Companies, authorities, county councils and municipalities are all highly dependent on IT systems to operate efficiently. What happens if a new IT system is procured and the previous supplier terminates the agreement before a new IT system has been implemented? This is what happened the City of Malmö when it procured a new healthcare IT system. The compensation that the City of Malmö is liable to pay the IT supplier for use of the supplier’s software has now been subject to court proceedings for almost four years. The case has been appealed all the way to the Swedish Supreme Court, which is to consider the issue of whether passive storage of software constitutes copyright infringement and if so, how to determine reasonable compensation payable to the copyright holder.
The City of Malmö licensed the copyrighted software, Origo, from the company Alfa Kommun & Landsting AB (“Alfa”). After a few years it became obvious to the City of Malmö that Origo would not be able to handle the City’s future requirements, so a new procurement for a healthcare IT system was initiated. Alfa then terminated the agreement with the City of Malmö effective 31 December 2013. In a letter to Alfa, the City of Malmö commented on the termination of the agreement stating that it believed that it had acquired the copyright to the Origo software and therefore had a continued right to use the software. Consequently, the City of Malmö continued to use Origo even after termination of the agreement.
In December 2013, the City of Malmö filed an application for summons with the Malmö District Court asserting that the City held the copyright to the software or had at least acquired a perpetual licence to the software. Alfa disputed the claim and submitted a counterclaim seeking compensation for copyright infringement due to unauthorised use of the software.
The fact that the software was subject to copyright and that the agreement between the parties had been terminated on 31 December 2013 was undisputed in the case. It was also clear that the City of Malmö had continued to use Origo up until 12 January 2015, when the application server was shut down. Furthermore, the City of Malmö still had a copy of Origo on its backup system up until 28 September 2015, when it was finally deleted. The District Court concluded that the City of Malmö had neither acquired the copyright for Origo nor a perpetual licence. Therefore, the key issue in the case was whether the City of Malmö had infringed the copyright and, if so, how to calculate the reasonable compensation for the infringement.
Under Swedish copyright law, reasonable compensation must be paid for any unauthorised use of copyrighted works. Reasonable compensation is generally determined by what constitutes the standard licence fee for the right of use in question, thus the commercial and correct compensation that should have been paid if a licence on market terms had been granted for the unauthorised use.
It furthermore follows from copyright law that anyone who has the right to use software also has the right to make a backup copy of the software, if this is necessary. However unless otherwise agreed, such backup copies may not be used for other purposes or continue to be used once the right to use the software has expired. One of the issues considered by the District Court and the Court of Appeal was whether passive storage of backup copies and user copies of a licensed software constitutes unauthorised “use” of the software after the expiry of the licence. The Court of Appeal concluded that the passive storage of the software by the City of Malmö was an unauthorised use and therefore constituted copyright infringement. The District Court came to the opposite conclusion.
In terms of calculating reasonable compensation, the Court of Appeal stated the following. In 2013, which was the last year for which there was a valid licence agreement, the City of Malmö paid SEK 2.3 million excluding VAT for the use of Origo. The Court of Appeal considered that there were no grounds for assuming that a voluntary and commercial licence for 2014 would cost less.
When the Court of Appeal determined what the reasonable compensation for use of Origo for 2014 would be, consideration was given to the fact that the software had been developed specifically for the City of Malmö and that it was of considerable importance. Furthermore, the City of Malmö “urgently needed to continue its use as the new system had yet to be implemented”. Furthermore according to information from Alfa, which the Court of Appeal appears to have accepted, the price for Origo had been set low in order to be “in a good position” for any future procurement. Therefore, Alfa’s negotiating position was very good. Based on this, the Court of Appeal concluded that the reasonable compensation for use of Origo during 2014 should be set at SEK 3.6 million excluding VAT. Thus, over 50 per cent more than the compensation paid by the City of Malmö for use of Origo the year before.
However, the Court of Appeal deemed that reasonable compensation for the passive storage should be considerably lower than the licence fee for the active use. Given this, the Court of Appeal decided that the compensation for 2015 should be SEK 960,000 excluding VAT. If the compensation was allocated based on an active use of 12 days in 2015 and passive storage for the remaining period from 12 January up to and including 28 September, the reasonable compensation for the passive storage totals approximately SEK 1,150,000 excluding VAT per year. This is equivalent to approximately half the compensation paid by the City of Malmö for its use of Origo in 2013.
In summary, the Court of Appeal judgment shows that firstly, the continued use of a an old software which is of considerable importance in the implementation of a new IT system that has not been completed can be costly, and secondly that the passive storage of such software has a fairly high value. It remains to be seen what the Supreme Court will conclude with respect to passive storage and compensation for this. However, it is clear that it is important to consider and regulate what happens in the procurement of an IT system if the previous supplier terminates the agreement before the new IT system has been implemented, and what the options should be for storing backup copies in such situations. There are also grounds for considering so-called exit/sunset provisions for IT licences or support for IT systems – that is, the ability for the licensee to extend agreements for an additional period of time once agreements have been terminated in order to create stability. Furthermore, it might be worth considering negotiating perpetual software licences and payment of an annual fee for support/maintenance. This would offer some degree of certainty to the licensees who could then continue to use old versions of the software, at least for a transition period.
The Supreme Court is expected to hand down its judgment in the beginning of the summer.