FEDERAL COURT OF AUSTRALIA

Microsoft Corporation v PC Club Australia Pty Ltd [2005] FCA 1522

COPYRIGHT – counterfeit certificates of authenticity (COAs) affixed to computers loaded with software onto hard disks thereof and accompanying restore compact disks – dispute as to ownership and subsistence of copyright in computer software – dispute as to standing of third Microsoft applicant to sue as exclusive licensee of first applicant – claim for damages for infringement of copyright – personal liability of appointed directors and de facto director – whether respondents had reasonable grounds for suspecting conduct involving purchase and use of COAs constituted infringement of copyright – flagrancy of infringements – injunctions – whether additional damages should be ordered – liability of directors in office as well as corporate infringer

TRADE MARKS – registered trade marks appearing on computer software flat packs, associated media and on-screen – whether conduct involving breach of copyright also infringed trade marks – injunctions – whether damage sustained

TRADE PRACTICES – whether conduct constituting infringement of copyright involved misleading and deceptive conduct – whether damage sustained

Copyright Act 1968 (Cth) ss 31(1)(a)(i), 35, 36, 38(1), 115(2), 115(3), 115(4), 116, 119, 126A, 126B, 128, 184, and 196

Copyright Amendment (Parallel Importation) Act 2003 (Cth)

Designs Act 1906 (Cth)

Foreign Corporations (Applications of Laws Act) 1989 (Cth)

Judiciary Act 1903 (Cth) s 79

Trade Marks Act 1995 (Cth)

Trade Practices Act 1974 (Cth) ss 52, 53(a), 53(a), 53(c) and 53(d)

Conveyancing Act 1919 (NSW) s 12

Copyright (International Protection) Regulations 1969 (Cth)

Federal Court Rules O 13 r 2

Kenrick v Lawrence (1890) 25 QBD 99 cited

Microsoft Corporation v DHD Distribution Pty Ltd t/as Austin Computers (1999) 45 IPR 459 applied

Codelfa Construction Pty Ltd v State Rail Authority (1982) 149 CLR 337 referred to

Safe Sport Australia Pty Ltd v Puma Australia Pty Limited (1985) 4 IPR 120 referred to

Reardon Smith Line Ltd v Ynguar Hansen-Tangen [1976] 1 WLR 989 referred to

DTR Nominees v Mona Homes Pty Ltd (1978) 138 CLR 423 cited

Cameron & Co v Slutzkin Pty Ltd (1923) 32 CLR 81 referred to

Wood v Boosey (1868) LR. 3 QB. 223 referred to

Fiscal Technology Co Ltd v Johnson (1991) 23 IPR 555 referred to

Redwood Music Ltd v Chappell & Co Ltd [1982] RPC 109 cited

Taypar Pty Ltd v Santic (1989) 21 FCR 485 discussed

Dixon Projects Pty Ltd v Masterton Homes Pty Ltd (1996) 36 IPR 136 distinguished

Global Brand Marketing Inc v Cube Footwear Pty Ltd (2005) 65 IPR 44 discussed

Trendtex Trading Corp v Credit Suisse [1982] AC 679 applied

Commonwealth v Mewett (1997) 191 CLR 471 cited

Northern Territory v GPAO (1999) 196 CLR 553 referred to

University of Wollongong v Metwally (1984) 158 CLR 447 cited

Microsoft Corporation v Auschina Polaris (1996) 71 FCR 231 applied

University of New South Wales v Moorhouse (1975) 133 CLR 1 cited

Australasian Performing Rights Association v Tolbush Pty Ltd (1985) 82 FLR 52 cited

Microsoft Corporation v Goodview Electronics Pty Ltd (2000) 49 IPR 578 referred to

Henley Arch v Clarendon Homes (1998) 41 IPR 443 cited

Wheeler Grace & Pierucci v Wright (1989) 16 IPR 189 applied

Milwall v Olympic Amusements Pty Ltd (1989) 85 FCR 436 cited

General Tyre & Rubber Co v Firestone Tyre & Rubber Co Ltd [1976] RPC 197 applied

Autodesk v Cheung (1990) 17 IPR 69 discussed

Microsoft Corporation v TYN Electronics Pty ltd (in liq) (2004) 63 IPR 137 discussed

Microsoft Corporation v Glostar Pty Limited (2003) 57 IPR 518 distinguished

Prior v Lansdowne Press Pty Ltd (1995) 29 FLR 59 cited

Ravenscroft v Herbert & New English Library [1980] RPC 193 at 208 cited

Microsoft Corporation v Atifo Pty Ltd (1997) 38 IPR 643 cited

Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88 discussed

Jones v Dunkel (1959) 101 CLR 298 referred to

Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 cited

Sheldon and Hammond Pty Ltd v Metrokane Inc (2004) 61 IPR 1 cited

Namol Pty Ltd v AW Baulderstone Pty Ltd (1993) 27 IPR 1 cited

Bailey v Namol Pty Ltd (1994) 53 FCR 102 cited

Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240 cited

Microsoft Corporation v Ezy Loans (2004) 63 IPR 54 cited

Sullivan v FNH Investments Pty Ltd (2003) 57 IPR 63 cited

Autodesk Inc v Yee (1996) 35 IPR 415cited

Amalgamated Mining Services Pty Ltd v Warman International Ltd (1992) 24 IPR 461 cited

Thunderbird Products Corporation v Thunderbird Marine Products Pty Ltd (1974) 131 CLR 592 referred to

Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 referred to

National Australia Bank Ltd v Nobile (1988) 100 ALR 227 referred to

K Garnett, G Davies and G Harbottle, Copinger and Skone James on Copyright, 15^th edition 2005

J W Carter and D J Harland, Contract Law in Australia, 4^th edition, 2002

J G Starke, Assignment of Choses in Action in Australia, 1972

J Lahore and W A Rothnie, Copyright and Designs, Vol 1, Butterworths

MICROSOFT CORPORATION AND MICROSOFT PTY LIMITED AND MICROSOFT LICENSING, GP v PC CLUB AUSTRALIA PTY LTD AND DAVID LEE AND MYMY LEE (ALSO KNOWN AS MIMI LEE) AND KE-HSIEH FANG (ALSO KNOWN AS KANE FANG)

NSD 1080 OF 2004

CONTI J

28 OCTOBER 2005

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1080 OF 2005

BETWEEN:	MICROSOFT CORPORATION FIRST APPLICANT MICROSOFT PTY LIMITED SECOND APPLICANT MICROSOFT LICENSING, GP THIRD APPLICANT
AND:	PC CLUB AUSTRALIA PTY LIMITED FIRST RESPONDENT DAVID LEE SECOND RESPONDENT MYMY LEE (also known as MIMI LEE) THIRD RESPONDENT KE-HSIEH FANG (also known as KANE FANG) FOURTH RESPONDENT
JUDGE:	CONTI J
DATE OF ORDER:	28 OCTOBER 2005
WHERE MADE:	SYDNEY

INDEX OF JUDGMENT

Pages	Paragraphs	Heading

1		INTRODUCTION

1 - 6	1 - 9	A preview of the context to the litigation and the parties involved

6 - 7	10 - 12	The Anton Piller, Mareva and injunctive relief sought and obtained on an interlocutory basis and the subsequent course of the proceedings

7 – 9	13 – 16	The applicants’ case in outline

9 - 12	17 – 20	The respondents’ case in outline on the copyright and other issues outstanding

12		THE APPLICANTS’ ACTION FOR INFRINGEMENT OF COPYRIGHT IN WINDOWS XP HOME AND WINDOWS XP PRO

12 – 14	21 – 26	The relevant legislative provisions

14 – 18	27 – 35	The applicants’ standing to bring the infringement action

18 – 64	36 – 136	The respondents’ challenge to the applicants’ standing to sue for infringement of copyright in Windows XP Home and Windows XP Pro
19 – 37	38 – 71	The Respondents’ challenge to subsistence of copyright in Windows XP Home and Windows XP Pro and to Microsoft’s ownership thereof
21 – 29	40 – 56	(i) Whether there is a separate copyright in the ‘version’ of Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’, and that those versions so created fell within the description of ‘derivative works’ contained in sub-clause 2.1(i) of the Parent-Subsidiary Agreement
29 – 32	57 – 61	(ii)Whether MLI was the sole entity entitled to author Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’ and to own the copyright therein, therefore whether Microsoft is not entitled to the benefit of the evidentiary provisions and presumptions in the Copyright Act in order to claim ownership of any copyright that might subsist in the relevant programs
32 – 37	62 – 71	(iii)Whether the applicants failed to prove the subsistence and ownership of copyright in Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’ potentially owned by MLI
37 – 54	72 – 111	My conclusions on the respondents’ challenge to Microsoft’s reliance upon ss 126A, 126B and 128 as establishing subsistence and ownership of copyright in Windows XP Home and Windows XP Pro
37 – 41	72 – 80	(i) Sections 126A, 126B and 128
41 – 42	81 – 84	(ii)The burden of proof
42 – 53	85 – 107	(iii)The construction of cl 2.1 of the Parent-Subsidiary Agreement
53 – 54	108 – 111	(iv)The applicants’ further submissions
54 – 64	112 – 136	The respondents’ contention that MLGP failed to obtain a legally effective assignment of MLI’s exclusive rights to sue for infringement of copyright

64 – 71	137 – 149	The copyright issues falling for resolution consequentially upon the findings in favour of the Microsoft applicants in relation to entitlement to sue for infringement of copyright in the subject computer software products

71 – 73	150 – 154	The nature and scope of PC Club’s activities of assembly of computer hardware and acquisition of software as explained by Mr Lee

73 – 99	155 – 202	The sale of personal computers by PC Club with pre-installed software – the procedures put in place as explained by Mr Lee – the evidentiary basis for the respondents’ case as to ‘innocent infringement’ under s 115(3) of the Copyright Act

99 – 103	203 – 209	The respective roles and functions of Mr Lee, Mr Fang and Mrs Lee undertaken for PC Club

103 – 146	210 – 290	Further circumstances outlined by the applicants as derogating from the respondents’ assertions as to ss 115(3) and 115(4) of the Copyright Act and the quantification of damages or loss of profits for infringement of copyright
103 – 109	210 – 220	Damages pursuant to s 115(2)
109 – 133	221 – 264	Additional damages for breach of copyright
110 – 129	222 – 255	(i) The flagrancy of the infringements and my conclusions upon the credibility of Mr Lee
129 – 130	256 – 258	(ii)Conduct of the respondents after receipt of notification by Microsoft of the alleged infringing conduct
131	259	(iii)Benefits said to have accrued to the respondents by reason of the infringements
131	260	(iii) Need for deterrence
131 – 132	261 – 264	(v)Other relevant matters
133 – 134	265 – 266	Judicial precedents as to quantification of additional damages and their operation in the present circumstances
134 – 145	267 – 290	The quantification of damages for infringement of copyright

146 – 154	291 – 308	TRADE MARK INFRINGEMENT

154 – 156	309 – 313	INFRINGEMENT OF TP ACT

156	314	CONCLUSIONS ON THE CAUSES OF ACTION PURSUED BY THE APPLICANTS

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1080 OF 2005

BETWEEN:	MICROSOFT CORPORATION FIRST APPLICANT MICROSOFT PTY LIMITED SECOND APPLICANT MICROSOFT LICENSING, GP THIRD APPLICANT
AND:	PC CLUB AUSTRALIA PTY LIMITED FIRST RESPONDENT DAVID LEE SECOND RESPONDENT MYMY LEE (also known as MIMI LEE) THIRD RESPONDENT KE-HSIEH FANG (also known as KANE FANG) FOURTH RESPONDENT
JUDGE:	CONTI J
DATE OF ORDER:	28 OCTOBER 2005
WHERE MADE:	SYDNEY

ORDERS

In these orders, the following expressions bear the respective meanings assigned thereto:

‘Date of judgment’ means 28 October 2005.

‘Incomplete Microsoft Program’ means a copy of the whole or a substantial part of any of the Microsoft Programs which is not accompanied by the associated media, the product manual, and the Microsoft COA Label which was originally affixed to that media or product manual.

‘Infringing Microsoft COA Label’ means any Microsoft COA Label which is either: (i) not attached to any computer, disk or manual; or (ii) is an Infringing Microsoft Product.

‘Infringing Microsoft Products’ means any Microsoft Class 9 Products or Microsoft Class 16 Products to which the mark ‘MICROSOFT’ or the mark ‘WINDOWS’ or a mark substantially identical with, or deceptively similar to, the mark ‘MICROSOFT’ or the mark ‘WINDOWS’ has been applied without the consent of the First Applicant.

‘Infringing Microsoft Program’ means a copy of the whole or a substantial part of any of the Microsoft Programs which has not been made by or with the licence of the First Applicant.

‘Microsoft COA Label’ means any document which is or is purported to be a Microsoft Certificate of Authenticity label (whether or not genuine).

‘Microsoft Class 9 Products’ means computer programs, magnetic disks and tapes containing computer programs, computer software, computer hardware, memory boards for use with computers, programmed chips, cartridges embodying computer programs and computer software and firmware embodied in computers or designed to be used therewith.

‘Microsoft Class 16 Products’ means printed instructional and teaching material related to computers and computer software, books, paper and printed matter for use with computer equipment, computer hardware and software manuals, newsletters featuring information about computer hardware and software, paper, paper tape and cards for the recordal of computer programs.

‘Microsoft Programs’ means the computer programs Microsoft Windows XP Home and Windows XP Pro, and their associated documentation and works.

‘Microsoft Trade Marks’ means any or all of the First Applicant’s registered trade marks comprising the mark ‘MICROSOFT’ and numbered 371528(9) and 377674(16) or comprising the mark ‘WINDOWS’ and numbered 576996(9) and 576997(16).

THE COURT ORDERS THAT:

As to the copyright claims:

1. Pursuant to section 115(2) of the Copyright Act 1968 (Cth)the respondents and each of them be permanently restrained from:

(a) reproducing or authorising the reproduction of the whole or a substantial part of any of the Microsoft Programs without the licence of the First Applicant;

(b) selling, offering for sale, supplying, offering to supply, importing or distributing any Infringing Microsoft Program;

(c) selling, offering for sale, supplying, offering to supply, importing or distributing any Incomplete Microsoft Program;

(d) selling, offering for sale, supplying, offering to supply, importing or distributing any Infringing Microsoft COA Label; and

(e) authorising, directing or procuring any other company or person from engaging in any of the conduct sought to be restrained by sub-paragraphs (a), (b), (c) and (d) above.

2. Pursuant to sections 115 and 116 of the Copyright Act 1968 (Cth), the respondents and each of them deliver up to the applicants and verified on oath each Infringing Microsoft Program which is in the possession, power, custody or control of the respondents or any of them and any equipment used to make any such infringing copy within 7 days of the date of judgment.

3. Judgment be entered for the third applicant against the respondents and each of them jointly and severally in the sum of US$188,950 being damages for infringement of copyright pursuant to s 115(2) of the Copyright Act 1968 (Cth).

4. Judgment be entered for the third applicant against the respondents individually and therefore cumulatively in the following sums for additional damages for infringement of copyright pursuant to s 115(4) of the Copyright Act 1968 (Cth):

(a) as against the first respondent in the sum of AUD$350,000;

(b) as against the second respondent also in the sum of AUD$350,000;

(d) as against the fourth respondent in the sum of AUD$50,000.

5. The award of damages under s 115(2) of the Copyright Act 1968 (Cth) which is presently expressed in terms of United States dollars (US) shall be payable in the equivalent sum of Australian dollars (AUD) according to the rate of exchange prevailing at 11 am on the day of judgment, such prevailing rate to be determined by the applicants in accordance with the procedure contained in s 6(11A) of the Foreign Judgments Act 1991 (Cth), which is to be read so that the ‘conversion day’ referred to therein is taken to be the date of judgment in these proceedings.

As to the trade mark claims:

6. The respondents and each of them be permanently restrained from infringing the Microsoft Trade Marks by:

(a) manufacturing, procuring the manufacture of, importing, purchasing, selling, offering to sell, supplying, offering to supply or distributing any Infringing Microsoft Product;

(b) authorising, directing or procuring any other company or person from engaging in any of the conduct sought to be restrained by sub-paragraph (a) above.

7. The respondents and each of them deliver up to the applicants and verified on oath all infringing Microsoft Products and any equipment used or intended to be used for making Infringing Microsoft Products in the possession, custody or control of the respondents or any of them within 7 days of the date of judgment.

As to the Trade Practices Act claims

8. The respondents and each of them, whether by their servants, agents or otherwise, be permanently restrained from representing in trade or commerce to persons to whom the relevant respondent supplies or offers to supply any Infringing Microsoft program or Infringing Microsoft Product:

(a) that any such product has been made with the licence of the First Applicant; or

(b) that the relevant respondent is lawfully entitled to supply any such product.

9. The respondents and each of them whether by their servants, agents or otherwise, be permanently restrained from representing in trade or commerce to persons to whom the relevant respondent supplies or offers to supply any Infringing Microsoft COA Label:

(a) that any such Infringing Microsoft COA Label evidences or constitutes a copyright licence from the first applicant; or

(b) that any software loaded onto a computer to which the Infringing Microsoft COA Label may subsequently be affixed is licensed or approved by the first applicant.

10. That the second, third and fourth respondents be restrained from aiding, abetting, counselling, procuring or being in any way directly or indirectly a party to or concerned in the conduct sought to be restrained by orders 8 and 9 above.

Other orders

11. The respondents and each of them pay interest pursuant to s 51A of the Federal Court Act 1976 (Cth) in respect of the damages awarded under s 115(2) of the Copyright Act 1968 (Cth) from 12 July 2004 until the date of judgment.

12. The respondents and each of them pay the applicants’ costs of the proceedings (including any reserved costs).

13. The applicants have liberty to apply within 14 days in respect of the content and form of these orders upon two days’ notice, and relief pursuant to s 87 of the Trade Practices Act 1974 (Cth) as to the publication of advertisements or notices shown to be appropriate or expedient in order to give force and effect to any of the foregoing orders.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1080 OF 2005

BETWEEN:

MICROSOFT CORPORATION

FIRST APPLICANT

MICROSOFT PTY LIMITED

SECOND APPLICANT

MICROSOFT LICENSING, GP

THIRD APPLICANT

AND:

PC CLUB AUSTRALIA PTY LIMITED

FIRST RESPONDENT

DAVID LEE

SECOND RESPONDENT

MYMY LEE (also known as MIMI LEE)

THIRD RESPONDENT

KE-HSIEH FANG (also known as KANE FANG)

FOURTH RESPONDENT

JUDGE:	CONTI J
DATE:	28 OCTOBER 2005
PLACE:	SYDNEY

REASONS FOR JUDGMENT

introduction

A preview of the context to the litigation and the parties involved

1 Microsoft Corporation (‘Microsoft’), being the first applicant, is a well known corporation incorporated under the laws of the State of Washington in the United States of America. It is one of the largest publishers and distributors of computer software for personal computers in the world. Microsoft carries on business of manufacturing, marketing, distributing and supplying the numerous computer programs identified in the schedules to the statement of claim, including all versions of those computer programs, along with the associated manuals and documentation. Microsoft asserts copyright ownership in those programs, manuals and documentation as original literary works first published in the United States, and therefore copyright therein, and for the purposes of the present litigation, in particular in the programs entitled Microsoft Windows XP Home (‘Windows XP Home’) and Microsoft Windows XP Professional (‘Windows XP Pro’). The first and most critical issue arising in the proceedings relates to the validity or otherwise of Microsoft’s ownership, and the subsistence of, that copyright, such that the same may be enforced by one or more of the applicants to the proceedings against the respondents in certain controversial circumstances.

2 Microsoft Pty Limited (‘MPL’), being the second applicant, is an Australian incorporated subsidiary of Microsoft, and provides marketing and technical support on behalf of the Microsoft Group in Australia in relation to all versions of the computer programs; it is also an authorised user of Microsoft’s trade marks.

3 Microsoft Licensing, GP (‘MLGP’), being the third applicant, is a general partnership established under the laws of the State of Nevada in the United States of America, and asserts entitlement to sue in that partnership name pursuant to the laws of that State. It is the exclusive licensee of, inter alia, the right of reproduction of Microsoft programs distributed in the so-called original equipment manufacturer channel, abbreviated in these reasons by description as the ‘OEMchannel’. OEMis in turn an abbreviation for ‘original equipment manufacturer’, the principal function of OEMs being to manufacture computer hardware equipment.

4 Computer programs were first published by Microsoft in the United States of America in the 1980s and its name and trade mark ‘Microsoft’ appeared on those programs as first published, and has continued to do so at least at all times material to the proceedings. Microsoft asserted at the outset of the proceedings that pursuant to s 128 of the Copyright Act 1968 (Cth) (‘Copyright Act’) and regulation 4(1) of the Copyright (International Protection) Regulations 1969 (Cth) (‘Copyright Regulations’) given effect through s 184 of the Copyright Act, copyright has been and continues to be presumed to subsist in the Microsoft programs, and Microsoft is presumed to be the owner of the copyright in the Microsoft programs at the time they were first published, unless the contrary be established. Alternatively it is the case of the Microsoft applicants that there is prima facie evidence that Microsoft is the owner of the copyright which subsists in the Microsoft programs by virtue of ss 126A and 126B of the Copyright Act. It was further asserted that the joinder of the third applicant, MLGP, was in accordance with s 120 of the Copyright Act, by virtue of MLGP’s status as exclusive licensee of certain of the rights comprising the copyright said to subsist in the programs. The extent of that exclusive licence and its legal efficacy were matters of controversy between the parties to the present proceedings.

5 Microsoft further asserts proprietorship of the following registered trade marks under the Trade Marks Act 1995 (Cth) (‘Trade Marks Act’) respectively relating inter alia to the following computer programs, as marketed and sold to the public in Australia:

‘371528(9) MICROSOFT Computer programs, magnetic disks and tapes containing computer programs, computer software, computer hardware, memory boards for use with computers, programmed chips, cartridges embodying computer programs, computer software and firmware embodies in computers or designed to be used therewith (“Microsoft Class 9 Products”)

377674(16) MICROSOFT Printed instructional and teaching material related to computers and computer software, books, paper and printed matter for use with computer equipment, computer hardware and software manuals, newsletters, featuring information about computer hardware and software, paper, paper tape, cards for recordal of computer programs (“Microsoft Class 16 Products”)

576996(9) WINDOWS Computer systems software, computer systems software and programmers reference and users manuals sold as a unit (“Windows Class 9 Products”)

576997(16) WINDOWS Books, computer documentation, namely, reference books, user and instructional manuals, data sheets, reference cards and templates; periodical and newsletters; all the foregoing featuring information about computer hardware and software and information about computer operating systems and environments (“Windows Class 16 Products”).’

Microsoft asserts that the events giving rise to its claims for breach of copyright have also given rise to or involved breach of those trade marks, and have also given rise to or involved misleading and deceptive conduct in contravention of ss 52, 53(a), 53(c) and 53(d) of the Trade Practices Act 1974 (Cth) (‘TP Act’). The addition of those two causes of action to that for infringement of copyright is in line with what has become largely a traditional pattern in more recent times, with the primary emphasis remaining however on the copyright based claims for relief.

6 The first respondent, PC Club Australia Pty Limited (‘PC Club’), is a company registered in the State of New South Wales, and conducts and has for some time conducted a substantial business at and from Rhodes in the State of New South Wales of wholesaling computer hardware and software since about April 2000. The second respondent (‘Mr Lee’) is said by the applicants, though denied by the respondents, to have the overall control of the day to day operations of PC Club, and the third respondent (‘Mrs Lee’) and the fourth respondent (‘Mr Fang’) were asserted by the applicants to be directors of PC Club and to be accustomed to act in accordance with the instructions of Mr Lee in relation to PC Club. Mrs Lee testified that she was actively involved in the day to day operations of PC Club, partly in the capacity of a purchasing officer, and Mr Fang testified to having undertaken the offices of managing director, ‘technical director’ and chief executive officer of PC Club.

7 The complaints of the applicants giving rise to the proceedings are that PC Club has engaged in conduct by way of unauthorised reproduction of Windows XP Home and Windows XP Proin which Microsoft claims copyright, and to which the above Microsoft trade marks relate, and has done so on a large scale, such as to give rise to substantial claims for damages, especially for infringement of copyright. The respondents have denied any such misconduct, but alternatively the respondents’ defence of the proceedings extended to the radical and evidently unprecedented claim that none of the three applicants, and Microsoft as first applicant in particular, has had the standing at any material time to bring the subject proceedings, for the reason that Microsoft was unable to rely upon the evidentiary provisions in ss 126A and 126B and the statutory presumption in s 128 of the Copyright Act establishing subsistence and ownership of copyright, at least for the reason that the only entity entitled to author the programs at their time of first publication was Microsoft Licensing, Inc (‘MLI’), a further corporate entity wholly owned at the time of first publication of the programs by Microsoft, which was not a party to the proceedings, and that the applicants had failed to adduce evidence establishing that MLI had not in fact created the programs. Moreover, MLI being said to be the only entity entitled to create the programs, the applicants were further said by the respondents to have failed to establish the subsistence and ownership of copyright in the programs by MLI in the manner required by the Copyright Act, those aforementioned evidentiary provisions and statutory presumptions being unavailable to MLI. That was asserted by the respondents to be because between 31 December 1997 and 1 September 2003, MLI was the worldwide exclusive licensee, pursuant to a so-called Parent-Subsidiary Agreement purportedly entered into ‘as of December 31, 1997’ between Microsoft and MLI with respect to certain of the copyright in and distribution of the so-called Windows XP Home and Windows XP Pro editions ‘in the OEM channel’, being versions of Microsoft programs supplied to and by OEMs for distribution as part of computer hardware packages (hereafter referred to as the ‘Parent-Subsidiary Agreement’). Collateral to the Parent-Subsidiary Agreement and entered into contemporaneously between Microsoft and MLI was a so-called Memorandum of Understanding (‘MOU’).

8 Microsoft claims that such somewhat belated issue is misconceived in terms as to the subject matter and language of the Parent-Subsidiary Agreement (which was referred to at times as the ‘OEM License’ by the applicants), and that in any event, the radical point so raised is broadly answered by the circumstance that as of 1 September 2003, and pursuant to a so-called Contribution Agreement entered into between MLGP (that is of course the third applicant) of the one part, and MLI of the other part, MLGP acquired from MLI the rights, titles and interests of MLI conferred by the Parent-Subsidiary Agreement. Such assignment was asserted by the applicants to have had the effect that MLGP replaced MLI as Microsoft’s exclusive licensee with respect to certain of the copyright in and distribution in the OEM channel of OEMversions of Microsoft programs the subject of the Parent-Subsidiary Agreement, and MLGP thereby acquired the statutory rights to sue and recover damages for infringement of the copyright in the OEMversions of Microsoft programs held by MLI prior to 1 September 2003.

9 The construction and operation of the Parent-Subsidiary Agreement, along with the MOU, thus became the initial issue arising in the proceedings, being an issue of complexity which will shortly be addressed. Moreover the construction and operation of the Contribution Agreement became a further issue, by reason of the respondents’ contention that the Contribution Agreement could have no effective operation in law as an assignment of MLI’s exclusive license to MLGP, by reason that s 12 of the Conveyancing Act 1919 (NSW) (‘Conveyancing Act’) had not been complied with by the giving of notice to the respondents of that assignment. In fact it was not apparent until the proceedings had been well on foot that the respondents became aware of the Parent-Subsidiary Agreement and the Memorandum of Understanding in the first place.

The Anton Piller, Mareva and injunctive relief sought and obtained on an interlocutory basis and the subsequent course of the proceedings

10 On 12 July 2004, the applicants sought and obtained ex parte from Whitlam J Anton Piller and Mareva orders and injunctive relief against PC Club, Mr Lee and Mrs Lee in relation to the reproduction, sale and distribution of the whole or any substantial part of Microsoft computer programs and associated documentation, including so-called ‘COA’ (abbreviation for Certificate of Authenticity) labels. At that stage Mr Fang had not been joined as a respondent. At the same time proceedings were instituted by the applicants for delivery up of the allegedly offending material, damages and an account of profits. The Anton Piller order was executed on 13 July 2004 at PC Club’s premises at Rhodes, a suburb of metropolitan Sydney. Subsequently those initial three respondents made an application to set aside the Mareva orders, but the status quo in terms of the Mareva and injunctive relief has remained in force. Mr Fang was added as a fourth respondent on 19 July 2004. Microsoft’s claim for damages was addressed at least mainly by evidence tendered at the final hearing. The initial interlocutory relief granted has remained in force pending the grant of any final relief in conformity with these reasons.

11 The hearing of the proceedings on a final basis commenced on 8 September 2004, and continued on 9 and 10 September 2004, during which three days, apart from relatively brief opening addresses of counsel for the parties on both sides of the record, supplementary testimony in chief and cross-examination took place. The hearing of the proceedings continued on 4 and 5 November 2004, when the cross-examination of affidavit deponents took place. The parties furnished comprehensive closing written submissions which the parties then addressed the Court on 3 and 4 March 2005 upon. Thereafter both parties provided further comprehensive written submissions.

12 Four large folders of written exhibits were tendered at the hearing, inclusive of confidential exhibits, as were many exhibits in the form of articles and equipment, such as compact disks (‘CDs’). Written submissions were not partitioned in relation to the recording, discussion and resolution of confidential exhibits, and understandably so, since the untangling of many areas of written submissions into segments of allegedly privileged and non-privileged material would have been a daunting undertaking for the parties and would have rendered more onerous the task of comprehensible decision writing.

The applicants’ case in outline

13 The applicants’ case was outlined in initial written submissions (and thereafter maintained and supplemented) as follows:

(a) PC Club infringed the copyright subsisting in Windows XP Home and Windows XP Pro owned by Microsoft and conferred under the Copyright Act by:

(i) reproducing, without the licence of the applicants, copies of the Microsoft computer programs Windows XP Home and Windows XP Pro on the hard disk drives of computers sold by PC Club, and on those compact disks called restore (or ‘recovery’) CDs supplied by PC Club along with computer hardware; this was described as ss 36 and 31(1)(a)(i) Copyright Act infringement, that is, the reproduction of literary… work in a material form;

(ii) selling those copies of the computer programs in circumstances where the respondents knew, or ought reasonably to have known, that the making thereof constituted infringement of copyright pursuant to s 38(1) of the Copyright Act.

(b) PC Club infringed Microsoft’s registered trade marks Microsoft and Windows by:

(i) doing the acts in (a) above, given that the computer programs displayed Microsoft’s ‘Microsoft’and ‘Windows’trade marks in the normal course of the operation thereof; and

(ii) stocking for the purposes of sale, and/or attaching to computers supplied by PC Club to its customers, counterfeit Microsoft COAs, which bore signs substantially identical to the ‘Microsoft’and ‘Windows’trade marks.

(c) PC Club engaged in conduct in contravention of ss 52, 53(a), 53(a), 53(c) and 53(d) of the TP Act by expressly or impliedly representing to purchasers of computers supplied by PC Club, concerning the copies of Windows XP Home and Windows XP Pro on the hard disks of the computers and on the restore CDs supplied by PC Club, that:

(i) those copies were made by or with the licence of Microsoft;

(ii) the respondents were lawfully entitled to sell such copies; and

(iii) the purchasers of such copies were lawfully entitled to use them.

(d) Each of Mr Lee, Mrs Lee and Mr Fang is personally liable to the relevant corporate applicant(s), in relation to the conduct set out in (a) to (c) above, as persons who have authorised the infringements of copyright and/or as joint tortfeasors and/or as persons otherwise involved in contravention of the TP Act.

(e) In the circumstances, the applicants are entitled to compensatory damages pursuant to s 115(2) of the Copyright Act, and a substantial award of additional damages pursuant to s 115(4) of the Copyright Act, as well as injunctions restraining further infringement.

14 The matters said by the applicants to be no longer in dispute are as follows:

(a) PC Club has committed trade mark infringement by:

(i) selling at least 2,181 computers with copies of Windows XP Home loaded onto the hard disk and accompanying restore CDs, with counterfeit COAs affixed to those computers;

(ii) selling at least 203 computers with copies of Windows XP Pro loaded onto the hard disk, and accompanying restore CDs, with counterfeit COAs affixed to those computers.

(b) The copies of Windows XP Home and Windows XP Pro referred to above in (a) were reproduced and sold by PC Club without the licence of Microsoft Corporation.

(c) Subject to arguments relating to ownership and subsistence of copyright, and standing to sue for infringement of copyright, the correct multiplier for the s 115(2) Copyright Act compensatory damages, which may be awarded to MLGP for infringement of copyright, is $US75 for each infringing copy of Windows XP Home and $US125 for each infringing copy of Windows XP Pro.

15 The following matters from the perspective of the case framed by the applicants were said to remain in dispute:

(a) ownership and subsistence of copyright in Windows XP Home and Windows XP Pro;

(b) the standing of MLGP to sue as exclusive licensee (in the OEM channel) for infringement of the copyright in Windows XP Home and Windows XP Pro;

(d) the number of copies of Windows XP Home and Windows XP Pro which infringed Microsoft Corporation’s copyright and trade marks by the respondents over and above the numbers set out in sub-paragraph (a) of the last preceding paragraph;

(e) the availability to the respondents of a ‘defence’ of innocent infringement under s 115(3) of the Copyright Act; and

(f) the entitlement of the applicants to an award of additional damages pursuant to s 115(4) of the Copyright Act.

16 I should make the general observation that the complexity of the issues arising is such as to render the task of definitive description somewhat impractical, though the broad outlines I have set out above provide a measure of guidance at least. It was submitted by the applicants that the respondents’ case on the issues the subject of sub-paragraphs (c), (d), (e) and (f) immediately above depend on the Court accepting the testimony of Mr Lee, and that for reasons later to be recorded in these reasons, Mr Lee should not be accepted as a witness of truth, and further if that submission of the applicants be accepted, then the respondents’ defences the subject of those four sub-paragraphs were bound to fail. I will defer the consideration and resolution of those issues until I first resolve the issues broadly the subject of sub-paragraphs (a) and (b) immediately above. That task involves issues and subjects of considerable complexity, which as will later be seen, demonstrate that the foregoing outline of issues tends to somewhat unwarranted simplicity in expression or framework.

The respondents’ case in outline on the copyright and other issues outstanding

17 Leaving to one side the respondents’ challenge to the applicants’ case on ownership and subsistence of copyright which I have already briefly foreshadowed, the respondents acknowledged that if subsistence and ownership of copyright was forensically capable of proof in favour of Microsoft, and if the standing of MLGP (as the third applicant) was susceptible to demonstration in principle for the purpose of enforcement of the claim for breach of copyright, ‘there will be no issue that there has been infringement by [PC Club], in the sense that Windows XP Home and Windows XP Pro have been reproduced by [PC Club] on the hard disks of computers assembled and sold by it, and on recovery discs, as [PC Club] now understands without the license of the applicants…’. However ‘relying on the provisions of s 115(3) of the Copyright Act, [PC Club] was not aware, and had no reasonable grounds for suspecting, that the acts constituting the infringements were infringements of copyright, and no one of the applicants is therefore entitled to any damages in respect of the infringements, but is entitled to an account of profits’. It was by reason of that alternative defence that there occurred a substantial amount of cross-examination of the PC Club directors at the instance of the applicants.

18 In any event as to quantification of damages for breach of copyright, the respondents contended that assuming that the applicants have any entitlement at all to sustain the relief sought in the proceedings, the respondents contended that quantification thereof had been ‘grossly inflated’ by the applicants, in that the basis of the claim made for US$1.83 million was founded on incorrect assumptions and arithmetic, and that if based instead on actual sale figures, the quantum of damages was said by the applicants to be a small fraction of the amount so claimed. The respondents’ case on the damages issue was clarified to the effect that ‘… there is now no dispute about the quantum of the multiplier, namely the minimum amount in royalties which MLGP would receive in relation to the sale in Australia by an authorised distributor of a copy of Windows XP Home and Windows XP Pro respectively (namely US$75 and US$125), but that there was a substantial dispute regarding the number of allegedly infringing programs which should be multiplied by the relevant figure…’. Further as to the quantification of damages for breach of copyright, the respondents submitted that there should be no entitlement to additional damages because the alleged infringements were not flagrant, there having been reasonable grounds for PC Club’s representatives believing (as they in fact claimed) that their conduct was legitimate. Moreover Mr Lee, Mrs Lee and Mr Fang for their part did not concede any personal liability for any award of damages.

19 As to the extent of the trade mark infringement issues arising:

(i) the respondents conceded that Microsoft is the proprietor in Australia of registered trade marks inclusive of 371528(9) MICROSOFT in relation inter alia to computer programs, and 576996(9) WINDOWS in relation inter alia to computer systems software, and that at least those two trade marks had been infringed by PC Club by using, as a trade mark, each of the registered marks on COA labels and on computer programs, in that the trade marks are visible on the screen of a computer when the computer program is started, and as PC Club ‘now understands without the license of Microsoft’;

(ii) the respondents accordingly admitted that Microsoft is entitled to relief under the Trade Marks Act against PC Club, including injunctions, but would not admit that Microsoft had proved any damage suffered by it as the proprietor of the registered trade marks; in any event with regard to damages, the respondents denied that Microsoft had proved that it had suffered any damage, the same being said to be, as above recorded, ‘grossly inflated’, but the respondents emphasised that the $1.83 million claim for damages said to have been suffered related to copyright infringement, and that there was no evidence that Microsoft as trade mark proprietor has suffered any damages as a result of trademark infringement; furthermore Mr Lee, Mrs Lee and Mr Fang again would not concede any personal liability on their respective parts.

20 In relation to the TP Act issues arising, the respondents conceded that the conduct of PC Club, as a corporation, occurred in trade and commerce, and that in so far as the same involved the use of the trade marks MICROSOFT and WINDOWS in relation to computer programs, the reproduction whereof not being authorised by Microsoft, the conduct alleged was likely to mislead or deceive, and the respondents accordingly admitted that Microsoft, as the applicant having the relevant reputation on the evidence, is entitled to relief by way of injunction on that account. The respondents would not admit however that Microsoft, or any of the other two applicants MPL and MLGP, had proved the sustaining of any damage, and submitted that if damages are notwithstanding payable, then the same would be co-extensive with any damages sustained by reference to the other causes of action, and that no separate award of damages would be justified, and further that the quantum of the claim was in any event ‘grossly inflated’; furthermore Mr Lee, Mrs Lee and Mr Fang would not admit any personal liability on their respective parts in relation to any such TP Act head of damages.

THE APPLICANTS’ ACTION FOR INFRINGEMENT OF COPYRIGHT in windows XP Home and windows xp pro

The relevant legislative provisions

21 The current infringement proceedings were purportedly brought by Microsoft against the respondents in its capacity as owner of copyright in Windows XP Home and Windows XP Pro and by MLGP as exclusive licensee of the right of reproduction of the programs vested in Microsoft by the Copyright Act, which is alleged to have been infringed (see s 119 of the Copyright Act). The owner of copyright in a work or a subject-matter other than a work has available to it several statutory causes of action in respect of which various forms of relief are available. Section 115(1) of the Copyright Act provides that the owner of copyright may bring an action for infringement of copyright. Section 115(2) states that subject to the Copyright Act, the court may grant relief in an action for infringement in the form of an injunction, an account of profits and damages. In addition the owner of copyright has available to them actions for conversion and detention in relation to infringing copies of the copyrighted work or subject-matter other than work or the device used to make those infringing copies under s 116.

22 In circumstances where copyright is subject to an exclusive licence, except against the owner of copyright, the exclusive licensee has the same rights of action as he or she would have, and is entitled to the same relief as he or she would be entitled to, by virtue of ss 115 and 116 if the licence had been an assignment: s 119. That provision also states that the rights and remedies of the exclusive licensee are concurrent with those of the owner of the copyright. I will address s 119 in more detail later since it provided the basis for the applicants’ rejoinder to certain aspects of the respondents’ challenge to the standing of MLGP to bring the present infringement action against the respondents.

23 Copyright protection is only available to what are referred to in the Copyright Act as ‘literary, dramatic, musical and artistic works’ (Part III of the Act) or ‘subject-matters other than works’ (Part IV of the Act). As a first step in bringing an action for infringement of copyright in a literary work, it is necessary to demonstrate that copyright subsists in that work.

24 In the present action, Microsoft asserts ownership of copyright in Windows XP Home and Windows XP Pro as computer programs, within the meaning of that expression in s 10(1) of the Copyright Act. That same section defines ‘literary works’ as including ‘a computer program or compilation of computer programs’. The nature of copyright in original literary, dramatic, musical and artistic works is relevantly defined in s 31 as follows:

‘(1) copyright, in relation to a work, is the exclusive right: (a) in the case of a literary, dramatic or musical work, to do all or any of the following acts: (i) to reproduce the work in a material form…’

Subsistence of copyright in a literary work is relevantly defined in s 32 as follows:

‘32(2) Subject to this Act, where an original literary…work has been published: (a) copyright subsists in the work…if, but only if: (c) the first publication of the work took place in Australia; (d) the author of the work was a qualified person at the time when the work was first published…

…in this section a qualified person means an Australian citizen, an Australian protected person or a person resident in Australia.’

For the purposes of literary works first published overseas, s 184 of the Copyright Act together with reg 4 of the Copyright Regulations effectively allows for the interposition of ‘the United States of America’ for ‘Australia’ in s 32, such that subsistence of copyright in the programs can be established by the applicants if they were to prove that the programs were ‘an original literary work’, and furthermore that publication had occurred in the United States and the author of the work was a citizen or resident of the United States.

25 The author of a literary work is the owner of any copyright subsisting in the work: s 35(2). Where a literary work to which neither of subss 35(4) and (5) apply (as is the case here), is made by the author in pursuance of the terms of his employment by another person under a contract of service or apprenticeship, that other person is the owner of copyright subsisting in the work: s 35(6). ‘Author’ is defined in s 10 only in relation to a photograph. As a general rule, case law has defined the author as the person who reduces the work to material form as opposed to the person providing the underlying ideas expressed in the work: Kenrick v Lawrence (1890) 25 QBD 99.

26 By virtue of ss 126(a) when a defendant does not put it in issue, subsistence of copyright in a literary work is presumed to exist. Likewise, s 126(b) provides that if subsistence is established and when the defendant does not put ownership of copyright in issue, the latter is also presumed. The respondents have in these proceedings placed both subsistence and ownership of copyright by Microsoft in Windows XP Home and Windows XP Pro in issue. Accordingly the applicants were put to proof of subsistence and ownership of copyright.

The applicants’ standing to bring the infringement action

27 Microsoft pleaded two separate bases for its contention that it owned copyright in the programs sufficient to give it, and its exclusive licensee MLGP, standing to bring the present applications for relief in respect of the respondents’ alleged infringement of copyright in Windows XP Home and Windows XP Pro,pursuant to ss 115(2) and 115(4) of the Copyright Act.

28 First, Microsoft contended that copyright subsisted in Windows XP Home and Windows XP Pro by virtue of the fact of being original literary works within the definition of that expression contained in s 10(1), and of being first published in the United States. Reliance was placed by Microsoft upon two evidentiary provisions of the Copyright Act that were introduced by the Copyright Amendment (Parallel Importation) Act 2003 (Cth), those provisions being ss 126A and 126B.

29 Section 126A provides as follows:

‘(1) This section applies to an action under this Part in which the defendant puts in issue the question whether copyright subsists in the work or other subject matter to which the action relates.

Labels or marks

(2) If a copy of the work or other subject matter, or the packaging or container in which the copy is packaged or contained, bears a label or mark stating the year and place of the first publication, or of the making, of the work or other subject matter, then the label or mark is admissible as prima facie evidence of the facts so stated.

Foreign certificates

(3) If a certificate or other document issued in a qualifying country in accordance with a law of that country states the year and place of the first publication, or of the making, of the work or other subject matter, then the certificate or other document is admissible as prima facie evidence of the facts so stated.

30 Mr T C Rubin, a copyright attorney employed by Microsoft in Washington since November 1998, testified that the Microsoft computer programs Windows XP Home and Windows XP Pro were first published by Microsoft on 25 October 2001 simultaneously in many countries worldwide, including the United States, the United Kingdom, Australia and New Zealand; the United States being the place of first publication. Mr Rubin tendered a copy of the United States certificate of registration of Windows XP Pro.By virtue of s 126A of the Copyright Act, and sub-section (3) in particular, that certificate is admissible as prima facie evidenceof the facts therein stated as to the United States being the place of first publication and that such publication took place on 25 October 2001. Moreover, Mr I N Walker, described as a system builder account manager employed by MPL since 2 July 2002, and who had been previously involved in the Microsoft IT sector for four years, and in the components supply channel for more than two years, testified that Windows XP Pro ‘… is simply a premium version of Windows XP Home’, and moreover ‘… is the same program as Windows XP Home edition with a number of extra modules included… to form a consolidated computer program which is sold as Windows XP Professional’. Hence it was the applicants’ case that Windows XP Home was subsumed for copyright purposes within Windows XP Pro, and thus that the United States of America was and remains the place of first publication of Windows XP Home.

31 The applicants acknowledged that they had chosen not to present evidence of originality and authorship of the programs in order to establish subsistence of copyright, and instead that they relied solely on the s 126A evidentiary provisions and the presumption stipulated in s 128 (see below). The applicants submitted that the Parliament’s intention in legislating for the inclusion of the evidentiary provisions, in particular of ss 126A and 126B in the Copyright Act, was ‘to relieve parties in the position of [the applicants] from proving originality and authorship when there [were] notices on the products…’. Counsel for the applicants referred generally for support on the extrinsic materials for the bill which introduced ss 126A and 126B. Accordingly, Microsoft contended that it had established, to the strength of prima facie evidence, subsistence of copyright in Windows XP Home and Windows XP Pro. For what it may matter, that contention was perhaps framed too broadly, because s 126A does not purport to address the entirety of subject matters essential to constituting subsistence.

32 Section 126B creates an evidentiary presumption of ownership. That provision is entitled ‘[e]vidence in relation to ownership of copyright’ and is relevantly in the following terms:

‘(1) This section applies to an action under this Part in which the defendant puts in issue the question of the plaintiff’s ownership of copyright in the work or other subject matter to which the action relates.

Labels or marks

(2) If a copy of the work or other subject matter, or the packaging or container in which the copy is packaged or contained, bears a label or mark stating that a person was the owner of copyright in the work or other subject matter at a particular time, then the label or mark is admissible as prima facieevidence of the facts so stated.’

Mr Rubin exhibited to his affidavit sworn 27 August 2004 copies of the original retail Microsoft packaging of Windows XP Pro and Windows XP Home and marked as ‘JBJ-1’ and JBJ-2’. Both forms of packaging identified ‘Microsoft Corporation’ as the owner of the copyright of the programs, from and including the year ‘2001’. Accordingly, the applicants submitted that such labels or marks are prima evidence that Microsoft was at all material times the owner of copyright in Windows XP Home and Windows XP Pro, as at and from 2001. Mr Walker exhibited the form of the flat packaging used in the ‘OEM’ distribution channel (also referred to by Mr Walker as multi-pack of software), in which Windows XP Pro was packaged, at the time of swearing of his affidavit of 10 August 2004, as ‘IW-1’. The form of flat packaging in which Windows XP Home was packaged for distribution in the OEM distribution channel at the time of swearing Mr Lee’s affidavit of 27 August 2004 was exhibited thereto as ‘DL-1’. Mr Lee testified that such ‘multi-pack’ article contained what was labelled an ‘OEM Preinstallation Kit CD3’,such OEMdescription having the connotation which I have earlier identified. Mr Lee admitted that he made the reproductions in question in these proceedings from the ‘OEM Preinstallation Kit CD3’. Thus the applicants submitted that they had proved, pursuant to subs 126B(2), to the level of prima facie evidence, whether one considered the ‘OEM’ packaging (exhibits DL-1 and IW-1), or the retail packaging (exhibits JBJ-1 and JBJ-2), that Microsoft was the owner of copyright in Windows XP Home and Windows XP Pro.

33 Secondly, the applicants relied upon the statutory presumption contained in s 128 of the Copyright Act as establishing subsistence of copyright in Windows XP Home and Windows XP Pro and ownership of the same by Microsoft. Section 128 is in the following terms:

‘128 Presumption in relation to publisher of work

Where, in an action brought by virtue of this Part in relation to a literary, dramatic, musical or artistic work, the last preceding section does not apply, but it is established:

(a) that the work was first published in Australia and was so published during the period of 50 years that ended immediately before the commencement of the calendar year in which the action was brought; and

(b) that a name purporting to be that of the publisher appeared on copies of the work as first published;

then, unless the contrary is established, copyright shall be presumed to subsist in the work and the person whose name so appeared shall be presumed to have been the owner of that copyright at the time of the publication.’

The reference above in s 128 to the last preceding section is of course to s 127, which relates to presumptions as to authorship of work. Section 128 (and s 129) thus stipulates for a rebuttable presumption, as distinct from ss 126A and s 126B, which relates to prima facie evidence.

34 Section 184 provides for the making of regulations to apply any of the provisions of the Copyright Act in relation to a country other than Australia in any one or more of the ways specified in s 184(1). One of those ways enables the provisions to apply in relation to literary works first published in that country in like manner as those provisions apply in relation to literary works first published in Australia (s 184(1)(a)). That subsection also provides for the application of provisions of the Copyright Act to persons who are citizens, or are resident or are incorporated under the laws of, another country. Accordingly reg 4 of the Copyright Regulations allows provisions of the Copyright Act, which apply in relation to literary works first published in Australia, to apply in the same way to literary works first published in certain foreign countries as if they had been first published in Australia. It was not disputed that reg 4 applies to works first published in the United States, so that there was no question that Microsoft was entitled to rely upon s 128, in its modified form such as to pick up the operation of the regulatory provisions in operation as to first publication in the United States.

35 The applicants therefore submitted that they enlivened the presumption in s 128 in relation to Windows XP Home and Windows XP Pro by virtue of the evidence that I have already set out at [30] and [32]. That is, the United States certificate of registration was prima facie evidence that Windows XP Pro was first published in the United States on 25 October 2001, being a date within the 50-year limit imposed by s 128. Furthermore, the name of Microsoft Corporation, who purports in these proceedings to be the publisher, appeared on copies of the work as first published and on its packaging: see exhibits JBJ-1 and JBJ-2 referred to above. Those copies and that packaging identified ‘Microsoft Corporation’ as the owner of the copyright in the programs, and it was submitted that this sufficed as an identification of the relevant entity purporting to be the publisher of the programs. The applicants referred to Microsoft Corporation v DHD Distribution Pty Ltd t/as Austin Computers (1999) 45 IPR 459, in which Lehane J upheld Microsoft’s reliance upon s 128 in the context of different programs. Microsoft was said by the applicants to be entitled to the benefit of that s 128 presumption, unless the contrary is established, and hence copyright would be presumed to subsist in Windows XP Home and Windows XP Pro, and Microsoft would be further presumed pursuant to s 128 to have been the owner of that copyright at the time of publication. As later appears, that submission of the applicants is correct.

The respondents’ challenge to the applicants’ standing to sue for infringement of copyright in Windows XP Home and Windows XP Pro

36 The respondents admitted that Microsoft has carried on at the material times the business of manufacturing, marketing, distributing and supplying the computer programs identified in the Schedule to the applicants’ statement of claim, including all versions of those computer programs prefixed Windows, but did not admit that those Microsoft programs, the subject of the current proceedings Windows XP Home and Windows XP Pro, are original literary works first published in the United States of America, and did not admit that copyright has subsisted in those Microsoft programs at the times material to the issues arising in the proceedings, or that Microsoft (or for that matter any of the applicants) is the owner of the copyright therein or has been at any material time.

37 In addition to those joinders of issue by non-admission, the respondents made two contentions. First, that Microsoft was not entitled to take advantage of the prima facie evidentiary provisions and the statutory presumptions as to subsistence and ownership of copyright, as set out in ss 126A, 126B and 128 respectively of the Copyright Act. Secondly, that the respondents had not received notification of the assignment of certain exclusive rights by MLI to MLGP under the Contribution Agreement as required by s 12 of the Conveyancing Act. The contended result of that defect was that the assignment took effect in equity only, rather than in law, and thus MLGP lacked standing to sue for damages and other relief for infringement of copyright. I will address each of those contentions seriatim.

The Respondents’ challenge to subsistence of copyright in Windows XP Home and Windows XP Pro and to Microsoft’s ownership thereof

38 The essence of the respondents’ challenge was that as at 25 October 2001, the time of publication attested to by Mr Rubin, Microsoft was not a person entitled to own copyright in what the respondents called the ‘relevant computer programs’, or to be the author of those programs, and therefore that the statutory presumptions and evidentiary provisions establishing subsistence and ownership of copyright by Microsoft were unavailable to it. This was said to emerge from the affidavit evidence filed on behalf of the applicants and from the agreements tendered by the applicants. The respondents pleaded this challenge in their amended defence filed 9 September 2005, which provided relevantly:

‘2.2 … the relevant Microsoft Programs were first published in the United States on or about 25 October 2001 (the “publication date”) under the name of the purported publisher “Microsoft Corporation” (the first applicant).

2.3 The relevant computer programs alleged to be infringed by the first respondent are Windows XP Home and Windows XP Pro distributed in the OEM channel and are derivative programs of the original Microsoft Windows program (the “relevant programs”).

2.4 On the publication date the first applicant had irrevocably divested itself of the right to make the relevant programs and the entity who had, between 31 December 1997 and 1 September 2003, the worldwide exclusive right to make the relevant programs was Microsoft Licensing Inc. [MLI] pursuant to a written agreement dated 31 December 1997.

2.5 In the premises, on the publication date the first applicant had no right to make the relevant programs, and therefore could not have been the author thereof and is not entitled to claim ownership of any copyright that might subsist therein by virtue of the fact of first publication under its name in the United States on the publication date or at all.

2.6 In the premises the respondents do not admit that copyright subsists in the relevant programs and deny that the first applicant is entitled to assert ownership of copyright in the relevant programs by virtue of the aforesaid publication or at all, and plead that if copyright does subsist in the relevant programs (which is not admitted) the only person who had a right to make the programs during the relevant period was Microsoft Licensing Inc and that it has not been shown that derivative programs made in the OEM channel (which are the relevant programs) by Microsoft Licensing, Inc were original or that any copyright that might subsist therein was owned by Microsoft Licensing Inc and has been acquired by any of the applicants.’

39 I will deal with that pleaded challenge to Microsoft’s ownership of copyright and the applicants’ entitlement to take advantage of the evidentiary provisions and statutory presumptions in the Copyright Act under the following headings, which briefly paraphrase the sequence of the respondents’ challenge:

(i) there is a separate copyright in the ‘version’ of Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’, and that those versions so created fell within the description of ‘derivative works’ contained in sub-clause 2.1(i) of the Parent-Subsidiary Agreement;

(ii) MLI was the sole entity entitled to author Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’ (so described in the applicants’ affidavit evidence) and to own the copyright therein to the exclusion of Microsoft;

(iii) therefore Microsoft is not entitled to the benefit of the evidentiary provisions and presumptions in the Copyright Act in order to claim ownership of any copyright that might subsist in the relevant programs; furthermore the applicants did not prove the subsistence of copyright in Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’ potentially owned by MLI.

(i) Whether there is a separate copyright in the ‘version’ of Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’, and that those versions so created fell within the description of ‘derivative works’ contained in sub-clause 2.1(i) of the Parent-Subsidiary Agreement

40 As earlier foreshadowed, certain intra-Microsoft corporate group agreements provided the basis for the respondents’ challenge to Microsoft’s ownership of copyright in Windows XP Home and Windows XP Pro. Evidence of Microsoft group practices in respect of the manufacture and distribution of software in Australia was provided by a number of the applicants’ witnesses and I will first set out the salient features raised, since those practices give meaning to the terms of those agreements the subject of controversy. That evidence was provided largely by the affidavit of MPL’s Ms Brasier sworn 9 July 2004, who had earlier attended Microsoft’s Head Office in Seattle in the United States, and also Microsoft’s Regional Office in Singapore, for training inter alia in the licensing of Microsoft programs. Ms Brasier’s affidavit was objected to by the respondents on the basis of relevance. Similar evidence was provided by Mr Kolb, Microsoft’s General Manager of Worldwide System Builder Channel and License Compliance in his affidavit sworn 30 August 2004, which was also read subject to objection on the ground of relevance. The evident relevance of both affidavit testimonies appears below.

41 In her affidavit evidence, Ms Brasier referred to ‘Microsoft programs’ as encompassing programs developed, manufactured and marketed by Microsoft, together with their associated manuals and other documentation. As to the manufacture of Microsoft programs, Ms Brasier confirmed at the outset of her affidavit that Microsoft programs are reproduced onto CD-ROMs, assembled and packaged by ‘authorised replicators’ (or their approved sub-contractors) who are licensed by Microsoft, and so packaged along with associated manuals and other documentation, and that it is Microsoft’s practice not to permit any other persons or entities to reproduce the Microsoft programs for distribution on CD-ROM unless licensed by Microsoft so to do. She testified as to standards and specifications prescribed for authorised replicators in relation to the reproduction, assembly and packaging of Microsoft programs, and as to the existence of strict controls prescribed by Microsoft on the distribution of Microsoft programs by authorised replicators to Microsoft’s authorised distributors.

42 Ms Brasier’s affidavit evidence stated that authorised copies of Microsoft programs are packaged for distribution in two forms: for retail distribution and for distribution by OEMs. Ms Brasier attested to that distinction being visibly presented by way of contrast in packaging only. The applicants relied particularly on [20] and [21] of her affidavit, which are as follows (the emphasis in non-italics is that of the applicants’):

‘20. Retail products are packaged in brightly coloured boxes. OEM products are packaged in shrink-wrap packaging.

21. The important distinction between the two methods of distribution is that OEM products are intended and marked for distribution with new (and sometimes second hand) PCs or other non-peripheral computer hardware. Retail products are intended for distribution on a stand-alone basis.’

43 Thus Ms Brasier explained the two separate ‘channels’ of distribution for Microsoft programs, distinguished only by the form of packaging used for the products sold within each channel and the intended method by which those products were to be loaded onto the ultimate customer’s personal computer. Her evidence further demonstrated that Microsoft exercises control over all aspects of the manufacture and distribution of its software programs and accompanying media. Those authorised replicators distribute the reproduced software to distributors nominated by Microsoft. Evidence on those points to the same effect was given by Mr Kolb at [33] of his affidavit (the emphasis below being again that of the applicants):

‘In Australia, all licensed copies of Microsoft Programs distributed in each of the retail and OEM distribution channels conform to certain packaging standards prescribed by Microsoft. These standards are placed on Authorized Replicators in their agreements with Microsoft Licensing.’

44 In respect of distribution of Microsoft programs per medium of OEMs, Ms Brasier explained the operation of two further distribution systems put in place by Microsoft in relation to two different categories of operators, first, that conducted by so-called ‘royalty OEMs’ and secondly, by system builders.

45 ‘Royalty OEMs’ are high volume OEMs with whom [MLGP] has in place a Royalty OEM Agreement. Microsoft’s authorised replicators make Microsoft programs packaged for OEM distribution directly available to Royalty OEMs, who are entitled to reproduce copies of the programs on each personal computer they manufacture in exchange for a royalty. Concurrent evidence to this effect was also provided by Messrs Kolb and Walker in their affidavits.

46 ‘Authorised Product Distributors’ are all other OEMs that have not entered into Royalty OEM agreements with MLGP (typically OEMs with lower sales volumes which are referred to as ‘System Builders’). System builders (such as was PC Club at all material times) obtain Microsoft programs packaged for OEM distribution in the form of ‘multi-packs’ from intermediate distributors authorised by MLGP, who in turn receive those multi-packs from authorised replicators. System builders assemble personal computers which are sold as a package including software operating systems such as Windows XP Home or Pro. Those multi-packs each contain somewhere between 3 and 10 units of software products and to each multi-pack there is affixed by the authorised replicator a standard so-called OEM System Builder Agreement. Authorised replicators will only provide those multi-packs to intermediate distributors and system builders who have agreed to the terms of those agreements. In accordance with those agreements, which the system builder is deemed to have accepted upon breaking of the seal on the multi-pack by opening it, the system builder is licensed to ‘preinstall’ one copy of a Microsoft program packaged for OEM distribution on a computer system supplied by that system builder to the customer. Having done that, the system builder is required to supply its customers with the original Microsoft program packaged for OEM distribution on CD-ROM and the associated manual for that program; furthermore, the system builder must adhere the certificate of authenticity (‘COA’) supplied with that software to the exterior of the personal computer’s chassis.

47 That testimonial explanation is admissible and relevant as descriptive of current industry structures and practices at all material times put in place by Microsoft, and explanatory or indicative of the substratum to the Parent-Subsidiary Agreement and the collateral MOU, such as to enable the Court to comprehend the substratum of circumstances and the meaning of contractual expressions adopted in and by that inter-corporate documentation. In that regard the authoritative dicta of Mason J (as he then was) in Codelfa Construction Pty Ltd v State Rail Authority (1982) 149 CLR 337 at 352, which I have cited and discussed below, is apposite.

48 The respondents sought to characterise the ‘relevant computer programs’, being those programs whose copyright is the subject of the applicants’ infringement action, as Windows XP Home and Windows XP Pro ‘in the OEM channel’, and thereby to distinguish those programs from so-called ‘Windows XP Home and Windows XP Pro made available for general distribution’. Upon that controversial footing, the respondents contended that on the face of the applicants’ evidence and of those intra-Microsoft corporate group agreements comprising the Parent-Subsidiary Agreement and MOU, Microsoft had ‘irrevocably divested’ itself of the copyright in Windows XP Home and Windows XP Pro programs distributed in the ‘OEM channel’. Copies of Windows XP Home and Windows XP Pro created for distribution ‘in the OEM channel’ were thus said to be ‘derivative works’, within the respondents’ contended meaning of that expression as it appears in cl 2.1 of the Parent-Subsidiary Agreement, such that Microsoft had thereby also ‘irrevocably divested’ itself of the right to create Windows XP Home and Windows XP Pro ‘in the OEM channel’.

49 The Parent-Subsidiary Agreement relied upon by the respondents as operating to exclude Microsoft’s entitlement to reliance on copyright in relation to Windows products was purportedly entered into ‘as of December 31, 1997’ between Microsoft (referred to in that agreement as ‘MS Corp.’) and MLI (referred to therein as ‘Subsidiary’), and signed by MLI’s President on 8 December 1997 and by Microsoft’s Assistant Treasurer on 9 December 1997. Although the governing law of the Parent-Subsidiary Agreement (and of the collateral MOU entered into at the same time) was expressly stated to be that of the State of Washington in the United States, and that of the subsequent Contribution Agreement, by which MLI purported to assign its rights under the Parent-Subsidiary Agreement to MLGP, to be that of the State of Nevada, the parties appeared content to assume that the general law of Australia would apply to all issues of construction and interpretation of the relevant terms in each agreement.

50 Clause 2.1 of the segment of the Parent-Subsidiary Agreement headed ‘Manufacturing and Distribution of MS Retail Software Products’is in the following terms:

‘2.1 License Grant

MS Corp. [i.e. Microsoft] hereby irrevocably grants Subsidiary [i.e. MLI] the exclusive, world-wide license, under MS Corp.’s copyrights patents, trade secrets and all other applicable intellectual property rights of MS Corp., during the Term (as described in Section 4.1 below):

(i) to create derivative works based on MS Software Products (and related documentation and other associated materials) as appropriate to customize the respective MS Software Products for the particular needs of each OEM;

(ii) to use (and reproduce as necessary) MS Corp. software to facilitate the creation of such derivative works and the incorporation of MS Software Products and such derivative works in OEM Packages;

(iii) to reproduce MS Software Products (and related derivative works, documentation and other associated materials) as appropriate for the incorporation of MS Software Products (and related derivative works, documentation and other associated materials) in, and for distribution thereof as part of, OEM Packages;

(iv) to distribute MS Software Products (and related derivative works, documentation and other associated materials) and copies thereof as part of OEM Packages; and

(v) to authorise third parties to exercise any or all such rights (including the right to enter into and carry out the terms of OEM Agreements and Authorised Replicator Agreements with respect to MS Software Products); such rights shall be exclusive to Subsidiary vis-à-vis MS Corp., as well as third parties.

In addition, MS Corp. hereby irrevocably grants Subsidiary such rights, under MS Corp.’s copyrights, patents, trade secrets and all other applicable intellectual property rights of MS Corp., in MS Software Products (and related derivative works, documentation and other associated materials) as may be reasonably necessary or appropriate for Subsidiary to carry on the business contemplated hereunder, which rights shall be exclusive to Subsidiary, vis-à-vis MS Corp., as well as third parties, with respect to OEM distribution of MS Software Products.’

51 Clause 1 contained definitions of some of the expressions used in cl 2.1:

‘“Authorized Replicator” shall mean a third party approved by Subsidiary from which an OEM may acquire MS Software Products and associated materials (such as certificates of authenticity, end user license agreements, product registration cards, etc) reproduced in accordance with specifications determined by Subsidiary.

“Authorized Replicator Agreement” shall mean a non-exclusive license between Subsidiary and an Authorized Replicator pursuant to which the Authorized Replicator may manufacture copies of MS Software Products (and associated documentation and materials authorized by Subsidiary) for distribution to OEMs and distribute the same to OEMs for further distribution pursuant to an OEM Agreement.

“Computer System” shall mean an assembled computer system which includes at least a CPU, a motherboard, a power supply, and a case; by way of example, personal computers, servers, laptops, hand-held computers, and similar multi-purpose computers now manufactured and/or hereafter developed and/or manufactured are Computer Systems.

“MS Software Products” shall mean all MS Corp. computer software products that are generally made available by MS Corp. for commercial distribution anywhere in the world during the term of this Agreement. Without limiting the generality of the foregoing, appended to this Agreement as Schedule A is a list of certain MS Software Products as of the date of this Agreement (but MS Corp. makes no representation that said list is complete).

“OEM” shall mean an original equipment manufacturer of Computer Systems (whether or not the actual manufacturing is performed by one or more subcontractors).

“OEM Agreement” shall mean a non-exclusive, limited, non-transferable license between Subsidiary and an OEM pursuant to which the OEM is entitled to (i) reproduce and install one copy of the applicable MS Software Products(s) on the hard drive or ROM of each unit of a Computer System and (ii) to distribute with such Computer System (w) such single preinstalled copy, (x) one copy of such applicable MS Software Product(s) on external media (such as diskette or CD-ROM) as acquired from an Authorised Replicator or Subsidiary, (y) one copy of the relevant end user documentation as acquired from an Authorised Replicator or Subsidiary, and (z) associated MS Software Product materials such as a certificate of authority, an end user license agreement, a product registration card, and/or other materials which an OEM may acquire from an Authorised Replicator or Subsidiary.

“OEM Package” shall mean a collection of software and/or related documentation selected by an OEM and distributed by the OEM as an integral element of certain of the OEM’s Computer Systems, preinstalled on the hard drive or ROM and/or on an external medium (such as a diskette or CD-ROM) included as part of the Computer System package.’

The expression ‘derivative works’, which appears in cl 2.1(i)-(iv), and again at the conclusion of cl 2.1, is not defined in cl 1 of the Parent-Subsidiary Agreement.

52 The respondents advanced what may be described as the bold submission that the applicants’ evidence, in particular that of Mr K Fay, a senior attorney of Microsoft to whose affidavit the Parent-Subsidiary Agreement was exhibited, made it clear that the ‘relevant programs’ (that is, the works subject to the infringement action brought by the applicants) are not Windows XP Home and Windows XP Pro, but ‘Windows XP Home and Windows XP Pro in the OEM channel’. Reliance was placed by the respondents on the following excerpts from paragraphs 5 and 6 of Mr Fay’s affidavit sworn 19 August 2004, which purported to describe respectively the effect of the Parent-Subsidiary Agreement and the Contribution Agreement (the emphasis appearing in non-italics is that of the respondents):

‘5. Pursuant to [the Parent-Subsidiary Agreement] Microsoft Licensing, Inc., was, between 31 December 1997 and 1 September 2003, [Microsoft’s] exclusive licensee with respect to the copyright in and distribution of Microsoft programs (including Microsoft Windows XP Home Edition…and Microsoft Windows XP Professional Edition)…in the “OEM channel” of distribution whereby Microsoft programs are supplied to original equipment manufacturers or assemblers (“OEMs”) for distribution as part of a computer hardware package…

6. Pursuant to [the Contribution Agreement], Microsoft Licensing, Inc. transferred all of its rights, title and interests in its OEM licensing business to [MLGP] (including the rights of Microsoft Licensing, Inc pursuant to the [Parent-Subsidiary Agreement]), and [MLGP]…thereby:

(a) replaced Microsoft Licensing, Inc. as [Microsoft’s] exclusive licensee with respect to the copyright in and distribution of all Microsoft programs (including Windows Home and Windows Pro) distributed in the OEM channel; and

(b) took an assignment of the rights to sue for, and recover damages for, infringements of copyright in Microsoft products distributed in the OEM channel, whether such infringements occurred before or after 1 September 2003.’

53 I record that Mr Fay’s foregoing evidence was admitted as a submission, his affidavit having been nevertheless objected to by the respondents on the ground of purported construction of controversial contractual arrangements falling for interpretation by the Court as issues in the proceedings. Support for the respondent’s construction was said to be available in any event from [43]-[48] of Ms Brasier’s affidavit sworn 9 July 2004, in which she testified that all licensed copies of Microsoft programs distributed in Australia in the OEM distribution channel conform to certain packaging standards prescribed by Microsoft. The respondents advanced the radical contention that the fact that ‘OEM versions’ of Microsoft Windows (‘OEM versions’ being the language adopted by Ms Brasier in her affidavit) are manufactured by authorised replicators specifically for distribution in the OEM channel, and with packaging distinct from that used on programs distributed through the retail channel, demonstrated that ‘Windows XP Home and Windows XP Pro in the OEM channel’ were separate copyright works.

54 The respondents thus maintained that it was ‘clear’ from those emphasised excerpts from Mr Fay’s and Ms Brasier’s affidavit evidence that there existed a separate copyright in those Microsoft programs as distributed in the OEM channel (as distinct from the copyright in those programs made for ‘general distribution’). Whether a chose fulfils the notion of copyright is however of course a matter for ultimate legal analysis of that chose and its characteristics. Those passages from Mr Fay’s evidence were said by the respondents in any event to necessarily inform the construction of the Parent-Subsidiary Agreement so that by the terms of cl 2.1 of that Agreement, Microsoft intended to ‘irrevocably divest’ itself of the right to make ‘derivative programs’, such ‘derivative programs’ being defined by the respondents as ‘programs customized for the OEM channel’. That is, it was the respondents’ contention that cl 2.1 of the Parent-Subsidiary Agreement, and in particular, the following aspect thereof:

‘the exclusive, world-wide licence… (i) to create derivative works based on MS Software Products … as appropriate to customize the respective MS Software Products for the particular needs of each OEM’

was to be interpreted as constituting the transfer by Microsoft to MLI of the former’s intellectual property right to create Windows XP Home and Windows XP Pro versions distributed per medium of OEMs, since those programs were asserted to be ‘derivative works’. Such an interpretation tends to beg the questions however as to what may be imputed as the mutual intention of those two Microsoft group companies by their use of the expression ‘derivative works’, and for what purpose was there a need for such programs to be created in the first place. The term ‘customized’ was also not defined by the Parent-Subsidiary Agreement. In any event, what is necessarily implied from the respondents’ interpretation of cl 2.1 thereof is that Windows XP Home and Windows XP Pro were ‘based on MS Software Products’, and their creation was somehow ‘appropriate to customize the respective MS Software Products for the particular needs of each OEM’. Inherent in that implication is a distinction between ‘MS Software Products’ and Windows XP Home and Pro as reproduced for distribution per medium of OEMs, which places a further obstacle to the viability of the construction for which the respondents would contend.

55 A similar observation is open to be made in relation to the remainder of cl 2.1, so the respondents submitted, which was said to be concerned with granting the necessary rights to MLI to enable the distribution of ‘derivative works’ in the ‘OEM channel’ as ‘OEM packages’, and the ‘OEM distribution of MS Software Products’; reliance was placed by the respondents on cl 2.1(iii) and cl 2.1(iv), which I reproduce again for convenience:

‘(iii) to reproduce MS Software Products (and related derivative works, documentation and other associated materials) as appropriate for the incorporation of MS Software Products (and related derivative works, documentation and other associated materials) in, and for distribution thereof as part of, OEM Packages;

(iv) to distribute MS Software Products (and related derivative works, documentation and other associated materials) and copies thereof as part of OEM packages…’

56 I observe that the expression ‘OEM channel’ does not appear as such in cl 2.1, and that the expression ‘derivative works’ where appearing in sub-clauses of cl 2.1 suggests that rights as to reproduction and distribution thereof were granted in addition or supplementary to rights of reproduction and distribution of ‘MS Software Products’. The broad definition of the expression ‘MS Software Products’appearing in the Parent-Subsidiary Agreement did not purport to list exhaustively in the schedule thereto all Microsoft software products, though numerous product names are there enumerated, including ‘Windows’as a general description and certain ‘Windows’designated products, though not by the specific designations of Windows XP Home and Windows XP Pro. So much might be thought to be unsurprising, given that the schedule pre-dated first publication of those programs on 25 October 2001. There was no suggestion by either party that Windows XP Home and Windows XP Pro did not fall within the scope generally of the designation ‘Windows’. Moreover both of those software products would implicitly fall within the broad cl 1 description of the Parent-Subsidiary Agreement as to ‘all MS Corp. computer software products that are generally made available by MS Corp. for commercial distribution anywhere in the world during the term of this Agreement.’ It was on that footing that the applicants later rejoined the respondents’ submission by requiring them to exhibit proof that Windows XP Home and Windows XP Pro were ‘customized derivative works’.

(ii) whether MLI was the sole entity entitled to author Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’ and to own the copyright therein, therefore whether Microsoft is not entitled to the benefit of the evidentiary provisions and presumptions in the Copyright Act in order to claim ownership of any copyright that might subsist in the relevant programs

57 According to the respondents’ interpretation of cl 2.1 of the Parent-Subsidiary Agreement, the only entity entitled to create Windows XP Home and Windows XP Pro ‘in the OEM channel’ (those being ‘derivative works’ within the meaning of that expression in cl 2.1(i)) as at the date of first publication was necessarily MLI, since by virtue of that Agreement, Microsoft had ‘irrevocably divested’ itself of the right to create ‘derivative works’ upon entry into the Parent-Subsidiary Agreement on 31 December 1997. Since MLI was the exclusive licensee by virtue of the Parent-Subsidiary Agreement until 1 September 2003 when MLI ‘contributed’ all of its assets to MLGP, the first publication date of the relevant programs, being 25 October 2001, fell within that period of time, such that MLI was said by the respondents to be the only entity entitled to create ‘derivative works’ of which ‘OEM products’, such as Windows XP Home and Pro, were supposed examples (the term ‘exclusive vis-à-vis Microsoft Corp’ appearing in cl 2.1 being relied upon by the respondents for emphasis of that submission).

58 The respondents’ submissions continued to the effect that in the absence of evidence from the applicants as to Microsoft having authored Windows XP Home and Windows XP Pro ‘in the OEM channel’ in breach of the Parent-Subsidiary Agreement, MLI was ‘prima facie’the author of those relevant programs and therefore the first owner thereof. The respondents contended that so much rendered ‘futile’ the applicants’ reliance upon ss 126B(2) and 128 of the Copyright Act, since the presumed state of affairs mandated by those provisions, being that of ownership by Microsoft of copyright in the programs, could not stand in the face of the affidavit evidence and the intra-Microsoft corporate group agreements, which were said to be cumulatively to the effect that the programs sued upon were Windows XP Home and Windows XP Pro ‘in the OEM channel’, and MLI was the only entity entitled at the relevant time to create programs ‘in the OEM channel’. The respondents’ submissions continued to the effect that it was inapposite for the applicants simply to point to Microsoft’s name appearing on the copyright notice affixed to the copies of the programs and their packaging (s 126B(2)), or for the applicants to allege that first publication of the programs took place in the United States under Microsoft’s name as publisher (s 128).

59 The respondents therefore claimed that, far from they bearing an onus by virtue of the operation of ss 126B(2) and 128, it was the applicants upon whom was cast ‘at least…an evidentiary burden’ in the light of the fact that the Parent-Subsidiary Agreement, when read with the evidence of Mr Fay, established ‘a prima facie case that only MLI was entitled to make [the] relevant programs at the time, and accordingly, that MLI was probably the author and therefore probably the first owner of copyright in the relevant programs at the time.’ The respondents contended that Microsoft could have led evidence to contradict that prima facie case by proving that Microsoft did in fact make the relevant programs, whether in breach of the Parent-Subsidiary Agreement or otherwise, but they chose not to do so. The alleged failure of Mr Fay, having made his affidavit after the respondents had pleaded their ‘prima facie case’, to present any such evidence to the contrary, invited the inference to be drawn that both parties complied with the Parent-Subsidiary Agreements, such that MLI created the programs in dispute, so the respondents further contended.

60 The respondents next submitted that since no evidence was led as to publication in the name of MLI, it was unable to rely upon any of the ss 126A, 126B and 128 presumptions relating to subsistence of copyright and ownership thereof. The respondents’ submission continued that for there to be proof of subsistence of copyright in the programs created by MLI, the applicants needed to have adduced evidence from witnesses from MLI to the effect that those programs were original literary works. Moreover, for there to be proof of first ownership of copyright in those programs by MLI, the respondents contended that there should have been further evidence led by witnesses from MLI that they made those programs within the course and scope of their employment (referring thereby to s 35(6) of the Copyright Act). Far from denying the possibility of copyright subsisting in computer programs allegedly produced by MLI, the respondents’ case was that ‘not a jot or tittle of evidence to prove subsistence of copyright in the works made by MLI, nor to prove ownership of copyright [was adduced by the applicants]’.

61 The applicants did not of course lead evidence of authorship and originality, instead relying upon the evidentiary provisions and statutory presumptions of the Copyright Act to establish subsistence and ownership of copyright. The issue therefore is whether or not the ‘evidence’ adduced by the respondents, being their reliance upon aspects of the applicants’ affidavit evidence and intra-Microsoft corporate group agreements to the extent I have outlined, was sufficient, first, to displace the prima facie case established by the applicants under ss 126A and 126B, and secondly, to ‘establish to the contrary’ the facts otherwise presumed by s 128.

(iii) Whether the applicants failed to prove the subsistence and ownership of copyright in Windows XP Home and Windows XP Pro distributed ‘in the OEM Channel’ potentially owned by MLI

62 The next stage of the respondents’ challenge was in answer to further evidence adduced by the applicants as to, first, the merger of MLI into Microsoft with effect from 2 September 2003; and second, as to the existence and effect of the Memorandum of Understanding (which as earlier indicated I have abbreviated to ‘MOU’). That evidence was said by the applicants to explain why the respondents have failed to displace the s 128 presumption, which presumption required the respondents to disprove on the balance of probabilities that Microsoft was the owner of the copyright in the relevant programs. The evidence adduced by the applicants was said to be such that even assuming the respondents to have established propositions (i) and (ii) immediately below, the respondents had nevertheless failed to displace the s 128 presumption; those propositions of the respondents were as already foreshadowed or articulated as follows:

(i) that Windows XP Home and Windows XP Pro ‘as distributed in the OEM channel’ are separate copyright works from those ‘available for general distribution’; and

(ii) Windows XP Home and Windows XP Pro ‘as distributed in the OEM channel’ are ‘derivative works’ within the meaning of cl 2.1 of the Parent-Subsidiary Agreement. and are therefore works that Microsoft did not have the right to create.

63 As to the merger of MLI into Microsoft issue, on and from 2 September 2003, and as disclosed in the affidavit evidence of Mr Fay sworn 8 September 2004, MLI purportedly merged with Microsoft, having the consequence under Washington and Nevada law according to Mr Fay, ‘that [MLI] ceased to exist at law with effect on and from 2 September 2003’. There was tendered in evidence in that regard certain further intra-Microsoft corporate group documentation comprising an Agreement and Plan of Merger and accompanying Articles of Merger executed on 14 August 2003 by Microsoft and MLI. That documentation was filed with the Secretary of State for the State of Washington on 2 September 2003, and was subsequently certified by that Secretary on 8 September 2003. The same or similar documentation was filed at the same time by Microsoft with the Secretary of State for Nevada. The purported effect thereof was that MLI merged with Microsoft as the so-called ‘Surviving Corporation’, and MLI became the so-called ‘Non-Surviving Corporation’. Article VII of the Agreement and Plan of Merger was relevantly to the effect:

‘The effect of the Merger shall be as provided by the applicable provisions of the laws of Washington and Nevada. Without limiting the generality of the foregoing, and subject thereto, at the Effective Date of the Merger: the separate existence of Non-Surviving Corporation shall cease; the Surviving Corporation shall possess all assets and property of every description, and every interest therein, wherever located…of all the Constituent Corporations…’

64 The recitals to that merger agreement, provided that the so-called ‘Surviving Corporation’ and the ‘Non-Surviving Corporation’ are sometimes referred to in the agreement as the ‘Constituent Corporations’. Although Australian corporations law does not recognise the concept of ‘merger’ of corporations, it was submitted by the applicants that s 7(3) of the Foreign Corporations (Applications of Laws Act) 1989 (Cth) recognises the merger as having the effect in Australia that it has under Washington and Nevada law. I observe in that regard that s 7(3)(a) provides that any question of the status of a foreign corporation (including its identity as a legal entity) is to be determined by reference to the law applied by the people in the place in which the foreign corporation was incorporated, which place is presumably the State of Washington, United States, that being the domicile of Microsoft Corporation. No dispute was raised by the respondents to the applicants’ interpretation of s 7(3), and it is therefore unnecessary for me to discern whether that provision is also intended to refer to the choice of law rules of the place of incorporation of the relevant entity, and any consequences thereof.

65 That notion of ‘assets or property of every description’ in Article VII of the Agreement and Plan of Merger is comprehensive enough to include and encompass inchoate and executory rights choses and interests, such as copyright and interests in copyright of a proprietary kind. The merger thus effected was submitted by the applicants to render nugatory the contention of the respondents that any copyright entitlements of MLI, pursuant to the laws of the States of Washington and/or Nevada, did not become in any event vested in Microsoft by 2 September 2003, that being the date upon which that Agreement took effect, irrespective of the contentious scope of operation of the Parent-Subsidiary Agreement and the MOU. So much put to an end, so the applicants’ submission continued, the respondents’ case as to ownership of copyright in Windows XP Home and Windows XP Pro not being vested in Microsoft for all purposes relevant to the subject proceedings and the relief hereby sought.

66 The respondents’ rejoinder to the applicants’ reliance upon the merger was that even assuming Microsoft to have acquired the assets of MLI, including copyright assets, the only attempt made by the applicants to prove subsistence and ownership of copyright in Windows XP Home and Windows XP Pro ‘in the OEM channel’ by Microsoft was the applicants’ reliance upon ss 126A, 126B and 128. The respondents’ submissions continued that if Microsoft sought to rely upon its ownership of the copyright chose in action obtained from MLI by virtue of the merger, the applicants would need to establish subsistence and ownership by MLI of that copyright. Such proof was said to be necessary, since MLI was said not to be in a position to rely upon those statutory presumptions and evidentiary provisions by virtue of its name not having appeared on the copyright notice or on copies of the work as first published (see ss 126A(3), 126B(2) and 128). The respondents thus did not deny, at least relevantly to the present area of contention, the possibility of there being copyright in Windows XP Home and Windows XP Pro ‘in the OEM channel’ owned by MLI. The respondents merely contended that such chose in action had not crystallised in favour of Microsoft by virtue of the applicants having failed to adduce evidence relevantly of MLI’s authorship of original literary works, and the other requirements of ss 32 and 35 of the Copyright Act, which define respectively subsistence of copyright, as well as ownership of the same.

67 As to the Memorandum of Understanding (MOU) issue, the applicants contended that the respondents’ defence of the proceedings, insofar as it was predicated upon the basis of a challenge to Microsoft’s reliance upon ss 126A, 126B and 128, involved a misreading and misunderstanding of (at least) the Parent-Subsidiary Agreement, and in particular, the cl 2.1(i) notion of creation of ‘derivative works based on MS Software Products (and related documentation and other associated materials) as appropriate to customize the respective MS Software Products for the particular needs of each OEM’, and the consequential cl 2.1 references, appearing in the ensuing subclauses of cl 2.1, to ‘OEM’, ‘OEM Packages’ and ‘OEMAgreements’ and ‘Authorized Replicator Agreements with respect to MS Software Products’, and also to the concluding words ‘with respect to OEMdistribution of MS Software Products’. That asserted misconception was said by the applicants to continue in the context of what the applicants submitted was the clarification of the notion of ‘derivative works’ contained in cl 3 of the contemporaneous MOU. The MOU had the same parties thereto as the Parent-Subsidiary Agreement, being Microsoft as licensor and MLI as licensee. The MOU was executed contemporaneously with and in precisely the same fashion and by the same persons as the Parent-Subsidiary Agreement, and as in the case of the Parent-Subsidiary Agreement, Microsoft is referred to as ‘MS Corp.’ and MLI as ‘Subsidiary’.

68 Consistently with and by way of purported support for that opening response, the applicants drew attention to the parties’ purported ‘desire to clarify their intention as to the scope of the [OEM] License with respect to MS Hardware Products and other matters’, by virtue of the terms of the MOU. Hence clause 1 of the MOU, headed ‘MS Hardware Products’, referred to ‘clarification as to the intent of the parties’ that the Parent-Subsidiary Agreement include ‘an exclusive license to distribute MS Hardware Products as part of OEM Packages’, and the definition of ‘MS Hardware Products’ as inclusive of components ‘which are developed by MS Corp’. Clause 2 of the MOU, headed ‘Third Party intellectual property rights’, spoke of an objective of clarification of the intent of the parties that the Parent-Subsidiary Agreement ‘grant an exclusive, world-wide license, under MS Corp’s copyrights, patents, trade secrets and all other applicable intellectual property rights of MS Corp.… during the Term’. Clause 3 of the MOU headed ‘Derivative works’ was as follows:

‘3. Derivative works.

(a) At the time they entered into the Parent-Subsidiary Agreement, MS Corp. and Subsidiary intended that to the extent that Subsidiary owns, creates or otherwise obtains any Derivative Works under Section 2.1(i), Subsidiary hereby assigns all right, title and interest, subject to the License, in and to such Derivative Works to MS Corp. “Derivative Works” shall mean any and all intellectual property or other proprietary rights, including but not limited to patent, copyright, trade secret and trademark, created or derived from MS Software Products, MS Hardware Products and any other product subject to the License.

(b) At the time they entered the Parent-Subsidiary Agreement, MS Corp. and Subsidiary intended that the license granted under Section 2.1(i) for the creation of derivative works be limited to the particular needs of each OEM for distribution as part of OEM Packages. The [non-italicized portion] of the following text states more clearly the party’s intent:

(There were no further sub-paragraphs of paragraph (b) above).

69 The applicants cited cl 3(a) of the MOU as ‘positive evidence that all right, title and interest in and to [‘derivative works’] have been assigned to Microsoft’. That clause was said to make it clear in any event that Microsoft is the owner of the copyright in Windows XP Home and Windows XP Pro as distributed in the OEM channel, even if the Court was to accept the respondents’ submission that those are ‘derivative works’ and are therefore different computer programs from those made ‘for general distribution’. The assignment effected by cl 3(a) was said moreover to satisfy the stipulations of s 196 of the Copyright Act¸ which require assignments to be in writing and signed by the assignor. The applicants’ submission on point was that irrespective of whether MLI had the right to create, or whether it did in fact create any ‘derivative works’ from Windows XP Home and Windows XP Pro, nevertheless as at the date of first publication that copyright was owned by Microsoft, since ‘creation necessarily precedes publication. Therefore any copyright in the so-called Customised Derivative Works (if any such works existed) in the hands of MLI was assigned to Microsoft eo instanti on creation of those customized derivative works’, so that the publication of Microsoft Corporation’s name on the original form of packaging of the programs correctly identified Microsoft as the owner of the copyright in the works. Hence the applicants claimed to reconcile the s 128 presumption of ownership with its responses to the entirety of the respondents’ challenge, assuming that challenge to be otherwise made out, which the applicants of course refuted.

70 The applicants further contended that the effect of the MOU, and cl 3 in particular, was that cl 2.1(i) of the Parent-Subsidiary Agreement should bear the following emphasis, which appears in non-italics:

‘MS Corp. hereby irrevocably grants Subsidiary the exclusive, world-wide licence… (i) to create derivative works based on MS Software Products (and related documentation and other associated materials) as appropriate to customize the respective MS Software Products for the particular needs of each OEM.’

Having established the presumptions of subsistence and ownership in Microsoft’s favour, in particular under s 128 which provides that such presumptions are to remain in place unless the contrary is established, the applicants submitted that it was for the respondents to prove with evidence that Microsoft XP Home and Microsoft XP Pro were ‘derivative works’ created ‘as appropriate to customize the respective MS Software Products for the particular needs of each OEM’. Omission to do so meant that the respondents effectively failed to prove on the balance of probabilities in this further context of dispute that Microsoft was not the owner of copyright subsisting in Microsoft XP Home and Microsoft XP Pro.

71 The respondents rejoined to the effect that even assuming the MOU to be a binding contractual document, which it submitted was ‘far from clear’, the MOU was superseded and terminated by cl 4.2 of the Parent-Subsidiary Agreement. Clause 4.2, entitled ‘Prior Agreements’, provides relevantly as follows:

‘(a) [t]his Agreement supersedes and terminates any and all prior agreements or contracts, oral or written, entered into between the parties relating to the subject matter hereof…’

According to the ingenuity of the respondents’ submissions, the MOU was a ‘prior agreement’ falling within cl 4.2(a) of the Parent-Subsidiary Agreement and was thereby terminated upon the passing into effect of that latter agreement on 31 December 1997 for the following reasons: first, the Parent-Subsidiary Agreement was expressed to take effect from 31 December 1997; second, since the draftsman of the MOU had neglected to include any similar provision in the MOU, the MOU took contractual effect from 9 December 1997, being the date the MOU was countersigned by Microsoft; and third, the MOU purported to vary, or at least qualify the ‘understanding’ of the parties to the Parent-Subsidiary Agreement thereby bringing it within the ‘subject matter hereof’. Accordingly, the respondents submitted that no benefit could be gained by the applicants by resort to the MOU on the respondents’ case.

My conclusions on the respondents’ challenge to Microsoft’s reliance upon ss 126A, 126B and 128 as establishing subsistence and ownership of copyright in Windows XP Home and Windows XP Pro

(i) Sections 126A, 126B and 128

72 By virtue of the respondents’ denial of both subsistence of copyright in Windows XP Home and Windows XP Pro and Microsoft’s ownership thereof, subsistence and ownership were placed in issue in the current proceedings: see again pars (a) and (b) of s 126 of the Copyright Act. For the purpose of establishing subsistence and ownership of copyright in those programs, and as has been already indicated in these reasons, the applicants have relied upon the presumptions contained in s 128 of the Copyright Act and additionally, or at least in the alternative, on the evidentiary provisions ss 126A and 126B thereof, which were introduced by Sch 4 of the Copyright Amendment (Parallel Importation) Act 2003 (Cth).

73 Section 128 was considered in DHD Distribution, a case similarly involving Microsoft computer programs. Lehane J was there presented with original copies of the relevant programs as first published. Having been satisfied that those computer programs were first published in the United States within the 50 year period prescribed by s 128(a) of the Copyright Act, his Honour then considered what was required under s 128(b) to prove that those original copies bore the name purporting to be that of the publisher. Lehane J found it significant that those copies of the computer program, as it was first published, made explicit reference to ‘Microsoft Corporation’ as the owner of copyright in the programs. Accordingly his Honour concluded that those references to ‘Microsoft Corporation’ were ‘plainly references to the first applicant as a person who has issued or caused to be issued copies of the works, as they were first published’ (at [8]), and hence Microsoft Corporation was entitled to the benefit of the s 128 presumptions as to subsistence of copyright and ownership of the same in those programs.

74 Likewise, I am satisfied that the evidence tendered by the applicants establishes Microsoft’s ability to rely upon the presumptions contained in s 128. Pursuant to s 126A(3) of the Copyright Act, the United States certificate of registration of copyright in Windows XP Pro (that program wholly subsuming Windows XP Home as earlier pointed out constituted) is prima facie evidence of the facts stated therein, that is, that Microsoft Windows XP Pro (and as a corollary, also Windows XP Home) was first published in the United States on 25 October 2001, which is well within the 50 year period prescribed by s 128(a). As the United States is a Convention country, s 184 of the Copyright Act and reg 4 of the Copyright Regulations have the effect of applying the operation of s 128 to literary works first published in the United States. Furthermore, I find that the name of Microsoft, who purports to be the entity who has issued or caused to be issued copies of the relevant programs, duly appeared on copies of the programs and their packaging as first published, and was also stated to be the owner of the copyright therein, as was the case in DHD Distribution. Accordingly I must conclude that copyright subsists in Windows XP Home and Windows XP Pro, and further that Microsoft is the owner of that copyright, unless I should find that the contrary has been established by the respondents.

75 The alternative basis put forward by the applicants for proof of subsistence of copyright, namely s 126A, is less straightforward. The applicants of course assert that the unchallenged United States certificate of copyright, stating as it does the year of first publication of the programs as 2001 and the place of first publication being the United States, is admissible as prima facie evidence of subsistence of copyright. Such an interpretation of that provision was said to flow from the legislative intention of simplifying the methods and standards of proof of subsistence and ownership of copyright motivating the introduction in 2003 of, inter alia, ss 126A and 126B. Subsection 126A(1) purports to apply s 126A to an action for infringement brought under Part V of the Copyright Act in which a defendant puts in issue the question of whether copyright subsists in the work, or other subject matter to which the action relates. Subsection 126A(2) is of similar effect to s 126A(3), for it provides that labels or marks upon the copy of the work or other subject matter or its packaging or container, which states the year and place of first publication, or of the making of the work or other subject matter, is admissible as prima facie evidence of those facts so stated. The question remains however whether or not proof of the matters contained in either s 126A(2) or (3) will suffice to establish prima facie subsistence of copyright, without the need for any proof as to the originality of the works concerned, as is required by s 32 of the Copyright Act.

76 Unlike subsections 126A(2) and (3), s 128 expressly provides that proof of the matters therein stated will create a presumption that copyright subsists in the work. Section 128 however is only expressed to apply to copyright works, and not to subject matter other than works, as in the case of s 126A. The applicants’ submission was that the very purpose of the new evidentiary provisions (that is, of s 126A) was to prevent applicants being put to the expense of proving authorship and originality in circumstances where they had sufficient evidence to enliven one of the prima facie evidentiary presumptions stipulated in subss 126A(2) or (3). The Supplementary Explanatory Memorandum to the Copyright Amendment (Parallel Importation) Bill 2002, which introduced those latter provisions, is somewhat equivocal. As stated in the preamble to that Memorandum, ‘[t]he amendments ease the burden of proof of subsistence and ownership of copyright for both criminal and civil matters…’. It also states:

‘In relation to civil proceedings, the amendments add general presumptions supporting proof of subsistence and ownership of copyright to be drawn from various sources – labels and marks, information in foreign certificates of registration or through citation of each of the owners and transactions in the relevant “chain of title” of the copyright.’

However later clauses of the Supplementary Explanatory Memorandum tend to indicate that evocation of s 126A(2) or (3) goes to prove, to the level of prima facie evidence, elements of subsistence, rather than subsistence per se. For instance cl 10 of that Memorandum, which states the effect of s 126A(2):

‘The year and place of first publication are key issues in determining the subsistence of copyright. Copyright has a finite duration. As such, proof of the year the material was first published or made when linked to the relevant provisions setting out the duration of the particular subject-matter in question provides a ready means of establishing that the copyright has not expired. Similarly, evidence as to the place of first publication provides a means of establishing that the work was first published in a jurisdiction, including Australia, giving rise to the recognition of copyright in Australia….’

77 It is clear that s 126A(2) and (3) do make it easier to establish proof of subsistence in copyright in works under s 32(2) (the provision here relevant), since in addition to authorship and originality, applicants are required to prove publication and any one of the matters listed in pars 32(2)(c)-(e). A successful evocation of either s 126A(2) or (3) would establish publication, and do so for the purposes of ‘… first publication… in Australia’ within s 32(2)(c). The enlivening of s 126A(2) or (3) does not provide prima facie evidence of authorship or originality however, those being the other requirements of s 32.

78 Since I am satisfied that the applicants have successfully invoked the presumption of subsistence of copyright available under s 128, it is not strictly necessary for me to determine this further question as to the operation of s 126A at the present time. However I think that it is nevertheless expedient that I do so. On balance I do not think that the applicants’ contentions as to the entire implications of the operation of s 126A(2) or (3) can be maintained. Those subsections do not refer expressly to subsistence (as s 128 does) or even to prima facie evidence of subsistence. Significantly the heading of s 126A refers to ‘Evidence in relation to subsistence’ (my emphasis) as opposed to ‘Evidence of subsistence to copyright’. Moreover s 126A(2) or (3) do ‘ease the burden of proof’ of subsistence in the ways I have described above. This outcome does not produce in reality any practical difference of present significance. Therefore prima facie evidence was established in favour of the applicants in terms of ss 126A, but this does not in my opinion equate to a presumption as to subsistence of copyright.

79 The applicants have however established to the level of prima facie evidence Microsoft’s ownership of copyright in Windows XP Home and Windows XP Pro by virtue of the operation of s 126B(2). I am satisfied in that regard that the copies of those software programs tendered in evidence, and their packaging, identified at all relevant times ‘Microsoft Corporation’ as the owner prima facie of the copyright in those programs from the year ‘2001’.

80 Accordingly, pursuant to s 128 of the Copyright Act, copyright should be presumed to subsist in Windows XP Home and Windows XP Pro, and Microsoft should be presumed to be the owner of that copyright. Moreover pursuant to 126B thereof, the applicants have established prima facie evidence of Microsoft’s ownership of copyright in those programs.

(ii) The burden of proof

81 Both parties made submissions to the effect that the prima facie case that each had respectively established had the effect of shifting the burden of proof to the other. It was the applicants’ submission that having discharged the evidentiary burden of bringing into operation ss 126A, 126B and 128, it necessarily remained for the respondents to adduce sufficient evidence to extirpate the presumptions triggered respectively by those provisions. The applicants pointed out in particular that the respondents did not challenge the basal fact enlivening the operation of the s 128 presumption, namely publication in the relevant forms, and did not choose to cross-examine Mr Rubin, who testifiedas to that basal fact. The respondents’ position, as I have already outlined, was that by reference to the applicants’ evidence, the respondents have discharged the onus of proving, in relation to the relevant programs, that Microsoft could not have been the owner of copyright, and that because there is no evidence of subsistence of copyright in works created by MLI, there exists no proof of copyright established in the relevant programs. Therefore as the respondents submitted, the applicants were unable to rely upon those evidentiary and presumptive provisions of the Copyright Act to establish Microsoft’s copyright ownership, and were thenceforth put to proof on subsistence and ownership of copyright in accordance with the relevant provisions of the Copyright Act.

82 The applicants urged that the words unless the contrary is established appearing in s 128 have the effect that the presumptions of subsistence and ownership in favour of the entity, whose name appeared on copies of the work first published, would stand unless the contrary was proved on the balance of probabilities. So much was not disputed by the respondents and correctly so in my view.

83 The standard of proof necessary to be achieved by the respondents to assail the prima facie evidentiary provisions of ss 126A and 126B is less straightforward. In Safe Sport Australia Pty Ltd v Puma Australia Pty Limited (1985) 4 IPR 120 at 124, King J (as he then was) addressed the meaning of s 26(3) of the Designs Act 1906 (Cth), which provided that a certificate of registration should be prima facie evidence of the validity of that registration. His Honour postulated two potential operational candidates for the effect of the words prima facie, first, evidence which, if not balanced or outweighed by other admissible evidence, would suffice to establish a particular contention, and secondly, evidence which, in the absence otherwise of admissible evidence inconsistent with the fact, becomes conclusive proof of that fact, and the party giving it thus discharges the onus. In the result, his Honour did not need to choose between the two candidates. The applicants submitted that even if, favourably to the respondents, the latter approach should here apply, there exists no evidence inconsistent with the facts proved by the prima facie evidence tendered on point by the applicants, which I have already reviewed or otherwise identified. There is clear force in that submission.

84 Accordingly, I accept the applicants’ case that once enlivened, the presumptions of subsistence and ownership arising under s 128 stood, unless and until the respondents were to adduce evidence which would prove, on the balance of probabilities, that copyright did not subsist in the relevant programs, and that Microsoft was not the owner thereof.

(iii) The construction of cl 2.1 of the Parent-Subsidiary Agreement

85 As I have foreshadowed, it is of critical importance to the respondents’ challenge to the applicants’ reliance upon ss 126A, 126B and 128 that editions of Windows XP Home and Windows XP Pro produced for distribution ‘in the OEM channel’ were separate copyright works falling within the ambit of the expression ‘derivative works’ appearing in cl 2.1 of the Parent-Subsidiary Agreement.

86 The parties’ submissions on the question of whether separate copyright existed in the programs distributed in the OEM channel amounted, in essence, to competing views as to the effect of the evidence given about the distribution and reproduction of Microsoft software programs, being in particular, that of Mr Fay, Ms Brasier and Mr Kolb for the applicants, and of Mr Lee for the respondents. I have found to be highly persuasive the applicants’ submission that just because the owner of copyright in a given work may choose to license certain of his or her exclusive rights in different ‘slices’ of the distribution chain, it does not follow that there is thereby constituted separate copyright works. In my opinion, the respondents’ contention in that regard as to separate copyright in such circumstances misconceived the nature of copyright, misinterpreted the applicants’ evidence, and was in any event untenable on a proper construction of the Parent-Subsidiary Agreement, particularly in light of the evidence as to common practices of manufacture and distribution of Microsoft programs to which I have already referred in these reasons.

87 I should record at once that Mr Fay’s affidavit evidence of 19 August 2004, upon which so much emphasis was placed by the respondents, was admitted subject to objection as a whole, upon the basis that the true construction of the Parent-Subsidiary Agreement, the MOU and the Contribution Agreement is for the Court to determine. Of course evidence is admissible as to identification of persons, events, objects and the like the subject of contractual stipulation, and to resolve ambiguities, and as to the matrices of circumstances relevantly prevailing at the time a contract is made, but those factors are not critically to the point here. I propose to treat the controversial aspects of Mr Fay’s evidence as being in the nature of a submission to the Court as to the operation of the Parent-Subsidiary Agreement (and the collateral MOU) and the Contribution Agreement, and nothing higher.

88 To the extent that Mr Fay identified the effect of the Parent-Subsidiary Agreement as constituting MLI the ‘exclusive licensee with respect to the copyright in and distribution of Microsoft Programs (including Microsoft Windows XP Home Edition…and Microsoft Windows XP Professional Edition)…in the “OEM channel”’, so much is at least equivocal as evidence as to the existence of any separate copyright. It could equally be said in that passage (and the further passages appearing at [6] of Mr Fay’s affidavit to which the respondents also drew attention), that Mr Fay was thereby submitting that the effect of the licence granted under the Parent-Subsidiary Agreement was to devolve upon MLI (and its sub-licensees) such exclusive rights as were necessary to provide for the distribution of Microsoft programs in the ‘OEM channel’, as opposed to granting them those exclusive rights in respect of the reproduction and distribution of the programs in both the OEM and retail channels. Furthermore, Mr Fay’s language may also be read as a submission to the effect that the Parent-Subsidiary Agreement granted to MLI the right to sue for infringement of those exclusive rights of reproduction and publication, such as they were, in respect only of programs distributed in that particular manner, that is, through OEMs.

89 By way of illustration, the applicants provided the example of a film distribution agreement whereby the owner of copyright in the film may license person A to exhibit the film to the public in New South Wales, and person B to exhibit the same film to the public in Victoria. In those circumstances the applicants submitted that there did not thereby ‘spring up’ new copyright works, by way of ‘the film as communicated in New South Wales’ and ‘the film as communicated in Victoria’, because the copyright work is the same in each case, that being the film itself. Similarly therefore, the applicants submitted, the fact that Microsoft might choose to license acts in the OEM channel separately from acts in the retail channel does not thereby mean that there was constituted two different copyright works being so licensed. Those exemplifications of the critical principle concerning the law of copyright are correct, and derogate materially from the theme of the respondents’ submissions upon the operation relevantly of the Parent-Subsidiary Agreement.

90 I was also referred by the applicants once more to Ms Brasier’s affidavit evidence of 9 July 2004 at [20] thereof as to the two forms of packaging of the Microsoft programmes, one being for retail distribution and the other for distribution by OEMs, and which evidence was accordingly submitted by the applicants to demonstrate that whilst there are differences in packaging, depending on whether the programs are distributed in the retail channel or in the OEMchannel, the underlying computer programs are the same. It was emphasised by the applicants in that regard that the respondents’ principal witness Mr David Lee, neither in his affidavit evidence nor under cross-examination, identified the relevant programs other than as Windows XP Home and Windows XP Pro, and that the evident explanation for his so doing was that there were no other relevant programs. In my opinion, it is open to me to draw the inference and reach the conclusion, in the light of all of the evidence, including in particular the language of the Parent-Subsidiary Agreement, and also as to the evidence as to contemporaneous practices of the industry in which the parties were respectively engaged as manufacturers and distributors of computer products, that the relevant copyright works were Windows XP Home and Windows XP Pro, and not Windows XP Home and Windows XP Pro ‘in the OEM channel’. That conclusion is largely destructive of the respondents’ contentions based upon the Parent-Subsidiary Agreement and the contemporaneous MOU.

91 In light of the burden cast on the respondents by reason of the applicants’ enlivening of the s 128 presumptions and the operation the 126B prima facie evidentiary provision, it became in effect the obligation of the respondents to establish that the relevant literary works were something other than or additional to the ‘Microsoft Windows XP’ computer programs. In that regard, it is I think significant that what I think may fairly be described as the strained interpretations of the applicants’ evidence pursued by the respondents to make good their submission on point were never put to the relevant witnesses in cross-examination. In the circumstances here where the applicants have successfully invoked, in particular, the presumptions of subsistence and ownership of copyright authorised by s 128 it was insufficient for the respondents to point merely to a reading of the applicants’ evidence merely arguably favourable to the respondents in order to establish the contrary to those presumptions.

92 In any event, the evidence of what constituted the relevant work was largely Mr Fay’s contended effect of the intra-Microsoft corporate group agreements and no more. Characterisation of the nature of the copyright work here involved and its implications depends ultimately in this case on the Court’s construction of those agreements, and of cl 2.1 of the Parent-Subsidiary Agreement in particular.

93 In undertaking the foregoing process of documentary interpretation, I have borne in mind Lord Wilberforce’s well known explanation as to permissible limits of recourse to prevailing surrounding circumstances in order to assist the task of contractual interpretation, appearing in his speech in Reardon Smith Line Ltd v Ynguar Hansen-Tangen [1976] 1 WLR 989 at 997, as follows:

‘… what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were…’

when the contract under scrutiny was made. Earlier at 995-996, his Lordship had explained that:

‘No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as “the surrounding circumstances” but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’

Further on at 996, his Lordship emphasised that:

‘…when one is speaking of aim, or object, or commercial purpose one is speaking objectively of what reasonable persons would have in mind in the situation of the parties [to the contract in dispute].’

94 Each of those passages was cited by Mason J (as he then was) in his reasons for judgment in Codelfa Construction at 350. Moreover on a related theme, his Honour had earlier formulated the following principle relating to documentary construction, in joint reasons for judgment with Stephen and Jacobs JJ in DTR Nominees v Mona Homes Pty Ltd (1978) 138 CLR 423 at 429, as follows:

‘A court may admit evidence of surrounding circumstances in the form of “mutually known facts” [in order] “to identify the meaning of a descriptive term” and it may admit evidence of the “genesis” and objectively the “aim” of a transaction to show that the attribution of a strict legal meaning would “make the transaction futile”…’

In an oft-cited passage, Mason J stated the principle applicable in Australia at 352 of his reasons for judgment in Codelfa as follows:

‘The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning…’

95 As earlier explained, at issue largely is the meaning of cl 2.1 of the Parent-Subsidiary Agreement, and in particular the words ‘derivative works’ as they appear both in that agreement, and in the contemporaneously executed MOU. Was the effect of cl 2.1, and subclause (i) of the Parent-Subsidiary Agreement in particular, to pass from Microsoft to MLI legal entitlement to create ‘derivative works’ and were Windows XP Home and Windows XP Pro ‘in the OEM channel’ of the nature of ‘derivative works’ for all relevant purposes? The answer to these questions requires close examination of the definitive expressions in the Parent-Subsidiary Agreement together with its operative provisions, informed by the evidence as to the Microsoft group’s practices for manufacture and distribution of computer programs. It is of course impermissible, at least in the normal case, to consider the manner in which the parties have performed a particular contract in order to construe its terms, and that is something from which I would refrain from undertaking.

96 That evidence as to surrounding circumstances inclusive of practices, prevailing at the time the subject agreements were made, duly demonstrates that Microsoft distributes computer programs, in particular its operating systems (such as Windows XP), to customers through two ‘channels’ (that not being a term appearing in any of the relevant agreements here in issue), the raison d’être for that separation being the two different ways in which a consumer may obtain the program. If the consumers have an existing version of a Microsoft operating system installed on their computer system and would seek to upgrade the same to a more recent version, they may purchase the operating software system ‘off the shelf’ as a stand-alone product and install it themselves onto their computer system. In this sense, ‘stand-alone’ means that the Microsoft computer program is obtained by a consumer without also purchasing a new or second-hand computer system (involving hardware, etc). In the case of Microsoft computer programs (in particular Microsoft operating systems) purchased through the OEM channel, those programs are provided as already installed onto the hard-drives of new or second hand computers. The consumer hence pays for a computer system which has already an operating system installed onto its hard-drive. The evidence was further to the effect that the programs distributed ‘stand-alone’ came in coloured, highly presentable boxes, whereas programs distributed through the OEM channel are embodied in flat packages provided to OEMs in multi-packs. Differences in packaging thus reflect the differing ways in which the product is marketed to, and consumed by, the customer. There was no evidence provided by either the applicants or the respondents to the effect that the programs thus acquired differed in any other sense. It is therefore to my mind appropriate to appraise or otherwise consider programs distributed in the OEM channel as merely programs sold pre-installed onto a computer system, as opposed to programs sold separately.

97 The process by which programs are reproduced and distributed in the OEM channel of distribution was explained variously by Mr Walker, Ms Brasier, and Mr Kolb, as I have summarised already. It is sufficient to observe that the evidence was to the effect that the OEM channel is controlled extensively by Microsoft through a patchwork of licensing agreements, whereby programs are mass produced in each geographical region in which Microsoft programs are sold by authorised replicators. Those authorised replicators are bound to produce those programs in specified ways, involving particular requirements as to packaging. They are also prohibited from distributing the finished programs to entities other than Microsoft distribution agents, who are themselves the subject of licensing agreements in favour of Microsoft. The extent of the complexity whereby Microsoft distributes computer programs through the OEM channel need not be elaborately described, it being sufficient to observe that its operation requires reproduction of computer programs by entities other than Microsoft and its subsidiaries, and additionally the publication and sale thereof by other entities similarly outside of the Microsoft corporate group.

98 Part III of the Parent-Subsidiary Agreement provides for the provision from time to time of ‘corporate and other services’ by MLI to Microsoft and vice-versa, and nothing turns on its provisions. Part IV of the Agreement, entitled ‘General Provisions’, provides for the term thereof, being ‘the life of all copyrights and patents related to the MS Software Products licensed under Section 2.1 of this Agreement and until all proprietary and confidential information and know-how related to such products enters the public domain.’ Clause 4.2 is the provision dealing with prior agreements which I have already summarised Clause 4.5 entitled ‘Preventing Unauthorized Copying’ contains an undertaking by MLI to use its best efforts to prevent, investigate and prosecute any unauthorized copying of Microsoft products, and it also gives MLI the right to institute and conduct legal proceedings to protect against infringement of its rights under the Parent-Subsidiary Agreement.

99 Also of importance is cl 4.7 of the Parent-Subsidiary Agreement, entitled ‘Trademarks, Service Marks and Trade Names’. Clause 4.7(a) grants rights to MLI to use Microsoft’s trademarks, service marks and trade names ‘in conjunction with the sale and distribution of MS Software Products…but only in connection with [MLI’s] distribution of MS Software Products in the OEM market contemplated hereunder…such rights shall be exclusive vis-à-vis [Microsoft] and third parties…’. Clause 4.7(b) provides that ‘the nature and quality of all products and services with which such marks are associated, the business with which such trade name(s) are associated, and the form and manner of use of marks and trade name(s) shall be subject to the control of [Microsoft]’; that clause thereafter requires that ‘any MS Software Products licensed by [MLI]’ must be packaged in accordance with Microsoft’s requirements, and be of good workmanship and quality with the intent that the quality of the software distributed by OEMs will be equivalent in quality to the software distributed by [Microsoft] to the general public…’.

100 Those latter provisions accord with the evidence as to distribution in the OEM channel to which I have referred on several occasions already, notably as regards the control that Microsoft asserts over all stages of that distribution process, particularly in relation to packaging. Moreover cl 4.7 tends to exemplify the parties’ objective intention to limit the scope and operation of the license grant made to MLI under cl 2.1. MLI’s rights to use Microsoft’s trademarks and similar intellectual property are ‘only [granted] in connection with [MLI’s] distribution of MS Software Products in the OEM market contemplated hereunder’; what is thus ‘contemplated hereunder’ is explained further in cl 4.7 as being ‘in connection with [MLI’s] activities authorized pursuant to this Agreement’, and those activities are stated to be ‘the sale and distribution of MS Software Products’ (my emphasis). Significantly, no reference is made to any grant of rights of use of Microsoft’s trademarks to MLI in relation to the creation of software programs or ‘derivative works’ by MLI. I would infer the reason therefor to be that no such creation of programs by MLI was contemplated by the parties, with the consequence ‘derivative works’ may be seen to be not intended to carry the meaning contended for by the respondents.

101 Part II of the Parent-Subsidiary Agreement, which is headed ‘Manufacturing and distribution of MS retail software products’, contains cl 2.1 which I have earlier extracted and the interpretation whereof is critical to the resolution of the respondents’ challenge to Microsoft’s ownership of copyright in Windows XP Home and Windows XP Pro. In construing cl 2.1 I think it is important to bear particularly in mind the cl 1 definition of ‘MS Software Products’, which I have already discussed and in relation to which I have emphasised its breadth. It is tolerably clear that the definition of ‘MS Software Products’ was not intended by the agreement to be static: so much appears from the description therein as to ‘all MS Corp computer software products that are generally made available by MS Corp for commercial distribution anywhere in the world during the term of this Parent-Subsidiary Agreement’. There is some circularity in the definition of the term of the agreement; cl 4.1 provides that the agreement will continue in effect for the ‘life of all copyrights and patents related to the MS Software Products licensed under section 2.1 of this Agreement…’; thus words ‘made available by MS Corp’ in the definition of MS Software Products suggest some ongoing practice as to provision by Microsoft of new or updated software products. Further support for that interpretation of ‘MS Software Products’ is provided by cl 2.2, entitled ‘Distribution’, which reads as follows (my emphasis appears in non-italics):

‘[Microsoft] shall provide [MLI] with such physical materials (including but not limited to master diskette or CD copies of all MS Software Products) and shall permit [MLI] to reproduce and otherwise use the same to the extent necessary and appropriate for [MLI] to exercise its rights under Section 2.1 above. If and when [Microsoft] releases new products to be licensed by [MLI], and/or successor versions or updates to products which have been previously distributed by [MLI], or the like, [Microsoft] shall provide [MLI] with new or updated master diskettes, as the case may be.’

Thus it may be seen that the parties contemplated the provision to MLI by Microsoft of master copies of newly developed software or updated versions in order for MLI to exercise its rights under cl 2.1.

102 In the light of the foregoing matters of documentary construction, it is not correct to attribute to the expression ‘MS Software Programs’ what may be described as the stationery meaning contended by the respondents. It was clearly not the parties’ intention for the body of programs comprising ‘MS Software Products’ to come to a standstill at a certain point in time, being 31 December 1997 when the Parent-Subsidiary Agreement took effect, such that any additional software programs produced thereafter would be ‘derivative works’ of those original programs. It was furthermore the basis of the licence thereby granted that Microsoft would continue to develop software products into the future, that those products if and when created would be ‘MS Software Products’ for the purposes of the Parent-Subsidiary Agreement, and that MLI would exercise its rights under cl 2.1 thereof to enter into further agreements (referred to therein as authorized replicator agreements and OEM agreements) to facilitate the mass reproduction of those programs and their distribution per medium of installation onto new or second hand computer systems by OEMs.

103 Accordingly I am not persuaded by the respondents that ‘derivative works based on MS Software Products’ (see again cl 2.1(i)) was intended to refer to all software programs, subsequently developed from 31 December 1997 onwards, that were either new or updated versions of programs contained within the body of programs countenanced by ‘MS Software Products’. It follows that the respondents have not shown, whether by way of evidence or otherwise, that Windows XP Home and Windows XP Pro were ‘based on MS Software Products’. The respondents have similarly failed to show how those programs were ‘appropriate to customize the respective MS Software Products for the particular needs of each OEM’, using the language of cl 2.1(i) which grants MLI the exclusive right to create ‘derivative works’. The applicants submitted rightly that the onus of establishing the former lay with the respondents by reason of the operation of the presumptions raised by ss 128, 126A and 126B of the Copyright Act. There was no significant or realistic attempt made by the respondents to essay an interpretation of the critical words ‘… as appropriate to customize the respective MS Software Products for the particular needs of each OEM’.

104 The applicants relied upon the content of the MOU, the validity of which was challenged by the respondents for the reasons I have earlier recorded. As I have already indicated, it is readily apparent that an inference of contemporaneity of execution should be drawn, and I would reject the proposition that the MOU was a ‘prior agreement’ within the meaning of that expression appearing in cl 4.2 of the Parent-Subsidiary Agreement. The MOU does not purport to vary or qualify the Parent-Subsidiary Agreement but to ‘clarify… [the parties] intention as to the scope of the License with respect to MS Hardware Products and other matters’. It is I think an entirely insupportable proposition raised by the respondents to the effect that it was the parties’ intention that the MOU, indicating as it does at the outset the mutual acknowledgement of those same parties as were parties to the Parent-Subsidiary Agreement (and thus to the ‘License’ contained therein), and thereafter reciting the desire of those parties ‘to clarify their intention as to the scope of the License with respect to MS Hardware Products and other matters, as described further in this Memorandum of Understanding’, could conceivably be described as superseded and terminated as soon as the Parent-Subsidiary Agreement took effect. The absence of any explicit provision for the MOU to take effect from 31 December 1997 is not definitive; such a term would be necessarily implied, given that the evident reason for the MOU was to clarify the scope of the license the subject of the Parent-Subsidiary Agreement.

105 It is therefore significant that cl 3(b) of the MOU purported to clarify the mutual intention of the parties that the ‘License’ granted under cl 2.1(i) of the Parent-Subsidiary Agreement to create derivative works ‘be limited to the particular needs of each OEM for distribution as part of OEM packages’ (emphasis in original). The expression ‘OEM packages’ is defined in the Parent-Subsidiary Agreement to mean ‘a collection of software and/or related documentation selected by an OEM and distributed by an OEM as an integral element of certain of the OEM’s Computer Systems, pre-installed on the hard drive or ROM and/or on an external medium (such as a diskette or CD-ROM) included as part of the Computer System package’. ‘Derivative works’ is defined in cl 3(a) of the MOU as ‘any and all intellectual property or other proprietary rights, including but not limited to patent, copyright, trade secret and trademark, created or derived from MS Software Products, MS Hardware Products, and any other product subject to the License.’ Reading those two passages of the MOU together, and bearing in mind that emphasis so appearing in the text of the MOU, a limited scope or meaning for ‘derivative works’ is thereby indicated by way of something incidental to the process of manufacture and distribution of MS Software Programs. Without direct admissible evidence of what constituted ‘derivative works’ at the time of execution of these controversial instruments, the term is not susceptible to an entirely definitive construction (Cameron & Co v Slutzkin Pty Ltd (1923) 32 CLR 81 at 86 per Knox CJ).

106 Nevertheless, construing the expression ‘derivative works’ in the context of the other operative provisions of the Parent-Subsidiary Agreement and cl 2.1 in particular, and in the light of the evident purpose of cl 2.1 which I have indicated, I do not accept that ‘derivative works’ include the ‘OEM products’ that the respondents postulate to be the subject of the current proceedings. As I have foreshadowed, the apparent purpose of cl 2.1 apparent from, inter alia, the definitive provisions of the Parent-Subsidiary Agreement and the objective background and commercial aims and practices informing that agreement, was to confer the necessary authority, inclusive of copyright protection, upon MLI in relation to ‘Manufacturing and Distribution of MS Retail Software Products’ (to pick up the heading to Part II of that Agreement), and thus to facilitate the activities of Microsoft’s authorised replicators and distributors operating in the OEM channel.

107 I conclude that upon the true construction of the Parent-Subsidiary Agreement, whether read alone or in combination with the MOU, Microsoft did not thereby transfer to MLI the copyright relating to the subject programs under or pursuant to those instruments, much less did it ‘irrevocably divest’ itself of the right to make ‘derivative works’, being ‘derivative works’ which were not ‘OEM products’ such as or including Windows XP Home and Windows XP Pro. All that was effected under and by virtue of that instrument was the grant to MLI of those rights necessary to enable MLI to sub-license in turn to other entities in turn those rights necessary to facilitate the reproduction of computer programs and other products created by Microsoft and their distribution to the public per medium of OEMs, and to do so during the term of the agreement. The relevant works here in issue comprise Windows XP Home and Windows XP Pro, whether distributed in the OEM or the retail channel, there being no relevant difference in those works other than their process of packaging, as I have earlier emphasised by reference to the false analogy of copyright prevailing in one State of Australia and a different copyright prevailing in another State. Of course the infringements that are here alleged by the applicants were committed in respect of those programs as distributed per medium of OEMs.

(iv) The applicants’ further submissions

108 Upon the assumption, contrary to the conclusions that I have therefore reached, that Windows XP Home and Windows XP Pro should be found to be ‘customize[d]’ and ‘derivative works’ within clause 2.1 of the Parent-Subsidiary Agreement, and that MLIhad the exclusive right, at least as against Microsoft and the other two applicants, to make those two computer programmes at the relevant times, so much did not necessarily mean, so the applicants submitted in any event, that Microsoft could not have been nevertheless the author according to law. The applicants emphasised in that regard that the identity of the author of a copyright work for the purposes of the Copyright Act is to be determined by reference to the person who actually created the work, and not by reference to the person who might have had the legal right to create the work, and referred generally to Wood v Boosey (1868) LR 3 QB 223 at 229-30, in which it was held that there was a separate copyright in an adaptation owned by the author of that adaptation, despite the fact that in so doing, the author infringed copyright in the underlying work. The applicants referred for further illustration of that principle to the decision of the High Court of New Zealand in Fiscal Technology Co Ltd v Johnson (1991) 23 IPR 555, in which the author of an adaptation was held by Henry J to have breached a contract by creating that adaptation (as well as infringing the copyright in the underlying work). His Honour nevertheless considered that the owner of copyright in the underlying work had no proprietary rights in the adaptation made in breach of the contract (at 562-3), owing to the skill that was applied in its creation (thereby following Redwood Music Ltd v Chappell & Co Ltd [1982] RPC 109). The applicants rightly pointed out that no evidence was adduced by the respondents as to MLI having sought to enforce against Microsoft any such alleged contractual right of authorship, whether by way of specific performance or otherwise, in a manner which would have prevented Microsoft from asserting authorshipof Windows XP Pro and Windows XP Home within the operation of s 35(2) of the Copyright Act, and thus ownership of any copyright subsisting in the work…

109 Even assuming that the respondents had established, contrary to my foregoing conclusion, that Microsoft was not the author of Windows XP Home and Windows XP Pro, the applicants submitted that so much was not sufficient to prove on the balance of probabilities that Microsoft was not the owner of copyright in those programs, as they are required to do to displace the effect of s 128. This was said to be because the existence of ownership does not necessarily follow from authorship, since it is typical for ownership of copyright to reside with a person other than the author; the applicants submitted that this was exemplified by the statutory notion of assignment of ownership of copyright from author to owner by virtue of employment under s 35(6) of the Copyright Act.

110 Finally the applicants submitted that all right, title and interest in and to ‘derivative works’ had been assigned to Microsoft by virtue of cl 3(a) of the MOU in the manner which I have described above and alternatively that MLI had merged into Microsoft as of 2 September 2003, being a submission I have earlier recorded but need not address.

111 Since I have reached conclusions on the construction of cl 2.1 to the contrary of those submitted by the respondents, it is not strictly necessary for me to deal with those further submissions made by the applicants in the alternative, and I will refrain from so doing.

The respondents’ contention that MLGP failed to obtain a legally effective assignment of MLI’s exclusive rights to sue for infringement of copyright

112 As foreshadowed, the respondents challenged in the alternative MLGP’s standing to sue for infringement of copyright upon the basis pleaded in [2.7]-[2.8] of the respondents’ amended defence as follows:

‘2.7 In the further alternative by virtue of an agreement referred to by the applicants as the “Contribution Agreement”, on 1 September 2003 the third applicant [MLGP] took assignment from Microsoft Licensing Inc [MLI] of the rights to sue for, and recover damages for, infringements of alleged copyright (which is not admitted) in Microsoft products distributed in the OEM channel, which include the relevant programs, whether such infringements occurred before or after 1 September 2003.

2.8 No written notice of the assignment referred to in paragraph 2.7 was given to any of the respondents and, by virtue of the provisions of s 12 of the Conveyancing Act the assignment of the choses in action is an equitable assignment, in respect of which none of the applicants are entitled to sue for, and recover damages for, infringements of alleged copyright in the relevant programs occurring before or after 1 September 2003.’

113 The effect of the respondents’ original contention on this alternative area of challenge was that by reason of the applicants’ failure to notify the respondents in writing of the assignment of the right to sue and recover damages for infringement of copyright made under the Contribution Agreement prior to the commencement of proceedings, that assignment took effect in equity only, it not being compliant with s 12 of the Conveyancing Act. Accordingly, MLGP as equitable assignee was not entitled to sue for damages for infringement of copyright in relation to Windows XP Home or Windows XP Pro, insofar as infringement occurred on the respondents’ part before or after 1 September 2003, given the hypothesis of this segment of issues that the Parent-Subsidiary Agreement did not have the scope of operation in favour of MLI for which the respondents primarily contended.

114 During the course of closing submissions, counsel for the respondents conceded that their challenge to the standing of MLGP in respect of infringements occurring after 1 September 2003 lacked efficacy. That concession was expressed during oral submissions as follows (Transcript, 3 March 2005, p 67):

‘…I think my learned friend is correct when he makes the submission that the section 12 assignment point [that is, the respondents’ challenge] is only relevant to infringements that would have occurred before 1 September 2003. Infringements that occurred after 1 September 2003 on the agreements that are exhibited, Microsoft Licensing, GP was the exclusive licensee in relation to the relevant programs and has standing as exclusive licensee to sue for copyright eventually…’

The relevant segment of the applicants’ oral submissions referred to above reads as follows (Transcript, 3 March 2005, p 32):

‘… and the reason your Honour can do that [that is, disregard the section 12 Conveyancing Act challenge in respect of MLGP’s standing to sue for infringements occurring after 1 September 2003] … is that for that period - that is after September 2003 – present on the masthead of the proceedings are both the exclusive licensee for that period and the owner of the copyright for that period, because the evidence shows - clear evidence given by Mr Fay… and with documents - that Microsoft Licensing, Inc, which your Honour knows was the former exclusive licensee, which assigned its rights to [Microsoft] Licensing GP in September 2003, has merged back into and become part of and is in fact now Microsoft Corporation. So Microsoft Corporation has absorbed by the American process of merger, Microsoft Licensing, Inc into itself, so there is no lack of constitution of the proceedings for that period. Microsoft Corporation stands as the owner and the exclusive licensee…’

115 The infringements alleged to have been made by the respondents prior to 1 September 2003 were referred to by the applicants as the ‘undetected infringements’. The existence of those infringements was said to be evident by inference from the ‘boastings’ made by various of the respondents about the size of their turnover of Windows XP Home and Windows XP Pro during that period and from financial records of PC Club in evidence. It was the applicants’ alternative submission that damages in respect of those infringements should be awarded on the mantle of additional damages pursuant to s 115(4), rather than ‘damages’ generally pursuant to s 115(2). If damages were awarded on that alternate basis, the entire s 12 Conveyancing Act challenge was said to disappear, since the applicants would not be thereby awarded damages in respect of an established infringement.

116 By reason of those oral submissions that I have extracted above, it appears that the respondents conceded that MLGP was an exclusive licensee in possession of statutory rights of action pursuant to s 119 of the Copyright Act in respect of acts of infringement of copyright occurring post-1 September 2003. The fact that MLGP as assignee of the relevant chose in action, as well as Microsoft as effective assignor as a result of the earlier merger of MLI into Microsoft, were both parties to the current infringement action, was mutually accepted by the parties as another basis for the respondents’ concession. The applicants’ written submissions in reply, filed after the oral submissions referred to above had been delivered in Court, do not appear to apply the same reasoning to the infringements allegedly occurring prior to 1 September 2003. No clear reason for this position appears from those submissions. However as I have already recorded, the applicants’ alternative position on those ‘undetected infringements’ was that they could be remedied through the discretionary grant of s 115(4) additional damages, rather than on the basis of damages for infringement per se under s 115(2). Accordingly the resolution of this ‘challenge’, such as may remain, is potentially of only peripheral importance.

117 In Taypar Pty Ltd v Santic (1989) 21 FCR 485 at 491, Spender J held that an assignee of copyright is not competent, by reason of that assignment alone, to bring an action in respect of an infringement of that copyright that occurred prior to his or her becoming the owner of the copyright. The assignment in that case did not purport to operate retrospectively; his Honour there observed: ‘[i]n particular there was no assignment or purported assignment of any right to litigate in respect of earlier breaches of the copyright’. Moreover the circumstances of this case are not similar to those involved for instance in Dixon Projects Pty Ltd v Masterton Homes Pty Ltd (1996) 36 IPR 136, where the applicant failed to establish that at the time it commenced proceedings for infringement, it did not hold an interest in the copyright, the assignment of ownership not having been given proper written effect for some months following the filing of the Court application.

118 Taypar and Dixon Projects were both recently distinguished in Global Brand Marketing Inc v Cube Footwear Pty Ltd (2005) 65 IPR 44, where the respondent sought to have the originating application struck out on a number of bases, one of which was the lack of entitlement of the applicant to sue for infringement of copyright. One of the applicant’s asserted bases for its claim in copyright was a retrospective deed of assignment of copyright whereby some two months after the commencement of the proceedings, the owner of copyright assigned:

‘(a) any and all rights, title and interest it may own, in the copyright and all other intellectual property rights subsisting in the Works; and

(b) all rights and immunities relating to, or arising, or to arise from any of the copyright subsisting in the Works, including all past, present and future rights to sue for infringement of the copyright and all other intellectual property rights in the Works.’

In dismissing the strike-out application, Goldberg J considered that it was at least ‘arguable’ that both Taypar and Dixon Projects were distinguishable from the circumstances there before his Honour, on the basis that neither of the purported assignments in dispute in those authorities were expressed to operate retrospectively. Furthermore, referring to the applicant’s description in its statement of claim of the subject of the assignment being of ‘all past, present and future rights to sue for infringement of the copyright and all other intellectual property rights in the said [works]’, Goldberg J considered it likewise arguable that the assignment was not of a ‘bare right of action’ but ‘of a right which is incidental to the assignment of intellectual property rights’ (at [59]).

119 By cl 2 of the Contribution Agreement, MLI (referred to therein as ‘MSLI’) purported to ‘contribute’ (by which term I take to mean ‘transfer’) to MLGP (referred to therein as ‘GP’):

‘all of its assets, of whatever kind or nature, including but not limited to its rights, titles and interests in its OEM licensing business, all cash, tangible assets, Contracts, employees and Employee Plans…liabilities, the OEM License, and all other assets other than the Excluded Assets (collectively, the “Contributed Assets”) to GP, in each case for and in respect of the entire world.’

The ‘OEM License’ was defined in cl 1 of the Contribution Agreement to mean all rights under the Parent-Subsidiary Agreement entered into between Microsoft and MLI effective 31 December 1997. Cl 2.1 of the Parent-Subsidiary Agreement relevantly provided that MLI would have the exclusive license:

‘(iii) to reproduce MS Software Products…as appropriate for the incorporation of MS Software Products…in, and for distribution thereof as part of, OEM Packages...’

Cl 4.5(b) of the Parent-Subsidiary Agreement provided that MLI ‘shall have the right to institute and conduct suits to protect against infringement of its rights under this agreement and shall have the right to retain all recoveries therefrom.’

120 The assignment to MLGP of that contractual right held by MLI under cl 4.5(b) to institute suits to ‘protect against infringement of its rights under’ the Parent-Subsidiary Agreement was not the basis upon which the applicants contended that MLGP had a right to sue in respect of the acts of infringement allegedly committed by the respondents. Rather, the applicants relied solely upon the fact that the right of an exclusive licensee to sue for infringement of a right comprised in the copyright, which is the subject of an exclusive licence (here the right of reproduction contained in cl 2.1(iii) of the Parent-Subsidiary Agreement), arose from s 119 of the Copyright Act. Section 119(a) provides relevantly:

‘except against the owner of the copyright, the exclusive licensee has the same rights of action as he or she would have, and is entitled to the same remedies as he or she would be entitled to, by virtue of section 115 if the licence had been an assignment, and those rights and remedies are concurrent with the rights and remedies of the owner of the copyright under that section…’

Section 119(b) provides in similar terms in respect of the rights of action and remedies contained in s 116. The expression ‘if the license had been an assignment’ appearing in s 119 is defined in s 117 as follows:

‘if the licence had been an assignment means if, instead of the licence, there had been granted (subject to conditions corresponding as nearly as practicable with those subject to which the licence was granted) an assignment of the copyright in respect of its application to the doing, at the places and times authorized by the licence, of the acts so authorized.’

That is to say, if the Parent-Subsidiary Agreement (and the licence granted by cl 2.1 therein) had constituted an assignment, MLI would have been the owner of, inter alia¸ that part of the copyright which comprised the right to reproduce MS Software Products as part of OEM Packages (cl 2.1(iii)). Thus the applicants submitted, cl 2 of the Contribution Agreement had the effect of assigning to MLGP the s 119 statutory right held by MLI in respect of acts of infringement of the reproduction right contained in cl 2.1(iii) of the Parent-Subsidiary Agreement.

121 What was assigned by the Contribution Agreement was, inter alia, a bundle of contractual rights held by MLI in relation to Microsoft and in particular, an exclusive license to reproduce MS Software Products. Assuming that prior to 1 September 2003, the respondents committed infringements of copyright in Windows XP Home and Windows XP Pro by reproducing copies of those programs without the licence of MLI (as is alleged by the applicants), a cause of action accrued in respect of each separate act of infringement. By virtue of s 119 of the Copyright Act, MLI was entitled, as the then exclusive licensee of the right of reproduction, to sue and recover damages from the respondents pursuant to s 115 of the Copyright Act.

122 It did not follow therefore that because under the Contribution Agreement, MLGP was assigned the exclusive right of reproduction, or even the right to institute proceedings in respect of infringements of that right under cl 4.5(b) of the Parent-Subsidiary Agreement or under s 119 of the Copyright Act, that MLGP was thereby conveyed the right to sue for those infringements occurring prior to the date on which the Contribution Agreement took effect. In this respect, Mr Fay’s evidence misstates the effect of the Contribution Agreement insofar as it purports to assert that MLGP thereby obtained an assignment of the rights to sue and recover damages for infringements of copyright in Microsoft products distributed in the OEM channel, in circumstances where those infringements occurred before 1 September 2003.

123 Insofar as MLI’s statutory right of action pursuant to s 119 in respect of those ‘undetected infringements’, that is, those committed prior to 1 September 2003, was an ‘asset’ within the terms of cl 2 of the Contribution Agreement, that ‘asset’ was assigned or transferred to MLGP on 1 September 2003. However so much would appear to amount to an assignment of a bare right of action and as such arguably fell foul of the public policy against maintenance and champerty: see Taypar Pty Ltd at 491-2. The issue therefore boils down to whether or not the assignment of that bare right of action in respect of undetected infringements can be said to constitute ‘the assignment of a right which is incidental to the assignment of intellectual property rights’: see Global Brand Marketing at [59], or whether it can be said that MLGP had ‘a genuine and substantial interest in the success of the…litigation’: Trendtex Trading Corp v Credit Suisse [1982] AC 679 at 694 (per Lord Wilberforce with whom Lords Edmund-Davies and Keith of Kinkel agreed), or that MLGP had ‘a genuine commercial interest in taking the assignment and in enforcing it for his own benefit’: Trendtex Trading Corp at 703 (per Lord Roskill).

124 It is apparent from the terms of cl 2 of the Contribution Agreement, and in particular the words ‘including but not limited to [MLI’s] rights, title and interests in its OEM licensing business…the OEM License’, that it was the objective intention of the parties to that agreement that MLGP was to take over from MLI the latter’s responsibility for the manufacture and distribution of MS Software Programs in the OEM channel. That being so, MLGP had a ‘genuine and substantial interest in the success of the litigation’ in respect of the undetected infringements, and thus any assignment of the right to sue and recover damages in respect of those infringements fall within the limited justifications for maintenance enumerated by their Lordships in Trendtex Trading Corp, which take such agreements outside of public policy concerns (see also in that regard K Garnett, G Davies and G Harbottle, Copinger and Skone James on Copyright, 15^th edition 2005, at [5-91] and J W Carter and D J Harland, Contract Law in Australia, 4^th edition, 2002 at [1629]). Alternatively, the assignment of the right to sue for those undetected infringements may also be viewed as incidental to the grant of all of the intellectual property rights held by MLI vis-à-vis Microsoft, such as they were, by virtue of the Parent-Subsidiary Agreement, and accordingly there was no illegal maintenance.

125 The issue that then arose was whether the assignment to MLGP of MLI’s right to sue in respect of the infringements occurring prior to 1 September 2003 took effect solely in equity by reason of the operation of s 12 of the Conveyancing Act.

126 Section 12 of the Conveyancing Act 1919 (NSW) provides relevantly as follows:

‘Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee, or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be, and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this Act had not passed) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same without the concurrence of the assignor…’

127 The respondents contended that what was assigned by MLI to MLGP pursuant to the Contribution Agreement were ‘the rights to sue for, and recover damages for, infringements of copyright in Microsoft programs distributed in the OEM channel, whether such infringements occurred before or after 1 September 2003’, citing verbatim the description of that aspect of that Agreement contained at [6(b)] of Mr Fay’s affidavit of 19 August 2004 which I have already described as mistaken insofar as it relates to infringements occurring prior to 1 September 2003. The respondents relied upon that ‘evidence’, and submitted that so much was not an assignment of copyright under s 196 of the Copyright Act, but rather an assignment of a ‘chose in action’ not governed by the provisions of the Copyright Act. As I have already indicated, the applicants relied upon the assignment of the causes of action under s 115, etc acquired by MLI upon the commission of the undetected acts of infringement. Those rights of action arose under s 119, by virtue of MLI being an exclusive licensee in respect of the copyright infringed, that being the relevant right of reproduction. In those circumstances the applicants’ submitted that s 12 of the Conveyancing Act was inapplicable to assignments of copyright interests, by reason of s 196 of the Copyright Act providing otherwise.

128 Section 12 of the Conveyancing Act is ‘picked up’ as a surrogate federal law for operation within the scope of the federal jurisdiction exercised by the Federal Court in the State of New South Wales, unless the Constitution or the laws of the Commonwealth otherwise provide: s 79 of the Judiciary Act 1903 (Cth) and Commonwealth v Mewett (1997) 191 CLR 471 at 506 (Dawson J), 523 (Gaudron J), and 554 (Gummow and Kirby JJ). Section 79 is in the following terms (my emphasis appears in non-italics):

‘The laws of each State or Territory, including the laws relating to procedure, evidence, and the competency of witnesses, shall, except as otherwise provided by the Constitution or the laws of the Commonwealth, be binding on all Courts exercising federal jurisdiction in that State or Territory in all cases to which they are applicable.’

129 It has been said that in determining whether the laws of the Commonwealth otherwise provide, so that the State or Territory law are not accordingly ‘picked up’, it is necessary to enquire:

‘…whether the operation of the former [that is, of the law of the Commonwealth said to ‘otherwise provide’] so reduces the ambit of the latter [that is, of the relevant State or Territory law] that the provisions of the [former] are irreconcilable with those of the [latter], with the result that the [former] otherwise provides.’

See Northern Territory v GPAO (1999) 196 CLR 553 at 588 (per Gleeson CJ and Gummow J).

130 The relevant question is therefore whether the provisions of the Copyright Act dealing with exclusive licensees and total and partial assignments of copyright, particularly s 196, have an operation that renders them ‘irreconcilable’ with s 12 of the Conveyancing Act.

131 The combined effect of ss 119 and 117, which I have extracted above, is to treat, subject to the remainder of the Copyright Act, any exclusive licence granted in respect of a right comprising copyright as if the bestowal of that exclusive right had been an assignment. So much is necessary because the rights of action contained in ss 115 and 116 use the language of the ‘owner of copyright’. Thus the applicants submitted that MLI, and hence MLGP, which was assigned all of MLI’s rights, titles and interests relevantly under the Parent-Subsidiary Agreement as at 1 September 2003 by virtue of cl 2 of the Contribution Agreement, was to be treated for the purposes of ss 115 and 116 of the Copyright Act as the owner of the right to reproduce copies of MS Software Products for distribution of the same in the OEM channel.

132 Assignments of copyright are regulated by s 196 of the Copyright Act, which is in the following terms:

‘(1) Copyright is personal property and, subject to this section, is transmissible by assignment, by will and by devolution by operation of law.

(2) An assignment of copyright may be limited in any way, including any one or more of the following ways:

(a) so as to apply to one or more of the classes of acts that, by virtue of this Act, the owner of the copyright has the exclusive right to do (including a class of acts that is not separately specified in this Act as being comprised in the copyright but falls within a class of acts that is so specified);

(b) so as to apply to a place in or part of Australia;

(3) An assignment of copyright (whether total or partial) does not have effect unless it is in writing signed by or on behalf of the assignor.

(4) A licence granted in respect of a copyright by the owner of the copyright binds every successor in title to the interest in the copyright of the grantor of the licence to the same extent as the licence was binding on the grantor.’

133 I have placed emphasis on subsection (3) above, because that was said by the applicants to be the only formal requirement of an assignment of copyright provided by the Copyright Act. Since both the Parent-Subsidiary Agreement and the Contribution Agreement met that requirement, there could be no issue, so ran the applicants’ submission, that the assignments effected thereby were other than legally efficacious.

134 Comparing s 12 of the Conveyancing Act to s 196 of the Copyright Act, it is clear that both stipulate requirements for the effective transfer of choses in action. It was not in dispute that copyright is a chose in action: see Taypar and J G Starke, Assignment of Choses in Action in Australia, 1972 at [95]. The requirements of s 12 exceed those in s 196, in that s 196 does not require that notice of the assignment be given to the debtor, trustee, or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action. Clearly in my opinion, the Legislature, by the enactment of s 196 of the Copyright Act, made an intentional choice to limit the formal requirements of assignments of copyright, and therefore the existence of the more substantial requirements contained in s 12 of the Conveyancing Act are in conflict with that legislative development. Section 196 of the Copyright Act hence ‘otherwise provides’ for the purposes of s 79 of the Judiciary Act 1903 (Cth). Thus in enacting s 196 of the Copyright Act, the Legislature may be rightly said to have impliedly repealed the operation of s 12 of the Conveyancing Act 1919 as surrogate federal law applying by virtue of s 79 of the Judiciary Act: see University of Wollongong v Metwally (1984) 158 CLR 447 at 463 (per Mason J) and Northern Territory v GPAO (supra) at 588 (per Gleeson CJ and Gummow J). Accordingly, there was no requirement for the respondents to have been notified in writing or at all of the assignment to MLGP from MLI pursuant to the Contribution Agreement, and the respondents’ challenge to MLGP’s standing, limited as that challenge now is in any event, must fail.

135 This result is overwhelmingly desirable from a public policy perspective, apart from the requirements of legal analysis. If the respondents’ contention had been correct, and s 12 of the Conveyancing Act did impose additional formal requirements on assignments, it would mean that every time an exclusive licence was to be assigned, all persons who may in the past have infringed or in the future may infringe copyright (depending on the terms of the assignment) would need to be given notice of that assignment prior to the commencement of infringement proceedings. Plainly such notice might have adverse strategic effects for copyright plaintiffs, and it would add a significantly additional burden for wronged copyright owners, particularly in respect of widely distributed products such as the current software programs here in issue.

136 In the result, it becomes unnecessary to resolve the conflicting submissions of the parties as to whether notice was given by or on behalf of the applicants of the assignment effected by the Contribution Agreement prior to commencement of the proceedings, and it suffices to dispose of the present issue addressed above to the extent and for the reasons which I have set out above.

The copyright issues falling for resolution consequentially upon the findings in favour of the Microsoft applicants in relation to entitlement to sue for infringement of copyright in the subject computer software products

137 These issues were broadly framed by the applicants as follows, consequentially upon infringement of the copyright by any one or more of the respondents being established:

(i) whether injunctive relief should be granted and either an award of damages made or an account of profits ordered pursuant to subsection (2) of s 115 of the Copyright Act, for infringement of copyright within that subsection, against any one or more of the respondents;

(ii) whether that infringement of copyright on the part of any one or more of the respondents was such as to attract the operation of subsection (3) of s 115 of the Copyright Act, and thus the grant of relief by way of an account of profits in lieu of damages, whether or not any relief other than damages is granted;

(iii) whether an award of additional damages should be made against any one or more of the respondents pursuant to subsection (4) of s 115 of the Copyright Act.

138 The respondents conceded that the applicants, or at least Microsoft, are or is (as the case may be) entitled to injunctions at least against PC Club, in the event of establishment of breach of copyright, but denied or at least put the applicants to proof of entitlement of damages and an account of profits. That would appear to reflect the position adopted by the respondents by their following opening submission recorded under the heading ‘Damages for copyright infringement’:

‘If the applicants are entitled to damages which is denied (and necessarily means that the court rejects the respondents’ case on innocent infringement), the applicants’ claim for US$1.83 million is grossly inflated. It is based upon incorrect assumptions as to the number of computer software products sold (or more correctly pre-loaded onto computers sold). The calculation assumes that the number of “infringing sales” made by [PC Club] is “at least 24,419”. This amount is then multiplied by US$75,00.’

139 For ease of reference, I set out below the full text of s 115 of the Copyright Act, which is the source of the relief sought by the applicants in respect of infringements of copyright in Windows XP Home and Windows XP Pro:

‘115 Actions for infringement

(1) Subject to this Act, the owner of a copyright may bring an action for an infringement of the copyright.

(2) Subject to this Act, the relief that a court may grant in an action for an infringement of copyright includes an injunction (subject to such terms, if any, as the court thinks fit) and either damages or an account of profits.

(3) Where, in an action for infringement of copyright, it is established that an infringement was committed but it is also established that, at the time of the infringement, the defendant was not aware, and had no reasonable grounds for suspecting, that the act constituting the infringement was an infringement of the copyright, the plaintiff is not entitled under this section to any damages against the defendant in respect of the infringement, but is entitled to an account of profits in respect of the infringement whether any other relief is granted under this section or not.

(4) Where, in an action under this section:

(a) an infringement of copyright is established; and

(b) the court is satisfied that it is proper to do so, having regard to:

(i) the flagrancy of the infringement; and

(ia) the need to deter similar infringements of copyright; and

(ib) the conduct of the defendant after the act constituting the infringement or, if relevant, after the defendant was informed that the defendant had allegedly infringed the plaintiff’s copyright; and

(ii) whether the infringement involved the conversion of a work or other subject-matter from hardcopy or analog form into a digital or other electronic machine-readable form; and

(iii) any benefit shown to have accrued to the defendant by reason of the infringement; and

(iv) all other relevant matters;

the court may, in assessing damages for the infringement, award such additional damages as it considers appropriate in the circumstances.’

140 At the times material to resolution of the issues arising in the present proceedings, it appears that the sole directors of PC Club were Mrs Lee and Mr Fang, though each of Mr Lee as well as Mrs Lee and Mr Fang was engaged personally in PC Club’s business operations at those times. Those operations comprise the importation of computer hardware componentry from various sources and the assembly of that componentry into completed products. Once assembled, those products are warehoused and distributed to retailers and government departments. PC Club also imports and wholesales a variety of computer accessories and components. The absence of any officially recorded directorship of Mr Lee to PC Club is not conclusive as to the applicants’ case against Mr Lee personally, nor is the recorded directorship of Mrs Lee or of Mr Fang necessarily conclusive as to their exposure to liability for breach of copyright.

141 Each of the respondents was alleged to have breached s 36 of the Copyright Act, which section reads relevantly as follows:

‘s 36 Infringement by doing acts comprised in the copyright

(1) Subject to this act, the copyright in a literary… work is infringed by a person who, not being the owner of the copyright, and without the licence of the owner of the copyright, does in Australia, or authorises the doing in Australia of, any act comprised in the copyright.

(1A) In determining, for the purposes of subsection (1), whether or not a person has authorised the doing in Australia of any act comprised in the copyright in a work, without the licence of the owner of the copyright, the matters that must be taken into account include the following:

(a) the extent (if any) of the person’s power to prevent the doing of the act concerned;

(b) the nature of any relationship existing between the person and the person who did the act concerned;

(c) whether the person took any reasonable steps to prevent or avoid the doing of the act, including whether the person complied with any relevant industry codes of practice.

…’

142 Section 36 thus defines two species of infringement of literary works. A person will infringe copyright in a literary work if they do any act comprised in the copyright without the licence of the copyright owner, or if they authorise the same. That test enumerated in s 36 was described by Lindgren J in Microsoft Corporation v Auschina Polaris (1996) 71 FCR 231 at 243-245, so far as concerns natural persons involved in the operations relevantly of offending companies, as follows:

‘What seems to underlie this test is the notion that, necessarily, companies can engage in tortious conduct only through human beings, and at least ordinarily, he should, as a matter of policy, be liable.’

That broad exemplification of the test in relation to persons engaged by corporations in management or direction of their affairs has been since adopted in judgments of this Court. As to Mr Lee, the evidence was overwhelming as to his control and direction of decision-making in relation to PC Club’s management and affairs, though all three of Mr and Mrs Lee and Mr Fang were engaged in full time employment duties for the PC Club.

143 Prior to the commencement of PC Club’s operations, it appears that Mr and Mrs Lee were the directors of a company named DAT Computers Pty Limited (‘DAT Computers’), which was deregistered on 17 February 2003 subsequent to the settlement of earlier proceedings for copyright infringement brought by Microsoft on 3 February 1999, and resolved on 12 April 2000. The shareholders of DAT Computers were Mr Lee, Mrs Lee and ‘The Malino Group’ (so-called) and the last place of business of DAT Computers was the present place of business of PC Club, being commercial premises known as Unit 2A, 11-21 Marquet Street Rhodes. Those were the premises where the Anton Piller order made by Whitlam J of this Court was executed against PC Club at the request of Microsoft on 13 July 2004. Mr Lee’s official designation of office in PC Club is that of national sales and marketing manager. It appears that legal ownership of those premises at Rhodes is vested in the corporate trustee of a discretionary trust estate, that corporate trustee being named DAT Property Investment Group Pty Limited, whereof Mr and Mrs Lee are the only shareholders and Mrs Lee and Mr Fang are recorded as the only directors. The proprietary implications of ownership and control of that trust estate are unclear, both by reason of somewhat confusing evidence given by Mr Lee in the course of cross-examination, and the apparent absence of documentary material in evidence, such as the trust instrument. It was said by Mr Lee that PC Club leases the Rhodes property from that corporate trustee, but the lease was not tendered in evidence.

144 The conclusion reasonably open to be drawn from the evidence is that Mr Lee is and has been at all material times in substance and reality the decision-maker in relation to at least the principal operations of PC Club. So much emerges for instance from the testimonial evidence of Hyundai’s Mr Aron Jackson (the chief executive officer of Hyundai MultiCav Australia Pty Limited, a wholesaler of personal computers with whom PC Club sometimes dealt) and Mr Walker and Ms Knox (each of the latter being so-called system builder partner account managers employed by Microsoft), and also of Mrs Lee and Mr Fang. PC Club appears to have been the sole operator of the business and manufacturing operations of computer system building conducted at the Rhodes premises at all material times since the cessation of DAT Computers’ manufacturing operations. The implication to be derived from the evidence in the proceedings is that Mr Lee was effectively the controlling mind of PC Club, and had at least the ultimate call in all major decisions relating to PC Club.

145 As I have foreshadowed, issues arose as to whether apart from the exposure of PC Club as an incorporated entity to the applicants claims, any one or more of the other respondents Mr Lee, Mrs Lee and Mr Fang, individually or together:

(i) authorised the reproduction by PC Club, without the license of Microsoft, of Windows XP Home and Windows XP Pro onto hard disk drives and restore CDs, thereby infringing Microsoft’s copyright pursuant to s 36 of the Copyright Act;

(ii) was a joint tortfeasor with PC Club in relation to its infringements of Microsoft’s copyright and trade mark;

(iii) was a ‘person involved’ in PC Club’s misleading and deceptive conduct within s 75B of the TP Act..

146 As to breach of copyright by any one or more of PC Club and of the other respondents, the authorities speak of contravention of s 36 of the Copyright Act as a statutory tort. In University of New South Wales v Moorhouse (1975) 133 CLR 1, Gibbs J (as he then was) enunciated the following principles as to the operation of the s 36 expression ‘authorizes’, in the context of the long established authorities his Honour there cited (at 13):

‘The word “authorize”, in legislation of similar intendment to s 36 of the Act, has been held judicially to have its dictionary meaning of “sanction, approve, countenance”… It can also mean “permit”, and… “authorize” and “permit” appear to have been treated as synonymous. A person cannot be said to authorize an infringement of copyright unless he has some power to prevent it… Express or formal permission or sanction, or active conduct indicating approval, is not essential to constitute an authorization.’

Jacobs J observed as to the meaning of the same statutory expression (at 21):

‘It is a wide meaning which in cases of permission or invitation is apt to apply both where an express permission or invitation is extended to do the act comprised in the copyright and where such a permission or invitation may be implied. Where a general permission or invitation may be implied it is clearly unnecessary that the authorizing party have knowledge that a particular act comprised in the copyright will be done.’

147 Subsequent authorities have continued to describe the operation of the statutory test concerning ‘authorize’ and its application to particular circumstances in a broad or comprehensive way. Those relied upon by the applicants, for the purpose of imputing personal liability to each of Mr and Mrs Lee and Mr Fang, included the following:

(i) Australasian Performing Rights Association v Tolbush Pty Ltd (1985) 82 FLR 52, where de Jersey J (as he then was) made the following finding:

‘If I enjoin the first defendant, I consider that I should enjoin the second and third defendants, who are directors of the first defendant… Under section 36(1), those who “authorise” infringements of copyright are liable for the infringement. The material before me suggests that the second and third defendants control and operate the first defendant. I consider that I should infer that they effectively run it. That being so, I consider that I should take the view that they, as the natural operatives of the first defendant, have authorised any infringement of copyright of which the first defendant has been guilty.’

(ii) In Auschina Polaris at 242-245, Lindgren J pointed to the need to assess a respondent director’s conduct and its relationship with the company’s infringing conduct; he there postulated as an appropriate test, in order to determine if a director had participated in an infringement, whether the director expressly or implicitly procured or directed the infringing conduct, or made the infringing conduct his own in the sense that the director deliberately wilfully and knowingly pursued a course of conduct that was likely to constitute the infringing conduct or was recklessly indifferent to the risk of it; Lindgren J indicated his preference for the former at 245-246; that ‘directed or procured’ test so enunciated by his Honour has been subsequently followed judicially, and was here invoked by the applicants;

(iii) in Microsoft Corporation v Goodview Electronics Pty Ltd (2000) 49 IPR 578, Branson J agreed with the Auschina test, as did Merkel J earlier in Henley Arch v Clarendon Homes (1998) 41 IPR 443 at 463-4.

148 A similar test for liability under s 75B of the TP Act (1974) (Cth) was summarised by Lee J in Wheeler Grace & Pierucci v Wright (1989) 16 IPR 189 at 209 by reference to par (c) of that section, as follows:

‘Section 75B(c) provides that a person involved in the contravention shall be read as a reference to a person who has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention. Section 75B(c) has been interpreted to require a party to a contravention to be an intentional participant in the sense that he possesses knowledge of the essential elements of the contravention… [citing thereby Yorke v Lucas (1985) 158 CLR 661 (per Mason ACJ, Wilson, Deane and Dawson JJ at 670 and Brennan J at 677)].’

The knowledge required is not knowledge or awareness that the conduct has the capacity to mislead nor knowledge that it may be a contravention of s 52 of the Act. What must be shown to be possessed is knowledge of the elements of the contravention.’

149 It is in the light of those prevailing principles that I will address the testimonial evidence of each of Mr Lee, Mrs Lee and Mr Fang as to their respective involvements or otherwise in PC Club’s alleged infringements of copyright and trademarks, and in PC Club’s alleged contraventions of the TP Act.

The nature and scope of PC Club’s activities of assembly of computer hardware and acquisition of software as explained by Mr Lee

150 The evidence adduced by the respondents concerning the nature and scope of PC Club’s business activities, as I have foreshadowed, was given principally by Mr Lee. It is appropriate that Mr Lee’s assertions and explanations made in his principal affidavit first be summarised, particularly given the respondents’ case as to unintended and unknowing contraventions of copyright. Irrespective of the formalities of PC Club’s governing or decision-making structure, it became readily apparent in the course of the proceedings that Mr Lee was in substance and reality the principal policy director and decision-maker of PC Club’s activities and operations.

151 In what constituted his principal affidavit evidence sworn 27 August 2004, Mr Lee spoke of his sphere of responsibility for PC Club’s business activities as embracing all aspects of sales and marketing, upon the basis whereof he asserted an awareness of ‘each and every item of hardware and software bought by PC Club and each and every computer or PC sold by PC Club, and what software or operating system has been pre-installed on such computers or PCs’. Given the evidently substantial size of PC Club’s manufacturing and distributing operations, that was a significant claim, at least logistically speaking. It was a claim upon the foundation of which he sought to refute any knowledge or intention as to contravention of copyright on the part of PC Club and its directors Mrs Lee and Mr Fang. Mr Lee asserted that as part of his employment duties undertaken for PC Club, he ‘source[d] all components of computer hardware and also software from various sources located in Australia and overseas’, and caused the same to be freighted to PC Club’s factory at Rhodes where each computer, being either a desktop or laptop personal computer, was there assembled. Once the componentry of each computer had been assembled, he said that PC Club might ‘sell the computer without software pre-installed or with software pre-installed’. Mr Lee further explained that PC Club was ‘also involved in sourcing and selling computer components separately as parts, accessories and peripherals for computers including keyboards, mouses, servers, speakers, batteries, cables, monitors, printers, scanners and modems’. Apart from computers, PC Club was also said to be ‘involved in sourcing and selling televisions, mini audio systems, DVD recorders and players and cameras including digital cameras, as well as audio and home theatre systems’.

152 The operation of PC Club’s invoicing and sales record system was further asserted by Mr Lee to have been carried out by him or under his personal supervision and management, commencing from ‘the issuance of the purchase order from PC Club to the receipt of an invoice and the goods relating thereto by PC Club, and the entry of that invoice onto PC Club’s internal computer systems’. He explained that in order to control record and document goods received and sold by PC Club, there was put in place the accounting software known as ‘Dynamic eEnterprises Accountage Package’, which enabled PC Club to trace all products bought and sold by the serial number appearing on the relevant product. He described that system in his affidavit evidence as ‘… crucial for warranty purposes’, and testified that ‘[a]ll warranties issued by PC Club for computers sold by it are linked to the serial number of the relevant computer’, and that accordingly ‘… PC Club can identify the relevant computer and the operating systems software installed on that computer by the serial number’. Upon that footing, Mr Lee asserted, materially to the respondents’ case for denial of breach of copyright, that ‘[i]n the case of computers sold by PC Club with Windows XP Pro or Windows XP Home pre-installed, the serial number used by PC Club and entered onto PC Club’s Accounting Software is the serial number on the Microsoft COA label applied to that particular computer’. The critical significance of what Mr Lee referred to as the ‘COA only’ method adopted by PC Club will later appear; as I have already observed, COA is the abbreviation for certificate of authenticity, and has been implemented by Microsoft for some time as an anti-piracy measure in relation to its computer software products such as Windows.

153 When purchasing a product and in particular a software product, Mr Lee explained by his affidavit evidence that ‘PC Club prepares and issues a purchase order which confirms the price and quantity of the relevant product with the supplier, which is then faxed or emailed to the relevant Supplier’. A sample was tendered by the respondents. Once the goods described in the purchase order were received by PC Club from the supplier, his affidavit testimony continued, ‘… the invoice is matched with the relevant purchase order in relation to the goods to ensure that the product codes, description, quantity, serial number, invoice number, date and pricing on the purchase order and corresponding invoice match’. Thereafter he explained that ‘[a]ll this information is then entered onto PC Club’s Accounting Software from which PC Club can produce a “Goods Received Enquiry Report – Inventory Control” from PC Club’s Accounting Software, which in turn summarises orders in relation to categories of products purchased and sold by PC Club’.

154 Mr Lee exhibited to his affidavit evidence what he described as PC Club’s ‘Goods Received Enquiry Report – Inventory Control’ relating to so-called ‘DSP Windows XP Pro edition’ for the period from 1 January 2002 to 30 November 2003, ‘DSP’ being the abbreviated term for ‘Delivery Service Provider’, which refers to a ‘method’ of providing personal computers with Microsoft Windows software pre-installed. That methodology was more comprehensively described as ‘loading Microsoft operating software bought from sub-distributors onto the computer, fixing the COA label that come (sic) with the software to the chassis of the computer, and supplying the flat pack with the computer’. That PC Club report was said to contain the means of identification of the source, and the number of units, of Windows XP Pro software purchased by PC Club during the period 1 January 2002 to 30 November 2003. The first and second columns of the report listed the PC Club purchase order, number and identity of the relevant supplier, and relevantly thereto, Mr Lee asserted in his affidavit that ‘PC Club has implemented and uses codes to identify its suppliers of authorised Windows XP Pro and Windows XP Home software’. He identified as his principal sources of supply three Australian authorised distributors (Synnex, Ingram and Tech Pac) and five Australian subdistributors (Opele, IT Art Vision, Global Trading Industries, MBI Computers and Rattacks). It was not part of the applicants’ case that any software sold and distributed by those suppliers was other than authentic.

The sale of personal computers by PC Club with pre-installed software – the procedures put in place as explained by Mr Lee – the evidentiary basis for the respondents’ case as to ‘innocent infringement’ under s 115(3) of the Copyright Act

155 Mr Lee explained next in his principal affidavit evidence that there have been two ways whereby PC Club pre-installed Microsoft Windows software onto personal computers which it then sold. That explanation purported to demonstrate the basis upon which PC Club asserted an absence of awareness, or of having reasonable grounds for suspecting that the acts constituting the infringement of copyright in XP Home and XP Pro were of that nature. The initial method was the ‘DSP’ to which I have earlier referred. Mr Lee testified that after 1 December 2003, PC Club adopted the methodology of selling ‘COA only’ versions of personal computers pre-installed with Windows XP Home and Windows XP Pro, and continued to do so until 13 July 2004 upon the execution of the Anton Piller process against PC Club. His asserted qualification to describe that methodology as applied by PC Club, critical to his refutation of the allegations made against him in these proceedings, was ‘because I have carefully observed staff employed by PC Club uploading software in PC Club’s build room and I have carefully observed precisely what tasks are performed in relation to each method’, and because he was involved personally in the purchase of Windows operating systems software utilised in PC Club’s so-called ‘build room’. Hence his assertion as to personal involvement in both the acquisition of Windows operating systems software used in the DSP method, and in particular in the purchase of the COA labels used by PC Club in the so-called ‘COA only’ method.

156 Before detailing Mr Lee’s evidence as to the two methods whereby PC Club pre-installed Windows XP Home and Windows XP Pro onto the hard-drives of personal computers which it then sold, it is necessary to briefly summarise the evidence of the applicants’ witnesses as to its licensing of distribution of software in the OEM channel.

157 The applicants’ evidence was that MLI, and subsequently MLGP, licensed those programs to be reproduced onto the hard-disk of a personal computer by computer system builders by only two possible means. The first method is that utilised by computer system builders that are ‘royalty OEMs’, or ‘Named Accounts’ (those expressions being synonymous with one another). The second method is for smaller system builders who must reproduce Windows XP Home and Pro in accordance with a Microsoft System Builder License.

158 Mr Kurt Kolb, who is Microsoft’s General Manager of Worldwide System Builder Channel and License Compliance and had in the past worked in other areas of the OEM Business Group of Microsoft, detailed the difference between Microsoft’s licensing requirements in the royalty OEM and system builder channels in an affidavit sworn 30 August 2004. Similar evidence was provided by Mr Walker of MPL. Royalty OEMs in the Asia-Pacific region are higher volume system builders who are in direct contractual relations with Microsoft’s licensing subsidiary, formerly MLI but currently MLGP. Pursuant to those ‘Royalty OEM Agreements’, royalty OEMs, or Named Accounts, are licensed to distribute recovery CDs together with computer systems that they manufacture and pre-load with Microsoft software programs, which computer systems must bear a genuine Microsoft COA attached to their chassis. Those recovery CDs are obtained from Microsoft authorised replicators. Mr Kolb’s evidence was further that only royalty OEMs are contractually entitled to distribute recovery CDs with computer systems. He also attested that none of the respondents nor either of Hyundai Digital (Aust) Pty Ltd or Hyundai MultiCAV Australia Limited were royalty OEMs. Mr Lee’s evidence was to the effect that he was aware at all relevant times that PC Club was not a royalty OEM, however he also denied being aware of the ‘definition or role’ of a royalty OEM as such appeared in Mr Walker’s affidavit.

159 In respect of the so-called ‘system builder channel’, Mr Kolb’s evidence (which again was attested to in similar terms by Mr Walker) was that MLGP authorises the three Microsoft OEM distributors operating in Australia, being Ingram Micro Australia Pty Ltd, Synnex Australia Pty Ltd and Tech Pacific Australia Pty Limited, to distribute Microsoft OEM Programs, that is software packaged in multi-packs, to system builders. Those multi-packs are acquired by authorised distributors directly from Microsoft authorised replicators and are then distributed to system builders, sometimes by means of sub-distributors. Those system builders, of which PC Club was an example, assemble new or else refurbish second-hand personal computers which they then sell with operating system software such as Windows XP pre-installed. The only legitimate source of that software for system builders is software packaged in multi-packs. Upon opening a multi-pack of software, the system builder ‘breaks the seal’ and is deemed to have agreed to the terms of the OEM System Builder License contained therein. In accordance with that license, the system builder is licensed to pre-install one copy of the Microsoft OEM program on a personal computer supplied by that system builder on the condition that the system builder supplies that personal computer to its customers with all associated components for those programs, which include CDs, manuals and COAs.

160 Those components are contained in the packaging or ‘software unit’. A multi-pack contains somewhere between 3 and 10 software units, depending on the program. Mr Kolb’s and Mr Walker’s evidence was further to the effect that those software units are comprised of a CD contained in a Jewel Case which are shrink wrapped together with a product manual or other product guide upon which is affixed the COA. This is the only way in which licensed copies of Microsoft OEM software are supplied to system builders for distribution. Each system builder is required to remove the COA label from the shrink-wrap packaging and to affix it to the chassis of the personal computer onto which it has installed the software. The system builder is then required to provide to the customer their PC including pre-installed software together with the original software program on CD in its Jewel Casing together with any associated manual. System builders are not entitled to distribute software to customers in any way other than this.

161 The Windows XP Home software pre-installed by PC Club onto the computers it assembled by way of the ‘DSP method’ was said by Mr Lee to have been bought in ‘multi-packs’ for an average price of about $120 per unit. Contained within that multi-pack, as marketed by Microsoft was apre-installed kit compact disk, together with three shrink wrapped packages each containing one such CD loaded with the relevant Microsoft Windows program, together with a Microsoft manual, a COAattached to the shrink wrap, and instructions of Microsoft as to the application of the COA label to the chassis of the computer described as ‘OEM instructions’ (‘OEM’ being as earlier recounted the abbreviation for original equipment manufacturer’s instructions). I have earlier referred to Mr Kolb’s and Mr Walker’s evidence as to shrink wrapped bundles made available by Microsoft’s authorised replicators and distributors to system builders. Mr Lee explained that PC Club would install the Microsoft Windows software onto the hard drive of a master computer, and the software would be deployed from the master computer onto each individual computer intended to be sold pre-installed with Microsoft software in accordance with those OEM Instructions contained within the multi-pack. Following the installation or uploading of the Microsoft Windows software on or to the individual computers ready to be sold, Mr Lee further explained that PC Club would use the so-called pre-installation kit CD provided with the multi-pack to seal the individual computer and thus to secure it. The COAlabel providedon the shrink wrapped package would then be fixed to the chassis of the computer. The manual would be placed in the box packaging in which the computer would be sold, the box packaging would be sealed, and the computer would then be ready for sale or delivery with the Microsoft Windows software pre-installed.

162 Mr Lee identified thus the function of installing the Windows XP Home or Windows XP Pro software on computer hardware, as undertaken by PC Club, to be that of a delivery service provider (abbreviated as earlier mentioned in these reasons as ‘DSP’). PC Club’s records or PC Club’s accounting software thus referred to ‘DSP Windows XP Home Edition’ or ‘DSP Windows XP Pro Edition’, being references to computers sold by PC Club whereby the Microsoft Windows software was said by it to be pre-installed and thus utilised in the manner above outlined.

163 What had been thus far explained by PC Club generally reflected the normal process adopted by system builders such as PC Club purported to be. However of critical relevance to the present proceedings was Mr Lee’s description of the source for PC Club’s acquisition of COA labels as left-over stock from certain apparently large distributors, the suppliers of which surplus stock were identified and asserted by Mr Lee to have provided oral assurances to him as to the authenticity of the COA labels he started to purchase from them. I will later review the evidence concerning those suppliers of COA labels to PC Club.

164 Mr Lee next explained in his principal affidavit evidence the ‘COA only’ method being the recording process said by him to have been implemented by PC Club by way of fixing the COA label, acquired from third parties, to the chassis of a computer. That method further involved the recording of the serial number (called a ‘product key’) appearing on the COAlabel attached to each computer ‘… so that PC Club can identify each individual item of software on each individual PC sold by it’, and further so that PC Club ‘can track each individual computer by this number through PC Club’s accounting software’. He further explained that once the serial number of the individual COAlabel on each computer had been entered into PC Club’s accounting software, it became possible to obtain a report of each computer sold by PC Club with Windows XP Home or Windows XP Pro pre-installed listed by serial number. Mr Lee tendered a report of about 170 pages, marked and thereby identified in the parties’ submission as ‘DL2’, titled ‘SOP Documents dated from 1 January 2002 to 30 November 2003’, the abbreviation ‘SOP’ connoting ‘sales order processing’ which was said to have been produced from PC Club’s accounting software. That report listed all personal computers sold by PC Club from 1 January 2002 until 30 November 2003 having Windows XP Home pre-installed by PC Club using the DSP method. The first column of the report related to PC Club’s product code for DSP Windows XP Home and the second column to the date of sale; the third column contained PC Club’s invoice numbers and the fourth column contained PC Club’s customer numbers; the fifth column listed each customer’s name and the sixth column contained the serial number appearing on the COA label attached to the chassis to each personal computer when sold. Mr Lee further tendered as ‘DL-3’ a PC Club report of 8 pages titled ‘SOP Documents dated 1 January 2002 to 30 November 2003’, which listed the details and numbers of personal computers sold by PC Club during that period of time having the DSP Windows XP Pro edition pre-installed and using the DSPmethod. Upon the basis of the 170 page report DL-2, Mr Lee testified that during the period from 1 January 2002 until 30 November 2003, PC Club sold 9419 personal computers with Windows XP Home pre-installed by way of the DSPmethod. Upon the basis of the 8 page report DL-3, Mr Lee calculated that during the same period of time, PC Club sold 426 personal computers with Windows XP Pro pre-installed by the DSP method.

165 After affirming that the purpose of PC Club’s accounting software was thus to enable identification to be made of the source of the XP Home and XP Pro software the subject of the said exhibits DL-2 and DL-3, Mr Lee explained that the PC Club purchase orders would be matched with the invoices respectively relating to those orders, and the relevant data therefrom would be entered onto PC Club’s accounting software. As a result of that process, Mr Lee asserted that in the period from 1 January 2002 to 30 November 2003, the said quantity of 426 units of Windows XP Pro software were in fact purchased by PC Club from various suppliers, and during the that period, the 426 computers listed in the report were sold by PC Club with the DSP Windows XP Pro edition pre-installed by the DSPmethod. Mr Lee further asserted that during the same period of time, PC Club purchased in fact 9708 units of DSP Windows XP software from various suppliers, and sold the said quantity of 9419 computers with Windows XP Home software pre-installed by the DSPmethod. That left 289 remaining copies of the 9708 software parcel purchased but not pre-installed on the computers sold within the same period of time. Those ‘various suppliers’ will shortly be identified from the evidence tendered by the respondents in the proceedings.

166 Mr Lee next addressed in evidence the affidavit of Microsoft’s legal officer Ms Brasier (affirmed on 11 August 2004), to the effect that during the period from 1 January 2002 to 30 June 2004, PC Club purchased 2581 copies of Microsoft Windows programs from Microsoft’s authorised distributors. Mr Lee asserted that ‘[t]he remainder of the Microsoft Windows Programs sold pre-installed on the computers and referred to in exhibits DL-2 and DL-3 were obtained from sub-distributors and dealers who obtained the software from Microsoft authorised distributors for resale or distributions on their behalf’, they being asserted to be the five Australian sub-distributors he identified by name and which I have already identified. He further asserted that ‘[c]opies of all invoices relating to the purchase by PC Club of Microsoft Windows software to be pre-installed onto computers sold by PC Club were seized from PC Club’s premises on 13 July 2004’, the latter date being that of execution of the Anton Piller order at the instance of Microsoft.

167 After referring to PC Club’s continued provision of Microsoft Windows software, being either Windows XP Home or Pro, pre-installed on computers by the ‘DSPmethod’, after 1 December 2003 and until the seizure on 13 July 2004, Mr Lee testified as to a report, said to have been obtained by PC Club from its own accounting system (exhibit ‘DL-5’) in respect of the period from 1 December 2003 to 13 July 2004 for DSP Windows XP Home, which listed details of all computers sold by PC Club during that period of time having Windows XP Home software pre-installed by PC Club using the DSPmethod. Mr Lee’s review of Ex DL-5 asserted that PC Club provided 2167 computers with Windows XP Home software pre-installed by the ‘DSPmethod’ in that period of time. Mr Lee testified to a further PC Club report (Ex DL-6) appearing upon accounting software headed ‘SOP Documents dated from 1 December 2003 to 13 July 2004’, for ‘DSP Windows XP Pro Edition’ sold during that period of time. From his review of that report, Mr Lee observed that PC Club sold 342 PCs from 1 December 2003 until 13 July 2004 with Windows XP Pro software pre-installed by PC Club using the ‘DSPmethod’. The quantity of Windows XP software legitimately sold by PC Club using the ‘DSP method’ during the period 1 January 2002 to 13 July 2004 is of relevance to the calculation of damages for infringement of copyright in respect of what the applicants called the ‘undetected sales’.

168 Mr Lee’s affidavit testimony thereafter moved to PC Club’s controversial communications with certain ‘retailers’ of Microsoft software, which had resulted in PC Club’s acquisition of COAs, other than from the five sub-distributors above identified and with whom he had been previously dealing. What was said by Mr Lee to have led him to initiate such communications was a telephone conversation with Hyundai’s chief executive officer, Mr Aron Jackson. According to Mr Lee’s evidence, Mr Jackson had complained of PC Club’s ‘expensive’ price for the supply of DSP Windows XP Home and DSP XP Pro software. PC Club had been engaged for some time in the assembly of three models of computers for Hyundai, to the chassis whereof PC Club had been attaching a COA label. The second was said by Mr Lee to have been an email from Mr Bradley of Silver Alien Consulting (‘SAC’), which advertised for sale ‘Win XP Home COA’ for $79 and ‘Win XP Pro COA’ for $105. Upon telephoning Mr Bradley, Mr Lee claimed to have been assured that Mr Bradley had been able to purchase from International Business Machines Limited (‘IBM’) genuine authorised and licensed Microsoft COA labels out of IBM’s ‘excess stock’ (so-called by the respondents) of COA labels that IBM wished to dispose of, and which Mr Bradley asserted to him to be ‘genuine and authentic’. Mr Bradley was said to have further assured him in the course of that telephone conversation as follows:

‘As the COA labels are authentic and licensed by Microsoft, by purchasing the COA labels you can upload Microsoft Windows XP Pro or XP Home from a master copy provided by Microsoft onto a hard drive and this software can then be deployed on to other computers. You can then create a restore CD from the hard drive which can be sold with the computer which will enable the purchaser to re-boot the computer in the event that the hard drive crashes or fails. You then need to affix the COA label to the chassis of the computer being sold. Once you enter the product key on the COA label I am giving you, you will see that the programme will operate and the license and software will register successfully with Microsoft online.’

As later became apparent during his cross-examination, Mr Lee was uncertain as to whether that specific assurance was given to him by Mr Bradley in person or over the telephone.

169 Mr Lee’s alternative account of the steps he took, and the context in which they were taken, to allegedly assure himself that the COAs offered by SAC constituted a valid license from Microsoft, was as follows:

(i) on 17 November 2003, Mr Lee telephoned Mr Bradley of SAC in response to an e-mail Mr Lee had received from Mr Bradley, apparently having never met or dealt with Mr Bradley before, and they had a conversation to the following effect:

Mr Lee: ‘You have very good prices on Windows, how did you source your products?’

Mr Bradley: ‘I can’t tell you over the phone where I sourced them from’.

Mr Lee: ‘We better have a meeting at our premises.’

(ii) later that same day, Mr Bradley attended the Rhodes premises of PC Club, yet did not bring a sample of any COA with him, and Mr Bradley and Mr Lee had a conversation in the terms of Mr Lee’s affidavit evidence as to the authenticity of SAC’s excess stock of COAs, which I have already extracted above;

(iii) Mr Bradley was said to have informed Mr Lee that those COA labels were excess stock obtained from IBM, and assured him that the ‘COA only’ method, by then in contemplation by Mr Lee, was licensed by Microsoft, and that it allowed PC Club to;

(a) create its own ‘restore CDs’ with copies of Windows XP made on them from ‘master copies’ of Windows XP loaded onto PC Club’s hard disk drives; and

(b) load a copy of Windows XP onto the hard disk of a computer to be sold by PC Club.

170 Mr Bradley did not testify in the proceedings as to those critical matters, or at all; Mr Lee sought to explain that shortcoming by reference to an alleged disputation between PC Club and SAC, though the respondents did not apparently seek to compel Mr Bradley’s attendance by subpoena, nor provide any documentary material relating to that disputation, including any written communications (infra).

171 Mr Lee’s evidence by affidavit continued to the effect that he then obtained a COA label from SAC’s Mr Bradley for testing at PC Club’s premises, but was not able to ascertain that it was counterfeit, asserting that it looked authentic on close visual inspection, and further that it looked identical to the COA labels provided on the shrink wrapped package in the multi-packs provided by Microsoft’s authorised distributors. He observed from the affidavit evidence of Ms Brasier that special tools and methodology, available only to Microsoft employees, were required in order to determine if a COA label happened to be counterfeit. No such verification exercise however was undertaken by Mr Lee with Microsoft in respect of that sample COA.

172 Mr Lee next testified by his principal affidavit that on 17 November 2003 or shortly thereafter, he turned on a computer at PC Club’s premises containing pre-installed but unregistered Microsoft software. He went to the Microsoft website into which he entered the product key on the COA label provided to him by SAC’s Mr Bradley, for the purpose of registering the program online with Microsoft. He continued that once he entered the product key, that key registered successfully with Microsoft online, because an activation code had been provided, and he therefore assumed that the COA labels he had so acquired from SAC were authentic, and that ‘this method was another way of selling personal computers with pre-installed Microsoft on them’. He testified further that ‘[b]ased on this and the representations from Mr Bradley, I was under the impression that PC Club could legitimately deal with Microsoft software in this way’. Further explanation of the activation process later appears in these reasons. Mr Lee testified also of his awareness by that time that Microsoft placed information on its website in relation to piracy, and further that he had thereupon reviewed that website located at www.microsoft.com/piracy/activation,which he described as ‘related to product keys and the like’, and formed the impression that provided the relevant product key on aCOAlabel successfully registered the computer with Microsoft online, the COAlabel would be authentic and that he could deal in Microsoft Windows software in the way he had so described. Mr Lee said he was able to point to the latest version of Microsoft’s website, which was tendered in evidence, and from which excerpts are later reproduced in these reasons as being ‘very similar’ to the version he had earlier consulted as above.

173 In the course of her cross-examination, Ms Knox, MPL’s system builder partner account manager since February 1997, accepted as correct the following statement, as cited to her by senior counsel for the respondents ‘… Product activation will help reduce total copying by ensuring that the copy of the software product being installed is legal and has been installed on a PC in [compliance] with the end user license agreement’. The case put forward by the respondents was that the belief which Mr Lee claimed to have formed as to the authenticity of the COA labels PC Club acquired, in the circumstances so described in these reasons for judgment, was ‘entirely reasonable’, and was supported by the tests and inquiries which he claimed to have made, and which I have above summarised.

174 It was common ground that the COA label comprises at least part of the Microsoft anti-piracy mechanism, containing as it does a unique 25 digit authorisation key known as a product key. Thus in order to activate the programme once it has been loaded onto the hard disk, it is necessary for any user of the computer to provide the product key to Microsoft, either ‘on line’, or ‘on the telephone’. Thereupon, either over the internet or on the telephone, the person thus activating the software would get an activation code sent or given to them. As it was otherwise explained in the evidence, what appears on the COA is not itself the activation code, but is a key that is necessary to send to Microsoft, and to which Microsoft in response gives the user a special activation code, and the user must then type that activation code information into the computer when he or she is activating the program. Otherwise the user is unable to use the product properly, in the sense that the product might operate but not to its full capacity, and thus only for a limited number of times before it would ‘cancel out’, that is, cease to operate. More detail of the activation process later appears. Both of MLP’s Ms Knox and Mr Walker testified to the effect that MPL’s website accurately stated that users would be unable to install software updates until they had acquired genuine software and installed that software with a valid product key and activation code.

175 Mr Lee narrated further in his principal affidavit that he purchased on 1 December 2003 some 300 COA labels relating to Windows XP Home from SAC, and he attached the receipt he received for the purchase of those labels. He said that he then entered the individual product key from each COAlabel onto PC Club’s accounting software, being the product key whereby PC Club was said by him to be able to track the relevant computer and identify the relevant software installed on each computer sold. From that information so provided, he claimed that PC Club was able to produce a ‘Receiving Posting Log’ which identified the product key on the relevant COA label. A copy of the log relating to the COA labels obtained pursuant to the invoice from SAC was tendered into evidence, the first column of which was asserted by Mr Lee to identify the serial number on the individual COA label.

176 Upon the basis of his foregoing narrative and explanations, Mr Lee claimed to have ‘formed the impression’ that provided the relevant product key on any COA label he had thus purchased from SAC successfully registered the program with Microsoft online, it would follow that the COA label was authentic. Mr Lee did not suggest that he verified the authenticity of any of the labels PC Club acquired from SAC by independent inquiry made of Microsoft. His withholding from so doing is a matter of significance to the credibility of his belief as to the authenticity of the exceedingly low-priced labels so received from SAC. An invoice of 12 December 2003 from SAC for 280 XP Home labels, featuring the product key contained on each COA label, was tendered by PC Club into evidence. The applicants did not in any event concede the authenticity of that invoice. No evidence otherwise of payment actually made by PC Club to SAC was tendered, or at least what would be described as primary evidence.

177 Mr Lee next testified that on or around January 2004, PC Club had been experiencing cash flow problems, and that he therefore requested Lifestyle Brilliance Australia Pty Ltd (‘LBA’) to purchase some further Windows XP Home and Pro forms of COAon PC Club’s behalf from SAC. The explanation given for interposing LBA as purchaser from SAC was because LBA was then indebted to PC Club, and by that process, LBA’s indebtedness to PC Club was thereby reduced. How LBA was able to fund that purchase from SAC at PC Club’s initiative, instead of satisfying its financial obligations to PC Club itself to enable PC Club to fund the purchase from SAC, was not explained. Mr Lee tendered into evidence a tax invoice dated 5 January 2004 from LBA for the supply to PC Club of 398 Windows XP HomeCOAlabels and 90 Windows XP Pro COAlabels, together with a tax invoice from SAC to LBA relating to those two parcels of labels. No other business (including accounting) records of PC Club in relation to the above or other dealings concerning PC Club’s acquisition of COAs, being for instance ledgers or journals or even supporting vouchers in relation to transactions relevantly involving LBA and PC Club, were tendered into evidence, other than an invoice bearing date 20 January 2004 for 500 COA labels for Windows XP Home, together with the corresponding tax invoice from SAC to LBA.

178 Mr Lee testified additionally as to PC Club’s purchase from LBA of a further 460 COA labels for Windows XP Home on 10 February 2004, and a further 10 COA labels for Windows XP Home on the following day; once again the only related business record documentation tendered into evidence appears to have been invoices. The applicants did not concede the authenticity of those invoices, or any transactions involving the interposition of LBA. Again, no independent verification as to the authenticity of the transactions relevantly between PC Club and LBA, or between SAC and LBA was provided, whether by way of journals, ledgers or otherwise. No officer of SAC or LBA testified in the proceedings on subpoena from the respondents, or otherwise. Again there was no suggestion by PC Club that it caused any enquiry to be made directly with Microsoft as to the authenticity of any of the COA labels which PC Club acquired from LBA.

179 Mr Lee’s ensuing testimony of his principal affidavit related to PC Club’s acquisition of further COA labels from sources other than Microsoft’s authorised distributors in the following circumstances:

(i) Hyundai’s Mr Jackson was said by Mr Lee to have rung him in March 2004 and said ‘I can obtain further COA Windows XP Home from Mr Gerry Holman from the company Introsys Limited in the United Kingdom’ (‘Introsys’); Mr Lee said that he then rang Mr Holman and a conversation ensued to the effect of Mr Holman saying ‘Aron Jackson informs me that you are making computers for him; I can provide COA Windows XP Home to you for this purpose’; Mr Lee’s response was said to be ‘how many can you provide?’ and Mr Holman’s rejoinder was said to be ‘how many do you want?’;

(ii) Mr Lee testified that he thereupon made arrangements to purchase 990 COA labels in relation to Microsoft Windows XP Home from Introsys on behalf of Hyundai, and he annexed to his affidavit a copy of an email enclosing an invoice dated 6 April 2004 which he said he received from Mr Holman for the supply of 990 COAsfor Windows XP Home; it appears from his ongoing narrative however that those labels were never in fact provided.

Mr Jackson, who provided some four affidavits in the proceedings at the instance of Microsoft, denied ever suggesting to Mr Lee that he (Mr Jackson) could obtain COAs from Mr Holman for PC Club. Mr Holman was not called by the respondents as a witness in the proceedings, nor were any documentary records of Introsys subpoenaed and tendered into evidence. I would prefer Mr Jackson’s denial to Mr Lee’s account of what seems to me to have been an unusual proposed transaction. My observations and impressions of Mr Jackson was that of a young man who was well acquainted with matters associated directly and indirectly related to the issues in the proceedings with which he had some connection. He answered questions put to him orally, all promptly, clearly, and decisively or emphatically. I thought he was a credible witness.

180 It is expedient at this point that I interpose a passage from Mr Jackson’s affidavit evidence, which assists to put into context what Mr Jackson testified as to certain of his basic arrangements with PC Club, and thus to unsteady the purported suggestions of reliance placed by the respondents on Mr Jackson’s testimony:

‘The arrangements between PC club and Hyundai for the shipping of computers assembled by PC Club for Hyundai were as follows:

(a) Hyundai placed a purchase order on PC club for the number of each model of computer to be built, setting out the components which were to be assembled together to produce that particular computer;

(b) Hyundai ordinarily instructed PC Club to ship a PC directly to a particular customer after assembly, and as a result Hyundai did not see the fully assembled computer before it was shipped to the customers; and

(c) on a few occasions, PC Club failed to meet delivery customer deadlines, and as a result, PCs were shipped to Hyundai’s offices in South Australia for direct distribution by Hyundai. On these occasions PCs would arrive in Hyundai-branded cartons and they would not be opened by Hyundai.’

181 Mr Lee continued his narrative of his controversial acquisition of COAs from third parties contained in his principal affidavit to the effect that on or around 4 June 2004, he met with Mr John Lee of John & Crew Marketing Communications (‘JCIMC’) at the Computex trade show in Taipei. He narrated a conversation to the effect that Mr John Lee informed him that he could obtain for PC Club some authentic Microsoft COA labels for Windows XP Home and XP Pro from ‘[a] large manufacturer [who] had some excess stock’, and that in response to his (ie Mr David Lee’s) query of Mr John Lee as to whether the same were authentic and genuine, Mr John Lee was said by Mr Lee (ie David Lee the respondent):

‘[t]he process is authorised by Microsoft. You need to obtain a master copy of XP Pro or XP Home. This can then be copied on to the hard drives of computers. You can then affix the COA label I am providing to the chassis of that computer. When a customer purchases that computer and enters the product key on the COA label, it will register successfully with Microsoft online. This is common when large manufacturers have excess stock of COA labels that they need to dump before their next month’s commitment’.

The identity of the particular ‘large-scale’ manufacturer was not stated by Mr Lee in his evidence. Mr Lee testified that he thereby formed the view that it was common industry practice to acquire COA labels in the manner demonstrated by SAC, LBA and JCIMC, and to deal accordingly in Microsoft Windows software, ‘… particularly as the COA labels appeared to be authentic and did not look to be counterfeit even after examination and inspection by me’. Mr Lee further testified that ‘the product keys on the COA labels were authentic and were not counterfeit’, the basis for that statement apparently being the successful activation by Mr Lee of the product key on the sample COA provided to PC Club by SAC.

182 Mr John Lee also did not testify in the proceedings and accordingly the applicants objected to the admissibility of that evidence (as well as that tendered by the respondents concerning SAC and LBA). I allowed the evidence to be given in each case. Since the same comprised in each case a purported description of an oral transaction and the circumstances as to its alleged formation, irrespective of the unusual nature thereof, and the apparent absence of business records bearing upon or relating to the transactions that were allegedly consummated, or at least the absence of production thereof as to the Court. That is not to say of course that any admissibility of evidence requires conclusions as to the authenticity of the alleged transactions the subject thereof.

183 It was in that context that Mr Lee thus deposed in his principal affidavit that PC Club purchased on 16 June 2004 from JCIMC 100 COAlabels relating to Windows XP Home and 200 COAlabels relating to Windows XP Pro, and a copy of an invoice for $20,500, and PC Club’s so-called ‘receiving posting log’, both of which were tendered in evidence in purported connection therewith. Subsequently on 30 June 2004, PC Club was said by Mr Lee to have purchased from JCIMC a further 150 COAlabels for Windows XP Home, and a further 150 COAlabels for XP Pro, and a copy of an invoice in purported relation thereto for $19,500 was also tendered in evidence (in each case of course by way of further attachment to Mr Lee’s affidavit). Moreover PC Club documents (12 pages in number) tendered in evidence purportedly recorded individual unit quantities received, and dates of receipt, covering the period from 1 January 2002 to 13 July 2004. They were not of course in the nature of formal ledgers or journals of PC Club, nor were they established to be as such. Mr Lee observed in his principal affidavit in relation to that documentation that PC Club ‘… purchased 2198 COAlabels for Windows XP Home’, and further ‘purchased 440 COAonly labels in relation to Windows XP Pro’. As in the case of the COA labels obtained from SAC and LBA, PC Club made no independent enquiry of Microsoft in order to verify the authenticity of the COAs acquired from JCIMC.

184 A report said by Mr Lee to have been prepared by him from PC Club’s accounting records, titled ‘SOP Documents dated from 1 December 2003 until 13 July 2004 for COA Windows XP Home’, was also produced in evidence by the respondents by way of attachment to Mr Lee’s affidavit, which purported to list ‘all computers sold by PC Club with Microsoft Windows XP Home pre-installed by the COA only method used by PC Club in that period’. Mr Lee testified by his principal affidavit in that context that ‘PC Club sold 2181 computers with Windows XP Home software pre-installed by the COA only method from 1 December 2003 until 13 July 2004’. He further testified on the footing of thatinternal PC Club accounting software report that ‘PC Club sold 203 computers with Windows XP pre-installed by the ‘COAonly’ method’.

185 It was on the purported basis of the documentation and circumstances I have summarised as to PC Club’s acquisition of counterfeit COAs from SAC and JCIMC (and LBA indirectly), and subsequent disposal of computers to which the COAs were attached, that the respondents advanced the bold contention that PC Club, through Mr Lee, ‘… had no reason to suspect that the “COA only” method was not legitimate’; moreover as I have also recorded, PC Club purportedly asserted reliance on the content of the Microsoft website, being a reliance which I have found to be misplaced.

186 The respondents next tendered evidence as to what they contended to be the significance of their response to the Anton Piller order and its execution. After the execution of thatorder at PC Club’s premises on 13 July 2004, Mr Lee sent an email dated 16 July 2004 to Mr Bradley at SAC in relation to the COA labels for Windows XP Home and Windows XP Pro which Mr Lee claimed to have purchased from SAC on behalf of PC Club; the text of that email was as follows:

‘Hello Steven

Silver Alien Re: Microsoft products request for refund

We had [sic] been caught by Microsoft Australia in relation to your COA Windows XP Home and XP Pro license only.

As I had mentioned to you earlier on around December 2003 at our PC Club Office, I asked you many time [sic] about the license software legality.

You had convinced me that the products are genuine and we can sell them in Australia.

You guaranteed to me that if it does not work, you will return the money.

Now Microsoft ceased all Windows products at PC Club on about July 13, 2004.

We now request a full refund on the products that you had supplied.

Could you please organise a transfer to PC Club ASAP for the following invoices

History 290 INV 1/12/2003 $23,595.00 $0.0

200 300 533

History 293 INV 12/12/2003 $23,177.00 $0.0

200 300 533

Total amount = A$46,772.00

[PC Club’s bank account details with National Australia Bank were then detailed]

I have lost so much time and effort for this particular issues [sic] and I do not wish to have more hassle from your company.

Could you please advise further your direction and reply to my email accordingly.

Thanks.

Should you require further assistance, Please feel free to call me on (02) 9736 2688.

David Lee

National Sales & Marketing’

A copy of that email was emailed to inter alia Mr Fang and Mrs Lee. No response was said by Mr Lee to have been received by PC Club to the above email, which in all the circumstances to date, and yet to be recorded, I would think to have been more probably than not merely self-serving. As I have already mentioned, Mr Bradley was not called by the respondents to testify, whether pursuant to a subpoena or otherwise. Nevertheless the respondents sought to gain support for their case from that email purportedly sent by Mr Lee to Mr Bradley, and to which Mr Bradley did not apparently respond.

187 A similar email was sent by PC Club on the same day addressed to John Lee of JCIMC, the invoice ‘history’ appearing therein, in relation to which PC Club demanded a refund, being particularised as follows:

‘History LB930624 INV 16/06/2004 $20,500

112 498 16/06/2004

History LB930629 INV 30/06/2004 $19,500

30/6/2004

Total amount = A$40,000.00.’

Mr David Lee asserted that he thereafter received a response from Mr John Lee on 20 July 2004, reading (literally) as follows:

‘Hi David

I am really regret to what did happen in ur company and your loss for the labels that sent from us. First of all, it’s not my intention to make you suffer the loss or trying to deceive you by inlegal labels. I bought from my supplier, (dear David u tell me that u know what it is) and the supplier (Mr Che) tell me that he bought from some technology company.

I never said those label are sellable in Australia, and only advised that labels are genuine and not fake and you can register in pc, because the supplier avouch me that. As a matter of fact, you did prove the labels can be registered by several days after I sent to u, then u order again.

After my father’s funeral I will keep push the supplier give the evidence to proof those product are not fake.

Best regards,

John’

It was at that point that Mr Lee’s affidavit account of the circumstances involving PC Club’s asserted acquisitions of COAs from SAC and JCIMC concluded. There was no evidence tendered as to the outcome of JCIMC’s so-called ‘push the supplier’ for the provision of authenticated evidence. As I have earlier recorded, neither Mr Bradley nor Mr John Lee testified in the proceedings for the respondents or at all, nor for that matter did any representative of LBA, and none of those persons were apparently subpoenaed by the respondents to give evidence on their behalf.

188 I interpolate here to record the evidence of Ms Brasier of MPL at [12] of her third affidavit that upon execution of the Anton Piller order at the premises of PC Club on 13 July 2004, the following were uncovered:

(i) 17 counterfeit and ‘loose’ Windows XP Home COAs;

(ii) 226 counterfeit and ‘loose’ Windows XP Pro COAs;

(iii) 3 genuine but ‘loose’ Windows XP Home COAs;

(iv) 1 genuine Windows XP Home COA which had been re-applied to media and manuals;

(v) 4 counterfeit Windows XP Pro COAs, attached to full computer systems; and

(vi) 1 counterfeit Windows XP Home COA attached to the side panel of a computer.

Ms Brasier testified to the effect that those COAs were counterfeit on the basis of tests undertaken of those labels by MPL’s representatives using specialised equipment. The applicants submitted correctly in my view that the presence of so many ‘loose’ COAs in the possession of a system builder invited the inference that those COAs were counterfeit and obtained without Microsoft’s license. This is because on the applicants’ evidence system builders were not licensed to accept supply of COAs unless affixed to the shrink-wrap packaging of software units contained in multi-packs. I observe however that the authenticity, or otherwise, of those COAs obtained and used by PC Club in pursuit of the ‘COA only’ method is not relevant to the question of infringement of copyright. The infringing conduct was of course the creation of unlicensed reproductions of Windows XP Home and Pro onto the hard disks of personal computers sold by PC Club and onto restore CDs.

189 In further support of their claim that neither PC club nor any of the other respondents were aware, or had reasonable grounds for believing, that the reproduction and distribution of Windows programs on computers per medium of the ‘COA only’ method amounted to an infringement of copyright in those programs, the respondents relied upon the contents of the anti-piracy page of the Microsoft website. That material was said by the respondents to ‘make clear’ that Microsoft’s so-called product activation instruction, explicitly requiring the supply to Microsoft of the 25 digit product key appearing on the COA label in order to obtain a unique product activation code, indicated that Microsoft’s software piracy protection technology is the product key on the COA label. The respondents pointed out in that regard that Microsoft’s Ms Knox and Mr Walker confirmed that the following statements from the ‘Software Piracy Protection page’ on Microsoft’s website were accurate and correct:

‘Page 1

Microsoft Product Activation is an anti-piracy technology designed to verify that the product has been legitimately licensed.

All customers who purchased retail product or a new PC from an original equipment manufacturer (OEM) will be required to activate the software.

Page 2

Microsoft designed Product Activation as a simple way to verify the software license and thwart the spread of software piracy.

Product Activation will help reduce casual copying by ensuring that the copy of the software product being installed is legal and has been installed on a PC in compliance with an End User License Agreement.

Product Activation is a breakthrough technology in that it makes activation a natural part of setting up the software and avoids the pitfalls of anti-piracy methods used in the earlier days of the PC industry.

Page 3

Product Activation also helps prevent unsuspecting customers from purchasing counterfeit software.

Page 4

… a user may use a product for a certain amount of time without activating it. For the Office XP family the grace period is the first 50 launches… for Windows, it is 30 days from first boot or upgrade.

Application product will go into reduced functionality mode if the user does not activate before the end of the grace period.

Page 5

The product does check itself from time to time to see if it is activated and if it is still on the same PC on which it was originally activated.

Page 10

Product activation was and will continue to be significantly harder to crack than most people think.

Microsoft will introduce additional technological measures in Service Pack 1 for Windows XP aimed at ensuring legally licensed customers receive the full benefits of owning their valid licence. These changes include denying access to the Windows XP updates for PCs with knowing pirated… product key validation during activation.

They will be unable to install the updates until they have acquired genuine software and installed that software with a valid product key.’

Ms Knox accepted that ‘… product activation ensures that the product is legal’; that acceptance needs however to be read with the references above to the Microsoft website at pages 3 and 10 to product activation ‘help[ing] prevent… [customers from] purchasing counterfeit software’ and also being ‘significantly harder to crack than most people think’, being assertions or claims not made of course in absolute terms.

190 Ms Knox was cross-examined upon the text of that Microsoft’s website material, and in particular upon the words on page 2 thereof above cited, namely ‘Product activation will help reduce casual copying by ensuing that the copy of the software product being installed is legal and has been installed on a PC in compliance with an End User License Agreement’. It suffices to observe that the text of the website material, at least to the extent above extracted, does not support the unqualified contentions of the respondents that the website material represented that ‘product activation ensures that the product is legal’, and further that so much ‘… really should be the end of the matter’. Microsoft’s official wording does not provide objectively the extent of unqualified assurance to users of COAs so submitted on behalf of the respondents. More will be included in these reasons as to the foregoing theme of this paragraph.

191 The respondents contended in any event that it was ‘clear’ that when Mr Lee tested the COA labels which PC Club had purchased from SAC and JCIMC, whereby ‘the product successfully registered and activated’, Mr Lee ‘could rest assured that the software he was selling was legitimately licensed’, and could do so particularly in the light of what was described as the Microsoft website assurances in relation to the product activation technology involving the product key on the COA label. The respondents also contended rhetorically ‘how can it possibly be unreasonable, as must be the applicants’ case, for someone to believe them?’, particularly given that ‘[t]he applicants witnesses, Ms Knox and Mr Walker, confirmed that the statements were true, but if the respondents’ defence of innocent infringement is to be rejected it will be necessary to find that David Lee believed they were false’. The respondents accepted that ‘[i]t now appears, upon production of copies of voluminous license agreements, that Microsoft’s incredibly complicated licensing system does not result in a legitimate license by the “COA only” method, but who was to know?’, so the respondents nevertheless asked rhetorically, and thereafter sought to answer in the same vein of overstatement to the effect ‘[c]ertainly not anyone who had read the web page and successfully activated using the activation key and the COA only method’. But of course the applicants did not shrink from the task of endeavouring to attribute adversely to Mr David Lee, not just dishonesty on his part but dishonesty on a substantial scale, in relation to which PC Club stood to be financially rewarded.

192 For the reasons I have already summarised, the applicants successfully demonstrated that the extent of reliance upon that website material by the respondents went well beyond what was reasonable, having regard to all the facts and circumstances here present and the text of the website. Also important as I have already pointed out, neither Mr John Lee of JCIMC, nor Mr Bradley of SAC, testified in the proceedings, nor did any representative of LBA, as to their sources of acquisition of the COAs purchased by PC Club. Nor was the Court placed in a position adequately to verify or corroborate Mr Lee’s account of the assurances allegedly provided by those persons.

193 In any event, in pursuit of the theme of their foregoing submissions, the respondents contended that Hyundai’s Mr Jackson for his part thought that the ‘COA only’ method was legitimate, and drew attention to the following passage in his cross-examination on behalf of the respondents, in the context of PC Club’s asserted intention to make a Hyundai restore CD:

‘And you know that COAs were going to be attached to the chassis of your computer by PC Club – Correct.’

However Mr Jackson eschewed emphatically any suggestion of anything other than genuine and authentic COAs being utilised in the course of Hyundai’s operations, directly or indirectly. He offered the following explanation as to his encounter with restore disks apparently assembled by PC Club:

‘In or about October 2003, Mr Chris Smoker, the Technical Services Manager at Hyundai received in the post from Mr Lee a sample of the Hyundai restore disk with [sic] Mr Lee had prepared for my approval…. Soon after receiving the Hyundai Restore CD, Mr Smoker showed it to me, and I did not object to it. To the best of my recollection Mr Smoker then spoke to Mr Lee and informed him that Hyundai approved the Hyundai Restore CD. On several occasions I visited PC Club’s Rhodes premises and noted that there were various CDs, including copies of the Hyundai Restore CD, lying around the DC burner in PC Club’s build room, or stacked on shelves.

At the time Hyundai received the Hyundai Restore CD, I thought that PC Club was entitled, pursuant to its licensing arrangements with Microsoft for the “COA only version”, to reproduce Microsoft Windows XP Home onto the hard disk drive of a Hyundai Computer and onto a CD accompanying the computer and branded “Hyundai”. I am now informed by Microsoft that PC Club was not authorised to reproduce Microsoft software on to the Hyundai Restore CD, and that the only way in which PC Club was authorised to distribute Microsoft Windows software pre-loaded on to a computer was in circumstances where a genuine Microsoft COA was affixed to the chassis of the computer, and the computer was accompanied by a CD originating from Microsoft.’

In other words, Mr Jackson testified to a belief on his part that PC Club was a ‘Named Account’ of Microsoft, that is, one of the so-called ‘royalty OEMs’, who as the evidence earlier extracted demonstrates, were legitimately provided with rolls of ‘loose’ COAs and pre-made recovery CDs from Microsoft authorised replicators pursuant to the wholly separate licensing agreements to which royalty OEMs were subject.

194 The respondents further sought to emphasise, in support of their case as to absence of reasonable grounds for suspicion within s 115(3) and in any event of any flagrancy of infringement within s 115(4), the unlikelihood of their being involved in ‘anything untoward’ in relation to their adoption of the ‘COA only’ method, in the light of the outcome to their previous litigious encounter, per medium of DAT Computers, with Microsoft, and thus of ‘publicly and widely advertis[ing] what [PC Club] was doing’. That publicity was said to take several forms as follows:

(i) PC Club’s email to its customers to the effect that it was using the so-called COA only method, by reason of the statement ‘Windows XP Home COA license only – no media supplied’;

(ii) PC Club’s invoices and accounting records referred to receipts of the COA labels, and moreover, as the respondents emphasised, referred to sales by the ‘DSP method’ and the ‘COA only’ method, thereby not attempting to dissemble or hide its exploitation of the ‘COA only’ method;

(iii) PC Club mass produced recovery CDs bearing Hyundai’s name, which further ‘broadcast to the world’ what PC Club was doing.

195 That publicity is a factor of course which I have borne in mind, though it is not of course a decisive factor in favour of the respondents. The respondents further asserted that their conduct involved in the ‘COA only’ method did not involve anything knowingly or suspiciously untoward on their part, and moreover that it would be reasonable to suppose that given their previous adverse litigious experience with Microsoft, it was to be all the more expected in the ordinary course that they would have sought the assurance of confirmation directly from Microsoft, particularly given the scale of their acquisitions from SAC and JCIMC, had the respondents not been otherwise convinced of the legality of their conduct. Particularly is that so, in the light of Mr Walker’s evidence as to the frequency of Mr Lee’s communications with MPL’s employees as to experiences of difficulties with Microsoft’s products. I have already made observations however upon the nature and extent of the respondents’ seeking of assurances from Microsoft, which did not take the form of direct communication with Microsoft as to at least the nature, size and other circumstances of their acquisitions of COAs, and of the extent of detail of their proposed acquisitions, the identity of the proposed vendors, and the legality of manufacture of their own recovery CDs.

196 The respondents’ case was of course that if infringement did occur, depending on whether the applicants first proved subsistence and ownership of copyright, the infringement was ‘innocent’, that is infringement falling within s 115(3), PC Club having established that at the time of the infringement, it was unaware, and had no reasonable grounds for suspecting, that its conduct, involving as it did ‘the preloading of software using the “COA only” method’, constituted an infringement of copyright. Upon that footing which I have sought to summarise, the respondents denied liability for any award of damages, irrespective of the outcome of the issue raised as to the applicants’ alleged absence relevantly of entitlement to sue for infringement of copyright.

197 In subsequent submissions in rejoinder, the respondents repeated in outline much of their submissions in chief, sometimes with differing emphasis, by reference to other circumstances which had since come to light. To that end, the court’s attention was drawn by the respondents to the following additional circumstances:

(i) the settlement of certain court proceedings effected in March 2004 between Microsoft and Mr Bradley of SAC relating to the supply by Mr Bradley of COA labels, which contained undertakings on his part to testify on behalf of Microsoft against other infringers; given that the applicants’ did not adduce evidence from Mr Bradley in the subject proceedings, it was submitted that Jones v Dunkel references were open to be drawn adversely to the applicants; however what those inferences might precisely have been was not articulated; Microsoft’s Ms Brasier for her part had testified in the present proceedings already that Microsoft had reached that settlement with Mr Bradley;

(ii) even close visual examination of the COA labels the subject of the present litigation would have presented the appearance of authenticity to any uninformed observer, given the absence of access to special tools, available only to Microsoft, necessary to detect hidden images proving absence of authenticity; moreover appearing on the counterfeit COAs were said to be repeated holographic images placed diagonally across the face of the label ‘Genuine Microsoft’; (ii) large volume manufacturers were asserted not to be purchasers of ‘flat packs’ (such as exhibit DL-1), which were said to be distributed in Australia to system builders and small volume computer manufacturers, such as was asserted by the respondents to describe PC Club; those large-scale distributors of which IBM in at least some countries was one, make their own restore disks; what the latter were said (again by the respondents) to customarily purchase from Microsoft were vast quantities of COA labels from authorised replicators; I observe however that the emphatic evidence of the applicants’ witnesses was that those large-scale manufacturers, or royalty OEMs, were actually also supplied with restore CDs by Microsoft authorised replicators.

198 Upon that general description of industry practices, the respondents submitted that, the belief asserted by Mr Lee that the subject COA labels were genuine ‘left over’ stock from IBM carried with it what the respondents described as the understandable belief, said to be claimed by Mr Lee, that Microsoft had already received payment of its license fees in relation to programs reproduced by the manufacturer. Of course, confirmation of that alleged factor could have nevertheless been sought by PC Club directly from Microsoft, but of course was not.

199 Nevertheless those contextual factors were contended by the respondents to provide support for the asserted understanding as to Mr Lee’s professed belief, to the effect that he was not buying merely ‘loose COA labels’, but product that ‘had already been paid for by IBM’, to cite the precise words of Mr Lee’s testimony cited by the applicants:

‘In your mind what was that you were buying from…? --- I was under my [sic] impression that I bought the license from a large manufacturer which has a license with Microsoft and so we can use the Recovery CD.’

No enquiry was however purportedly made by Mr Lee to verify that asserted impression, whether from IBM or any of the other entities above referred to. It was truly a case of unsubstantiated speculation at best on Mr Lee’s part in relation to what were very substantial acquisitions of COAs from two different suppliers (being SAC and JCIMC of course), the testimonial assistance of neither having been invoked by PC Club.

200 The respondents further submitted that the price differential did not carry the extent of significance asserted by the applicants, since it was ‘… the difference between a range of $118 to $125 on the one hand and a price of $79 (or possibly a range of $55 to $75) on the other. That was however a significant difference, bearing in mind in particular the very large number of COA’s relevantly involved, the context of a product susceptible to large turnover in the hands of an operator such as PC Club, and the competitiveness of the market for OEM versions of Microsoft software programs. It was acknowledged by the respondents that PC Club paid $55 to $75 or $79 for what Mr Lee believed to be ‘the COA label and the bare license’, as his senior counsel so accepted; the submission continued to the effect that a buyer of the COA label, ‘having thus paid his license fee, makes his own restore discs, whereas in the case of “system builder flat packs”, what is bought is the physical product and the license’, at a price of $118 to $125 as exemplified by exhibit ‘DL-1’. The price difference therefore was said by the respondents to be reasonably explicable by the absence of a CD and other media when purchasing programs via the ‘COA only’ method. As the applicants persuasively rejoined, the notion that an experienced system builder, such as was Mr Lee, would believe that such a large price differential was explicable wholly by the absence of a CD and a few pieces of plastic and paper comprising the associated media and packaging is preposterous. It was of course never part of the respondents’ case, nor sensibly could have been, that the price paid by PC Club for the contentious COAs gave PC Club other than a very profitable competitive advantage over its traditional established competitors.

201 The respondents then repeated their reference to the affidavit evidence of Microsoft’s Ms Knox in relation to the operation of the COAs’ 25 digit product key, and submitted that it was ‘inconceivable’ that any person, particularly if he or she had read the Microsoft anti-piracy website, and who had successfully performed that operation, would believe that the computer program successfully activated was not legitimate, and a fortiori where what had been undertaken by the operator was not a ‘one off’ activation, as Mr Lee seemingly testified to have been occurred. The respondents also again empahsised Mr Lee’s asserted understanding that he was not just buying loose COA labels, but rather a license that had already been in effect paid for by IBM. I do not find that proposition to be plausible. The integrity of that understanding falls to be gauged in however in the light of the combination of the factors I have reviewed, including the significance of the extent of the price differential comprising the price range of $118 to $125 which generally prevailed at the material time for authentic transactions of Windows XP Home, and the range of $55 to $75 (or $79) applicable to PC Club’s impugned purchasing transactions. That price differential was all the more significant, given the absence of adducement of evidence in the proceedings from PC Club’s vendors (being Mr Bradley of SAC and Mr John Lee of JCIMC), and the absence of any endeavour on Mr Lee’s part to verify the authenticity of PC Club’s acquisitions and the ‘COA only’ method directly with Microsoft.

202 I have given close consideration to the nature and implications of the evidence adduced by the respondents, and by Mr David Lee of course in particular, as to his alleged experience with Microsoft’s 25 digit product key, and also his explanations and assertions appearing at the material times on Microsoft’s website. Assuming that such essentially uncorroborated evidence may be accepted as credible, and of course I have indicated my misgivings in any event as to the credibility of other aspects of Mr David Lee’s testimony, the inference open to be drawn from the evidence otherwise in the proceedings was to the effect that the activation code was not necessarily 100% operative on every occasion of attempted activation on PC Club’s part in relation to each and all of the very numerous COAs acquired by PC Club for the purchasers of its duly loaded computers. Various complaints were voiced by Hyundai’s Mr Jackson at a meeting involving representatives of Hyundai, PC Club and United Electrical (infra) in relation to computers installed with Windows XP programs purchased from PC Club. (United Electrical was the firm to which customer support in respect of Hyundai PCs was outsourced). The experiences of other purchasers of equipment relevantly from PC Club must be a matter for speculation only. Mr Jackson’s satisfaction with the legitimacy for the time being of the product which his company Hyundai was acquiring from PC Club does not advance the respondents’ case the distance required to adequately enliven s 115(3) or to confront the case which the applicants propounded against the respondents as to the flagrancy factor under s 115(4).

The respective roles and functions of Mr Lee, Mr Fang and Mrs Lee undertaken for PC Club

203 After a permanent injunction had been granted on 4 May 2000 by Lehane J of this Court against Mr Lee and his former company DAT Computers to the effect of restraint of infringement of copyright in Microsoft’s programs, it would appear that Mr Lee was concerned to establish a new business structure for his ongoing involvement in the computer industry. That took the form of course of PC Club. However as has been already pointed out, the only directors appointed to PC Club have been his wife and Mr Fang. Given the nature and major extent of the functions that Mr Lee thereafter seemingly undertook for PC Club, no explanation was proffered by him as to why he did not take up office as a director of PC Club. I should add that PC Club’s incorporation occurred in February 1999, though when it actually started business operations is unclear. In any event the nature and scope of its business undertaking appears to have been in due course not dissimilar in operational size and scope as before that engaged in by DAT Computers, and to have been again based at the same premises at Rhodes held in the ownership in law of the trustee of the Lee family discretionary trust. The precise basis for PC Club’s occupation of the property from that trust estate, whether formal or informal, does not appear from the evidence.

204 Mr Lee was said to have undertaken as from June 1999 responsibility for sales and marketing for the new or substitute corporate vehicle PC Club. The list of his responsibilities, set out in [3] of his principal affidavit, tends to consistency with the reality of his exercise of the function of managing directorship of PC Club, and as exemplified in the events which subsequently happened in terms of PC Club’s decision-making and management control. Such was the nature and extent of Mr Lee’s managerial involvement in PC Club’s business operations that he was able to speak of his awareness ‘of each and every item of hardware and software bought by PC Club and each and every computer or PC sold by PC Club’, and of his responsibility in particular for sourcing and purchasing COAs using the ‘COA only’ method, as he claimed to have informed at least Mr Bradley of SAC, and subsequently Mr John Lee of JCIMC. He did not suggest that he sourced the acquisition of any controversial COAs at the behest of Mrs Lee or Mr Fang, or after consultation with either of them, and there is no evidence otherwise to any such effect. The applicants have responsibly acknowledged that evident reality in the submissions they have made as to the respective monetary orders proposed against Mrs Lee and Mr Fang, in contrast to that proposed against Mr Lee (and PC Club).

205 The applicants submitted, in my opinion rightly, that the inference should be drawn that Mr Lee not merely sanctioned but was primarily responsible for, PC Club’s reproduction of copies of Windows XP Home and Windows XP Pro onto the hard disk drive of computers and onto restoreCDs, in accordance with what was described as the ‘COA only’ method whereof Microsoft makes complaint. It was submitted by the applicants accordingly that:

(i) Mr Lee should be made jointly liable with PC Club for the infringements of copyright that occurred in terms of ss 36 and 38 of the Copyright Act, and also for the infringement of Microsoft’s trade marks under the Trade Marks Act, in each case as complained of in the present proceedings;

(ii) Mr Lee was a person knowingly involved in PC Club’s misleading and deceptive conduct within the meaning of s 75B of the TP Act as further complained in the proceedings.

I will later separately address the trademarks and misleading and deceptive conductissues.

206 It is true that Mr Fang testified, consistently with PC Club’s official records, that it was he who was the ‘managing director/chief executive officer’ and ‘technical director of PC Club’, having responsibility for the day to day operations and management of PC Club. Nevertheless when Mr Lee was absent from PC Club premises, it appears that Mr Fang was not prepared to make decisions without reverting to Mr Lee, Mr Fang describing Mr Lee colloquially as the ‘boss’. Moreover, in conversations with Hyundai’s managing director Mr Jackson, Mr Fang indicated that he was unable to ‘control’ Mr Lee.

207 The applicants were able nevertheless to point to the following matters of significance disclosed in the evidence concerning Mr Fang’s authority as well in relation to PC club’s affairs:

(i) he was a director of PC Club at times material to the causes of action the subject of present proceedings;

(ii) he informed the independent solicitor, at the time of execution of the Anton Piller order, that he was ‘in charge’ of PC Club’s premises;

(iii) he acknowledged under cross-examination that he was ‘well aware of the activities that were going on throughout the business’, and of the purchasing of computer software from Microsoft suppliers to be loaded onto computers sold by PC Club; he was designated ‘technical director’ of PC Club, and he acknowledged that he was ‘heavily involved’ in PC Club’s so-called ‘Technical Department’;

(iv) by accepting appointment as one of the two directors of PC Club, he had a measure of legal authority to discipline and control Mr Lee’s activities as an employee; whether of course that legal authority prevailed over Mr Lee’s actuality or reality of control and direction was another matter; my perception of the evidence in the proceedings was at least implicitly to the contrary.

208 In the circumstances that Mr Fang had the purported authority of the office of chief executive director, coupled with his evident or likely awareness of Mr Lee’s activities impugned by the applicants as constituting infringements of copyright, it was contended by the applicants that Mr Fang should be inferred to have sanctioned, approved and countenanced the infringements of copyright of PC Club and Mr Lee’s conduct undertaken on behalf of the Club in that regard, and hence to have authorised the same within the meaning of that term contained in s 36 of the Copyright Act. It was therefore contended that Mr Fang should be held liable jointly and severally with PC Club for infringement of copyright under the Copyright Act, and for that matter also for infringement of trade marks under the Trade Marks Act, and for misleading and deceptive conduct under the TP Act. I have difficulty in accepting how it could be that Mr Fang can avoid any measure of extent of personal responsibility for the consequences tending to arise from his acceptance of and continuation in office as a director of PC Club at all material times, irrespective of what may be readily inferred as to Mr Lee’s dominant personality in relation to PC Club’s affairs, and as to his dominance in PC Club’s decision-making. Nevertheless it is appropriate to mention at this point that the impression I gained of Mr Fang, in the course of his testimony in the witness box, was that he did not appear to have a relatively good understanding of the English language, and hence had some difficulty in coming to issue upon matters raised adversely in the course of his cross-examination.

209 Similar adverse implications to those indicated above in relation to Mr Fang should I think be implied as flowing adversely to Mrs Lee by reason of the nature and extent of her office as a director of PC Club and of her apparently full time duties undertaken. She held the office of director of PC Club at the material times, and the evidence tends to demonstrate that she was as equally actively involved in the day to day operations of PC Club at Rhodes as Mr Fang. Moreover as a so-called purchasing officer, as well as an executive director of PC Club, she may be reasonably inferred to have known at least something of the circumstances of PC Club’s acquisition of the COAs from SAC and JCIMC. Significantly, she acted as PC Club’s signatory to the ‘Code of Ethics’ documentation provided to Microsoft by PC Club, which included an undertaking not to undertake acts in the nature of infringement of copyright. As in the case of Mr Fang, there is in my opinion no reasonable avoidance by Mrs Lee of some measure or extent of personal responsibility for the consequences under the general law of PC Club’s conduct complained of, irrespective of the evident dominant personality of her husband. I have the same difficulty in understanding, as in the case of Mr Fang how she can avoid at least certain of the consequences of her working directorship of PC Club, any less than I have indicated above in relation to Mr Fang.

Further circumstances outlined by the applicants as derogating from the respondents’ assertions as to ss 115(3) and 115(4) of the Copyright Act and the quantification of damages or loss of profits for infringement of copyright

Damages pursuant to s 115(2)

210 In order to restrict exposure to an account of profits pursuant to s 115(2) and (3) of the Copyright Act, and thus avoid exposure to an award of damages, an infringer must satisfy for example the test explained and paraphrased by the Full Federal Court (Lee, von Doussa and Heerey JJ) in Milwall v Olympic Amusements Pty Ltd (1989) 85 FCR 436 at 449, as follows:

‘To obtain the protection of s 115(3) a defendant must establish (i) an active subjective lack of awareness that the act constituting the infringement was an infringement of the copyright, and (ii) that, objectively considered, he or she had no reasonable grounds for suspecting that the act constituted an infringement.’

211 As Mr Kolb testified, Microsoft’s licensing scheme required at all material times that copies of Windows XP Home and Windows XP Pro not be supplied at any material time for distribution in Australia by system builders in any form other than the Microsoft multi-pack, whereby the software was contained shrink-wrapped in jewel cases of the kind that are also used to distribute most audio recording compact discs, and be accompanied by a Microsoft product manual and integrated COA label, comprising thereby a single software unit. It is difficult to conceive how either Mrs Lee or Mr Fang, and a fortiori in any event Mr Lee, could have been unaware of that Microsoft selling practice, and hence the implications of acquiring so-called ‘loose’ COAs from third parties. COA labels were manufactured and distributed by Microsoft’s ‘authorised replicators’ under license from Microsoft, those appointees being systematically required to observe strict standards and specifications concerning the manufacture and distribution of COA labels in order to obviate infringement of copyright in relation to Microsoft’s computer software. The applicants’ case was that at least Mr Lee knew, or ought reasonably to have known, as a person of at least 10 years’ experience in system building of computer systems utilising Microsoft operating systems, of that systematic methodology designed to prevent copyright infringement. The COAs acquired by PC Club were obtained, not from Microsoft authorised replicators or their authorised distributors, but according to the respondents from SAC and JCIMC in what might be described as the enigmatic, if not somewhat bizarre, circumstances that I have earlier detailed. The ingenuity of the respondents’ endeavours to rationalise any understanding of authenticity in relation to those circumstances of acquisition of ‘loose’ COAs cannot survive realistic or practical analysis. Mr Lee in particular impressed me as being intelligent and perceptive, at least in relation to the operations of the industry in which PC Club was engaged. I should take the opportunity of here adding the impression I gained from his time in the witness box that he was highly intelligent as well as shrewd and inscrutable, and possessed a good understanding of the English language.

212 The licence fee approach to the assessment of damages under s 115(2) for breach of copyright adopted in General Tyre & Rubber Co v Firestone Tyre & Rubber Co Ltd [1976] RPC 197, and further applied in other authorities, such as Autodesk v Cheung (1990) 17 IPR 69, was characterised by the applicants as appropriate to situations where the inference may be drawn that given the choice between not using the copyright work or paying the license fee, the latter course would have been adopted by the offender, given for instance that his principal business involvement in reality was that of a system builder of personal computers utilising Microsoft Windows operating systems. The applicants contended therefore that the assessment of damages to be payable by PC Club pursuant to s 115(2) should be adjudged on the hypothesis that PC Club would have purchased genuine Windows XP Home and Windows XP Pro products packaged in the normal way, if it had not resorted to the use of counterfeit COAs and infringing reproductions. There is a significant measure of reality in the adoption of that approach to the assessment of damages in the circumstances here prevailing. PC Club could not realistically have sold the computer hardware to its customers without first installing an operating system, which in the reality of the market place would have been inherently likely to have been Windows: see also Microsoft Corporation v TYN Electronics Pty ltd (in liq) (2004) 63 IPR 137 at [38] where Stone J reached the same conclusion in respect of another version of the Windows operating system software.

213 Furthermore Mr Lee testified by affidavit to the effect that the COAs purchased from SAC and JCIMC constituted an alternative source of product to licensed versions of those programs which PC Club had previously purchased from authorised Microsoft sub-distributors, the former being a source of supply of COAs which PC Club adopted for the period of time approximately from about 1 December 2003 to 13 July 2004, during which time (as has been earlier recorded) it sold 2181 computers with Windows XP Home software pre-installed by the ‘COA only’ method, and 203 computers with Windows XP Pro software similarly pre-installed. Those figures were described by the applicants as minimum estimates, because of indications of further sales made by PC Club of computers loaded with Windows XP Home and Windows XP Pro and not recorded in the accounting records of PC Club as having been sold per medium of the ‘DSP method’ or by the ‘COA only’ method, being indications said to be inferentially apparent from the respondents’ affidavit evidence. Those alleged further sales, referred to by the applicants as the ‘undetected infringements’ or ‘undetected sales’, were submitted by the applicants to be in excess of the specific numbers of total purchases of product claimed by Mr Lee to represent legitimate sales of Windows XP Home and Windows XP Pro acquired, and sold by the ‘DSP method’, and to have been likely to have constituted infringing copies.

214 The respondents conceded in the context of their notice disputing facts filed in the proceedings that the net revenue derived by MLGP from genuine sales of Windows XP Home and Windows XP Pro respectively was US$75 per unit in the case of the former and US$125 per unit in the case of the latter. The respondents ultimately adhered to that concession, albeit after initially seeking to withdraw the same in circumstances unnecessary to describe. In the result, the total amount of compensatory damages based merely on the admitted number of infringements, and hence not taking into account what the applicants asserted to be undetected infringing sales, would aggregate US$188,950.

215 The respondents however challenged the applicants’ entitlement to the full extent of that amount on the postulated basis of ‘double recovery’. The respondents submitted that MLGP was not entitled to damages from PC Club in respect of the infringements facilitated by the COAs supplied to PC Club by Mr Bradley because ‘MLGP has already received full satisfaction for a claim of damages against Stephen Bradley in relation to all COA labels supplied by him to customers, including PC Club, and that accordingly the figure [of s 115(2) compensatory damages] should be US$62,500’. That suggested figure reflected the respondents’ submission that the applicants could only rely upon infringements of copyright derived from COAs obtained from Mr John Lee.

216 The respondents relied upon Ms Brasier’s agreement, given during the course of her cross examination, with counsel for the respondents’ statement that ‘damages’ were paid by Mr Bradley as a part of the settlement. As the applicants correctly submitted, ultimate regard must be had to the terms of the settlement agreement, a copy of which was tendered by the applicants. It is apparent from that agreement that the amount rendered by Mr Bradley was ‘in respect of the Applicants’ costs of the Proceedings’ and not damages. The respondents’ attempt to circumvent those clear words by the postulated construction of that settlement agreement that Mr Bradley undertook obligations to discharge the ‘claims’ made against him (including of course, damages) is inapposite. In any event the damages award with which we are now concerned is in respect of the acts of infringement on the part of the respondents in reproducing copies of Windows XP Home and Windows XP Pro without the licence of the applicants. That is a wholly different tort from that which was the subject of the applicants’ claims against Mr Bradley.

217 The applicants contended of course that the figure of US$188,950 in respect of s 115(2) damages required substantial increase to accommodate what they asserted to be a realistic estimate of ‘undetected infringement’ sales, that being an estimate from 800 to 1000 for the two Windows products on a monthly basis. I was referred by the applicants to the following evidence tendered by the applicants and bearing upon that issue as to quantification:

(i) in February 2003, Mr Lee told Ms Knox, in the course of her visit to PC Club, that ‘we do around 1000 units per month’, meaning thereby to Ms Knox that PC Club was supplying to customers approximately 1000 computer systems with Microsoft Windows operating systems pre-loaded every month;

(ii) in or around January or February 2003, Mr Lee told Mr Jackson of Hyundai that ‘we sell about 700 to 1000 PCs per month’;

(iii) on 2 July 2003 Mr Lee emailed Ms Knox and Mr Walker as follows:

‘I had an open account with Synnex, however the credit limit is very limited.

I purchased only 300 units operating system only before the credit line is gone again.

I need to purchased [sic] around 1000 units operating system per month and 150 copies of Microsoft Office, but I can not do it.

I suppose we have to take time before I will get there, unless you have any suggestion.’

The reference above to ‘get[ing] there’ is to the promotion of PC Club into the status of a Microsoft Named Account.

In the 23 months’ period from 1 January 2002 to 30 November 2003 however, PC Club purchased only 9708 units of genuine Windows XP Home and 426 units of genuine Windows XP Pro, as evident from records or summaries of records of PC Club.

218 When Mr Lee was cross-examined upon that affidavit evidence, he sought to explain that each time he had held discussions with Microsoft on those performance topics, he was referring merely to ‘projected’ or ‘forecast’ or ‘potential’ sales or making ‘an estimate’, or that he was ‘anticipating 1000 units’, and so doing ‘once the arrangement with Hyundai starts operating’. It is appropriate that I set out verbatim the text of part of his cross-examination bearing on this subject or issue, which the applicants asserted to reflect in any event adversely upon his credibility:

‘Indeed, 1000 units of operating systems per month was simply what you regularly said to people throughout this period of time as being the operating volume of PC Club?--- Sorry, I didn’t---

1000 units of operating systems per month was what you regularly said to people as being the operating volumes of PC Club in 2002 and 2003?--- Just doing around 1000 units.

Well, you weren’t doing around 1000 units, isn’t that your case?--- We are not doing 1000 units, yes.

But you said, did you not, to Mr Walker and to Ms Knox and in this email that you were doing 1000 units?--- If the orders come through, yes.

Go back to page 1054 please Mr Lee, and to the email. Where you say in the middle of that email:

“I need to purchase around 1000 units operating systems per month”

You don’t say: I will need to purchase if a deal comes through. Or: I estimate I might need it if I do a particular deal. You say there:

“I need to purchase around 1000 units operating systems per month.”

There is no qualification, is there, Mr Lee?--- Yes.

The qualification you are seeking to add now is one that you have made up?--- No. I didn’t make it up.’

219 The applicants submitted that the appropriate inference to be drawn, in the light of the evidence I have reviewed and sought to summarise, is that Mr Lee’s assertions in his communications made in writing in 2002 and 2003 should be treated as the more reliable and credible for the purpose of determining what should be the appropriate multiplier for the purposes of arriving at any relevant damages calculation, and that Mr Lee’s testimonial assertions as to lower numbers of computers sold should be rejected as an attempt to reduce the level of the respondents’ exposure to any prospective award of damages. The applicants contended in any event that the alleged condition precedent or contingency ‘if the orders come through’ was contextually implausible. Accordingly the applicants adopted as the benchmark for calculation of additional infringing sales, purportedly by way of conservative approach, a sales figure of 800 personal computers (all loaded with Windows) per month for the period of time from 1 January 2002 to 30 June 2004, which would multiply out to 24,000 personal computers sold by PC Club in that period. After deducting the purchases shown to be genuine aggregating 10,134 (ie 9708 Windows XP Home plus 426 Windows XP Pro), and admitted ‘COA only’ sales calculated at 2384 (ie 2181 plus 203), the result was on the applicants’ case a figure of 11,482 for undetected infringing sales of Windows. Assuming further in favour of the respondents that each of the likely additional sales would have been of Windows XP Home to the entire exclusion of Windows XP Pro, the applicants calculated the resulting assessment of compensatory damages, based on undetected infringing sales, to be 11,482 multiplied by US$75 and thus equalling US$861,150, which, when added to the figure of US$188,950 (supra)for admitted infringing sales, would give the amount of US$1,050,110 or A$1,353,179 as at 27 January 2005.

220 Alternatively to s 115(2) damages of that order for those undetected infringements, the applicants sought an allowance for those undetected sales, in the quantification of any additional damages awarded pursuant specifically to s 115(4), in accordance with the approach taken by Hill J in Microsoft Corporation v Glostar Pty Limited (2003) 57 IPR 518. The applicants submitted incidentally that if this Court was of the view that although Mr Lee did represent in the year 2003 that PC Club was selling between 800 to 1000 computers per month, but that PC Club was not in reality achieving those volumes, a finding should necessarily follow that Mr Lee was at that time being misleading as to the volumes being attained by PC Club for its perceived commercial advantage at the time, being the advantage of having an increased chance of PC Club becoming a Microsoft Named Account, so much being said to involve ‘clearly support for the Applicant’s attack on Mr Lee’s credit in relation to his other testimony’. In Glostar, his Honour made the following finding adversely to the credit of the respondents in that litigation, which the applicants contended to merit adoption in principle by way of that further ultimate approach to the assessment of s 115(4) additional damages in this case:

‘[22] There seems to me little doubt that the respondents in this case have proceeded, and have deliberately proceeded, to breach the first applicant’s copyright in flagrant disregard of the first applicant’s rights. There is little doubt that it is likely that the number of infringing copies which the respondents have supplied would be substantial. It has been submitted by the applicants that a significant level of undetected sales should be inferred and that it would be an appropriate way to proceed to assume that at least 10 programs of Microsoft Windows per week would have been sold during the period, with at least four programs a week of Microsoft office being sold in that period.

[23] That submission assumes presumably that the respondents should be inferred to have sold something like 10 Pcs a week in the relevant period. It is difficult to know what the extent of the respondents’ business was in the period that comprises some 91 weeks. No doubt it is probable that sales in the early period of trading were low as the respondents developed some form of goodwill and thereafter increases.’

I have not found that Mr Lee’s representation should be inferred to have been broadly correct, nor that s 115(4) damages should be assessable on the footing adopted by Hill J for the reasons that I will shortly provided.

Additional damages for breach of copyright

221 The applicants also made claim for an award of additional damages specifically pursuant to s 115(4) of the Copyright Act, having regard to the following factors apparent therefrom:

(i) the flagrancy of the infringements;

(ii) the need to deter similar infringements of copyright (that is of course the copyright asserted by the applicants in the proceedings);

(iii) the conduct of the respondents after the acts constituting the infringements;

(iv) any benefit shown to have accrued to the respondents by reason of the infringements;

(v) any other relevant matters.

(i) The flagrancy of the infringements and my conclusions upon the credibility of Mr Lee

222 ‘Flagrancy’ has been described as meaning a ‘calculated disregard of the plaintiff’s rights, or [a] cynical pursuit of benefit’ (Prior v Lansdowne Press Pty Ltd (1995) 29 FLR 59 at 65 per Gowans J), and as reflecting ‘the existence of scandalous conduct, deceit and such like’, and as including ‘deliberate and calculated copyright infringement’ (Ravenscroft v Herbert & New English Library [1980] RPC 193 at 208 per Brightman J), and ‘deliberate, deceitful and serious’ conduct (Microsoft Corporation v Atifo Pty Ltd (1997) 38 IPR 643 at 648 per Tamberlin J). Flagrancy is not an essential requirement for additional damages but it is an important factor: Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88 at 103 (Tamberlin J).

223 The applicants submitted that in the light of the matters referred to below, ‘it was clear beyond argument’ that Mr Lee and thus PC Club knew that the ‘COA only’ method was not licensed by Microsoft. Inferentially the evidence demonstrates sufficient support for that submission. The conduct of Mr Lee and PC Club was described indeed, in my opinion with justification, as deliberate and flagrant, and it was contended that the present case attracts the Court’s award of additional damages pursuant to s 115(4). I was referred by way of exemplification of the operation of that subsection to the following authorities: Goodview Electronics at [59]-[64]; Raben Footwear at 103; Atifo generally and TYN Electronics also generally. In TYN Electronics, awards made by Stone J against the respondent corporation and corporate officer by way of additional damages were respectively $300,000 and $400,000. Of course every case must be adjudged according to its own facts and circumstances.

224 The applicants emphasised, in my opinion with justification, that Mr Lee was well acquainted with Microsoft’s licensing policies and with the appearance of genuine Microsoft software; for example:

(i) he was experienced in the business of assembling and marketing personal computers, having operated the former business operations of DAT Computers, which he described as a ‘substantial business’, for a period of ten years, that business having similarly involved the loading of Microsoft Windows software operating system onto computers which had been assembled by that company; inclusive of his time with PC Club, he had gained a total of more than fifteen years’ experience in acquiring both hardware and software for inclusion in assembled personal computers;

(ii) in April 2000, as part of the settlement of previous proceedings brought by Microsoft against DAT Computers and Mr Lee for infringement of copyright in Microsoft software, he had signed a contractual document which stated relevantly as follows:

‘[DAT Computers] and [Mr Lee] acknowledge that the acquisition of Microsoft Programs and Microsoft products from sources other than Microsoft’s authorized distributors carries with it a significantly increased risk that [DAT Computers] and [Mr Lee] may acquire counterfeit products which would infringe Microsoft’s copyright and/or trade marks.

[DAT Computers] and [Mr Lee] acknowledge that if they supply copies of any Microsoft Programs and/or Microsoft products to any person, they will:

(a) only supply legitimate copies of the Microsoft Programs which the Respondents can reasonably establish were sourced directly from Microsoft’s authorized distributors or from any wholesaler who sourced the programs from Microsoft’s authorized distributors, and accompanied by original disks, manuals and licence agreements;

(b) only supply genuine Microsoft products which the Respondents can reasonably establish were sourced directly from Microsoft’s authorized distributors or from any wholesaler who sourced the products from Microsoft’s authorized distributors; and

Mr Lee was also well acquainted, and became so in the years 2002 to 2003 in particular, with the appearance of licensed Microsoft software, which bore prominent reference to a ‘warning’, and contained explicit instructions as to how a COA should be dealt with, as well as other licensing documents; Mr Lee accepted that he had seen and opened ‘many, many boxes’ of licensed Microsoft software supplied in response to PC Club orders.

225 PC Club must further have been aware that the terms of a system builder’s licence, such as attached to Ex DL-1, required the system builder to peel the COA from a genuine flat-pack software unit containing an authentic copy of the Microsoft program on CD, and to adhere the COA to the chassis of a personal computer. Multi-packs such as Ex DL-1 also contained an OEM preinstallation kit, which in turn contained an authentic copy of the Microsoft Windows software, and from which that copy embodying the Microsoft program or programs could be loaded onto each computer being assembled. Hence the COA operated as a certificate of the authenticity of the copy of the program or programs on the CD contained within the flat pack, and of the authenticity of those programs loaded on to the hard disk from the OEM preinstallation kit.

226 The respondents’ case was necessarily or inherently that PC Club was entitled to buy loose COAs, that is COAs unaccompanied by any authentic Microsoft media or software packaging, and subsequently to apply those COAs to computers onto which were installed copies of the programs made by the respondents without Microsoft’s license. So much would however tend to render the notion of ‘certificate of authenticity’ meaningless, as the applicants rightly submitted, since a COA cannot realistically constitute a certificate of the authenticity of a software program when no copies of the software program accompany the certificate, the COA in those circumstances being provided ‘loosely’ in the sense of having nothing realistically and relevantly to authenticate in any physical or tangible sense. That situation was reason enough, as I think the applicants rightly submitted, to reject the respondents’ contention that the ‘COA only’ method provided the respondents with licence to make reproductions of Microsoft software. Put another way, Mr Lee testified that the operation of a COA involved ‘authenticating itself’, but as the applicants in my opinion rightly contended, the unreality of that proposition reflected no more than his unwillingness to concede the obvious – being that it is pointless for the function of a COA to be merely a form of self-authentication. Mr Lee would have been aware, so the applicants further rightly submitted, that any concession to that effect would have destroyed or rendered inherently unsustainable any claim that he genuinely believed that the ‘COA only’ method he was postulating provided PC Club with a licence to make reproductions of Microsoft software.

227 There was the evidence of Mr Lee’s knowledge, at all times relevant to the resolution of the issues arising, of Microsoft’s methodology in respect of the source of Microsoft product for system builders and the application of COAs to personal computers and its implications as follows:

(i) in early June 2003, Microsoft’s Mr Walker had a conversation with Mr Lee in relation to defective Microsoft XP Pro product which Mr Lee had purchased, in the course of which Mr Walker testified as to speaking of product legitimacy in general, adding thereby the following warning:

‘So from hereon in, don’t cut corners, don’t buy from sources you don’t trust, don’t save $5 buying from your brother-in-law. We don’t have specials, there are no cheaper deals, there are no “Lite” versions – it’s just the same green flat pack that everyone else gets.’

(that conversation took place in the context of Mr Lee’s prior adverse involvement with Microsoft per medium of his then company DAT Computers);

(ii) Mr Walker explained that ‘green flat pack’ is ‘slang’ for the authorised OEM packaged versions of Windows XP Home or XP Pro contained within multi-packs, such as forming part of ‘Ex DL-1’, and did so in the course of conversations with Mr Lee in relation to the need to buy genuine product;

(iii) in September or October 2004, Mr Lee purportedly represented to Mr Jackson (of Hyundai) that the ‘COA only version’ he espoused was ‘a licensing arrangement with Microsoft’, though he denied any communication with Microsoft officers on that subject, and it was clear on the evidence that PC Club was not a Microsoft Named Account, and further that Mr Lee was well aware of that;

(iv) in the course of the meeting between them on 10 December 2003, Mr Walker warned Mr Lee to the following effect: ‘You should purchase Microsoft Windows from Authorised Distributors – it is your only guarantee of getting genuine product – I still can’t see you buying from Authorised Distributors’;

(v) as early as January 2004, Mr Lee specifically asked Microsoft’s Ms Knox whether PC Club could ‘do a restore CD’, and was told that PC Club was not authorised to do so, because only Named Accounts were so authorised; despite that, Mr Lee caused PC Club to continue distributing computers with Windows XP Home and Windows XP Pro installed per medium of the ‘COA only’ method (which on Mr Lee’s evidence involved the creation of a restore CD) until the Anton Piller order was executed on 13 July 2004;

(vi) Mr Lee was present at a lunch at Abhi’s Indian Restaurant in May 2004 at which he heard Ms Knox of MPL inform Ms Cindy Wong, another lunch guest, that only ‘Named Accounts’ are authorised to distribute restore CDs.

228 Mr Lee sought to deny at least the circumstances recorded in (v) and (vi) above; the applicants rejoined to the effect that Mr Lee’s denials were not to be believed, and that the evidence of Ms Knox should be preferred. It was asserted by the applicants that Mr Lee had proffered those denials because he was aware that if he admitted his participation in those conversations, so much in particular would adversely affect his prospects of succeeding in this litigation. Having had the benefit of hearing Mr Lee’s evidence under lengthy cross-examination, I am not persuaded that those denials should be accepted. My impression of Mr Lee under cross-examination was that of an astute and intelligent person who was fully acquainted with the issues the subject of the proceedings and the implications thereof to the context of his answers given under cross-examination, and who consciously endeavoured to avoid the giving of any answer to questions under cross-examination, to the extent that the answer might adversely affect the respondents’ case. However I should also record that I found Ms Knox to be clear and precise in her recall, and to have a sound knowledge of matters the subject of her functions of office. I thought her testimony was more persuasively credible than that of Mr Lee, in particular to the extent of conflict or inconsistency.

229 In addition to the evidence I have summarised already tendered by the applicants in order to establish that Mr Lee knew that the ‘COA only’ method was not licensed by Microsoft, Mr Lee testified further as follows:

(i) he was aware that what he claimed to be the ‘DSP version’ of Windows XP Home was priced at approximately A$118 as at 30 November 2003, yet he accepted that the prices for the Windows XP Home COAs he had controversially purchased ranged from A$55 to A$75.25 to $79;

(ii) he was aware that the ‘DSP version’ of Windows XP Pro was priced at approximately A$192.00 as at 30 November 2003, and the prices for the Windows XP Pro COAs he had purchased ranged from A$75.00 to A$105.00 respectively, being variations which he claimed to have reflected changes in the exchange rate; he was further aware also that aside from exchange rate fluctuations, the price variation for a genuine Windows ‘flat pack’ (for example ‘Ex DL-1’), as between different suppliers, was within a small range, in the order in fact of 10%;

(iii) despite the significant price differential for software obtained by PC Club pursuant to the ‘COA only’ method, as compared with the prices for genuine ‘green flat packs of that software’, the only assurances Mr Lee indicated that he obtained as to whether the ‘COA only’ method was authorised by Microsoft emanated not from Mr Walker or Ms Knox (being of course the Microsoft representatives with whom at material times he was regularly dealing), but instead from Mr Bradley and Mr John Lee, the latter a man Mr David Lee had met on the occasion of an isolated meeting at a computer trade show in Taiwan; he also purportedly relied on material he claimed to have seen on Microsoft’s website, which I have already set out in detail, that being in my opinion lacking cogency.

Those price differentials were reasonably to be compared, despite the physical differences of course between ‘flat packs’ and COAs, because what was being sold essentially were established copyright licenses on the one hand, and merely purported rights or licenses on the other. Significantly, neither Mr Bradley nor Mr John Lee gave evidence in the present proceedings on behalf of the respondents or at all, and no explanation, or at least no adequate explanation, was given for their absence. It was submitted by the applicants that Mr David Lee’s account of the alleged assurances so obtained by him should not believed, and even if believed, that it was inconceivable that such assurances could have led him to honestly believe that PC Club was authorised to reproduce software by the ‘COA only’ method. That submission clearly has considerable force.

230 The applicants submitted therefore that the price differential between what PC Club was paying for ‘DSP software’, and its ‘COA only’ purchases respectively, was itself objectively enough, without more, to have plainly indicated to Mr Lee that the ‘COA only’ method was not licensed by Microsoft; similarly in Goodview Electronics, Branson J observed at [42] as to price differentials from authentic product:

‘From the discrepancies in price between copies of Windows 95 obtained for cash and those obtained from authorised Microsoft dealers, and from the profit margin achieved by Goodview Electronics in such a competitive industry, Mr Liu must have been aware that the copies obtained for cash were counterfeit’.

231 It was emphasised by the applicants that the prices for Windows at the times here material were as competitive as those in the context of the Goodview Electronics litigation. Mr Walker’s evidence was that sub-distributors may be able to sell Microsoft Windows product cheaper than a Microsoft authorised distributor, but only on the basis of a price differential of $1 or $2. By way of contrast, Mr Lee’s evidence was to the effect that he had obtained a source of supply of Windows software which was less than half the price charged by the sources from which he had previously been buying, yet he still allegedly considered that product to have been legitimate, being a persistence which inherently redounded to his discredit. The applicants’ case that Mr Lee could not have genuinely thought that the ‘COA only’ method was sound, at least because of the price levels at which he was obtaining product, as I have already foreshadowed, points to disengenuity.

232 Significantly yet further in support of Microsoft’s case, PC Club did not pass on the price decrease thus obtained to any significant extent for instance to what appears to have been its largest customer, or at least one of its largest customers, being Mr Jackson’s Hyundai corporate group, PC Club’s price to Hyundai for Windows XP Home being reduced from only A$125 for the genuine version to A$109 for PC Club’s ‘COA only’ version, despite the fact that the cost to PC Club of XP Home in relation to the latter software version had been effectively reduced by more than $35. The applicants submitted that so much demonstrated that Mr Lee appreciated that if he reduced the price to too low a level, Mr Jackson would have become suspicious as to whether the ‘COA only’ version was in fact genuine. Once again, the applicants’ submission has persuasive force.

233 The applicants next pointed out that Mr Lee was ‘intimately acquainted’ with the way in which Microsoft software was being marketed, and that he knew that the marketing of Microsoft software was typically accompanied by documents containing licensing terms and warnings as to infringement. So much was said to have been established by clear implication from his answers under cross-examination. Mr Lee further knew in any event, it may be readily inferred, that Microsoft software was subject to strict rules as to how it could be legitimately used. Yet as the applicants emphasised, the COAs obtained by PC Club from both SAC and JCIMC took the form merely of sheets of COAs, unaccompanied by any official licensing documentation or other accompanying terms and conditions purportedly emanating from Microsoft. That is also a significant factor damaging to the respondents’ case on infringement.

234 It was implausible that in the foregoing circumstances, so the applicants submitted and in my opinion justifiably on the evidence I have reviewed, that Mr Lee would not have communicated with Microsoft in order to ascertain the legitimacy of a merchandising process involving substantially lower prices for the Windows XP Home and Windows XP Pro products he had previously been purchasing, unless he had appreciated that Microsoft would have protested that the ‘COA only’ method was unauthorised, and unless he therefore wanted his operations or intended operations to remain undetected by Microsoft. In that regard it is apparent that Mr Lee regularly communicated during the material times with Microsoft about relatively minor matters. Mr Walker’s evidence was to the effect that he felt he had been ‘deceived’ by Mr Lee as a result of Mr Lee not making any inquiries of him as to the legitimacy of the ‘COA only’ method, adding:

‘We’d spoken so many times about sourcing a product that I thought he – if he was to have thought that this was a legitimate way to do things he would have asked me.’

235 The applicants next addressed the circumstance that although Mr Lee showed Hyundai’s Mr Jackson the restore CD made by PC Club and asked him to approve it, he did not communicate with Mr Walker or Ms Knox and ask either of them to do likewise, even though it purportedly contained Microsoft software. Furthermore for Mr Lee to have had supposedly ‘no idea’ as to what were the proper licensing terms of a restore CD, and yet for PC Club to go ahead and make a restore CD, allegedly on Mr Bradley’s mere ‘say-so’, stretches credulity. Indeed so much tends to indicate mala fides on the part of PC Club and the other respondents, or Mr Lee at least, rather than naivety. As I have elsewhere emphasised, the respondents did not seek to adduce testimonial evidence from SAC’s Mr Bradley or JCIMC’s Mr John Lee. Mr Lee did not inquire of Microsoft what copyright notice it would have required PC Club to have placed on the restore CDs it produced, even though Mr Lee asserted in evidence that he thought that he was making the restore CDs under licence, and furthermore was aware that licensed restore CDs manufactured by authorised replicators for royalty OEMs bore copyright notices in favour of Microsoft. The asserted basis upon which Mr Lee, with all his experience and knowledge, thought that PC Club was making such CDs under license, being largely based upon what he was allegedly told by the representatives of SAC and JCIMC with whom he dealt, and given the circumstances otherwise in which he allegedly caused PC Club to acquire COAs at the low prices that it did, was plainly reflective of unreality.

236 Mr Lee further testified that prior to December 2003, PC Club had not duplicated restore CDs using its CD duplicator and acknowledged that it was a novel step in his experience for PC Club to resort to duplicating CDs. He virtually acknowledged the obvious that it would have been a simple matter for him to have made inquiries of Mr Walker or Ms Knox, or of members of the Microsoft legal department, as to whether any such duplication or operation otherwise on PC Club’s part was licensed by Microsoft under the ‘COA only’ method. I agree with the submission of the applicants that no such inquiries were made implicitly because Mr Lee must in reality have known that the response from Microsoft would have been in the negative, that is, that PC Club was not entitled or permitted to make restore CDs, and that in any event the COA only method was not permitted. Mr Lee’s assertions to the contrary were not to be believed, so the applicants submitted with I think entire justification.

237 Each of the foregoing matters, a fortiori cumulatively, required or assisted to require the inference to be drawn that Mr Lee well knew that the loose COAs he was obtaining from SAC and JCIMC were not authentic, and that the use to which he was putting the same was similarly unauthorised. It was submitted by the applicants moreover that Microsoft did not need to go that distance in proof in order to establish knowledge of copyright infringement on Mr Lee’s part, it being sufficient to establish that he must have known that the ‘COA only’ method was not licensed by Microsoft.

238 It was emphasised by the applicants in the foregoing context, once more, that Mr Lee’s former operations conducted by DAT Computers had been subjected to the restraint order made by Lehane J on 4 May 2000 (ante) as to infringement of Microsoft’s programs, being an order which was formally served on him as DAT Computer’s representative on 7 June 2000. Thus it was justifiably submitted by the applicants, particularly in the context of that earlier circumstance, that by not first verifying the legitimacy of the ‘COA only’ method with Microsoft, Mr Lee knowingly exposed himself to the risk of contempt of the court’s injunction. It was a compelling proposition that if Mr Lee was truly concerned to ensure that the ‘COA only’ method was licensed, he would have surely sought verification to that effect from Microsoft, before launching upon the acquisition of so many COAs in the extraordinary circumstances that occurred.

239 As to Mrs Lee specifically, the applicants drew attention to the circumstance that on 24 January 2002, Mrs Lee on behalf of PC Club had complied with Microsoft’s request to sign a so-called System Builder Code of Ethics form on behalf of PC Club, which contained the following undertakings:

‘We will not engage in or tolerate the unauthorized copying, distribution or use of computer software under any circumstances, including without limitation…copying, distribution, or use of CD-ROMs, EULAs, COAs, manuals or other software components in a manner that is inconsistent with the applicable distribution and licensing terms authorized by the software publisher.

We agree to bear full legal responsibility for any illegal or unauthorized copying, distribution or use of computer software by our company and our employees acting within the scope of their employment. This includes payment of damages and other remedies available to the copyright holder, as well as civil and criminal penalties.’

The signature on that document matched the signature on Mrs Lee’s affidavit of 16 July 2004, which was conceded by her. Mrs Lee could not reasonably have overlooked, the applicants submitted with some justification, that she provided to Microsoft under her signature such an important undertaking, given as it was on behalf of PC Club on 24 January 2002.

240 It is therefore in the context of largely the foregoing matters I have outlined that the Court is required to evaluate the credibility of the respondents’ case that the ‘COA only’ method constituted, and provided PC Club effectively with, the licence of Microsoft to make reproductions of Windows XP software onto the hard disk of computers and onto restore CDs. The credibility of claims to that effect were not realistically sustainable.

241 As I have already foreshadowed, the applicants further pointed out that the evidentiary accounts by Mr David Lee, as to acquisition of so many loose COAs from SAC and JCIMC, changed somewhat during the course of his cross-examination from those given by him in chief in two significant respects, as follows:

(i) in his affidavit of 27 August 2004, Mr Lee testified that he received the assurance relevantly from Mr Bradley (of SAC) in a telephone call; under cross-examination, Mr Lee appeared to change his testimony to the effect that the assurance was received in a face-to-face meeting;

(ii) the respondents’ solicitors answered a request for particulars from the applicants’ solicitors, implicitly on Mr Lee’s instructions, to the effect that the programs were installed from ‘a master program provided by Microsoft through the aforesaid suppliers of the COA labels’, being of course SAC and JCIMC; under cross-examination, Mr Lee conceded that so much was incorrect, and that the master program was not supplied by SAC or JCIMC, but that PC Club simply made copies from a Microsoft program which PC Club had stored on its hard drive from PC Club’s previous use of an OEM pre-installation kit accompanying a multi-pack.

242 The applicants submitted that those inconsistencies cast at least doubt upon the veracity of Mr Lee’s explanations, and that this narrative of events underwent change in order to accommodate what Mr Lee perceived would advance his prospects in the present litigation. It was further submitted by the applicants that the earlier recorded accounts of Mr Lee, even if accepted, could not have plausibly founded any honest belief on the part of Mr Lee to the effect that the ‘COA only’ method provided PC Club with a licence from Microsoft to make reproductions of Windows XP Home or Pro, for the further reasons which included the following:

(i) the fact that the source of the COAs being sold by Mr Bradley could not be disclosed ‘over the phone’ implied that the same were illegitimate;

(ii) by 17 November 2003, when Mr Lee first spoke to Mr Bradley, Mr Lee knew that Microsoft’s permission was needed to duplicate any of its programs on CDs, yet Mr Lee admitted under cross-examination that the Microsoft website at www.microsoft.com.piracy/activation did not contain any statement to the effect that a COA allowed the duplication of Microsoft programs onto restore CDs or onto the hard discs of computer systems;

(iii) Mr Lee tested only one COA label he received from Mr Bradley, yet PC Club purchased a total of 1,978 COAs sourced from Mr Bradley, and apparently did so without making any further enquiries or tests as to authenticity;

(iv) Mr Lee’s most recent explanation proffered in evidence was that he understood Mr Bradley to mean that PC Club was permitted to make copies of Windows XP Home or Pro onto a computer hard disk and restore CD from the ‘master copy’ that was loaded onto to a computer at PC Club from the pre-installation copy provided by Microsoft in an OEM multi-pack; yet so much was contrary to the express terms of the system builder licence appearing on the outside of a OEM multi-pack (for example ‘Ex DL-1’), so the applicants pointed out, which relevantly provided as follows:

‘2. Distribution Licence Only

This is a limited licence to distribute the Software Units or Microsoft hardware with the associated components and documentation enclosed in each Software Unit or with each hardware item in this package (including, without limitation, a Certificate of Authenticity label as described in section 9). Software Unit means any one of the software programs in this package along with its associated components and documentation (including, without limitation, manuals, Certificates of Authenticity and media).

…

8. Preinstallation Requirement

If the Software Unit includes a Microsoft desktop operating system and you distribute it with a fully assembled computer system, you must pre-install the Microsoft desktop operating system on the hard drive of the fully assembled computer system, with such preinstallation limited to one copy of each software program per Software Unit in this package, if any.

…

16. Miscellaneous

16.1 Except as granted in this agreement, you may not use, run, distribute, copy, modify, display, repackage or reassemble any Software Units or Microsoft hardware or any of them.

16.2 MS reserves all rights not expressly granted in this agreement.’

(v) Mr Lee had observed that a system builder licence was attached to the OEM multi-pack; he had noticed it ‘many times before’;

(vi) Mr Lee had always been aware that the effect of the system builder licence was that ‘once you break the seal you are agreeing to the licence conditions provided by Microsoft’;

(vii) Mr Lee admitted, before he heard of the ‘COA only’ method, that he knew that PC Club needed the permission of Microsoft in some way or another to make a copy of Microsoft software;

(viii) Mr Lee received no assurance from Mr John Lee of JCIMC that he was entitled to make restore CDs by using the COAs, yet he assumed that he was entitled to make a restore CD by copying any Windows XP Home or Pro compact disk which was ‘lying around’ at PC Club, despite that course being contrary to the express terms of the system builder licence; and

(ix) Mr Lee acknowledged under cross-examination that computer assemblers, such as IBM, would have no basis for needing to rid themselves of excess stock of COAs for Windows XP Home and Pro, thus undermining the foundation of his asserted belief, so the applicants pointed out, that the COAs supplied by Mr Bradley were excess stock from IBM (Mr Lee later sought to resile from that acknowledgement, according to the applicants, only after he realised that it did not suit his interests in the litigation).

In my opinion the foregoing submissions, as to the effect of the evidence and inferences to be drawn therefrom, were sound and should be accepted. The overwhelming impression from Mr Lee’s evidence, taken as a whole, was that he was prepared to testify and to verify anything that he thought might assist or advance the respondents’ case.

243 As I have already mentioned, the applicants emphasised that further inferences should be drawn adversely to the respondents’ case by reason of the respondents not calling Mr Bradley and Mr John Lee to testify in the proceedings, and thus to verify Mr David Lee’s assertions as to the critically important assurances allegedly given to him by each of those two vendors of COAs on behalf of SAC and JCIMC respectively. Initially, no explanation was given for not requiring those critical witnesses to testify, thereby attracting the operation of the principle in Jones v Dunkel (1959) 101 CLR 298. A belated endeavour was made on behalf of the respondents to explain by affidavit why no such testimony from Mr Bradley or Mr Lee was presented by the respondents to the Court, at least after the trial resumed following two months adjournment (see affidavits of Mr Lee of 4 November 2004 and of Mr Mancini bearing date 20 July 2004 but actually sworn 4 November 2004). The applicants submitted that those affidavits were inadmissible both as to form and relevance but the same were in any event read to the Court, subject to debate in the context of final submissions in terms of admissibility. Plainly that material, not having been subjected to testing by cross-examination, cannot strictly and ultimately be treated as evidence in the proceedings, or at the very least in terms of any cogency.

244 The applicants submitted that irrespective of those belated purported and untested explanations, the reasons for the failure to call Mr Bradley were in any event inadequate. I was referred to an email from Mr Bradley to the effect that he was not willing to provide an affidavit; no reason was given however for the absence of service of a subpoena on Mr Bradley, whose address was apparently in Petersham in the State of New South Wales. Upon that footing it was submitted that an explanation should have been given in proper first hand form, but was not, as to why the attendance of such a material witness was not compelled by subpoena, in order to dispel any Jones v Dunkel inference: I was referred in that regard to Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 at 343 per Kirby P (as he then was). In all the circumstances, I do not think any such adverse inference has been dislodged, but even if the contrary might conceivably be the case, that purported explanation was hardly persuasive in the light of the other factors I have above recorded.

245 The respondents’ reasons given for the omission to call Mr John Lee of JCIMC were asserted by the applicants to have been also inadequate. Mr David Lee’s affidavit of 4 November 2004 merely attached a list of written questions and answers by Mr John Lee, asserted by the applicants to be in any event in inadmissible form, which of course was strictly correct. It was pointed out by the applicants moreover that such material indicated implicitly that Mr John Lee had been fully co-operating with the respondents and answering their questions, and that affidavit evidence could well have been provided in the context of proper verification in the witness box in the usual way, and I was referred to my reasons for judgment in Sheldon and Hammond Pty Ltd v Metrokane Inc (2004) 61 IPR 1 at [139-140]. It was not demonstrated that Mr John Lee had been subpoenaed by the respondents to attend the hearing and to give evidence.

246 The applicants submitted therefore that the Court should not accept Mr David Lee’s evidence to the effect that he honestly believed that the so-called ‘COA only’ method involved or carried with it a licence from Microsoft to make reproductions of Windows XP Home and Pro onto restore CDs and the hard disk drives of computers sold by PC Club; that evidence was described by the applicants as inherently implausible, and that Mr Lee’s explanations as to his belief in the legitimacy of PC Clubs’ adoption of the COA only method were in fact untruthful. The submission should in my opinion be upheld.

247 The respondents relied in any event on Mr Lee’s testimony as to his examination of the COAs he purchased, or proposed to purchase, from the three sources he nominated (ie inclusive of LBA), and as to the activation of the product numbers on the COAs sampled by him, as evidence to the effect that Mr Lee thought the ‘COA only’ method was licensed by Microsoft. That evidence was critical to the respondents’ claims as to the application of s 115(3). Yet no corroborative first hand evidence was provided by the respondents, except to the very limited and dubious extent I have summarised, and which was in my opinion clearly unpersuasive if not at times also fanciful.

248 The applicants submitted moreover that such testimony as the respondents adduced concerning the circumstances of acquisition of the COAs, even if accepted, constituted evidence in reality to the effect that Mr Lee dishonestly adjudged that the unlicensed ‘COA only’ method would not be detected as unlicensed by Microsoft, and thereby added to the flagrancy of Mr Lee’s conduct. An unlicensed method of distributing Windows XP Home and Pro, which did not successfully complete the activation mechanism used by Microsoft on at least some occasions, would not have been of any use to PC Club, as Mr Lee was asserted by the applicants to have well known from his previous experience in relation to DAT Computers. Earlier in April 2003, PC Club had sold to a customer a Microsoft product which would not activate, and PC Club’s customer had complained. Mr Walker explained the dynamics of typical copying experiences sustained by Microsoft as follows:

‘Microsoft’s product activation is a consumer deterrent (inhibiting casual “schoolyard” copying) and is not intended to be a manufacturer or supplier deterrent. Most PC manufacturers welcomed the addition of this feature while understanding it can be simply circumvented by those with an industry knowledge of technology. As such, getting a product key to successfully activate could not be considered a valid way to confirm that software is genuine. Counterfeit COA labels can have working keys printed on them in the same way that activation be beaten without the presence of any COA label.’

That evidence alone undermined if not demolished a key theme and aspect of the respondents’ case.

249 Mr Walker further testified that working product keys could be obtained on the Internet by a means which he did not want to precisely specify in open court, because of the adverse implications self-evidently to Microsoft’s product security, and that the material on Microsoft’s website in relation to activation, which was heavily relied upon by the respondents, was directed at consumers who were not sophisticated and experienced system builders, and not operatives such as was PC Club. In any event, the Microsoft system builder licence stated, as the respondents were aware, ‘visit www.microsoft.com/oem for resources available to System Builders’, and PC Club had at all times the benefit of a business relationship with Microsoft through Mr Walker and Ms Knox, and could have readily made inquiries as to the legitimacy of the ‘COA only’ method PC Club implemented on such a large scale, if its motivations and intentions had been bona fide.

250 Moreover the applicants pointed to what they described as cogent evidence to the effect that Mr Lee was well aware, from at least February 2004, that complaints had been received from persons who had bought Hyundai computers manufactured by PC Club, to the effect that Windows XP Home and Pro products were failing to activate correctly. On 6 February 2004, a meeting was held at Hyundai’s offices with attendees comprising or including Mr Jackson from Hyundai, Mr Rickman and Mr Latzel from United Electrical, and Mr Lee from PC Club. The purpose of that meeting, as described by Mr Jackson in evidence, was to discuss ways and means to resolve the extremely high number of complaints which had been received at the United Electrical call centre in relation to Hyundai PCs manufactured by PC Club. Certain resolutions were agreed at the meeting, and the document summarising those resolutions stated as follows:

‘Reason	Responsibility	Action
XP Activation Code	UEE	United Electrical will provide assistance to any customers who require assistance with Windows XP activation issues. We will contact Microsoft and get correct Activation Code’

251 Mr Lee’s evidence in the proceedings, by way of explanation for any apparent infringement of copyright committed on PC Club’s part, was said by the applicants to be moreover directly inconsistent with the evidence of three of the applicant’s witnesses on the subject of material incidents and matters. Those incidents and matters were summarised as follows:

(i) as between Ms Knox and Mr Lee in relation to:

(a) the discussions concerning Named Accounts being the only system builders authorised to provide recovery CDs;

(b) the representations made by Mr Lee about the number of computers being sold by PC Club each month;

(ii) as between Mr Walker and Mr Lee in relation to:

(a) the representations made by Mr Lee about the number of computers being sold each month in 2003;

(b) the conversations as to Microsoft so-called Office products, which had failed to activate, being ‘stolen’; in that regard there was submitted to be a direct and irreconcilable conflict with that part of Mr Lee’s affidavit evidence of 8 September 2004, where he said (in [3]):

‘In relation to product activation problems, I only had one conversation with Mr Walker and that related to stolen Microsoft products which were purchased by PC Club from IT Artvision….’

and Mr Lee’s answers in cross-examination (at transcript page 393):

‘Q. You are aware, aren’t you, that the reasons why the products did not activate was that the activation codes had been cancelled because the product had been stolen in a robbery? A. He didn’t mention that.

Q. I suggest to you, Mr Lee, that he did say that. He said that to you at your premises in early June 2003? A. That it was stolen?

Q. Yes, that the Office XP Product? No, he didn’t say it was stolen, that just to return it. He didn’t say about…’;

(d) whether Mr Lee was in fact in control of the day-to-day operations of PC Club;

(iii) as between Mr Lee and Mr Jackson in relation to:

(a) conversations held between them in relation to the ownership of PC Club;

(b) a conversation in relation to the sale by Mr Lee of DAT Computers and the payment of moneys into an offshore account;

(d) further as to whether Mr Lee was in control of the day to day operations of PC Club;

(e) Mr Lee’s allegation that Mr Jackson tried to arrange the purchase of further ‘COA Windows’.

In my judgment, the respective testimonies of each of Ms Knox, Mr Walker and Mr Jackson were truthfully given, and should be characterised as essentially or sufficiently accurate in their material respects.

252 It was emphasised moreover by the applicants that the ‘GST scam’ reflected ‘extremely badly’ on Mr Lee’s credibility; Mr Lee admitted in that regard that he:

(i) created an invoice from PC Club made out to himself solely for the purpose of getting a GST refund; and

(i) had not in fact purchased the computer listed in the invoice, even though the invoice indicated that to be the case.

It was submitted by the applicants with justification that Mr Lee thereby implicitly conceded a serious occasion of dishonesty on his part, which I think was clearly the case. Mr Lee admitted that Mr Jackson’s account of the transaction was substantially correct, though Mr Lee continued to insist that he had only obtained a GST refund on one occasion, and that was because he had imported a PC and was receiving a GST refund because he was re-exporting it for repair. Given that Mr Jackson’s account of the related conversation with Mr Lee should be further accepted to be correct, being that Mr Lee used his own computer for the transaction and that he did not leave it in Taiwan for repair but brought it back to Australia with him, and given further that Mr Lee told Mr Jackson that he had done so on many occasions before, as Mr Jackson further testified, it was further submitted by the applicants that the additional inference is open to be drawn that Mr Lee had perpetrated the ‘scam’ on other occasions. As I have earlier indicated, I found Mr Jackson to have provided impressive and credible testimony to the Court.

253 The applicants next pointed to evidence to the effect that Mr Fang for his part harboured concerns about Mr Lee’s honesty. Thus in a conversation with Mr Jackson on a flight to Germany, admissible as evidence of Mr Fang’s awareness of Mr Lee’s allegedly adverse conduct, though not per se of the truth of such allegation, Mr Fang told Mr Jackson that ‘I am having some issues with David, I am trying to work out a way to control him. David has been doing some bad things…he sends out stock from PC Club to [LBA] without invoicing [LBA]’. Mr Jackson’s testimonial account in that regard was not effectively disturbed in the course of his cross-examination.

254 It was submitted by the applicants that faced with so many conflicts between Mr Lee’s evidence and three of the applicants’ principal witnesses, including Mr Jackson, and in the light of Mr Lee’s dishonesty and business misconduct otherwise established, the Court should at least generally prefer the evidence of the applicants’ witnesses, where the same conflicted with that of the respondents, and in particular that of Mr David Lee. The thrust of the applicants’ evidence so adduced was said to possess the ‘ring of truth’, Mr Walker, in particular and I think rightly, being described by counsel for the applicants as ‘impressive’ in his role as principal witness for the applicants. His evidence was unshaken in cross-examination, at least in all essential aspects. In my opinion, he presented as an earnest and intelligent person, who testified in an emphatic but pleasant manner, and answered questions under cross-examination fully and frankly. It was further submitted by the applicants by way of contrast that Mr Lee was dishonest, that his evidence as to the assurances he allegedly received, materially to his subsequent conduct complained of, was inherently implausible, that he had already engaged in conduct by way of infringement of copyright in Microsoft software per medium of his previous company DAT Computers, and that the Court should reject in particular his testimony that he believed that the ‘COA only’ system was licensed by Microsoft. As I have foreshadowed already in relation to a number of testimonial accounts and incidents attributed to Mr Lee by various witnesses, I think that such submission in summary adverse to Mr Lee must be upheld. I am obliged to conclude that Mr Lee was prepared to testify to anything untruthful or exaggerated or inaccurate, however unrealistic or implausible, at least in circumstances where he thought to do so might conceivably assist the respondents’ case.

255 Accordingly I would find the infringement of copyright perpetrated by the respondents was of such a kind and occurred to such an extent as to have been flagrant, and to require the need for deterrence of similar infringements.

(ii) Conduct of the respondents after receipt of notification by Microsoft of the alleged infringing conduct

256 On 26 July 2004, the applicants served a notice to admit facts requiring the respondents to acknowledge inter alia that:

(i) the Microsoft programs are original literary works first published in the United States of America;

(ii) copies of each of the Microsoft programs, and the packaging in which they are contained, bear a label or mark stating that Microsoft is the owner of the copyright in the Microsoft program at the time each Microsoft program is published;

(iii) the Microsoft programs were first published by Microsoft in the United States of America after 1980; and

(iv) Microsoft’s name appeared on each of the Microsoft programs as first published.

257 The applicants contended that each of the above matters, and additionally matters relating to the transfer of the OEM business from MLI to MLGP which have been initially addressed in these reasons, could not have been seriously in dispute, yet each of those matters had been put in issue by the respondents’ notice disputing facts served on 9 August 2004. The applicants further contended that the respondents had conducted the proceedings ‘tactically’, by putting the applicants to the time and cost of proof on technical but ultimately uncontroversial matters. There is no doubt that the respondents fought every conceivable matter put in issue, and with great vigour. In that regard the applicants recorded that the respondents’ defence initially disputed the absence of licence in their favour to do the matters complained of, and thus put the applicants to technical proof on that subject, but that the respondents ultimately admitted the absence of licence per se in their favour. As a result of the respondents’ position thus consistently adopted in these proceedings, so the applicants’ submissions continued, the applicants have been obliged to undertake considerable expense and effort in order to establish technical matters from overseas witnesses which should never have been raised as issues in the proceedings. I have given those submissions much thought, and although my response thereto might have more appropriately been postponed until later in these already lengthy reasons, I think I should record at once that the professional conduct of these proceedings on the part of the respondents’ senior counsel has been never less than appropriate, and in accordance with the best traditions of practice which this Court is entitled to expect from those practitioners who appear to present responses on the part of a respondent to an applicant’s case, however strong the applicant’s case may appear to be. The applicants have been put to proof of title to copyright as well as other matters to an extent that was within the scope of the forensic entitlement of the respondents, and on the basis of pleadings. Counsel for both parties have provided very considerable assistance to the Court in relation to what has been difficult and complex forensic litigation, and both counsel displayed at all times appropriate respect to each other and to the Court in the best traditions of the Bar.

258 In any event, the applicants submitted that Mr Lee (and necessarily therefore his controlled entity the PC Club) for his part had been ‘dishonest’ in his defence of these proceedings by alleging that he did not even know that the ‘COA only’ method was not licensed by Microsoft. The findings I have made provide support for that submission, which reflects adversely upon Mr Lee and at least as a consequence the company PC Club in relation to which he exercised de facto, if not also de jure, control. All that was said by the applicants to be a further factor, in particular in the light of the evidence adduced by the applicants and the inadequacy or shortcomings of the respondents’ responses, which should result in a substantial award of additional damages against PC Club and Mr Lee. As will shortly be seen, the same extent of criticism was not levelled at Mrs Lee or Mr Fang, and I think correctly and responsibly so.

(iii) Benefits said to have accrued to the respondents by reason of the infringements

259 The applicants submitted moreover that the respondents clearly benefited financially from the distribution of counterfeit copies of Windows XP Home and XP Pro. The testimony of Mr Walker was unchallenged to the effect that the computer industry is very competitive, and consequently the computer market customarily tends to react to very small pricing differences. Hence by acquiring COAs for Windows XP Home and Windows XP Pro at prices less than one half the market value for the time being of a licensed copy of the program, PC Club would have inherently reduced its cost of sales, and have been thereby enabled to ‘undercut’ its competitors in price. As earlier indicated in these reasons, PC Club’s price to its largest customer Hyundai was reduced from only A$125 for the genuine version of Windows XP Home to A$109 for the ‘COA only’ version, despite the fact that the cost to PC Club of Windows XP Home had become effectively reduced from $118 to prices between $55 and $79 by reason of its conduct complained of.

(iv) Need for deterrence

260 As the designation ‘certificate of authenticity’ implies, the applicants emphasised that the COA system constituted a means put in place by Microsoft by way of assurance to bona fide users of acquisition of authentic Microsoft products. The applicants’ case was that the respondents’ infringement of copyright, taking the form of the purchase and profitable disposition of counterfeit COAs in the course of the operation of PC Club’s business of computer hardware system building, constituted a serious abuse of Microsoft’s security device designed to minimise infringements of copyright. The applicants asserted the need for the Court to deter the respondents, as well as other putative abusers, from committing infringements of the Microsoft copyright by the use of counterfeit security devices such as COAs.

(v) Other relevant matters

261 As to other matters relevant to relief, what was further emphasised in that context by the applicants was that Mr Lee had remained subject to the order of Lehane J of this Court made on 4 May 2000 in the Microsoft/DAT Computer litigation, which restrained infringement of copyright in Microsoft’s programs, and further that Mr Lee had been at all times aware of the terms of that order, at the very least because that order had been personally served on him on 7 June 2000. In TYN Electronics at [46], Stone J observed that a respondent’s disregard of previous orders restraining infringement was a factor which ‘warrants particular condemnation’, and was an important element in the determination whether there should be a substantial award of additional damages.

262 Although the applicants have of course sought injunctions against Mr Lee in particular as part of the relief required in the present proceedings, the applicants raised concern as to the extent to which those injunctions would deter further infringements of Microsoft copying directly or indirectly by Mr Lee, given that on the applicants’ case, as I have just mentioned again, he was knowingly involved in the breach of the orders made earlier by Lehane J. Accordingly the applicants submitted that a substantial award of additional damages, at least against Mr Lee as well as PC Club would be additionally justified upon that footing, in order that he be permanently deterred from further infringements (directly or indirectly) of Microsoft’s copyright: see in that latter regard TYN Electronics at [47].

263 The applicants referred again to Wilcox J’s observations in Autodesk, to the effect that it is material to a decision to award additional damages, that the detection of infringement arising in the context of computer programs is often a difficult task. Mr Walker exemplified that concern by the observation, in the course of his evidence, that ‘there are a lot of people making a dollar here and a dollar there and it creates the incentive to cheat and if you are going to cheat, well, we’ve got the easiest stuff to steal in the market, you can’t fake an Intel CPU, if you’re going to take it from someone, take it from us.’

264 I would readily infer that the applicants were obliged to undertake expensive measures to prove substantial infringement of copyright, first by preparing for and executing the Anton Piller order at the premises of PC Club, and thereafter by pursuing the present litigation, partly with necessary assistance from overseas witnesses. The counterfeit COAs said to have been used by the respondents to conceal their copyright infringements were described as physically relatively simple to manipulate. The fact that Mr Lee had previously been subjected directly or indirectly to legal processes for infringement of Microsoft computer software copyright was said by the applicants to be the reason, or at least one of the reasons, why an Anton Piller order had been considered by the applicants to be necessary to ensure in particular that critical evidence was not destroyed.

Judicial precedents as to quantification of additional damages and their operation in the present circumstances

265 An assessment of the amount of additional damages, which the applicants sought to obtain in principle, was described by the applicants as a ‘jury’ question; and that in an appropriate case, the quantification thereof may well exceed the amount of compensatory damages awarded under ss 115(2) or 116. I was referred again to Raben Footwear, where a Full Federal Court rejected the contention that s 115(4) additional damages of $15,000.00, apart from s 116 damages of merely $275.00 was excessive. Some further precedents of awards of additional damages, cited by the applicants by way of illustration are reproduced below (being in some cases authorities to which I have already referred):

Autodesk Australia Pty Ltd v Cheung (1990) 17 IPR 69: compensatory damages $15,000; additional damages $35,000;
Namol Pty Ltd v AW Baulderstone Pty Ltd (1993) 27 IPR 1 (affirmed Bailey v Namol Pty Ltd (1994) 53 FCR 102); compensatory damages $350,000; additional damages $150,000;
Milpurrurru v Indofurn Pty Ltd (1994) 54 FCR 240: compensatory damages $120,000; additional damages $70,000 (approx);
Microsoft Corporation v Goodview Electronics Pty Ltd (2000) 49 IPR 578: compensatory damages $625,034.80; additional damages $500,000;
Microsoft Corporation v Atifo Pty Ltd (1997) 38 IPR 643: compensatory damages $24,000; additional damages $20,000;
Microsoft Corporation v Glostar Pty Ltd (2003) 57 IPR 518: compensatory damages $4,375; additional damages $291,625;
Microsoft Corporation v Ezy Loans (2004) 63 IPR 54: compensatory damages $240,625; additional damages $350,000.
Microsoft Corporation v TYN Electronics Pty Limited (in liq) (2004) 63 IPR 137: compensatory damages of $386,000; and awards of additional damages of $300,000 against the corporate respondent and $400,000 against the individual respondent.

Of course each case must be viewed in the light of its own circumstances, but the foregoing evident margins between compensatory damages and additional damages are not without significance in terms of a principled approach to assessment.

266 The applicants submitted that the flagrancy of the infringements in the present case well exceeded that established in the previous cases which have been cited in the course of the applicants’ submissions, and that PC Club is a substantial and knowledgeable player in the PC market, as have been its principal officers (in particular Mr Lee) for some considerable time, and hence that an amount of additional damages should be awarded against at least the respondents PC Club and its de facto controlling mind Mr Lee, to the extent of not less than double that of the amount of compensatory damages appropriate in the present case. If an award for damages in respect of those ‘undetected infringements’ which I have earlier defined is not to be made under the s 115(2) head of damages, then the applicants also submitted that the same should be provided for in the award of s 115(4) description of damages, in accordance with the approach taken by Hill J in Glostar. I record again the factors which the applicants identified as giving rise to their entitlement for s 115(4) damages:

(i) flagrancy;

(ii) a false defence as to acquisition from authorised dealers;

(iii) a deliberate pattern of conduct in which the respondents (being at least PC Club and Mr Lee personally) engaged in deliberate infringements which they sought to conceal;

(iv) the evident rewards, including trading advantages inherently gained from the respondents’ misconduct, directly or indirectly.

(v) the relative ease by which computer software may be duplicated, distributed and concealed, thereby rendering detection and proof of infringement a substantial task.

Each of those elements are in my opinion clearly here present. As matters have transpired, I have not found it to be feasible to award damages for undetected sales under either ss 115(4) or 115(2)..

The quantification of damages for infringement of copyright

267 In the light of the findings I have made as to infringement of copyright on PC Club’s part, being infringements designed and implemented at least principally by Mr David Lee as the controlling mind of PC Club, albeit that he did not officially occupy the position of a director of PC Club, it becomes necessary for an assessment to be made of the damages that should be awarded, in the first place as against PC Club and against Mr Lee as the controlling mind of PC Club. That task is complicated by the inadequacy of PC Club’s record keeping in relation to the sales of its computers along with non-licensed computer software and restore CDs in furtherance of its wrongful operations.

268 As I have earlier recorded, the unlicensed reproduction and sale of Windows XP Home and Pro units affected by PC Club involved an estimated denial of copyright royalty income to the applicants, and MLGP in particular, assessed in the sum of US$188,950 in respect of the period of time commencing from November or December 2003, when PC Club implemented the so-called ‘COA only’ method, until 13 July 2004 when the Anton Piller orders were implemented at PC Club’s Rhodes premises. Prior to the commencement of that period of time, that is to say, prior to the time when PC Club started to acquire ‘loose’ COAs from SAC and JCIMC, there is evidence of representations made by Mr Lee, in the nature of boasting or ‘puffing’, as to PC Club achieving a higher number of sales of Microsoft Windows XP product than those in relation to which royalties had been and were being paid. I use the expression ‘applicants’ in that context for convenience, though strictly speaking, by reason of internal Microsoft arrangements in force at the times material, the deprivation of license fees involved was attributable directly to the third applicant MLGP, pursuant to inter-Microsoft royalty income arrangements, as I have already explained. The premises for establishing at least the calculation of the amount of those unpaid license fees on the infringements conceded by the respondents are reasonable and persuasive. Where the unpaid license fee claim remains outstanding for resolution is in respect of what the applicants described as ‘undetected sales’, being ‘undetected’ from PC Club’s inadequately constituted records in respect of the preceding period of time beginning in January 2002. that is more controversial, because the evidence as to any such earlier undetected sales was confined essentially to Mr Lee’s boastings, which I have earlier summarised from the evidence.

269 The applicants’ case as to the extent of unlawful copying related to the period of time from January 2002 to November/December 2003, and was said to involve infringing sales of 11,482 units, each such unit falling to be multiplied by US$75 for the reason I have identified earlier. Hence the applicants’ calculation of US$861,150 for those so-called undetected sales. When added to the amount of US$188,950 for the ‘detected’ sales involving 2181 Windows XP Home and 203 Windows XP Pro, a total figure of US$1,050,110 results on the applicants’ case for loss of copyright royalty income sustained by MLGP, which corresponds in Australian currency to A$1,353,179 effectively as at 27 January 2005. The obstacle to upholding the applicants’ claim to license fee income prior to that relating to the period commencing November/December 2003 is that it is based not upon tangible evidence as to the implementation by PC Club of a system of copyright infringement of the kind commencing from that later starting point, but upon Mr Lee’s so-called ‘boastings’ as to PC Club’s sales performance. I have no good reason to find in his favour as to absence of such boastings for the reasons earlier given. However the difficulty is that there is no other evidence as to PC Club’s achievement of the ‘boasted’ figures. Having regard to my findings adverse to his credibility, acceptance of those figures would involve findings antithetical to those as to his credibility. This renders the award of either ss 115(2) or 115(4) damages for the ‘undetected sales’ at best problematic.

270 Whilst I can identify no good reason why I should not accept the evidence as to Mr Lee’s boastings, I find myself unable to adopt the antithetical approach to give effect to the truth thereof for the purpose of establishment and calculation of loss, in circumstances where there is no documentary evidence whatsoever of infringing sales in support of the so-called boasting. That conduct on Mr Lee’s part, or more accurately misconduct, was designed of course to further PC Club’s interests, but cannot be established as a sufficiently cogent evidentiary basis as to the truth of the necessary basis for those boastings. It would be, as I have said, antithetical for me to accept the truth of such exultations as to PC Club’s supposed trading performances uncorroborated by authentic documentation. The same have however no evidentiary support the same comprising merely assertions made by a person of no credibility. The same were made in my opinion for the devious purpose of achieving the status of a Microsoft ‘Named Account’. I do not think therefore that those boastings may be sufficiently equated per se to admissions, having regard to the context in which they were made, the credibility of the person who uttered the same, and the absence of any documentary evidence of any cogency to provide any support.

271 Bearing in mind the obstacle I have outlined above as to the awarding of damages for undetected sales in respect of the period of time pre-dating the adoption by PC Club of the ‘COA only’ method, being of course November or December 2003, and that the sole cognisable basis for all established infringements the subject of the proceedings have been related to a context of the COA methodology, I have therefore difficulty in awarding damages based on s 115(4), or for that matter on s 115(2), being made referrable to so-called undetected sales, for the following reasons:

(i) no accounting records of PC Club, for example ledgers, journals, accounting statements or taxation records, or of SAC or of JCIMC or any other COA supplier, are in evidence concerning the acquisition by PC Club of COAs additional to those disclosed in Mr Lee’s principal affidavit;

(ii) no contention has been made by the applicants, in the course of approximately 100 pages of their written submissions, as to any false or otherwise incorrect testimony given by Mr Lee or Mrs Lee or Mr Fang as to the exact or approximate number of COAs purchased by PC Club, much less as to an evidentiary basis for any such false or incorrect testimony;

(iii) there has been no evidence placed before the Court of the existence of financial statements of PC Club, from which an inference is open to be drawn as to the existence of any transactions, at least upon which evidentiary reliance may be reasonably placed, as to the number of acquisitions of COAs by PC Club beyond those detailed in the documentary evidence of PC Club or in testimonial evidence given by the respondents.

272 It follows that the Court is left without any viable evidentiary foundation for what otherwise necessarily constitutes mere speculation as to the existence of additional undetected purchases made and the number thereof, and as to the additional use of COAs undisclosed by the respondents, other than of course as already recorded in detail in the respondents’ affidavit evidence tendered in the proceedings.

273 The present case is hence not akin, or at least not sufficiently akin, to the circumstances in Glostar, where the inference was open to be drawn by Hill J at [24] as to a probability relevantly of transactions ‘in the order of 10 PCs a week’. Present there was evidence adduced by the respondents as to specific numbers of COAs acquired and exploited for use in the marketing of unlicensed reproductions of the Windows XP programs.

274 In summary, it seems to me that more is required for the Court to infer the existence of undetected infringing sales, additional of course to those specifically adverted to and conceded by Mr Lee’s affidavit evidence, than merely the controversial ‘boastings’ by Mr Lee, as to PC Club’s monthly turnover of Windows XP products, which were made in the context of purported furtherance at least of PC Club’s application to become a Named Account. There is no other evidence, direct or indirect, documentary or otherwise, I find myself to be placed in the position where testimony bearing upon relevant matter proffered by Mr Lee could not be accepted unless independently corroborated. What I have controversially addressed here are not on true analysis in the nature of admissions against interest but assertions made for the gaining an unmerited advantage, the credibility whereof being entirely uncorroborated and emanating from a person of no credibility.

275 It follows that recourse to the assessment of additional damages under s 115(4) must I think be confined to the factors of flagrancy, the need for deterrence, and the accrual of intangible benefits, each of which factors in my opinion have been established affirmatively by the evidence. It further follows that damages under s 115(2) must be confined in scope to inferences arising from the use of those COAs demonstrated by the evidence to have been specifically acquired, being inferences as to actual exploitation. Accordingly the amount of damages to which MLGP as exclusive licensee is entitled under s 115(2) is US$188,950.

276 I have already summarised a catalogue of evidentiary matters and considerations raised upon by the applicants, and which may be relied upon in support of an award of additional damages pursuant to s 115(4) against the respondents and in favour of the applicants, and of MLGP in particular. Those matters indicate that the infringements committed by PC Club from and after about December (or perhaps November) 2003 were flagrant on a significant scale, and from which PC Club would have profited inferentially to a significant financial extent. I have earlier summarised the inconsistencies between the testimonial evidence of Mr Lee on the one hand, and Ms Knox, Mr Walker and Mr Jackson on the other hand, each bearing or tending to bear upon the assessment of additional damages pursuant to s 115(4). I am readily persuaded to accept the substance of the respective testimonies of each of Ms Knox, Mr Walker and Mr Jackson, and to do so to the exclusion of such of the testimony of Mr Lee given directly or indirectly to the contrary, partly because of the coherence of the respective testimonies of each of the former three of them individually, and partly because of the very limited extent of reliance which can be placed on the evidence adduced on behalf of PC Club, inclusive of its business records (such as they were at least in the post November/December 2003 period of time). Mr Lee’s testimonial evidence was largely at odds with that of Ms Knox, Mr Walker and Mr Jackson in relation to many relevant matters, and in circumstances where the latter testimonies were soundly and persuasively based and articulated, being matters of significance and relevance which I have recorded at some length in these reasons for decision. I should add for completeness that Mr Lee’s wrongful involvement in GST tax avoidance was reflective of the inadequacy of PC Club’s record-keeping, apart from being further damaging to his credibility and to the integrity of the conduct of PC Club’s operations.

277 As directors in office of PC Club at all material times, neither Mrs Lee nor Mr Fang can escape liability, along with PC Club and Mr Lee, for the same quantification of s 115(2) damages for infringements of copyright. By virtue of their respective appointments to office as the only two directors of PC Club at all material times, and their full time (or virtually so) employment at the Rhodes premises, each of them must be taken to have authorised the infringing conduct of PC Club, and of Mr Lee on its behalf as PC Club’s evidently dominant decision-maker and otherwise controlling mind, within and for the purposes of s 36 of the Copyright Act. Moreover the evidence which I have reviewed establishes that each of them knew or ought reasonably to have known that the reproductions and sale of Windows XP Home and XP Pro the subject of complaint in the proceedings constituted infringement of copyright by PC Club.

278 Apart from the matters bearing directly upon the exposure of the respondents to s 115(4) additional damages, there have been further factors I have recorded in my reasons for decision which are material to the issue of s 115(4) additional damages, such as Mr Lee’s unconvincing defence as to his ignorance of the applicants’ licensing arrangements concerning the COA methodology, the unfair competitive advantage vis-à-vis other system builders which PC Club gained from its distribution of unlicensed ‘COA only’ reproductions of the two Windows products, and the fact that Mr Lee had been placed on ample notice of the damaging implications of copyright infringement in the context of the earlier Microsoft/ DAT Computer litigation which resulted in at least the issue of orders of this Court against what was Mr Lee’s corporate trading vehicle for his then system building operations.

279 It must therefore follow that in relation to PC Club, and also to Mr Lee personally as PC Club’s controlling mind at all material times, the applicants have established a persuasive case for an award of additional damages referrable to s 115(4) factors, in particular based upon the flagrancy of infringement and the need to deter similar infringements, and upon the benefits inherently accrued from the infringements, at least of a pecuniary nature. It was not a case only of flagrancy of conduct on the part of PC Club and Mr Lee, but also a case of history of engagement in infringing conduct by the predecessor corporate vehicle controlled by Mr Lee. Moreover there was undertaken in the present context, falsely on Mr Lee’s part to his knowledge, a defence to infringement based on the acquisition of COAs from supposedly authorised dealers (SAC and JCIMC), none of whom testified on his behalf for reasons not satisfactorily provided and demonstrated by the respondents. The absence of Mr Bradley of SAC and Mr John Lee of JCIMC from the witness box was of particularly adverse significance to the respondents’ case as to supposed ‘innocence’ of infringement under s 115(3), to which I would add reference for completeness to the absence also of any representative of LBA or Introsys. The self-serving character of the emailed communications between Mr David Lee and SAC’s Mr Bradley, and also JCIMC’s Mr John Lee, carried implications of contrivance rendering their respective absences from the witness box all the more adverse to the respondents’ case. The respondents’ case purportedly founded on aspects of the text of material appearing on Microsoft’s website was not well or sufficiently founded, and their further case as to the infallibility of COA 25 digit product keys, even by virtue of a single initial experience, was I think beyond credibility and in any event plainly unsupported by the evidence in the case.

280 Guided by the judicial precedents in this Court as to the principles governing awards of additional damages, and taking into account the entitlement of MLGP to an award of s 115(2) damages of the Australian dollar equivalent of US$188,950, I am of the view that the case has been made out in principle by the applicants for an award of additional damages against PC Club, and also Mr Lee as its evidently controlling mind and decision-maker, referrable to s 115(4) factors. Those factors comprise in the aggregate the subpar (i) factor as to flagrancy of infringements, the subpar (ia) factor as to the need to deter similar infringements of copyright of Windows programs, and the subpar (iii) factor as to benefits shown to have accrued to PC Club by reason of the infringements.

281 I have also taken into account the body of authority, commencing conveniently with Milpurrurru v Indofurn Pty Ltd (1994) 30 IPR 209 (at 348-349), to the effect that the damages stipulation of s 115(4) is designed to be in part punitive in nature. The Court is conferred with a wide discretion as to the awarding and quantification of s 115(4) damages (Sullivan v FNH Investments Pty Ltd (2003) 57 IPR 63 at 75 per Jacobson J – upheld on appeal at (2003) 59 IPR 121). Incidentally in Autodesk Inc v Yee (1996) 35 IPR 415 at 418-9, Burchett J traced the origins of the notions underpinning s 115(4) to 18^th century characterisations of illicit copying as reflective of ‘piracy’. In the present case, the evidence established more than gross carelessness, and was sufficient to attract the operation of the further subsection (4) notion of intentional deceit, implicit in the notion of ‘flagrancy’ or at least ‘all other relevant matters’ being deceit on the part of Mr Lee and accordingly of PC Club. I would uphold the applicants’ submissions that the statutory concept of deterrence is widely to be applied, and thus not just specifically to relevant respondents, but generally in relation to prospective or putative infringers as here, of the Windows programs. Par (ia) was inserted into s 115(4) incidentally with effect from 13 May 2003. It is a matter of importance for the Court to deter commercial operations of an infringing nature conducted on a wide ranging scale, a description which would encompass PC Club’s knowingly illicit activities per medium of Mr Lee undertaken since late 2003. Moreover unjustified protestations of innocence, made subsequent to profitable exploitation of wrongdoing, add to the catalogue of matters potentially informing the quantification of a s 115(4) damages award.

282 The applicants sought to encompass, within relevant factors to which the Court’s discretion under s 115(4) may operate, the respondents’ conduct of what was described as the raising of ‘technical defences’, involving for one matter the radical proposition that Microsoft does not own the copyright in Window XP Home and XP Pro. The raising of those defences, which I have dismissed, have undoubtedly occasioned considerable delay and expense in relation to the conduct and finalisation of the proceedings. It became evidently necessary for Microsoft to adduce evidence from overseas witnesses in order to engage the attacks made on the validity of the applicants’ copyright. The length and complexity of the respective written submissions of both parties, both in chief and in reply, have served to demonstrate that those defences involved issues of documentary construction of complexity, as well a consideration of affidavit evidence as to the nature and implications of Microsoft’s international corporate framework and operations. Whilst the issues of documentary interpretation fell for resolution ultimately in terms as to whether the subject Windows programs distributed in the OEM channel were different to those available for general distribution, the length and detail of the written submissions of the parties on that issue alone are testimony to the complexity of the issues raised by the respondents. As I have already indicated however, the fact that the applicants were put to the trouble and expense of addressing those defences is not a matter in my opinion relevant to quantification of s 115(4) damages, in that the defences could not have been dismissed without the need for careful thought involving the consideration of much documentation.

283 The evidence discloses that PC Club benefited financially, and to a relatively speaking substantial extent, from the sale of infringing copies of Microsoft’s products. No financial accounts or statements of PC Club were tendered by it in evidence, such as might have provided some insight into the extent of the financial benefits derived directly or indirectly from its breaches of copyright. The applicants have sought to establish the gross income which inferentially would have accrued to PC Club, in the light of the cost base attributable to its acquisition of the COAs from SAC and JCIMC at the purported prices which it apparently outlaid. PC Club’s sale price to its largest customer Hyundai was reduced from $125 for genuine Microsoft XP Home to $109 for ‘COA only’ versions, as Mr Jackson’s affidavit evidence indicated. Conversely the evidence enables the conclusion to be drawn that the cost to PC Club for the acquisition of Windows XP Home was reduced from what had been previously about $118 for authentic product to amounts ranging between $55 and $79 for counterfeit product acquired from SAC and JCIMC. Those figures demonstrate the gaining of substantial profitability illicitly from infringement of copyright, as well as a considerable advantage over competing system builders in what was clearly a highly competitive market.

284 Other matters relevant to the quantification and other determination of the relief appropriate to be granted were submitted by the applicants to include the evident difficulty, reflecting ultimately in cost, directly or indirectly, that computer program manufacturers such as the applicants necessarily incur in taking measures to protect and enforce their respective copyrights (cf TYN Electronics at [46] per Stone J). Any such quantification would however tend to be to imprecise, so far as the evidence extends.

285 The authorities have established that the assessment of an award of additional damages under s 115(4) nevertheless ‘… must of necessity be a somewhat imprecise exercise’, as the subsequent Full Federal Court decision in Bailey v Namol (1994) 30 IPR 147 at 158 emphasised. As Burchett J pointed out moreover in Raben Footwear at 104, ‘… the circumstances giving rise to and surrounding copyright infringement, must always vary infinitely and, in my view, it is not desirable to adopt any principle which results in the broad general discretion [as to additional damages] carefully formulated in s 115(4) being fettered in any arithmetical or mechanical way’. I have already cited instances of quantification of varying sums awarded to copyright owners appearing in recent authorities. The applicants contended that the infringements of copyright involved in TYN Electronics closely reflect such circumstances as to severity of infringement as are involved in this case, and emphasised in particular that counterfeit COAs were used to conceal copyright infringement, yet in the context where the applicants had put in place the COA system as a means purportedly to prevent copyright infringement. The applicants adopted as here apposite Wilcox J’s description in Amalgamated Mining Services Pty Ltd v Warman International Ltd (1992) 24 IPR 461 at 479 as to ‘… breathtaking flagrancy’, and the theme that ‘[i]f copyright protection is to mean anything the courts must take a severe view in cases as blatant as this’.

286 Since an award of damages under s 115(2) is required to be compensatory in nature, that award of US$188,950 should be made against the respondents jointly and severally, since the position and role of all four respondents is analogously to that of joint tortfeasors. For the purposes of an award of s 115(4) damages however, what is required is analysis of the respective roles and contributions of the respondents in relation to such of the discrete factors as are set out in such of the sub-paragraphs of s 115(4) as are applicable. On the footing that damages in respect of the undetected sales are to be awarded under s 115(2), the applicants submitted what were described as ‘the following ranges of damages under s 115(4)… appropriate for each of the respondents [respectively]… and the relative culpability of each of the respondents:

(a) PC Club: $300,000 - $400,000;

(b) David Lee: $400,000 - $485,000;

(d) Kane Fang: $150,000 - $200,000.’

Those varying and of course cumulative quantifications purport to reflect proportionately the respective functions of office and activities of Mr Lee, Mrs Lee and Mr Fang, but were implicitly, to my perception, geared to s 115(2) damages inclusive of some US$861,150 in respect of the undetected sales, which for the reasons I have given, are not to be made the subject of an award in the circumstances.

287 The respondents joined issue upon the applicants’ case as to flagrancy, asserting that ‘… there is no proof of flagrancy’, and further that ‘… even if infringement is not innocent, it is not necessarily flagrant’. Moreover the respondents submitted that no allowance for ‘undetected sales’ should be included in any event for ‘flagrancy’, or for any other subsection (4) considerations of relevance. I agree with that proposition in principle, irrespective of the subpar 115(4)(b)(iv) provision as to ‘all other relevant matters’ though the nature and extent of infringement may well bear upon the flagrancy, deterrence and accrued benefit factors falling within s 115(4)(b), including ‘any benefit shown to have accrued’. The applicants emphasised that flagrancy ‘… is evidenced by facts showing a calculated disregard of the plaintiff’s rights, a cynical pursuit of benefit, not mere carelessness or inadvertence’, citing thereby J Lahore and W A Rothnie, Copyright and Designs, Vol 1, Butterworths at [36,260]. The learned author introduced the above description of general principle by the generality of expression ‘… may be evidenced…’, and thereafter stated that ‘[f]lagrant conduct will include conduct that is “deliberate, deceitful and serious”’, citing Atifo, and further that ‘[f]lagrancy is not a threshold which must be crossed, but merely one of the factors to be taken into account in calculating an award of damages’, referring to Raben Footwear. The respondents pointed furthermore to the author’s emphasis that ‘[f]lagrancy implies the existence of scandalous conduct, or deceit, or deliberate and calculated infringements…’, and further that ‘[f]lagrancy is not established by proof of mere knowledge of copying otherwise every act of indirect infringement would attract additional damages because knowledge is an essential element of the infringing act’. Nonetheless the author continued that ‘[i]n the case of infringement of copyright in computer software it is relevant to take into account the fact that computer software is easy to duplicate, distribute and conceal’, citing in that regard Autodesk v Cheung.

288 The evidence which I have recorded concerning the conduct of PC Club, and that of Mr Lee in particular as PC Club’s controlling mind, has I think, established flagrant conduct on his part as the controlling mind and decision-maker of PC Club. Moreover Mr Lee’s previous involvement in infringement, indirectly per medium of DAT Computers, suggests that Mr Lee was a persistent infringer and a person not readily deterred by unsuccessful litigious experience or court ordered injunctions. Moreover it does not seem to me that either Mrs Lee or Mr Fang can avoid the operation adversely of the flagrancy factor, irrespective of their respective subordinate roles, or the other factors of s 115(4)(b) to which I have referred, given their acceptance of appointment as directors of PC Club, contemporaneously with their respective employment positions. The respondents’ submissions tended to ‘roll up’, as it were, Mr Lee’s conduct relevantly with that of Mrs Lee and Mr Fang, but that is not the approach taken by the applicants, in my opinion correctly, in their submissions which I have above recorded in particular in relation to s 115(4) damages, and which purport to reflect individual and thus varying quantifications of awards of damages pursuant to that subsection. Both of them must bear an appropriate measure of responsibility for what they knew or ought reasonably to have known concerning the flagrancy of abuse of copyright which occurred over a relatively significant period of time, though the Court cannot exclude the relevance of Mr Lee’s dominant role in the management and direction of PC Club’s affairs, Mrs Lee’s relationship with him as his wife, and the evident dominance by Mr Lee of Mr Fang in relation to PC Club’s management, direction and decision-making, despite the nature of the duties of management said to have attended his employment.

289 I think that the ratio or structure of the applicants’ fractional apportionment of s 115(4) damages tends to reflect the reality of PC Club having been at all material times, both in terms of policy implementation, decision-making and direction, dominated by the control and direction de facto of Mr Lee. As I have indicated, Mr Lee was the controlling and directing mind of PC Club in virtually if not all, matters of business significance to PC Club, and for their part Mrs Lee and Mr Fang were each obeisant to his dominant decision-making and management in that regard. On the other hand, Mr Fang did accept an executive appointment in terms of the management of PC club’s affairs, and both he and Mrs Lee accepted appointment as directors of PC Club in addition to their employee roles or functions.

290 I am therefore of the opinion that to the extent of the potentially differing assessments of additional damages which should be quantified for the purposes of s 115(4) of the Copyright Act, the amount which should apply adversely to Mrs Lee and Mr Fang respectively is in the sums of AUD$30,000 and AUD$50,000 respectively. I would make orders against Mrs Lee and Mr Fang for additional damages pursuant to s 115(4) in those respective sums. The amount for which PC Club must pay to MLGP pursuant to s 115(4) is AUD$350,000 and I would also hold Mr Lee liable to MLGP for additional damages of AUD$350,000. Those two latter awards are in no way intended to be concurrent so that both PC Club and Mr Lee are individually liable to MLGP for additional damages in the sum of AUD$350,000.

Trade mark infringement

291 As I have earlier recorded in the preview to these reasons for judgment, the respondents conceded infringement of Microsoft’s trade marks to the extent of sales of 2181 computers containing copies of Windows XP Home and 203 computers containing copies of Windows XP Pro, eachreproduced onto the hard disks affixed to those computers, and onto the accompanying restore CDs with counterfeit COAs, being infringements committed without the license of Microsoft. Those trademarks the subject of that concession comprised what I have earlier identified as Microsoft 371528(9)and Windows 576996(9), and such infringements related to each of the computers sold by PC Club that was loaded with copies of Windows XP Home and Windows XP Pro using the ‘COA only’ method.

292 Such concession of the respondents was described by the applicants as inevitable for the following reasons:

(i) the personal computers produced and sold by PC Club contained copies of those programs on their hard disks, and the screen display of those programs as reproduced by PC Club each showed the Microsoft and Windows trade marks, as did the restore CDs reproduced by PC Club;

(ii) the seized counterfeit COAs also bore those trade marks, the ‘inescapable’ inference from the evidence being that all of the loose COAs purchased by PC Club were counterfeit, and hence were also inherently infringing trademarks; in that regard I was referred for comparative illustration to the single justice decision of the High Court in Thunderbird Products Corporation v Thunderbird Marine Products Pty Ltd (1974) 131 CLR 592, and the Full High Court’s decision subsequently in Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414. Although both decisions related to the 1955 precursor Trade Marks Act legislation, they serve to demonstrate the broad approach required to be taken in relation to the concept of uses in Part 12 of the current legislation. Consequently the applicants’ case was that there occurred trade mark infringement in relation to the counterfeit COAs seized at the Rhodes premises pursuant to the Anton Piller order, as well as in relation to those attached to the computers which PC Club had earlier manufactured and sold from those premises.

293 The respondents accordingly conceded further that the applicants were entitled to injunctive relief by reason of PC Club’s trade mark infringements, but not to relief by way of damages for such infringements suffered. My reference to the applicants generally in this segment of reasons is for convenience, though as will appear, the applicants relevantly entitled are Microsoft and/or MLGP. The respondents denied that damage had been sustained by any of the applicants as a consequence of the trademark infringements on the part of PC Club. The reasoning in support of that denial is complex. Before examining the same, I will address the case of the respondents in relation to the remaining trademarks earlier identified in the reasons.

294 As I have also earlier recorded, the applicants alleged infringement of two other trademarks, which I identified as Microsoft 377674(16) and Windows 576996(16) relating inter alia to instructional manuals etc. Although the respondents’ defence put those matters in issue, their subsequent written submissions did not appear to provide any reasoned or explanatory basis for so doing. Of course in terms of damages for trade mark infringement, the potential extent of quantification of loss does not involve the potentially multiple quantification implications as to vulnerability to damages for breach of copyright. The position adopted by the respondents in relation to trademark damages issues generally appeared to boil down to that of an absence of evidence as to loss or damage suffered as a result of the alleged trademark infringements.

295 The quantification of the applicants’ claims for damages for breach of trademarks was framed initially on the following basis:

(i) during the period January 2003 to July 2004, the net revenue derived by MLGP (ie the third applicant) for each supply in Australia by MPL’s authorised distributors of a single licensed copy of an OEM version of Microsoft Windows XP Home to retailers and wholesalers, such as PC Club, was in excess of US$75.00.

(ii) during the period January 2003 to July 2004, the net revenue derived by MLGP for each supply in Australia by MLGP’s authorised distributors of a single licensed copy of an OEM version of Microsoft Windows XP Pro to retailers and wholesalers, such as PC Club, was in excess of US$125.00.

(iii) MPL (ie the second applicant) was asserted to be an authorised user of Microsoft trademarks.

Initially each of those matters was formally admitted by the respondents in the respondents’ Notice Admitting and Disputing Facts filed 9 August 2004, except that the same was confined in terms of quantification to the above sums of US$75 and US$125, and therefore did not extend to any amounts respectively in excess thereof.

296 Although the applicants also sought injunctive relief in relation to what it alleged to have been trade mark infringements, the applicants did not seek in principle any award of damages referable thereto additionally to what the applicants ultimately quantified for breach of copyright pursuant to s 115(2) of the Copyright Act. The debate between the parties on the damages issue arising from breach of trademarks is outlined below. Of course the complexity of this debate only needs to be resolved as a practical matter if the applicants’ case for breach of copyright, contrary to my conclusions, should fail, and therefore no damages would be recoverable for breach of copyright.

297 Clause 4.7 of the Parent-Subsidiary Agreement should first be reproduced below (the references therein to ‘Subsidiary’ is of course to MLI):

‘4.7 Trademarks, Service Marks and Trade Names

(a) In connection with Subsidiary’s activities authorised pursuant to this Agreement, Subsidiary is granted the right to use the trademarks and service marks used by MS Corp. in conjunction with the sale and distribution of MS Software Products and such other marks as MS Corp. may specify in writing, but only in connection with Subsidiary’s distribution of MS Software Products in such distribution; as pertains to said OEM market, such rights shall be exclusive vis-à-vis MS Corp. and third parties. If permissible and commercially reasonable in a jurisdiction, Subsidiary may sublicense MS Corp. trademarks, service marks and trade names in that jurisdiction; provided that each sublicense shall agree to comply with all terms of this Agreement to the extent they relate to the rights sublicensed. Notwithstanding the foregoing, to the extent that any jurisdiction restricts MS Corp’s rights to transfer to Subsidiary the authority referred to in this Section 4.7(a), or makes such transfer commercially unreasonable, then to the extent that MS Corp. can do so without jeopardizing its rights in such marks MS Corp. agrees to license rights in such marks to the licensee(s) designated by Subsidiary to the extent necessary or appropriate for Subsidiary to conduct its business as contemplated under this Agreement.

(b) The nature and quality of all products and services with which such marks are associated, the business with which such trade name(s) are associated, and the form and manner of use of marks and trade name(s) shall be subject to the control of MS Corp. Any MS Software Products licensed by Subsidiary will be packaged, if applicable, in approved MS Corp. packaging and comply with all requirements for use of MS Corp’s marks. The products shall be of good workmanship and quality and meet the specifications publicised in writing by MS Corp, the services shall be performed in a good workmanlike manner and the business shall be operated in a good businesslike manner and each shall meet the standards specified by MS Corp. from time to time (with the intent that the quality of the software distributed by OEMs will be equivalent in quality to the software distributed by MS Corp. to the general public). MS Corp. shall have the right to inspect Subsidiary’s facilities, to examine the manner in which Subsidiary’s services are being rendered and to examine the business and the manner in which the business is being conducted for the purpose of compliance with such standards.

(c) Subsidiary agrees to take such steps as MS Corp. request to establish or confirm MS Corp’s ownership and Subsidiary, or any sublicense of Subsidiary, as an authorized user.’

The reference to ‘Subsidiary’ above is to MLI, being the grantee of the licence the subject of that Agreement.

298 The applicants next pointed out that the Parent-Subsidiary Agreement, when read with the subsequent Contribution Agreement made between MLI and MLGP, established that MLGP was an ‘authorized user’ within s 8 of the Trade Marks Act, which provides that a person is an authorised user of a trade mark if the person uses the trade mark in relation to goods or services under the control of the owner of the trade mark. Thereafter the applicants referred to s 26 of the Trade Marks Act, which relates to the powers of an authorised user of registered trade marks, and which provides relevantly as follows:

‘(1) Subject to any agreement between the registered owner of a registered trade mark and an authorised user of the trademark, the authorised user may do any of the following:

…

(b) the authorised user may (subject to section (2)) bring an action for infringement of the trade mark:

(i) at any time, with the consent of the registered owner;

…

(2) If the authorised user brings an action for infringement of the trade mark, the authorised user must make the registered owner of the trade mark a defendant in the action…’

299 Here of course, the trade mark owner Microsoft is already an applicant, whilst in consequence of the Contribution Agreement made between MLI and MLGP, the authorised user MLGP is of course also an applicant. Section 126 of the Trade Marks Act provides as follows:

‘The relief that a court may grant in an action from infringement of a registered trademark includes:

(a) an injunction, which may be granted subject to any condition that the court thinks fit; and

(b) at the option of the plaintiff but subject to section 127, damages or an account of profits.’

300 It was upon the footing above outlined that the applicants submitted that MLGP was able to recover, as an authorised user of the trademarks of Microsoft, though as a mutually exclusive alternative to damages payable under s 115(2) of the Copyright Act, the amount of US$75.00 for each infringing sale of XP Home and of US$125.00 for each infringing sale of XP Pro, that being the net revenue receivable by MLGP for each respective genuine sale of those two products. All that is because, so the applicants further submitted, there is an inescapable inference that had the respondents not sold computer hardware loaded with Microsoft software labelled with trade mark infringing stickers, the respondents would have sold those same computers loaded with genuine copies of Windows XP Home and Windows XP Pro: see in that regard the same so-called ‘one-to-one substitution’ point addressed earlier in these reasons in relation to damages for breach of copyright, which holds equally valid for damages for trade infringement.

301 The respondents rejoined first to the effect that recovery of trade mark damages at the instance of MLGP was not specifically pleaded. The response of the applicants to that rejoinder was threefold, as follows:

(i) the substance of the Parent-Subsidiary Agreement and the subsequent Contribution Agreement were respectively pleaded in pars 11 and 12 of the statement claim, and par 38 thereof along with par 8 of the amended application, which were contended to be wide enough to encompass a claim for damages for trade mark infringement at the instance of MLGP pursuant to s 126 of the Trade Marks Act;

(ii) although it was Microsoft’s registered trade marks that were infringed, MLGP as authorised user for its part suffered damage, or should validly be so treated, and it can establish loss on that hypothesis;

(iii) the authorised trade mark user claim of MLGP arises entirely out of evidence already placed before the Court, and constitutes an alternative legal characterisation of the applicants’ claim based on or referrable to the same facts and circumstances;

(iv) that alternative characterisation on the part of the applicants was prompted, for more abundant caution, by the respondents’ so-called ‘technical arguments on copyright’, which were not pleaded ‘until the trial began’, but were raised shortly thereafter;

(v) in those circumstances, the enabling provisions of Order 13 rule 2 of the Federal Court Rules empowers the Court to grant leave for the purpose of determining the real questions raised by… the proceedings, being leave said to be customarily granted.

302 The interests of justice clearly require that the applicants be permitted to pursue relief in relation to admitted trade mark infringement in the forgoing circumstances, and in my opinion, no prejudice could conceivably thereby flow in substance or reality to the respondents (see National Australia Bank Ltd v Nobile (1988) 100 ALR 227 at 227 per Davies J); moreover as the applicants pointed out, the status of MLGP as an authorised user was not controversial. To the extent that formal amendment to the Statement of Claim may be required, I would grant leave to the applicants nunc pro tunc to amend par 14 of the statement of claim, so that the same would now read:

‘Each of the second and third applicants is an authorised user of the Microsoft Trade Marks.’

303 The respondents contended that irrespective of the foregoing amendment, so much did not solve a so-called insuperable obstacle to the applicants’ claim for damages for breach of trade marks. That repudiated claim of the applicants was said to be to the effect that it was only MLGP which claimed to have suffered any damage as a result of the conceded trademark infringement, that being the loss of copyright royalties of US$75 per copy of Windows XP Home and US$125 per copy of Windows XP Pro. The respondents submitted that if MLGP was unable to prove an entitlement to damages under the Copyright Act, MLGP would not be entitled to be compensated for the loss of copyright royalties under the guise of the Trade Marks Act, or for that matter under the TP Act.

304 The next step in the respondents’ submissions was the assertion that as the owner of the registered trade marks, Microsoft had not proved any loss at all, in that it was merely endeavouring to rely on the losses sustained by MGLP, by way of lost copyright royalties. It was further asserted that the applicants were alleging for the first time in closing oral submissions that they could establish those losses because MGLP was at all material times an authorised user of the trade marks. A claim under s 26 of the Trade Marks Act, relating of course to the powers of an authorised user of registered trade marks, had not been specially pleaded, so the respondents’ contentions continued, and had not been proved on the applicants’ case, mere reference to clause 4.7 of the Parent-Subsidiary Agreement (ante) being asserted by the respondents to be insufficient. That was said by the respondents to be because under s 8 of the Trade Marks Act relating to the definition of authorised user, it is necessary to show that the user of registered trade marks does so under the ‘control’ of the registered proprietor; however under the terms of the Parent-Subsidiary Agreement, the respondents submitted that the conduct of the MGLP as the user is not under the control of Microsoft in the relevant sense. That was further said to be because the rights of MLGP, and before it MLI, to make ‘derivative works’, and to distribute Microsoft programs in the OEM channel, were all ‘exclusive vis-à-vis Microsoft’, and not conduct that was under Microsoft’s control. On the contrary it was said that Microsoft had excluded itself from that part of PC Club’s market (described by the respondents as the OEM market), and MLGP therefore had the relevant rights to the exclusion of Microsoft. There is a measure of unreality in that analysis, involving as it does the postulation that Microsoft was unable to exercise control over MLGP such that Microsoft would have been unable to reclaim from its general partner MLGP its so-called exclusive rights in the OEM market instantly or at any time of its choosing. The inference of entire control of MLGP by Microsoft in any relevant sense is I think clearly to be inferred from the relevant (non-arms length) documentation. In any event, the effect of the respondents’ submission is to denude any exclusive licensee of copyright, who is granted concomitant rights in respect of trademarks of the licensor, from the status of an authorised user under the Trade Marks Act.

305 Nevertheless the respondents contended that there was no necessary corollary ‘under the structure’ of s 26 of the Trade Marks Act that makes the measure of an authorised user’s loss equate with that of the trade mark proprietor. In that regard it was pointed out by the respondents that MLGP’s loss was the loss of royalties for use of the copyright works, being its Windows computer program, and I was again referred to [5] and [6] of the affidavit testimony of Microsoft’s senior attorney, Mr Fay, which I have extracted earlier in these reasons for judgment. However I am unable to comprehend why MLGP’s loss would not in substance and reality be reflected, at least inferentially as a corresponding loss to Microsoft.

306 In any event, the respondents asserted that there was no attempt made to prove, or to quantify, any loss suffered as a result of alleged trade mark infringements, as distinct from loss suffered by MLGP as a result of copyright infringement, and further that potential damages for trade mark infringement were not co-extensive with MLGP’s loss of copyright royalties, that being said to be the evident loss sought by MLGP to be recovered by it. The respondents placed emphasis again on Mr Fay’s testimony, referring as it did to the rights to sue for copyright infringement only. Moreover MLGP’s claim for the full amount of the revenue lost, by way of copyright royalties, assumed that Microsoft would have made the same level of sales, and this was said by the respondents to be an incorrect assumption for the purpose of calculating damages for trade mark infringement. The respondents referred in that regard to the testimony of Mr Walker to the effect that there are other operating systems for use on computers, Windows being no more than one of those, along with others such as Linux and the relevant operating systems available for use on Apple McIntosh computer systems. As counsel for the applicants observed during argument however, the market for Microsoft operating systems is novel. Hence once PC Club had committed itself to selling personal computers advertised as carrying Microsoft Windows operating systems, it was almost impossible to infer that they could sell those PCs with any of the other operating systems postulated by Mr Walker. As I have already indicated, the inference that PC Club would have purchased the program legitimately rather than used other operating systems, or forewent those systems entirely, is open to be drawn in the present circumstances.

307 In my opinion, there is no substance or reality reflected in the respondents’ foregoing submissions. There is no evidence to suggest otherwise than at all material times, Microsoft remained the registered owner of the trademarks MICROSOFT and WINDOWSand merely authorised its controlled entity MLGP to have the benefit of the relevant trade marks for the time being. The fact that MLGP is one of the applicants for the same relief in the proceedings is enough to complete its standing, MLGP being subject to the entire control of Microsoft; as Microsoft’s controlled entity, the status of Microsoft and MLGP as applicants renders the point technically sought to be taken by the respondents’ nugatory and of no realistic or operative effect. Similarly the respondents’ contention to the effect that MLGP had no right to damages to compensate the conceded trademark infringement in the event that it was found ineligible to obtain damages for copyright infringement is fallacious. Although the measure of damages in respect of MLGP’s loss caused by infringement of the trademarks matches that measure adopted for infringement of its copyright, the entitlement to the latter does not therefore predetermine the entitlement to the former. The statutory basis for the award of damages in respect of copyright infringement is wholly separate from that grounding the award of damages for trademark infringement.

308 At this point in time, the applicants sought orders confined entirely to injunctive relief in relation to trade mark contraventions.

Infringement of TP Act

309 The applicants further pleaded that by the respondents selling and offering to sell infringing copies of Windows XP Home and Pro and related products to which the Microsoft trade marks applied, without the license of the applicants inclusive of course of Microsoft, the respondents expressly or implicitly represented falsely to purchasers of those products, as follows:

(i) such items were made by or with the license of Microsoft;

(ii) the respondents were lawfully entitled to sell such items; and

(iii) the purchaser of such items was entitled to use such items.

Consequently the applicants pleaded that PC Club had engaged in conduct in contravention of ss 52, 53(a), 53(c) and 53(d) of the TP Act, and each of Mr and Mrs Lee and Mr Fang were involved in those contraventions by being knowingly concerned in and party to those contraventions.

310 The applicants pointed out that the Court was only required of course to consider those causes of action for damages, pursuant to s 82 of the TP Act, if it was to find that the applicants were not entitled to recover damages for infringement of copyright under s 115(2) of the Copyright Act, either because the Court may find that a ‘defence’ under s 115(3) thereof had been made out in relation to any of the respondents, or because the Court ‘finds against the Applicants on technical copyright argument’. The applicants’ claim for injunctive relief against the respondents was of course pressed in any event.

311 The respondents’ submission in response was, in short, that there was ‘just no evidence to prove damages for contraventions of the TP Act, and that if the applicants are entitled to damages at all, they are entitled, or more accurately MLGP is prima facie entitled, to damages for copyright infringement’. If however the applicants were to fail in their copyright claim because of what the respondents described as their ‘technical arguments’, or if the applicants were to fail in their copyright claim for damages for copyright infringement because of the operation of s 115(3) of the Copyright Act as to so-called innocent infringement, the respondents submitted that the applicants cannot recover any alleged losses as a result of copyright infringement, as they sought to do under the so-called guise of the TP Act.

312 The respondents’ contention suffers from a similar misconception as that which they advocated in respect of the applicants’ entitlement to sue for trademark infringement. The measure of damages proposed by the applicants in respect of its causes of action under s 82 of the TP Act should not be confused with the wholly distinct statutory basis for damages granted under that measure. That is, just because the applicants have adopted the quantum of damages available under s 115(2) of the Copyright Act as the measure (my emphasis) for damages under s 82 of the TP Act does not mean that in addition to making out the s 82 causes of action, they need also to have satisfied the requirements of the Copyright Act for an infringement action.

313 The respondents did not dispute that Microsoft had used that name in the context of the business operations of itself and its wholly controlled entities, nor that Microsoft, or MPL or alternatively MLGP, had acquired the relevant reputation in that name in Australia in respect of the products presently the subject of dispute. Likewise the respondents did not deny that the above three representations are false. All of this provides the basis for the applicant’s claims for misleading and deceptive conduct on the part of the respondents. I also find that Mr Lee, Mrs Lee and Mr Fang are persons involved in a contravention of ss 52, 53(a), 53(c) and 53(d) of the TP Act by virtue of their being knowingly concerned in, or parties to, PC Club’s contravention within the meaning of s 75B(1)(c). As I have found each of those persons were aware of, or in the case of Mr Lee, actively involved in, the procurement of COAs, the adoption of the ‘COA only’ method and the marketing and sale of PCs installed with infringing copies of the programs. As per the dictum of Lee J in Wheeler Grace v Pierucci, each of Mr and Mrs Lee and Mr Fang therefore had ‘knowledge’ of the claims of the contravention of ss 52, 53(a), 53(c) and 53(d).

Conclusions on the causes of action pursued by the applicants

314 For essentially the reasons I have outlined, the applicants are entitled to maintain and to succeed, in principle, on their respective causes of action for breach of copyright, breach of trade marks and for misleading and deceptive conduct under the TP Act, and I will grant injunctive relief at this stage pursuant to the applicants’ request. Since I have found in the applicants’ favour to the effect that MLGP, as exclusive licensee of the right to reproduce copies of Windows XP Home and Windows XP Pro, is entitled to an award of damages pursuant to ss 115(2) and 115(4) of the Copyright Act from each of the respondents in respect of their infringement of that copyright, I have not considered it necessary to formulate an appropriate damages award in respect of the action brought by the applicants under the Trade Marks Act or the TP Act. This is in accordance with the applicants’ submissions. It is appropriate however that I also make orders preventing PC Club from taking any further steps in contravention of either of those Acts.

I certify that the preceding three hundred and fourteen (314) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Conti J.

Associate:

Dated: 28 October 2005

Counsel for the Applicant:	R Cobden SC; P Flynn

Solicitor for the Applicant:	Mallesons Stephen Jaques

Counsel for the Respondent:	A Franklin SC

Solicitor for the Respondent:	Maxwell IP

Dates of Hearing:	8, 9, 10 September and 4, 5 November 2004, 3, 4 March 2005

Date of Judgment:	28 October 2005

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