QAD Inc. v. Shepparton Partners Collective Operations Pty Ltd is a 2021 decision of the Federal Court of Australia on the use of enterprise resource planning (ERP) software by the buyer of a business, when the seller’s licence could not be transferred without the vendor’s consent. Shepparton Partners Collective Operations (SPC) bought the SPC food processing business from a Coca-Cola Amatil group company and kept running QAD’s ERP software, but would not pay the fee QAD required as a condition of consenting to transfer the licence. Justice Thawley held that QAD had given SPC an implied licence while the parties negotiated, that it ended on 27 November 2019 when SPC refused to pay, and that SPC infringed QAD’s copyright from that date. He awarded A$662,428.80 in compensatory damages and A$500,000 in additional damages. The Full Court dismissed SPC’s appeal on damages.[1][2]
Background
In 1991 the company that later became SaleCo 2 acquired a perpetual licence for QAD’s ERP software that was non-transferable from the licensee’s side, and it remained so after later amendments. At the relevant time SaleCo 2 was running QAD Enterprise Applications 2008 Standard Edition (QAD 2008 SE) and paying QAD for maintenance and support. Coca-Cola Amatil’s group (CCA) owned the business through SaleCo, and SaleCo 2 held the licence.[1]
The software was critical: the business could not function without it. SPC’s managing director read the licence agreement during due diligence and knew it could not be assigned or transferred without QAD’s consent, and that QAD might not consent. SPC signed the business purchase agreement on 3 June 2019, for A$40 million subject to adjustments, and completion took place on 28 June 2019.[1]
The dispute
On 21 June 2019 QAD wrote to SaleCo 2, CCA and SPC offering to consent to a transfer if SPC ordered a transfer fee of A$424,392 and a maintenance fee of A$177,816 for the year from 1 July 2019 (both excluding GST), signed transfer and new licence documents, and did so by completion. Otherwise SPC would have to buy new licences. QAD later extended the deadline to 31 July 2019 in return for a meeting, and SPC continued to use the software after completion while it considered its ERP options, including an upgrade with QAD.[1]
The deadline passed without acceptance. Meetings continued until October 2019, but SPC’s internal ERP review ranked Microsoft Dynamics 365 first and recorded a “MFGPro Claim” of A$660,000 as a cost to be accounted for. On 4 November 2019 QAD wrote that the software was “being used unlicensed”. On 27 November 2019 SPC wrote that it was “not required to pay, nor is it willing to pay” any amount to transfer the licence. On 10 December 2019 QAD’s lawyers offered three options, including a new licence at list price of A$1,147,041.50 or a discounted licence of A$680,210.19, both including GST, and QAD sued on 28 January 2020.[1]
SPC accepted that it had reproduced the software in day-to-day use, in test and development environments, in a migration copy and in backups. It argued that QAD had granted an implied licence lasting until at least 10 December 2019, which could be withdrawn only on reasonable notice. It also cross-claimed against the seller, arguing that the seller had to use “best endeavours” to secure the transfer and should bear the fee.[1]
Decision or outcome
Implied licence and when it ended
The court accepted that QAD, knowing the software was in use and choosing not to demand that SPC stop so that negotiations could continue, gave SPC permission to use it. Silence alone is not enough to imply a licence, but it had to be considered in context. Assessed objectively, the permission allowed SPC to use the software while it decided whether to pay the A$602,208 transfer and maintenance fee or to take a QAD upgrade, provided it was genuinely considering one of those options.[1]
The implied licence ended on 27 November 2019, when SPC said it would not pay and was no longer genuinely considering a QAD upgrade. The reasonable notice defence had not been pleaded and would have failed anyway, because the permission was terminable at will while negotiations lasted. SPC therefore infringed from 27 November 2019.[1] SPC moved its live ERP to Microsoft Dynamics 365 on 28 September 2020, but kept running QAD 2008 SE to extract data during the proceedings and after the hearing.[1]
Remedies
| Remedy | QAD’s claim | Court’s award |
|---|---|---|
| Compensatory damages | A$984,059.12, list price for 214 frequent and 6 infrequent users | A$662,428.80 including GST: the transfer fee plus a year’s maintenance that SPC would have paid to secure the transfer |
| Additional damages | An uplift to a total of A$1,476,088.68 | A$500,000, for flagrancy, continued infringement during and after the hearing, and deterrence |
| Other relief | Declaration, injunction, verified deletion | All granted; the court preferred an injunction to SPC’s undertaking |
The court rejected SPC’s arguments that damages should reflect the short period of infringement or the age of the software. It noted that QAD sold only perpetual licences, that SPC would otherwise have kept using the software for at least seven years, and that the business had revenue of over A$284 million in its 2020 financial year, which its managing director accepted could not have been earned without the software.[1]
Cross-claim against the seller
The cross-claim failed. No reasonable businessperson would have read the sale agreement’s obligation to “permit” the buyer to have the benefit of a contract as requiring the seller to pay a substantial sum to secure its transfer, and the seller could not lawfully give SPC the benefit of a licence that was for SaleCo 2’s use only.[1]
Appeal
SPC appealed only against damages, arguing that the maintenance fee was not a foreseeable loss and should at least be reduced to net profit. The Full Court dismissed the appeal on 19 November 2021. SPC had itself argued at trial that the proper measure was the 21 June 2019 offer, and it could not complain on appeal that the judge had accepted that case. The Full Court added that it would have rejected the new arguments anyway, because SPC knew the seller’s licence included a maintenance fee, and the evidence supported an inference that maintenance cost QAD little or nothing to provide.[2]
Significance for software licensing and SAM practice
The case concerns a common event in licence management: a change of ownership of the business that uses the software. It is not about overuse, but about a buyer using software that was licensed to a different legal entity.
- Entity scope. The licence was for the benefit of SaleCo 2 only, so the buyer of the business had no rights under it.[1]
- Transfer fees. The court used the vendor’s transfer fee and a year’s maintenance, not list price for a new licence, as the measure of loss, because that was what the buyer could have paid to avoid infringing.[1][2]
- Maintenance as part of the price. Both courts treated maintenance required as a condition of transfer as part of the loss.[1][2]
- Use after migration. Running a legacy system only to extract historical data still involved reproductions of the software, and the court relied on continued use during the proceedings in awarding additional damages.[1]
Lessons learned
- Buying a business does not transfer a non-transferable licence. SPC needed QAD’s consent or its own licence, and the seller’s licence could only benefit the seller’s entity.[1]
- A vendor’s forbearance can be an implied licence, but only on its conditions. The court found permission while SPC genuinely considered paying or upgrading, which ended when SPC refused both.[1]
- Continued use after refusing the vendor’s terms can be flagrant. The A$500,000 additional damages rested mainly on continued infringement and deterrence, and the award was upheld on appeal.[1][2]
- Address licence transfers in due diligence and in the sale agreement. SPC’s attempt to shift the transfer fee to the seller failed on the wording of the sale agreement.[1]