Information technology Last reviewed: July 2020 ‘Authored by Tim Somerville, Founding Partner, Somerville Legal, Solicitors & Notaries Currently updated by the LexisNexis team Geoft Rees, Director and Nikoles Keleic, Solicitor, JRT Partnership Pty Ltd (Vie) Currently updated by Roger Wade, Director, WadeLegal (Qld) Originally authored by Warren Wackerling, Senior Associate, Holman Webb (Qld) Currently updated by Eric Ross-Adjie, Principal and Andrea Keri, Principal, Warren Syminton Ralph (WA) Originally authored by Eric Ross-Adjie, Partner and Christopher Hall, Solicitor, Karp Stedman Ross-Adjie, Lawyers (WA) ‘Martin Lovell, Partner, Piper Alderman (SA) Tim Tiemey, Principal, Tierney Law (Tas) Currently updated by Lyn Bennett, Consultant, Minter Ellison (NT) Originally authored by Leon Loganathan, Managing Partner, Emma Farnell, Lawyer, and Billy Tarrio, Lawyer, Ward Keller Lawyers (NT) Currently updated by Alice Tay, Partner, Meyer Vandenberg Lawyers (ACT) Originally authored by Alice Tay, Partner and Eve Martin, Associate, Meyer Vandenberg Lawyers (ACT) What is information technology? At the heart of most businesses is an information technology (IT) system, made up of computer hardware and software. In a sale of business, there are no specific legal issues about computer hardware. It can be dealt with just as with other items of plant and equipment (see Plant and equipment). However, computer software raises special issues. What is software? ‘The software required to run a business is made up of a jigsaw of separate computer programs and other operating information. The programs are made up as follows. System software This is the program permanently embedded in a silicon chip in the hardware as part of the central processing unit, to tell the hardware how to carry out its basic functions. It is designed to provide services to other software. Applications software ‘Standard products This refers to programs such as Microsoft Word and Adobe Acrobat. Specialised softwarePage 2 of 5 Information technology This refers to programs such as MYOB used by accountants, and Locus used by legal practices. This often requires specific programming to fit in with the business, and with the other software being used in the business. Specifically written software This is software uniquely writen for a particular business. Legal rights to software When your clients decide to purchase a business, they will also wish to “buy’ the software. Software is a collection of computer programs, each made up of a complex code. This cade, when used in a ‘computer with other software, tells the computer what to do and produces images on the computer screen, When acting on the purchase of a business, you must secure for your client all the rights to use the software as part of the business and as part of a subsequent sale of that business. To do so, requires an understanding of those rights. What is software copyright? Generally, copyright protects the original way in which facts or ideas are expressed, eg in writing, computer programs, a drawing, a painting or a photograph. Section 10 of the Copyright Act 1968 (Cth) defines “computer programs”. That section also defines “literary work”, which relates to written compositions such as novels, essays or poems. This definition specifically includes ‘computer programs. Section 10 also contains a definition of “artistic work’, which relates to artistic compositions, such as drawings or paintings. This definition is broad and would capture many of the images produced on the ‘computer screen or by the printer by the computer program. References: 5 10, Copyright Act 1968 (Cth) Accordingly, when you are acting for the purchaser of a business, you must secure for your client the right to use the copyright of + the computer programs; and + original images produced by those programs, Ownership of software copyright The owner of the copyright is usually the author. The author is the actual person who wrote the software unless they were doing so in the course of their employment. In this case, the owner of the copyright, ie the person or company which owns the rights in the work, will be the employer. Also, an author may agree in writing that another person is to be the owner of copyright References: s 35, Copyright Act 1968 (Cth) Business clients talk about owning, buying and selling software. However, in almost all cases, the ownership refers to a licence. Even where unique software is written for a business, the business proprietor probably does not own the copyright, for the following reasons: + The software was written by an independent software developer, the development contract does not deal with copyright ownership and no one ever thought of transferring the copyright to the business owner. However, there would probably be an implied licence for the business owner to use it in the business, as that was the purpose for which it was written.Page 3 of 5 Information technology + Even original software is usually made up of chunks of code from other programs, put together to make a new program. While a developer has written code to join it all together, the developer does not own, and has no right to sell the copyright to those chunks of code. “Sale” of copyright There is no system in Australia for registration of copyright. When a piece of software is originally written, the copyright automatically comes into existence and is automatically owned by the author (unless one of the exceptions explained above applies). ‘Assignment of copyright, including computer programs, is covered by s 196 of the Copyright Act. There is no prescribed form of assignment; the only formal requirement is that the assignment of copyright must be in writing signed by or on behalf of the assignor. References: s 196, Copyright Act 1968 (Cth) ‘The Act does not prescribe how a licence of copyright may be assigned, Accordingly, the requirements for a valid assignment of a licence are governed only by the terms of that licence, For the reasons set out above, the vendor of a business, when “selling” software is, in almost all cases, merely assigning the licences. This is effected as follows: Systems software This is built into the hardware, That hardware comes with a licence to use the software as part of the hardware. In a standard sale of business, the purchaser's solicitor does usually not worry about assignment of the licence to use this software. Applications software Standard products ‘Again, itis likely that the vendor purchased software under a licence, which is transferrable to the purchaser of the business. The standard terms of the contract will probably be sufficient to assign the licence to such software. The licence terms should be checked to confirm that the licence is transferable, ideally. If the vendor uses standard products without having paid the appropriate licence fees, it may not have a valid licence to pass to the purchaser. In practice, this potential issue is usually ignored. Specialised software This may not be automatically transferrable. There will probably be a detailed licence agreement containing an assignment clause. As part of the due diligence process (see Due diligence) the purchaser's solicitor should call for and examine these agreements, including the assignment provisions. ‘Specifically written software This is where most problems arise. It is common to find that there is no documentation in place giving the vendor ‘ownership, or even a licence for the software. A purchasers solicitor should + insist on documentation showing that the vendor owns, or at least has a licence to use the software; and + ensure that such documentation allows any licence of the software to be transferred to the purchaser. Software support For any software other than systems software or standard products, the purchaser will need a support agreement with a supplier of the software. This is required for the following purposes:Page 4 of 5 Information technology + to incorporate any of the developer's standard updates; + to fix any malfunctions; + to make any changes. When a business is purchased, there may be several changes required to such programs. These may include changing the software which prints invoices so as to print the new Australian Business Number (ABN), or more complex changes to integrate the system with the purchaser's other businesses; and + to keep up with other technology. As other software and hardware change over time, so this software may need to be updated. It is essential that these support agreements should be checked out in the due diligence process and that the agreements should be assigned to the purchaser of the business. See Due diligence. Practice Tip: If there is computer software which is essential to the functioning of the business, whether or not it has been specifically written for that business, care should be taken to ensure that it will continue to be supported. Whoever is providing the support for the software will have a source code, This is the original code which generated the computer program used in the business. The program used in the business is known as an “object coda". Without the source code, the object code cannot be supported, and would soon be useless. If the company holding the source code goes out of business, the proprietor of the business will soon end up with software that cannot be used. However, software developers jealously guard source codes, and refuse to hand them over. The solution is for a copy of the source code to be placed with an escrow agent who will hold it and hand it over to the business owner if the developer goes out of business. Several specialised companies provide this service for a few hundred dollars per year. When buying a business with specialised software, enquiries should be made as to the location of the source code, and if necessary, the purchaser's solicitor should insist on arrangements being made to place a copy of the source code into escrow. Software patents Until laws changed around the world during the 1990s, it was not possible to register a patent for a computer program. It then became possible to register a patent for software, provided that it was a novel invention with a “commercially useful effect.” Since those changes, there have been thousands of patents for software registered throughout the world. Accordingly, itis possible for your client to purchase a business, and then find that its use of the business’ software infringes a registered patent. When acting on a purchase of a business, a solicitor cannot be expected to advise as to whether the software used in the business will infringe a registered patent. In most cases, the issue is ignored, as the chances of facing an infringement suit are remote. However, if the business is based on a unique software function, it may be wise to refer the purchaser to a patent attorney for advice, Practice Tip; Practitioners should use standard letters to clarify the limits of the retainer and ask clients to specify extraordinary due diligence requirements. Cloud Computing ‘There is a growing trend for businesses to use hardware and software owned by service providers, via the internet, rather than buy the resources themselves. This can save time and money by allowing businesses only to pay for the use they require, without capital outlay. In a sale of business, all that is required is an assignment of the rights and obligations of the vendor, as no actual software or hardware is changing hands. Like any other contract, you ‘may be required to review and advise on the contract with the company providing this service, and the purchaser would need to be satisfied with the reliability and integrity of that company. Practice Tip: You should always read the privacy policies of those service providers and ensure that your client'sPage 5 of 5 Information technology privacy conoems are addressed, Precedents Software transfer [T. Somerville, Somerville Legal, Solicitors & Notaries] Further Reading - you will need a LexisNexis® subscription Halsbury’s Laws of Australia > 240 — Intellectual Property > Il! Copyright > (4) Introduction > [240-1500}-[240- 1503