Yue Ming and several of his fellow Chinese students spent five years whilst studying abroad developing a large-scale data management system called “Unidata”.  They founded Unidata Company (UI) in 1984.  In 1992, Yue Ming transferred UI to new shareholders (American UI) and established Pacific Unidata Ltd. in Hong Kong (PU).  American UI and PU entered into a “General Authorization Agreement” for the copyright of the Unidata software, which prescribed that PU owned the copyright in mainland China, Hong Kong and Taiwan, whilst American UI owned the copyright in all other locations.  PU later transferred its copyright, which contained the rights to exclusive agency, management, development, adaptation into a Chinese version and distribution, to Beijing Jingyan Electric Co., Ltd. (Jingyan).  In 1995, Guangzhou Avon Cosmetic Products Co., Ltd. (Avon) bought the Unidata software (version 3.1.5B) for $150,000 from American UI’s distributing agent, Jenkon Company (Jenkon), and installed the software into Avon’s computer networks.  PU learnt about the above sale in June 1996 and filed a complaint with the National Copyright Administration of the People’s Republic of China (NCAC), which accused the Defendant, Avon, of infringing PU’s copyright to the Unidata software.  On 26 May 1997, the NCAC ruled that the Defendant must cease unauthorized use of the Unidata software and pay a fine of RMB 490,000.

In August 1997, the Plaintiffs brought a lawsuit against both Avon and Jenkon, the American distributor who sold Avon the Unidata software, at the Guangdong High People’s Court.  The Plaintiffs accused the two Defendants of infringing the copyright that had been registered by the proprietor, PU, at the Software Registration Center of the People’s Republic of China (PRC) and claimed USD 30m as compensation.  On 27 August 1997, Jenkon announced deregistration and the Plaintiffs accordingly withdrew Jenkon as a party to the litigation, leaving Avon as the sole defendant.

The Plaintiffs Opinion: According to the “General Authorization Agreement” entered into between PU and American UI, PU should enjoy the disputed copyright in mainland China.  In addition, American UI and PU are both registered in the U.S. and China respectively as the legal owners of the software’s copyright.  The Defendant bought the software from Jenkon, who had no authorization in China, and then installed and reproduced it in all its office computers without entering into any written authorization agreement, as is required pursuant to the “Provisions of Computer Software Protection in the PRC”.  Therefore, the Plaintiffs asserted that the Defendant had committed infringement of PU’s copyright and exclusive distribution rights in China.

The Defendant’s Opinion: Avon asserted that the copyright of the English version of the Unidata software, which was purchased from the original proprietor of the copyright of the English version, was different from the copyright of the Chinese version that had been registered by PU in China.  Furthermore, the Defendant claimed that, according to the “Provisions of Computer Software Protection in PRC”, by having obtained the right to use the software by the copyright proprietor in the U.S., they had taken “reasonable care” of the matter and their use and reproduction of the software was reasonable and did not transgress their limits of authorization.  Avon had never distributed or reproduced the software in order to make profit.  In addition, since the Defendant had no way of knowing that there was another copyright proprietor prior to purchasing the Unidata software, the Defendant should, at most, be required to cease use of the software.  In fact, the Defendant claimed that it had already ceased using the software and had returned it to Jenkon before the litigation arose.  Therefore, Avon pleaded with the Court to reject the Plaintiffs’ petition.

The Court focused on the following key questions:

1.  Could PU’s copyright be extended to the version purchased by the Defendant?

PU claimed that it acquired the exclusive distribution rights and other related intellectual property rights to the software (versions 2 & 3) from American UI in September 1994, which covered mainland China, Hong Kong and Taiwan.  As Avon purchased and used version 3.1.5B of the Unidata software,the Defendant should be considered to have infringed the exclusive distribution rights of PU.

The Defendant claimed that PU acquired the copyright to Unidata version 2.3.2, which was different from the version 3.1.5B purchased by the Defendant.  The Defendant believed that the two versions differed from each other in content, function, publishing date and copyright proprietor.

2.  Was there any intention on the part of the Defendant to infringe the copyright to the software?

According to the Plaintiffs, Mr. David Brunel, American UI’s President, mailed a letter to Mr. Yue Ming, PU’s Chairman of the Board, on 12 January 1995, in which American UI informed PU that American UI’s agent, Jenkon, had learned of the Defendant’s plan to install the Unidata software.  At that time, American UI had already informed the Defendant that they should purchase the Unidata software from PU, but they could acquire technological support from Jenkon.  Meanwhile, American UI attempted to contact PU regarding whether American UI could sell the software to the Defendant directly.  However, before the Plaintiffs had reached an agreement with American UI, Jenkon sold the software to the Defendant without signing a license contract with PU.  Hence, the Defendant did intend to infringe the copyright.
  
The Defendant claimed that they purchased the original version of Unidata from Jenkon, for which they had a legal receipt.  The software had American UI’s trademark, serial number and license number, and the startup interface of the software’s system contained a statement on American UI’s copyright.  If the software that Avon had purchased was illegal, why had American UI and Jenkon dispatched employees to install the software and provide training?  As the end user, there was no way for Avon to be aware of the relationship between American UI, PU and Jingyan, and they should therefore bear no responsibility.

3.   Is software licensing required in written form to establish its legality?

The Plaintiffs deemed that the software license agreement should be in written form.  Pursuant to Articles 18 and 19 of the “Provisions of Computer Software Protection in the PRC”, which were effective as of 1 October 1991, a software license agreement shall be executed in the statutory form of a written contract.  Since the Defendant failed to provide any written purchase contract, they therefore had no legal right to use the Unidata software.

The Defendant claimed that the contract form should depend on the governing law.  Since the software was purchased in the U.S., the governing law should be U.S. law, which does not require a written contract for a non-exclusive software license.  Under the Uniform Commercial Code (UCC), software is regarded as an “ordinary commodity” and no written purchase contract is required.  Instead, the seller should guarantee the integrity of all rights related to the sold commodity.  The technical support provided by the U.S. copyright proprietor during the course of Avon using the software was more reliable than written documentation.

4.  Was the Defendant’s duplication a violation of the Plaintiffs’ right to duplication?

The Plaintiffs considered that the Defendant had violated their right of duplication because the Defendant duplicated the software many times during the course of its use.

The Defendant admitted that they had duplicated the software, but claimed they should be excused as this act was reasonable due to the nature of the software and should not be regarded as an infringement.  The Defendant duplicated the software in order to save documents, which is different in nature from “infringement of duplication rights”.  In addition, the software has self-inspection and limitation functions that can automatically terminate operation of the software if the user has an incorrect or no authorization number.  Avon changed hardware structures in order to operate the software, but acquired re-authorization each time from American UI to do so.
   
5.  Is it reasonable to claim USD 30m compensation?

The Plaintiffs claims that PU transferred its rights to exclusive licensing, management, development, adaptation into a Chinese version and distribution in the registered Unidata software to Jingyan, who then transferred its exclusive licensing rights to Kelly China Co., Ltd. (Kelly) at a price of USD 50m.  Jingyan was unable to perform its duties as prescribed under the contract with Kelly because Avon was using the software in China without authorization from the copyright proprietor.  Therefore, USD 50m was a reasonable base for loss compensation.

The Defendant questioned the validity of the contract between Kelly and Jingyan.  The price of USD 50m was over RMB 400m, but the Unidata software could be purchased in the U.S. for just a few tens of thousands of dollars, yet Kelly had no rational explanation for purchasing the exclusive licensing rights to the software at such a high price.

Ruling

On 18 June 1998, the Guangdong High People’s Court ruled that, in accordance with the period of use, scale and profits of management during use and economic losses incurred through the contract between Jingyan and Kelly, Avon should cease using Unidata software and pay USD 12m to the Plaintiffs as compensation and bear RMB 750,000 in litigation fees.  Avon was not satisfied with the judgment and appealed at the Supreme People’s Court.

Appeal

On 2 February 1999, the Supreme People’s Court heard the case publicly and made the following civil judgment on 26 September 1999:

Civil Judgment by the Supreme People’s Court of the People’s Republic of China (Final No. 6 on Intellectual Property in 1998)

Appellant (the original defendant):
Avon (China) Ltd. Co., (original name “Guangzhou Avon Cosmetic Products Co., Ltd.”), with a registered address at 2nd Floor, 420 Huanshi East Road, Guangzhou

Legal representative:
Gao Shoukang, Chairman of the Board

Entrusted attorneys:
Zhou Qiang and Dong Yongsen, Lawyers from Beijing Zhengjian Law Firm

Appellee (the original plaintiff):
Pacific Unidata Co., Ltd., with a registered address at Building No. 19, Wah Kit Commercial Centre, 300 – 302 Des Voeux Road Central, Central, Hong Kong SAR

Legal representative:
Yue Ming, Chairman of the Board

Entrusted attorney:
Liu Xiaolin , Lawyer of Great Wall Law Firm

Appellee (the original plaintiff):
Beijing Jingyan Electric Co., Ltd, with a registered address at South Garden Industrial Zone, Yanqing County, Beijing

Legal representative:
Yue Yang, Chairman of the Board

Entrusted attorney:
Jian Yanzhong, Lawyer from Beijing Zhongchuang Law Firm

With regard to the computer software copyright infringement case filed by the Appellees Pacific Unidata Ltd. Co. (PU) and Beijing Jingyan Electric Co., Ltd (Jingyan), the Appellant Avon (China) Co., Ltd. (Avon) appealed to the Court against the civil judgment of Guangdong High People’s Court (Primary No.1 on Intellectual Property in 1997).   The Court heard the case publicly in accordance with the law.  Attendants at the Court included Avon’s legal representative Mr. Charles William Pryor with his entrusted attorneys Mr. Zhou Qiang, and Mr. Dong Yongsen, and the Appellees legal representative Mr. Yue Ming of PU with his entrusted attorney, Mr. Liu Xiaolin, and the legal representative Mr. Yue Yang of Jingyan with his entrusted attorney, Mr. Jia Yanzhong.

The Court deemed that the original judgment was based on unclear facts.  In accordance with Article 153(1.3) of the Civil Procedure Law of the People’s Republic of China, the Court decides as follows:

1.  To withdraw the civil judgment of Guangdong High People’s Court (Primary No.1 on Intellectual Property in 1997);
2.  To order the Guangdong Superior People’s Court to retry the case.

Chief Judge: Jiang Zhipei
Judge: Dong Tianping
Acting Judge: Wang Yongchang  
26 September 1999
Clerk: Zhang Hui

Retrial

On 10 October 2000, the Guangdong Provincial Superior People’s Court retried the case, adding Ardent Company (the inheritor of American UI’s copyright) and distributor Jenkon as third parties to the litigation.  After the Court had opened, the Plaintiffs requested to change their petition to request that Ardent Company and Avon immediately cease any infringement action and make a public apology.  The Plaintiffs further required Ardent Company and Avon to jointly pay USD 26m to Jingyan, and Avon to pay USD 400 in compensation to PU.  Since the Plaintiffs had changed their petitions at the last minute, the Defendant and the third parties requested adjournment of the court for preparation.  The Court agreed to delay the hearing.

Settlement