australia for the supply of dispensary software to pharmacists (the “dispensary software market”).

·               At all material times since 1988 Chemdata has had a substantial degree of power in the dispensary software market within Australia.

·               The use of dispensary software, including Chemdata’s software, enables pharmacists to record and collect information concerning each prescription dispensed (“prescription data”).

·               There is and has been at all material times a market in Australia for the provision of prescription data for reward to interested persons, especially pharmaceutical manufacturers (the “prescription data market”).

·               Since about 1988 Chemdata has granted to all retail pharmacists to whom it supplied its dispensary software (the “Chemdata software”) a non‑exclusive, non‑transferable licence to use the Chemdata software (the “Chemdata licence”).

·               It is an express term of the Chemdata licence that a licensee pharmacist would:

v            keep all information recorded on Chemdata software confidential and secret (clause 8(a));

v            not use information recorded on Chemdata software for any purpose other than that for which it was acquired and not disclose or otherwise use that information for his own benefit or a third party’s benefit without the prior written consent of Chemdata (clause 8(b)); and

v            not add to, amend or make alterations to the Chemdata software (clause 8(d)).

·               ComputerAd has developed or caused to be developed to its specifications and is the proprietor of, or holder of a perpetual licence to make copies of and distribute, computer software which functions as a computerized continuing education, communications and marketing system for pharmacists and which also functions as a means of collecting and recording prescription data (the “ComputerAd system”).

·               The ComputerAd system is designed to and can interact with the particular dispensary software run by a pharmacist, including the Chemdata software, in a way which does not add to, amend, make any alteration to, or inhibit in any way the operation of that dispensary software, including the Chemdata software.

·               Chemdata has since 1988 been in a position to prevent or attempt to prevent the operation and commercial viability of the ComputerAd system.

·               Since October 1988 Chemdata has in fact prevented and continues to prevent the operation and the commercial viability of the ComputerAd system by:

(a)           refusing to deal with ComputerAd on a commercial or any other basis in relation to distribution and operation of the ComputerAd system;

(b)          threatening to prevent pharmacists from using the ComputerAd system by resort to contractual rights purportedly arising under the Chemdata licence;

(c)           threatening to prevent pharmacists from using the ComputerAd system by resort to intellectual property rights, in particular copyright in the Chemdata software alleged to be infringed by the operation of the ComputerAd system;

(d)          threatening to disable the operation of the ComputerAd system by moving the location of the National Health Scheme (“NHS”) number as it appears in the Chemdata software;

(e)           failing to withdraw the refusal to deal set out in (a) above and the threats set out in (b), (c) and (d) above.

·               The ComputerAd system does not infringe any copyright of Chemdata in the Chemdata software.

·               Chemdata has, contrary to s 46(1)(b) and (c) of the Act, taken advantage of its substantial degree of power in the dispensary software market for the purpose of preventing entry by ComputerAd into one or other or all of the markets pleaded in the statement of claim (except the dispensary software market) and from engaging in competitive conduct in one or other or all of those markets.

·               By relying upon its contractual rights under the Chemdata licence, Chemdata is in breach of s 45(2)(b) of the Act by giving effect to a provision of a contract which is likely to have the effect of substantially lessening competition in the relevant markets and is also in breach of s 45 by giving effect to an exclusionary provision, namely, its contractual rights mentioned earlier.

The evidence was given by affidavit supplemented by cross‑examination of some of the appellants’ deponents.  None of the respondents’ deponents was cross‑examined.

Mr Morwood represented himself.  He is not a lawyer.  ComputerAd was represented by Mr Lee, a Sydney solicitor who assisted Mr Morwood during the hearing.  When Mr Morwood gave oral evidence, Mr Lee was permitted to represent him.  Lockhart J observed that Mr Morwood represented himself ably.  He had full knowledge of the facts of the case and seemed to his Honour to grasp the legal issues involved.  When Mr Morwood and Mr Lee told his Honour they did not propose to cross‑examine any of the respondents’ deponents, he pointed out to them the possible consequences and implications of that course.  Despite this warning, no cross‑examination took place.

The parties prepared a document headed “Summary of Major Issues in Dispute”.  Lockhart J set out the fourteen issues recorded in the document.  It is sufficient that we set out six of them.

1.                  Did ComputerAd develop software capable of performing the functions of continuing education, communications and a marketing system for pharmacists and which also functioned as a means of collecting and recording prescription data and what were its features and capacities?

…

4.                  Is there a separate dispensary software market?  If so, what goods and services comprise that market?

5.                  Did Chemdata have a substantial degree of power in a “dispensary software” market from 1988 to date?

…

7.                  Has Chemdata prevented the operation and commercial viability of the ComputerAd system by:

(a)                its conduct generally; or

(b)                by reliance on certain terms of the Chemdata licence?

…

9.                  Was any conduct of Chemdata carried out for the purpose of preventing the entry of ComputerAd into the “prescription data” or “pharmacy computer marketing opportunities” markets …, or for the purpose of deterring or preventing ComputerAd from engaging in competitive conduct in those markets?

10.              Does the Chemdata licence contain exclusionary provisions and, as part of this issue:

(a)               are pharmacists and Chemdata competitors or potential competitors in the “prescription data” market;

(b)               what was the purpose of the terms of the Chemdata licence;

(c)                to what extent are those terms exempt from the provisions of section 45 by virtue of section 51(3)(a) of the Trade Practices Act?

MR MORWOOD’S CREDIT

The primary judge considered Mr Morwood an unreliable witness.  His Honour was of the view that Mr Morwood was keenly aware of all the relevant issues in the case and had tailored his evidence to suit the interests of the appellants.  His Honour did not accept his account of critical conversations, preferring that of the respondents’ witnesses.  He noted that Mr Morwood’s evidence was in many respects inconsistent with contemporaneous documents and not in accord with the probabilities.

THE EVIDENCE

The primary judge described the principal events that occurred between 1986 and the commencement of proceedings in October 1994.  The following summary of the evidence is taken from his judgment.

The concept of ComputerAd was conceived by the twelfth respondent (“Mr Richards”) and was developed by him together with David McDougall (“Mr McDougall”) in mid 1986.  In so far as the ComputerAd concept has ever existed in the form of a computer system or programme, it was owned by Wayne Green (“Mr Green”).  Mr Green offered the source code to ComputerAd on 23 May 1990, but ComputerAd never acquired it.  In May 1986 Mr Richards engaged Mr Green to write a demonstration programme of the concept for $480.

ComputerAd was incorporated on 30 December 1986.  The original shareholders were Mr McDougall, a family company of Mr Richards, and Stancraft Pty Limited (“Stancraft”), a company controlled by Mr Morwood through his daughters.  In January 1987 Mr McDougall and Mr Richards sold their interests in the ComputerAd concept to ComputerAd for $65,000.  Only the first instalment of the purchase price was paid.

Mr Morwood was made bankrupt on 12 August 1986.  From that time onwards he controlled the affairs of various companies, including Stancraft, by arranging for the appointment of his daughters as directors.  At all times Mr Morwood played a key role in the management of the affairs of ComputerAd.

Between 1987 and 1992 ComputerAd made various patent applications to the Australian Patent Office in respect of the ComputerAd system.  All were unsuccessful.  There has been no communication between ComputerAd and the Patent Office since February 1992 with respect to the ComputerAd system.

Mr Green retained possession of the source code for the ComputerAd system.  The expert witnesses agreed that without access to the source code ComputerAd could not make any modifications to whatever software it did possess had it ever attempted to create an “add on” programme that was compatible with the Chemdata software, and that it could not make any necessary changes to its own programme without Mr Green’s co‑operation.  Mr Green was not called as a witness and no explanation for this was given by the appellants.

The first relevant contact between ComputerAd and Chemdata was at a meeting on 8 January 1987.  Mr Morwood and others represented ComputerAd and the fourth respondent (“Mr Crook”) represented Chemdata.  In oral evidence (though not in their earlier affidavits) Mr Morwood and Mr McDougall stated that at the meeting Mr Crook said he would regard any attempt to develop ComputerAd as a breach of Chemdata’s copyright, and that Chemdata would “take all means to protect that user base and that relationship”.  His Honour did not believe their evidence, and found that Mr Crook had made no threats or statements to the effect that Chemdata would take whatever steps it could to prevent the ComputerAd system from interacting with the Chemdata software.  Despite attempts by Mr Morwood and Mr Richards to generate marketplace interest in the ComputerAd concept, they were unable to organize any firm contractual arrangement for the launch of the concept.

In March 1988 ComputerAd borrowed $300,000 from Barry Allen, a Sydney plumber who later became a director of ComputerAd.  This money was exhausted by January 1989, mainly in payment of salaries to Mr Morwood’s family company and others.  In the meantime ComputerAd had not generated any real interest in its potential product from pharmaceutical companies or potential investors.

During 1988 ComputerAd engaged Mr Green to develop two programmes.  One was for an “add on” computer programme to interact with existing dispensary software programmes.  The other was for an integrated programme containing both the ComputerAd concept and the dispensary software programme.  Mr Green’s company retained the source code for whatever programmes were produced by it, and ComputerAd had the right to purchase the source code.  Mr Green produced a prototype programme which failed its initial tests in late 1988.  On the basis of unchallenged expert evidence, the primary judge found that a somewhat laudatory letter purporting to be from the company which carried out the tests was a forgery.

His Honour was not satisfied that any working ComputerAd programme for the ComputerAd system was in existence.  At no time had ComputerAd ever had a software “add on” programme which could interact with the Chemdata software.

From at least February 1989 ComputerAd had been in severe financial difficulties and was probably insolvent.  When the Allen money ran out, three key employees whose remuneration it had funded left ComputerAd.  ComputerAd was deregistered by the Australian Securities Commission in 1993, and was restored to the register only for the purpose of bringing the proceedings.

The primary judge examined the evidence surrounding a meeting between Mr Morwood and Mr Crook in October 1988 at which Mr Crook was alleged to have made the threats particularised in the statement of claim.  His Honour did not accept Mr Morwood’s account of what transpired at the meeting, preferring the evidence of Mr Crook, which was supported by that of another witness, Mr Bruce McConochie.  His Honour found that Mr Crook did not during that meeting make any threat to Mr Morwood to take steps to prevent the ComputerAd system from working with the Chemdata system.

During late 1991 and early 1992 Chemdata and Lockie Computers Pty Limited (“Lockie”) engaged Mr Richards to develop and conduct a pilot test of a feature called “Druglink”.  This was to be a companion selling and advertising feature to be incorporated into the Chemdata and Lockie programmes.  The trial was abandoned by November 1992, and the feature was never incorporated into the Chemdata software.  The development of Druglink led to correspondence between ComputerAd and Chemdata as to Chemdata’s right to deal with Mr Richards and develop the Druglink software.  In Chemdata’s solicitors’ letter to ComputerAd’s solicitors of 6 June 1992 the former reasserted Chemdata‘s right to make use of the feature and advised that their client intended to develop and market it, and to employ Mr Richards to market it.  They denied any liability or obligation to ComputerAd, and said that if ComputerAd wished to take the matter further, a meeting could be arranged so that Chemdata could “make clear their inflexibility in this matter”.  ComputerAd did not reply to the letter and did not commence any litigation to vindicate its intellectual property claim.  ComputerAd relied on this letter as a constructive refusal by Chemdata to deal with ComputerAd.  The primary judge did not accept this characterisation of the letter.  Rather, he said, it was a challenge to ComputerAd to “put up” or “shut up” in relation to its claim of intellectual property rights concerning the ComputerAd concept.

There was no contact between ComputerAd and Chemdata between 6 June 1992 and the commencement of the proceeding in 1994.  The primary judge found that there was no conduct by Chemdata or its officers between 1986 and the date of the trial which involved a refusal by Chemdata to deal, or a threatened refusal to deal, in respect of ComputerAd.

ESSENTIAL FINDINGS

The primary judge rejected ComputerAd’s claim that, for the purposes of s 46 of the Act, there existed a dispensary software market.  He also held that there were no barriers to entry into that market, if it did exist.  He rejected the claim that a “prescription data market” existed in Australia.  No trade evidence was called to establish the existence of such a market, and no economist gave evidence in support of the appellants’ case.  His Honour found that the appropriate market relevant to ss 46 and 4E was the market for business database software or business stock control software.  This software was available to a broad spectrum of industries and professions of which the pharmacy profession was but one example.  Chemdata only supplied dispensary software, and in his Honour’s view did not possess a substantial degree of market power in the relevant market.

Although it was not necessary for the primary judge to go further, his Honour went on to find that if, contrary to his view, a dispensary software market and a prescription data market existed, Chemdata had not engaged in any conduct whereby it took advantage of whatever market power it did possess in the dispensary software market to prevent entry of ComputerAd into the prescription data market or to deter or prevent it from engaging in competitive conduct in that market.  (The appellants do not appear to have suggested before the primary judge that they wished to participate in any other market, and certainly no other market was asserted before us.)  Even if Chemdata had relevantly exercised its market power, the evidence relied on by the appellants did not establish that Chemdata did so for any of the purposes proscribed by s 46(1)(a), (b) or (c).  His Honour had already rejected the claims that Mr Crook had made threats and that the letter of 6 June 1992 was a constructive refusal to deal.  He accepted Mr Crook’s evidence that he had no impermissible purpose and that he had done nothing wrong at the 1988 meeting or thereafter.  He accepted the denials by Chemdata’s directors that any of them had any proscribed purpose in relation to the 6 June letter.  None of them was cross‑examined.

The primary judge then turned to the claim that sub‑clauses 8(a), (b) and (d) of the Chemdata licence agreement were in breach of ss 45(2)(b) and 4D of the Act.  By clause 8 the licensee covenants with Chemdata that he will

(a)               keep the Software, all improvements, modifications and updates thereto and any data base and all information relating thereto which comes into his possession or is recorded or embodied on the Software (all of which are herein collectively called ‘the Information’) whether pursuant to this Agreement or otherwise confidential and secret;

(b)               not use the Information for any purpose other than that for which it was or is acquired and shall not disclose or otherwise use the Information for his own benefit or for the benefit of any third party, without the prior written consent of the Licensor;

(c)               instruct and require any person having access to the Information to keep secret the Information and take all reasonable steps to prevent any such person from divulging to any third party or using for his own benefit or for the benefit of any third party any part or all of the Information and, where required by the Licensor, the Licensee shall obtain from that person an acknowledgment of the secrecy of the Information and an undertaking from that person to the Licensor in terms satisfactory to the Licensor that the Information will not be disclosed to any third party; and

(d)               not add to, amend or make any alterations to the Software in its form as provided by the Licensor from time to time.

The primary judge rejected the appellants’ claim that the sub‑clauses were in breach of ss 45(2)(b) and 4D.  In his Honour’s view sub‑clause (a) had the effect of maintaining confidentiality of the licensed software, and sub‑clause (b) was a “use and confidentiality” restriction.  Both had a business justification.  Sub‑clause (d) had the effect of maintaining the integrity of the licensed software, and had the sound business purpose of allocating risk between Chemdata and the individual pharmacist.  It essentially prevented tampering with the software itself, thus maintaining its integrity.  His Honour observed that the licence agreement was not a contract, agreement or understanding between competitors.  The sub‑clauses had no anti‑competitive purpose.  Rather their purpose and effect was to protect the copyright and confidential information of Chemdata in its software.

The primary judge then examined the contention in the statement of claim that the ComputerAd system is designed to and can interact with the Chemdata software in a way which does not add to, amend, make any alteration to, or inhibit in any way the operation of that software.  His Honour accepted expert evidence from the sixth respondent, Mr John Green, which was not challenged, that it was not possible for the two programmes to have interacted as suggested by the appellants.  There was no evidence that any such interaction could occur or had occurred.  His Honour found that the programmes could never have worked together.

Had the primary judge found a relevant contravention of Pt IV of the Act, he would have found that none of the second to thirteenth respondents had any knowledge of the essential facts constituting the alleged contravention.  He also held that in so far as the causes of action arose before 27 October 1991, they were barred by ss 82(2) and 87(1CA) of the Act.

ISSUES ON THE APPEAL

On the view the Court takes of the matter it is not necessary to decide all the issues that were decided by the primary judge.  Although the parties filed extensive written submissions which dealt with all issues, with the agreement of the parties we limited oral argument to the issues which, if decided against the appellants, would determine the appeal against them.  The two issues that require decision are (1) whether the appellants have established the existence of the two markets they rely on for their s 46 case, and (2) whether they have made out their case that sub‑clauses 8(a), (b) and (d) of the Chemdata Licence contravene s 45(2)(b) of the Act.

The prescription data market

The appellants case is that Chemdata had a substantial degree of market power in what was claimed to be the dispensary software market, and had used that power to prevent the entry of ComputerAd into what was claimed to be the prescription data market or to deter it from engaging in competitive conduct in that market.  The appellants must thus establish the existence of both markets.  The primary judge said that the evidence to support the existence of the prescription data market was minimal, and that no economist was called by the applicants to support its existence.  Mr Morwood took us to various industry documents in order to persuade us that his Honour was wrong and that there was a prescription data market.  Some of the documents do not seem to bear on the issue at all.  Others consist of predictions as to the likelihood of a prescription data market coming into existence.  For example, an IMS International document said it was likely that Australia would follow the United States market in that the pharmaceutical information services market in Australia would evolve from wholesale‑based to prescription‑based information services.  A March 1992 document disclosed that the marketing of Chemdata’s statistical data of pharmaceutical usage within Australia had been delayed.  Mr McDougall gave evidence of a ComputerAd demonstration to Merck Sharpe and Dohm (“MSD”) in January 1987 at which MSD said that information as to the number of times a particular drug was dispensed was of immense interest and value to pharmaceutical manufacturers.  Other documents disclose that Chemdata has been collecting prescription data from pharmacists for a number of years.

A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 195; Re Queensland Co‑op Milling Association Ltd (1976) 25 FLR 169 at 190.  See also Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158 at 174 and Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313 at 329.  The material to which we were taken by Mr Morwood does not establish the existence of an area of close competition between firms or a field of rivalry between firms in relation to the collection and distribution of prescription data.  A market requires buyers and sellers.  See Queensland Wire at 199.  The evidence does not establish an existing market involving the sale and purchase of data derived directly from sales by pharmacists.  The appellants have not established the existence of a prescription data market, and it is unnecessary for us to decide whether they have established the existence of a dispensary software market.  It has not been shown that the primary judge was wrong in his conclusion that the evidence relied on by the appellants was insufficient to establish the existence of a prescription data market in Australia.  His Honour’s conclusion is supported by the evidence of Mr de Morentin, to which he referred in this connection.

Clause 8 of the Licence

The appellants’ s 45(2)(b) claim is in two parts.  The first depends on their establishing, amongst other things, that sub‑clauses 8(a), (b) and (d) constitute an “exclusionary provision”.  This is defined in s 4D, so far as material, as a contract between “persons who are competitive with each other”.  It is plain, as his Honour found, that Chemdata and its licensed pharmacists are not competitive with each other.  Having regard to the way they put their case, the other part of the appellants’ claim requires them to establish that clause 8 has the purpose of substantially lessening competition in a market.  The appellants contended that the effect of clause 8 was to prevent a pharmacist dealing with information recorded or embodied by him on the Chemdata software data base.  We think that this involves a misconstruction of clause 8.  An examination of the whole of the clause discloses that the material defined in sub‑clause (a) as “the Information” is confined to the software referred to in clause 1 together with any improvements, modifications and updates etc which are provided to the pharmacist by Chemdata, and does not encompass information recorded or embodied on the software data base by the pharmacist.  In particular we do not regard the words “information … recorded or embodied on the Software” as covering information recorded or embodied by the pharmacist.  That is perhaps not entirely clear from sub‑clause (a) standing alone.  But it is made clear by the other sub‑clauses.  Thus sub‑clause (b) prevents the pharmacist using the Information for any purpose for which it was or is acquired.  That must mean “acquired from Chemdata”.  Further, the prohibition in that sub‑clause of disclosure or use of the Information for the pharmacist’s own benefit cannot have been intended to prevent the pharmacist using information keyed in by him about prescriptions for his own purposes or those of his customers.  For the same reason the secrecy provision in sub‑clause (c) cannot have been intended to preclude the pharmacist using that information for his own professional purposes.  Sub‑clause (d) confirms the conclusion that the software does not include information embodied in the data base by the pharmacist.

Once the true meaning and effect of clause 8 is understood, the foundation for the appellants’ case under s 45(1)(b)(ii) disappears.  We think that is what the primary judge had in mind when he said that the s 45 claims were without foundation because they proceeded on a misconstruction of clause 8.

CONCLUSION

The appellants’ case under s 52 and s 53(g) of the Act was expressly abandoned.  Accordingly the appeal must be dismissed.

Associate:

Dated:              18 November 1998