A clash of liability in contract and tort in an IPR environment: Case analysis C-666/18 – IT Development SAS v Free Mobile SAS

Back in 2019 the Court of Justice of the European Union (CJEU, the Court) was faced with a request for a preliminary ruling from the Paris Court of Appeal related to a dispute that arose from an alleged breach of a software licensing agreement. The case (C‑666/18) that was ultimately decided by the CJEU by judgement from 18 December 2019 is interesting and practically relevant as it deals with the potentially complex interplay between contractual liability and tortious liability.

The facts of the case accompanied by a brief analysis are summarized below.

Facts of the case

Back in 2010 the company IT Development concluded a licensing and maintenance agreement with the mobile operator Free Mobile for the software product “ClickOnSite”. The product was a centralized project management tool that was to be used by the mobile operator to monitor in real time the progress that was being made by its technical teams when deploying telecommunications equipment and antennae. Five years later, in 2015, IT Development brought a claim against Free Mobile alleging that it had modified the software which was in breach of the licensing agreement as the licensee was not granted the right to modify the software product. It was postulated in Article 6 of the concluded license agreement that the customer expressly undertakes not to reproduce the software package, not to decompile or reverse engineer it, as well as not to modify, adapt or create derivative works based on it. It is important to note here that IT Development filed its claim on the ground of an alleged copyright infringement within the ambit of the tortious liability regime. In response, the mobile operator Free Mobile brought a counterclaim for abuse of process and argued that the claim of IT Development was inadmissible and unfounded.

By judgement issued on 6 January 2017, the Regional Paris Court declared that the claim of IT Development which was based on tortious liability was legally inadmissible and it also dismissed the counterclaim by Free Mobile. In its reasoning the regional court expanded on the fact that under French law there are two sets of rules related to liability in IP matters – i) tortious liability in the event of an infringement of the IP rights of the right-holder that are established by law and ii) contractual liability when there is an infringement of IP rights that are granted by way of contract. According to the Regional Paris Court, in the present case Free Mobile was alleged to have failed to perform its contractual obligations and therefore IT Development had legal basis for an action for contractual liability and not for tortious liability. That is why its claim was found to be inadmissible.

Consequently, IT Development brought an appeal before the Paris Court of Appeal requesting it to overturn the judgment of the first instance and to declare the infringement proceedings which it had brought to be admissible. IT Development also sought a declaration that the modifications to the software that were made by Free Mobile constitute copyright infringements and that Free Mobile is ordered to pay IT Development the sum of EUR 1 440 000 as compensation for the suffered damage and, in the alternative, that Free Mobile is ordered, on a contractual basis, to pay IT Development the sum of EUR 840 000 as compensation for the suffered damage. Thus, in its appeal IT Development brought in the alternative a claim for compensation that had its basis in contractual liability.

The question raised before the CJEU

The Paris Court of Appeal decided to stay the proceedings and to refer to the CJEU the following question for a preliminary ruling:

“Does a software licensee’s non-compliance with the terms of a software licence agreement (by expiry of a trial period, by exceeding the number of authorised users or some other limit, such as the number of processors which may be used to execute the software instructions, or by modifying the source code of the software where the licence reserves that right to the initial rightholder) constitute:

–        an infringement (for the purposes of Directive [2004/48]) of a right of the author of the software that is reserved by Article 4 of Directive [2009/24] on the legal protection of computer programs,

–        or may it comply with a separate system of legal rules, such as the system of rules on contractual liability under ordinary law?”

The Paris Court of Appeal further explained that under French law civil liability is based on the principle of non-cumulation – i) one person cannot hold another liable both under contract and tort for the same acts and ii) tortious liability would be excluded in favor of contractual liability where the parties are bound by a valid contract and the suffered damage results from contractual non-performance. At the same time the referring court clarified that under French law copyright infringement, which was originally a criminal offence, was based on tortious liability and furthermore, there was no provision in statutory law explicitly stating that copyright infringement cannot exist when the parties are also bound by a contract. The Paris Court of Appeal also provided certain examples that under French law, infringement proceedings (under tortious liability) can be brought against a licensee who has breached a licensing agreement in the realm of patents and trademarks. Based on the expected guidance from the CJEU, it remained to be decided whether such an outcome could also be possible in the field of copyright.

The CJEU judgement

First, the CJEU decided that it had to slightly reformulate the question that was referred for a preliminary ruling so that it is posed in a more precise manner. The reformulated question was whether “Directives 2004/48 and 2009/24 must be interpreted as meaning that the breach of a clause in a licence agreement for a computer program relating to the intellectual property rights of the owner of the copyright of that program falls within the concept of ‘infringement of intellectual property rights’, within the meaning of Directive 2004/48, and that, therefore, that owner must be able to benefit from the guarantees provided for by that directive, regardless of the liability regime applicable under national law.” The reformulation was more in line with the principle that the determination of the applicable liability regime is something that ultimately falls within the competences of the Member States. What the CJEU could effectively advise on was the interpretation of Directives 2004/48 (Enforcement Directive) and 2009/24 (Directive on the legal protection of computer programs) and achieving effective protection of the IP rights of the rightholder based on the requirements of those Directives.

In view of Directive 2009/24 which establishes the substantive rights of the authors of computer programs, such as the right to modify the computer program, the CJEU rightly observed that the protection of the rights of the rightholders in a computer program does not depend on the fact whether those rights are infringed as a result of a breach of license agreement. To do the opposite would be contrary to the aim of the Directive and would unfairly narrow down the scope of protection. Moreover, recital 15 of Directive 2009/24 explicitly stipulates that the unauthorized transformation of the form of the code in which a copy of a computer program has been made available is an infringement of the exclusive rights of the author. Obviously, no mention is made in the Directive about a breach of a licensing agreement or any contractual origin of the infringement.

In view of Directive 2004/48 (Enforcement Directive), the CJEU turned its attention to the text Article 2(1) which clearly states that the Directive applies to “any infringement of intellectual property rights”. Therefore, the measures, procedures and remedies necessary to ensure the enforcement of IP rights which are established by the Directive will clearly apply also for infringements which are caused by a breach of a provision in a licensing agreement. Moreover, Article 4 of Directive 2004/48 prescribes that any holder of IP rights in accordance with the provisions of the applicable law shall be recognized as a person that is entitled to seek application of the measures, procedures and remedies established by the Enforcement Directive. Once again, there is no limitation to the applicability of this provision based on the origin of the infringement – whether contractual or tortious. Finally, recital 13 of the Enforcement Directive clarifies that “it is necessary to define the scope of this Directive as widely as possible in order to encompass all the intellectual property rights covered by Community provisions in this field and/or by the national law of the Member State concerned”.

Based on the sum of all these arguments, the CJEU reached the position that the breach of a provision in a licensing agreement which concerns the IP rights of the rightholder without any doubt falls within the concept of infringement of IP rights within the meaning of the Enforcement Directive and therefore, the rightholder – IT Development, must be able to take the full benefit of the guarantees that are established by that Directive.

Tortious vs contractual liability

Finally, the CJEU clarified that the Enforcement Directive provides for a general framework for the measures, procedures and remedies, necessary to ensure the enforcement of IP rights. Accordingly, Article 3 of the Enforcement Directive stipulates that “those measures, procedures and remedies shall be fair and equitable and shall not be unnecessarily complicated or costly, or entail unreasonable time-limits or unwarranted delays”. Furthermore, they “shall also be effective, proportionate and dissuasive and shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse”. Therefore, the Enforcement Directive does not prescribe the exact mechanisms for implementation of the required guarantees and it also does not prescribe the specific liability regimes applicable in the event of infringement of IP rights. Without a doubt, it is up to the national legislatures to establish the specific legal framework for protecting the IP rights and also to establish the effective remedies that would be available to the rightholders in the case of IPR infringement.

Nevertheless, the CJEU provided additional guidance to the referring French Court in view of solving the clash between contractual and tortious liability in the particular dispute at hand. The Court asserted that the application of a certain liability regime by a Member State shall in no way act as an obstacle for the effective protection of the rights of the rightholder as established by Directives 2004/48 and 2009/24 in case of IPR infringement. This can be viewed as a tacit reference to the decision of the French court at the first instance which dismissed the claims of IT Development based on the fact that the parties were bound by a licensing agreement. The CJEU went on to explicitly point out two further arguments. First, it explicitly highlighted the position of the referring French court of second instance that there is no provision of local law that expressly provides that an infringement can only be invoked when the parties are not bound by a contract. Second, it stated that copyright infringement is defined, in its broadest sense, as an infringement of an IP right, and that clearly includes an infringement of one of the copyrights of a computer program. The CJEU also pointed out that the national court is required, to the greatest extent possible, to interpret national law in conformity with the requirements of EU law and to also ensure, within the limits of its jurisdiction, the full effectiveness of EU law when it determines the dispute before it. Based on its analysis of the case at hand, the CJEU expressed the position that an interpretation of national law by the French court in conformity with the requirements of Directives 2004/48 and 2009/34 is possible. All these arguments and implicit statements from the CJEU point in the direction that the outcome of the case before the Paris Court of Appeals most likely will have to be in favor of the applicability of an action under the statutory copyright regime.

In principle, the answer to the question at hand – whether contractual or tortious liability will apply in the case of a license breach which also amounts to a copyright infringement, could have far-reaching legal consequences. First, there will be crucial differences in the way the financial compensation would be calculated – whether the liability cap or liability exclusions established by the contract will kick in or alternatively the claimant would be able to receive full compensation for all suffered damages irrespective of the agreed liability cap. Second, there could be also implications in view of the statute of limitations or the applicable remedies (injunctive relief) and the respective procedural frameworks.

In the end, it seems it was hardly possible for the CJEU to arrive at a different conclusion. There shall be no doubt that a breach of a licensing agreement where the licensee modifies the source code without authorization from the rightholder constitutes a copyright infringement. The right to modify the software (alteration right) is an exclusive right of the author of a computer program as established by Article 4(1)b of Directive 2009/24. Hence, the alteration of a computer program is a restricted act where only the author can perform that act or authorize its performance. It would be contrary to logic to subject the rightholder to a detrimental treatment due to the fact that the use of the software was regulated through a licensing agreement which formally made it possible that the copyright infringement is also a license breach. It can be argued that a decision in favor of contractual liability would deprive the author of the computer program from the special guarantees and measures provided by copyright law as a result of the transposition of the Enforcement Directive 2004/48.