Nintendo Wins the Circuit Layout Game: Nintendo Co Ltd v

Centronics Systems Pty Ltd

EUGENE CLARK*

Abstract
In this article the author examines the decision of Nintendo Co. Ltd. v. Centronics Systems Pty. Ltd.
His conclusion is that the High Court has adopted a liberal interpretation of the Circuit Layouts
Act and that there may be force for a sui generis scheme to govern the protection intellectual
property rights in computer technology.

1. Background to the Legislation

In Nintendo Co Ltd v Centronics Systems Pty Ltd[1] the Australian High supported Court adopted
a liberal interpretation of the Circuit Layouts Act 1989 (Cth) thereby supporting the aims of the
legislation in establishing a special regime for the protection of such rights.

Australia's Circuit Layouts Act generally follows similar legislation adopted in the US[2], Japan[3],
the UK[4] and European Community[5]. The Australian Act was passed in anticipation of
Australia's obligations under the Treaty on Intellectual Property in Respect to Integrated
Circuits.[6] It was also felt that protection of circuit layouts was inadequate under existing
copyright and designs legislation.

The Circuit Layouts Act gives legal protection to the layout of computer integrated circuits.[7] A
circuit layout is the plan, much like an a civil engineer or architect's plan for a city, which shows
the location of the elements and interconnections which comprise an integrated circuit. The
representation must be in a material form which can include the storage of the layout in
computer form. The legislation protects what are termed "EL rights" to the creator of an
'eligible layout'. The circuit itself or its packaging is usually labelled to give notice of the
creator's EL rights. The designer of the circuit layout is given automatic protection without the
need for registration. Protection under the Circuit Layouts Act is for a minimum of ten and
maximum of twenty years.

2. Facts
Nintendo, holds the EL rights in its video games. The defendant, Centronics, imported video
game circuits which were unauthorised copies of Nintendo's circuit layout which Nintendo
manufactured and marketed in regard to its game products. Nintendo initiated proceedings
against Centronics and three of its directors for infringement of various intellectual property
rights, including Nintendo's circuit layout rights.[8] The Circuit Layouts Act, though receiving
assent on 22 May 1989, did not commence until 1 October 1990. Some months prior to this
commencement date, Centronics had imported the Entertainment Units in question, although
such units were actually sold after the commencement date of the Act.
3. Procedural History and Holding
At trial, the Federal Court (Sweeney J) held in favour of Nintendo. The full Federal Court
(Northrop, Beaumont and Burchett JJ) upheld an appeal by Centronics and the three directors
in regard to the circuits layout issue.[9] This led to the appeal by Nintendo to the High Court.

The High Court unanimously held that Nintendo's rights under the Circuit Layouts Act were
infringed. Accordingly, Nintendo's appeal was upheld and Centronic's application for a cross-
appeal was refused. As to Nintendo's remedy, the High Court held that Nintendo was entitled
pursuant to s. 27(1) of the Circuit Layouts Act to sue for infringement of its EL rights and
under s. 27(2) was entitled to an injunction and 'either damages or an account of profits.'[10]

4. Was Nintendo's action was barred by s 7 of the Circuit Layouts Act?

Section 7 of the Act provides:

. . .an action does not lie under Part III in respect of any act done before that commencement in
relation to the layout, a copy of the layout, or an integrated circuit make in accordance with the
layout.

While admitting that the act of selling the entertainment units in question occurred after the
commencement date of the Act, the units themselves were imported ten months prior to the
Act's commencement. The Full Federal Court had given this language a broad interpretation
relying on the rule of construction that legislation is presumed not to interfere with vested
proprietary interests. The Full Federal Court concluded that "[i]f Nintendo's contentions are
upheld, goods that were lawfully imported for sale will be sterilised in terms of trade by virtue
of a statute coming into operation 10 months after their importation."[11]

However, on appeal, the High Court rejected the reasoning of the Full Federal Court and held
that such a principle of construction cannot

"displace . . . the unambiguous effect of the words which the parliament has seen fit to use.
In defining what constitutes commercial exploitation for the purposes of the Act, s
8(1) identifies three distinct categories of conduct, namely, distribution by way of trade (para
(a)), offering or exposing for distribution by way of trade (para b)) and importation for the
purpose of distribution by way of trade: Para (c)."
As a matter of language, the clear effect of those words is that the act of selling a circuit layout,
a copy of a circuit layout or an integrated circuit made in accordance with a circuit layout (or
something incorporating an integrated circuit) is an independent and complete act of
commercial exploitation. If itself, it constitutes commercial exploitation of the layout regardless
of whether or not there has been a prior act of importation.[12]

Their Honours also noted that the Full Federal Court's wide construction would have the effect
of placing the lawful importer of such goods in a "privileged position vis-a-vis persons who
lawfully acquired the goods locally."[13] Finally, their Honours pointed to the fact that the 16
month period between Royal Assent and commencement of the Act meant that Centronics had
imported the goods 6 months after the enactment of the legislation, thus "removing the
consideration of practical injustice"[14] which was averted to in the decision of the Full Federal
Court.[15]

5. Did Nintendo fail to established the element of 'actual or constructive

knowledge' as required by s. 19(3) of the Act?
EL rights are infringed when a person acting without the owner's authority, does anything
falling within the scope of the owner's exclusive rights. This is qualified, however, by s.
19 which is designed to protect those who commercially exploit a circuit layout but did not
know or could not reasonably be expected to know of any infringement. This defence is
applicable to secondary or indirect infringement of another's EL rights. A primary infringement
would involve actually copying or making a copy of another's layout. In contrast a secondary
infringement would amount to a mere commercial exploitation of EL rights, for example by
importing products which happened to contain a component based upon the unauthorised
copy of another's integrated circuit layout. Thus, in cases of secondary or indirect
infringement, s. 19(3) requires the owner of EL rights to prove actual or constructive
knowledge.

Centronics argued on appeal that Nintendo failed to establish that Centronics knew or ought
reasonably to have known that it was not licensed by the owner of the EL right.

In construing s. 19(3) of the Act, the High Court held that the requirement of actual or
constructive knowledge on the part of the alleged infringer that he or she is not licensed by the
owner, whoever that may be, involves more than actual knowledge of the fact that the infringer
is not licensed by that owner; but it also involves actual or constructive knowledge that the
plaintiff is in fact the owner of the EL rights.[16] However, s. 19(3) does not require that the
alleged infringer knows or ought reasonably to know that his or her conduct in fact involves
commercial exploitation of the protected layout. In this case there was sufficient evidence that
Centronics had at least constructive knowledge of the existence of Nintendo's property rights
in the protected layout.[17]

6. Did Centronics have a defence under old s. 20 of the Act

Under the Circuits Layout legislation,[18] a circuit layout is taken to be commercially exploited if
among other things, a product is sold or offered for sale which incorporates the protected
integrated circuit or a substantial portion thereof. As to the interpretation s. 20 of the Act
dealing with infringement by commercial exploitation, it was held that in s. 20, in its original
form and as applied in the present case, the requirement of actual or constructive knowledge
was satisfied if the infringer by commercial use knew or ought reasonably to have known that
intellectual property rights existed in the layout. Importantly, the original s. 20 contained no
requirement that the infringer either knew or could reasonably be expected to know that the
integrated circuit was in fact made in accordance with the protected layout and was therefore
unauthorised. "Its focus was solely on actual or constructive knowledge that EL rights existed
in the layout."[19] In the present case, and applying the language of the original s. 20, Centronics
was found to have possessed the required constructive knowledge and its defence under s.
20 therefore failed.[20]
Subsequent to the events of this case, s. 20 was amended to make it clear that the Act does not
catch innocent commercial dealing in regard to unauthorised EL rights.[21] For example, the
new wording would provide a defence to a retailer or consumer who innocently deals with an
electronic item with no knowledge of or means of ascertaining that the product contained a
concealed integrated circuit which was unauthorised. This amendment is consistent with Art
6(4) of the Treaty on International Property in Respect of Integrated Circuits[22] on which
the Circuit Layouts Act is based.[23] Art 6(4) provides:

no Contracting Party shall be obliged to consider unlawful the performance of any of the acts
referred to in that paragraph in respect of an integrated circuit incorporating an unlawfully
reproduced layout-design (topography) where the person performing or ordering such acts did
not know and had no reasonable ground to know, when acquiring the said integrated circuit,
that it incorporates an unlawfully reproduced layout-design (topography).

7. Was the Circuits Layouts Act unconstitutional under s 51(xxxi) of the

Constitution in that it purported to enact an acquisition of property on other
than just terms.
As a 'defence of last resort' Centronics finally contended that the Act amounted to a taking of
property on other than just terms and was thus unconstitutional. In its rejection of this
argument, their Honours cited the well settled principle that:

"the implied guarantee of just terms contained in s. 51(xxxi) of the Constitution . . .is subject to
a contrary intention either expressed or made manifest in . . .other grants of legislative power.
Where that is so, the other grant of legislative power manifests a contrary intention which
precludes the abstraction from it of the legislative power to make such a law.
The grant of Commonwealth legislative power which sustains the Act is that contained in s
51(xviii) of the Constitution with respect to "Copyrights, patens of inventions and designs, and
trade marks". It is of the essence of that grant of legislative power that it authorises the making
of laws which create, order, and provide for the enforcement of, intellectual property rights in
original compositions, inventions, designs, trade marks and other products of intellectual
effort. It is of the nature of such laws that they confer such rights. . .and that they conversely
limit and detract from the proprietary rights which would otherwise be enjoyed by the owners
of affected property. Inevitably, such laws may, at their commencement impact upon existing
proprietary rights. to the extent that such laws involve the acquisition of property from those
adversely effected by the intellectual property rights which they create and confer, the grant of
legislative power Miandetta in s 51(xviii) manifests a contrary intention which precludes the
operation of s. 51(xxxi).
The cases also establish that a law which is not directed towards the acquisition of property as
such but which is concerned with the adjustment of the competing rights, claims or obligations
of persons in a particular relationship or area of activity is unlikely to be susceptible of
legitimate characterisation as a law with respect to the acquisition of property for the purposes
of s. 51 of the Constitution. [24]

8. Significance of the Decision

Nintendo Co Ltd v Centronics Systems Pty Ltd is a significant decision in several respects. First,
the Australian High Court adopted a liberal interpretation of the Circuit Layouts Act 1989 (Cth)
thereby supporting the aims of the legislation in establishing a special regime for the protection
of such rights. Second, it is important to realise that to date there have been very little
successful litigation surrounding EL rights.[25] The result in the Nintendo case, however,
suggests that this situation may change and that there may be some force in the arguments for
a sui generis scheme to govern the protection of intellectual property rights in computer
technology.[26] Thirdly, the High Court judgment provides an excellent example of legislative
drafting and judicial interpretation which creates an appropriate balance between the need to
protect such intellectual property rights and the legitimate expectations of consumers of
electronic products who are often unaware of and unable to ascertain that there has been a
violation of such rights. Finally, the passage and enforcement through the courts of the Circuit
Layouts legislation also reflects the growing impact of international treaty obligations on
Australian domestic law. Given the growth in and importance of international trade this trend
is likely to continue.