AFD Software Ltd v DCML Ltd

This is an application for permission to appeal brought by a company who were the claimants in an action tried in the Chancery Division in the Intellectual Property Court before Mr John Baldwin QC sitting as a deputy judge of the Chancery Division. The judge handed down his judgment after a full trial which lasted for four days on 2 March 2015. He dismissed the claim. The claimants now seek permission to appeal. The application was initially considered on paper by Kitchin LJ as long ago as 29 July 2015 and permission was refused.

This morning I have had the benefit of hearing oral submissions from Mr Wilson QC leading Mr Harbottle who appeared below, and, having immersed myself in the documentation over the last 24 hours, I have an understanding of the issues in this case. The judge’s judgment, which I anticipate is publicly available under the neutral citation [2015] EWHC 453 (Ch), explains in detail the background and it is not necessary or indeed possible for me in the short compass of this judgment to do more than summarise it.

The claimants have a business which amongst other things provides software for multiple users in varying circumstances who need to access the Post Office postcode database. Many will be familiar in the modern world with visiting a website selling goods and being asked to enter the postcode and then a drop-down menu provides a list of neighbouring addresses from which you choose your own address, and it is that facility, the drop-down menu and the accurate postcode information sourced via the Post Office through the claimants, that the claimants provide to their various users.

The defendants are a business that provides support and software to car dealerships. No doubt they may have other strings to their bow but the facility that this case focuses upon is the organisation and management of the courtesy car fleet and replacement car fleet operated by dealerships. That is partly an organisational task (which car is in which location) but it also involves recording, checking and authorising insurance for the user of each car in each dealership from time to time. Part of the package that they supply to the dealers includes a postcode address facility of the type that I have described, and in 2006 it became apparent to the defendants that the postcode software that they had been relying upon was not going to be available any longer because the company providing it was ceasing to provide that facility. They therefore, in the form of their employee, Mr Flaherty, who was a senior management officer, investigated the market to look for alternatives. Mr Flaherty hit upon the claimants, he made contact with them and in due course an agreement was made by which the software was provided.

The structure of the defendants’ provision of support to dealerships was (certainly at the time this dispute is concerned with) to provide it all centrally from a main server into which each dealership would enter through a password and identity-checking system, and so a dealership in Preston or in Truro would access the facility in that way over the web, and the defendants’ software, including the package providing the postcode address system, would sit on the one server albeit being accessed by a range of terminals up and down the country based at individual car dealerships.

The arrangement that the claimants understood that they had agreed with the defendants was altogether different. They had understood that they were licencing the use of the software package to sit on one internal network and for it to be accessed simply by individuals from time to time logging onto that network. They therefore charged on that basis and the charge including VAT was less than £2,000 a year, which was within a similar range to the figure that the defendants had been previously paying. The claimants’ business model has at least two other variants higher up the scale of charge. One is where the software sits on a public web where the public can access the scheme and the postcode produces their address and a hire fee is charged for that. Where (as it turns out is the case with the defendant’s business model) multiple terminals log into a single mainframe server then a different price scheme is arranged and it depends upon the number of terminals. This might be as I understand it a range of people up and down the country accessing their software support scheme through a password system, and the claimants’ case is that the difference in charging is manyfold between what they thought they were supplying to the defendants and what the defendants were actually using the software for, and it was not for some years that the claimants realised the extent of the defendants’ use and that realisation came in 2010 and it led to the claimants sending an invoice to the defendants for £12 million plus £2.1 million pounds VAT. The difference between £2,000 a year and that figure speaks for itself in terms of the gulf between the understanding that the claimants had as to what they were supplying to the defendants and the scale of use.In the event the claim that was the subject of the proceedings before the judge was reduced in its financial terms but still the claimants were claiming something in the order of £3 million.

How did this gulf occur? The contractual discussions between the two parties were of the most minimal kind. They involved two telephone conversations. First of all Mr Flaherty telephoned the defendants and was put through to one of their senior sales representatives, a Mr Johnson, and a telephone discussion took place between those two individuals in January 2006. That resulted in a trial version of the postcode software being sent out to the defendants for them to try out the product. That achieved a positive response. Mr Flaherty telephoned back on a later date and was put through to a different individual who confirmed (provided the invoice that was going to be sent out was met) the software would be sent. That happened and the CD was sent.

As is common I think with all such products the CD is accessed by on this occasion two separate clicks to show that the user accepts the terms and conditions which are (I gather from the judge’s judgment) extensive. But the physical disk that was sent was also accompanied by a licencing certificate which is in very plain terms and is captioned at the top, “Important information -- please retain this certificate”, and it sets out the licence details. It says, “This licence certificate confirms your licence to use the product named below on the number of licenced computers set out below”, and it gives other details, and, looking down the form, the number of licenced computers appears as “1”.

It was the claimants’ case that at no stage did the defendants ever explain to them (certainly in a way that they had taken in and understood) the extent of the use that they were proposing to put the postcode software to. They had a different understanding which was that it was going to be a single licence for a single website use. Much turned therefore on the oral evidence of the two individuals, Mr Flaherty and Mr Johnson. The judge in his judgment makes plain that neither witness really had any recollection of the content of the conversation at all. Of the two witnesses the judge concluded that Mr Johnson was much less reliable as a witness than Mr Flaherty. He was concerned that in his oral evidence Mr Johnson made a basic error as to the functionality of the system and he was also concerned that Mr Johnson had allowed himself to sign up to a crucial witness statement in the proceedings which did not in fact accord with his own recollection of the conversation.Conversely the judge formed the view that Mr Flaherty was a good witness who answered questions clearly and well, and the judge was satisfied that Mr Flaherty was telling the truth and doing his best to assist the court.

In terms of the telephone call, at paragraph 35 the judge says this:

“35.

AFD submitted that Mr Flaherty deliberately misled Mr Johnson and that he purposely misdescribed the use DCML would make of the AFD software by making reference only to the use of the software in connection with the dayinsure.co.uk product, the purpose being to get a licence for a lower price than should be paid. I reject that allegation. Dayinsure was a relatively small part of DCML’s business and Mr Flaherty wanted the software for use with the DCM product which generated the most value for his company. Moreover, even Mr Johnson’s attendance note makes reference to 30,000 look ups in a month and the context of that could only be the DCM product. My clear impression of Mr Flaherty was that he was an honest and responsible person and I find that it is much more likely than not that he described to Mr Johnson fully and clearly what use DCML would make of the AFD software if it took a licence to use the same.”

There the judge rejects the part of the claimants’ case which was to the effect that Mr Flaherty had “deliberately” misled Mr Johnson, and he goes on to hold that Mr Johnson was an honest and reliable person who would have set out to the claimants in detail what it was that his company intended to do in terms of the use of the software.

The judge moves on but really that finding about the initial telephone conversation sets the chain of judicial thinking moving throughout the rest of the history, which was fairly formulaic after that. There was not another occasion when either party sought to drill down to the detail of how the software was going to be used, and the claimants’ case related to the acceptance of the licence certificate that I have already described.

The judge moves back to the question of Mr Johnson and Mr Flaherty at paragraph 51, where he says this:

“51.

Where do these findings leave us? Mr Johnson said that he would have asked Mr Flaherty if DCML’s website was a public facing website and that he would have explained what public facing meant but his evidence was not persuasive and I do not accept it. Moreover, I am satisfied that neither Mr Johnson nor anyone else at AFD explained to Mr Flaherty that PCI could only be used on ‘public Internet Websites’ and what that term meant in the context of AFD’s software licensing conditions.”

Then he moves to look at the conclusions in terms of the important decisions in relation to his judgment in the action that follow from those findings. The judge concluded that the claimants had been told correctly and clearly what the defendants intended to use the software for, that Mr Johnson had advised on the level of pricing that would apply to that and the defendants had then gone ahead and accepted Mr Johnson’s recommendations, and as such therefore the judge concluded that the claimants could not assert a contract to the contrary and certainly could not assert that the defendants had abused, misused or acted in breach of their copyright in the software product.

It is against those primary conclusions that permission to appeal is now sought. A number of grounds are raised but Mr Wilson (rightly in my view) accepts that really the whole case on appeal must turn upon the judge’s findings of fact. In refusing permission to appeal Kitchin LJ also focused upon that and effectively held that the judge had made no error of law and that therefore his findings of fact were at the core of the case and there were no grounds for holding that the judge was in error in making these findings. The case, put clearly, attractively and forcefully by Mr Wilson, is that behind this situation is a bigger picture and it is one that relies in part upon the business that these claimants undertake. They make money out of people using their software and the more people who use it, the more money they make, and the difference in terms of people using the software as between what they understood the defendants’ use to be and what the defendants use actually was is of a very high order. It is demonstrated by the difference in the charge that was being paid and the sum that is now sought in these proceedings, and they say that for Mr Johnson, flawed though the judge found him to be as a witness, but nevertheless as a seasoned sales representative, to hear down the telephone a customer describing the scale of use undertaken by these defendants and not catch on that this was the scale of the project takes the judge’s evaluation that this was if anything a misunderstanding out of the scale of what is credible. Their case is that it just would not have happened. If the defendants had explained clearly what they wanted to use the software for then Mr Johnson could not have acted in the way that he did. It is just something which is completely not possible to contemplate, partly because of the scale of remuneration for the company, partly no doubt as a salesman because of his own personal position, but also because of the scope of the contract that would have to be drawn up. I understand those points. They are points that were made by Mr Harbottle in closing and I have been shown the closing submissions made on behalf of the defendants which make these points albeit in slightly less strong words from the way it is put to me today, and it is submitted that the judge in his judgment (particularly at paragraph 35) does not engage with the point. He engages with the allegation of Mr Johnson being deliberately misled but once he rejects that he does not entertain the possibility that there was some innocent misunderstanding between the parties in this telephone conversation.

In order to grant permission to appeal I have to be satisfied that the applicants have a reasonable prospect of successfully persuading the Court of Appeal on these central points. I well understand the position of the claimants here, who will be bewildered that this turn of events can have happened. The claim was brought however by the claimants and they, as a business organisation, rightly bore the burden of proving the terms of the agreement and, particularly, the terms of the telephone conversations here. In terms of business practice it does not seem that any satisfactory record was kept of the telephone conversations. The calls were not followed up. The key conversation was not followed up by a letter. All that happened was the sequence of events that I have described. So (I hope not unfairly) it can be said that the claimants have not helped themselves in terms of business practice here in putting themselves in a position where they can mount a strong probative case in support of the claim that they make.

Having looked at this, I am afraid I take the view that, despite understanding the points that are made, there is really no prospect of this appeal succeeding. The judge is an experienced judge in this field. He saw the witnesses, he was exposed to the arguments, including the argument that I have been presented with prominently today by Mr Wilson, and he formed the view that the defendants did set out their stall honestly, correctly and truthfully; they conducted themselves in accordance with that, and were entirely open throughout as to what they were doing when asked in 2010; and that the claimants then responded to that in the way that they did; and that therefore the findings of fact the judge made not only were open to him but they are not findings that in my view have any reasonable prospect of being overturned by the full court if permission were given to appeal.

So I find that I am in the same position as Kitchin LJ having gone through the exercise myself in concluding that there is no reasonable prospect of success. I therefore refuse permission to appeal.