Intelmail Explorenet Pty Limited v Vardanian (No 2) [2009] FCA 1018.

Synopsis

This case involved a dispute regarding the ownership of copyright in software programs which form components of intelligent mailing systems. The main question for the Court was whether the applicant, Intelmail Explorenet, had a right to the copyright in software created by Mr Vardanian (a former employee of the Intelmail business) either as an owner or licensee. There was no express agreement between the parties dealing with the ownership of the software programs at the centre of the dispute. The case illustrates the circumstances where a court may imply contractual terms in relation to the ownership of copyright in copyright works.

FACTS OF THE CASE

Vardanian was, for many years, an employee of companies (including Intelmail Australia) which had formerly operated part of the Intelmail business. He developed software components used in the mail sorting machines manufactured and sold by Intelmail as an employee until 1996. After that, he provided his services to Intelmail and was paid for doing so through a separate company, Controlmech Pty Ltd. The arrangement between Vardanian, Controlmech and Intelmail was complex. Vardanian was the brother-in-law of Intelmail Explorenet's sole director, Mr Dilanchian, and the two had enjoyed a close working and personal relationship until the time of the dispute. Dilanchian used the Intelmail business to financially assist Vardanian and his wife (Dilanchian's sister) to relocate to the Gold Coast from Sydney in 1996, including contributing to the acquisition of two Queensland properties for them to the order of $660,000. One of the properties was referred to as “the Greenhouse“ and was the site from which Vardanian worked on Intelmail software development. The relocation was not a subject of disagreement between the Dilanchian and Vardanian, who continued to work after 1996 as he had when in the employment of the Intelmail business.

THE DECISION

The facts were not in issue between the parties to the proceedings. Vardanian was seriously ill by the end of the trial and to expedite his judgment Justice Moore adopted, in the main, the facts put forward in the written submissions of counsel. The important factual findings going to the question of copyright ownership include:

  • There was a strong personal relationship between Vardanian and Dilanchian rooted in the family connections and their cultural ties (both men were Armenian).
  • Vardanian had made significant contributions to the development of the Intelmail business as an employee.
  • When he left the employment of the Intelmail business in 1996 neither Vardanian nor his company Controlmech held or acquired any interest in the software then subsisting. The rights were held by the various Intelmail entities which had employed Vardanian over time.
  • The main software components were developed after Vardanian ceased to be an employee of the Intelmail business (and the declarations sought by the parties also related primarily to these later components).
  • Both Vardanian and Dilanchian had treated the different entities within the Intelmail business as one, and had not given consideration to issues of ownership of the software until as late as 2003 when the actions of former employees brought the issue into focus.
  • In particular, Vardanian had not considered the issue of copyright ownership until that time.

The Court rejected the contention that Vardanian believed he had always owned the copyright in the software, both before and after 1996, and the alternative contention that Vardanian understood that while he was an employee the Intermail business owned the copyright but that once the new arrangements were implemented the ownership situation shifted to his benefit.

Legal principles

These factual findings and the conduct of the parties generally were relevant to the consideration of the terms of what Justice Moore described as the “1996 agreement“ – the contractual provisions which were to be implied regarding ownership and use of the software developed or modified after Vardanian's employment ceased. Justice Moore summarised the basic principles for implying contractual provisions in the absence of express agreement:

  • Where the applicant asserts the existence of an implied term regulating the parties' rights in relation to copyright then the precise definition of that implied term involves a question of construction of the alleged agreement.
  • The circumstances for implying a term are that: (1) it must be reasonable and equitable; (2) it must be necessary to business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
  • Where there is no formal contract agreed by the parties all that is necessary to show is that the term to be implied is necessary for the reasonable or effective operation of the contract in all the circumstances.

Specifically in relation to copyright:

  • The circumstances may require the implication of a right for the assignment of the copyright, for example when the party commissioning the creation of the work should be able to exclude the author from using the work and also to enforce copyright against third parties.
  • If there is a contractual deficiency and it is necessary to imply the grant of some right involving a choice between possible alternative rights, the choice should be of that right which does not exceed what is necessary in the circumstances. In the case of copyright, if the need can be satisfied by the grant of a licence, the implication will be of the grant of licence only.

Justice Moore also considered the relevance (if any) of post-contractual conduct in determining what the terms of the contract are when they are not in writing. If the terms are in writing the common law of Australia is clear that the post-contractual conduct is irrelevant. However the court in ascertaining the terms of an oral contract can consider the way the parties acted, in particular in their subsequent conduct. This was ultimately of limited relevance in the present case because it is necessary to show that the term to be implied is necessary for the reasonable or effective operation of the contract such as evidence of conduct surrounding the formation of the contract to determine what objectively may have been agreed or what might need to be implied by the court.

Decision

The decision was that Intelmail Explorenet was the beneficial owner of the software in its most recent iteration (its 2008 form). The court made declarations to this effect along with an order requiring Vardanian and Controlmech to deliver up to Intelmail Explorenet the associated source code. The decision was reached on the basis of a finding that it would have been improbable that Vardanian and Dilanchian would have agreed to an arrangement which would, over time, invest in Controlmech copyright in the software over which the Intelmail business would have no control other than as a licensee and deny it the opportunity to control the source code of the software. The ownership arrangement which was implied was determined to be necessary for the reasonable or effective operation of the “1996 agreement“ in all of the circumstances.

Other matters

A secondary matter involved a claim that Vardanian and Controlmech had made a groundless threat of legal proceedings within the meaning of section 202(1) of the Copyright Act 1968 (Cth). The court held that threats of legal proceedings for copyright infringement made by Vardanian and Controlmech against Dilanchian and Intelmail Explorenet in a letter sent by their lawyers in October 2008 did amount to an unjustifiable threat for the purposes of the Copyright Act. It was relevant that Vardanian gave oral evidence that he intended the letter to be a catalyst to “start negotiations“ but that the correspondence between the parties was to the contrary.

COMMENTARY

The case illustrates the commercial and legal importance of having written agreements in place to deal with the ownership of intellectual property rights created by employees and contractors. The use of written agreements can clarify the ownership position for both employer and employee, and principal and contractor. Ideally, these arrangements would be clearly articulated and agreed before any work is commenced. One of the main difficulties faced in Intelmail Explorenet Pty Limited v Vardanian (No 2) was that the parties had failed to put their minds to the issue of ownership of copyright until well after the software had been developed and was being put to use and licensed out by the Intelmail business to its customers. In effect, the dispute arose between the parties as a result of the value which the software (the intellectual property rights) had acquired over time and in the absence of a contractual framework for determining their respective rights.

In relation to employees, it is generally the case that an employer owns copyright in a work made by his or her employee in pursuance of the terms of employment under a contract of service. But even so a written agreement may be used for the purposes of certainty and to clarify the arrangements in each circumstance. In the case of contractors it is important to implement written agreements dealing with the ownership and use of works created by them. This could involve an assignment of the works to the principal, or some form of licence arrangement. The situation will depend on the type of work created and the purpose for which it is to be used.