The Full Federal Court has confirmed the first instance decision in Software AG (Australia) v. Racing & Wagering Western Australia, finding that Racing & Wagering was contractually entitled to create, install remotely, maintain and test a disaster recovery copy of licensed Software AG software.

The decision is important as it provides guidance on the extent to which a licensee is permitted to use licensed software, in the context of a standard software licence, says Jonathan Kelp, a solicitor at Mallesons Stephen Jaques, writing in the firm’s IT Update.

The decision makes the following important points, says Kelp: If a licence allows the creation of a copy of software for disaster recovery purposes, it would be unreasonable and inconvenient not to allow the licensee to install and test that copy, and the statutory exception to infringement of copyright programs provided by Section 47(F) of the Copyright Act only protects testing the security of original licensed programs, not back-ups or copies.

Since 1980, Racing & Wagering (and its predecessors) licensed proprietary software for its mainframe computer from Software AG. The licence agreement granted Racing & Wagering a licence to use the software on a single machine at a designated location, and authorised the company to copy the system for “archival or emergency restart purposes.”

The software was installed at Racing & Wagering’s head office, where it subsequently made a disaster recovery (DR) copy of the software, which was stored offsite on a system hosted and maintained by a third party. The DR copy had only been used four times, for the purpose of testing, according to the Mallesons report.

Software AG sought A$3.2 million (US$2.5 million) in additional licence fees and maintenance fees from Racing & Wagering to cover the DR copy. It claimed the existing licence agreement between the parties did not allow for the installation or testing of an offsite DR copy.

“Racing & Wagering instituted Federal Court proceedings seeking a declaration that it was not in breach of the licence agreement, and that its use of the DR copy was permitted by the Copyright Act,” says Kelp. “Software AG cross-claimed for the money it claimed it should have received by way of additional licence and maintenance fees.”

At first instance, the Court held that the licence permitted the creation of the DR copy, and that the off-site installation and storage of the DR copy was not “use” of the software requiring separate authorisation or licence (nor the payment of separate licence or maintenance fees), because it was not being used in the ordinary course of Racing & Wagering’s business. He also held that Racing & Wagering was entitled both under the licence agreement, and pursuant to the Copyright Act, to test the off-site DR copy.

On appeal, the Full Court was asked by Software AG to revisit the trial judge’s decision that Racing & Wagering was entitled (either contractually or under the Copyright Act) to install the DR copy onto a mainframe computer at the DR Site in order to conduct disaster recovery testing, according to the Mallesons report.

Software AG argued that while the licence authorised the making of the DR copy, it did not allow for it to be installed or used. The Full Court agreed with Racing & Wagering’s submission that the licence had to be given a sensible commercial meaning. It would be unreasonable and inconvenient if Racing & Wagering was not permitted to test the DR copy in order to ensure that it could be used for the purpose of the authorisation granted by the licence. Accordingly, the Full Court confirmed the trial judge’s interpretation of the licence agreement.