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IP created by employees: who owns it?

Posted on 19 January 2022

A recent Court of Appeal decision, Penhallurick v MD5 Ltd, highlights the importance of ensuring that businesses secure ownership of any software and other copyright works created by employees that they may wish to exploit. The decision concerned whether certain works created by Mr Penhallurick belonged to his employer, or to him. If employees create copyright works in the course of their duties as an employee, the copyright in those works will belong to the employer. Works not created in the course of employment, however, will belong to the employee.

The key takeaway points and implications of the decision are that:

  • Whether an employee works from home or from the office will not determine whether or not something forms part of their duties. The question is whether the work itself is of a type they were employed to do – it is the nature of the work that matters, not where it is done or which equipment is used.
  • It is important to ensure that employment contracts include clear wording to ensure that all intellectual property in any copyright works created by employees belong to the employer, irrespective of when and where the work is carried out.
  • Employers should secure assignments of any pre-existing works created by employees prior to their employment, if the business contemplates making any use of those works. These assignments should be put in place at the outset.

Background

The copyright in works created by employees "in the course of their employment" automatically belongs to the employer under section 11(2) of the Copyright, Designs and Patents Act 1988. However, whether something is created during the course of employment depends on a variety of factors, including the nature of the employee's duties.

This case concerned ownership of copyright in a number of literary works consisting of computer software underlying a tool for the forensic examination of computers. The software allows agencies such as the police to extract evidence from the contents of a computer's memory without altering the source files. It was created by Mr Penhallurick, a former police officer, who had worked on a manual method behind the software (his Virtual Forensic Computing (VFC) method) whilst studying for an MSc degree from 2002 until 2005. Mr Penhallurick began working for MD5 in 2006 and, according to him, his primary duties revolved around forensic computer investigations, not software development. According to MD5, his duties were more flexible and extensive than he claimed. Mr Penhallurick continued to work on the software from 2006, and from 2007 MD5 sold products incorporating an automatic version of the software to its customers.

Mr Penhallurick argued that he owned the copyright in the software as the final product incorporated code that was written before his employment, and his work on the software whilst at MD5 was done outside the scope of his employment, using his own computer and primarily in his own time.

The IPEC decision

The Intellectual Property Enterprise Court (IPEC) found in favour of MD5. The judge accepted that Mr Penhallurick may have worked on an early version of the software before joining MD5, but this did not form any part of MD5's final product and was therefore irrelevant. The remaining works were found to be created during the course of Mr Penhallurick's employment (and therefore owned by MD5).  One of the key reasons for this was the nature of the work - the fact that an employee does work at home or on a home computer is not determinative: what really matters is whether the work being done falls within the scope of the employee's duties. Here, making VFC software was the central task for which Mr Penhallurick was being paid by MD5, irrespective of whether this was done during working hours or at home.

Even if MD5 was not the owner of the copyright in all the relevant works by virtue of them having been created in the course of Mr Penhallurick's employment, the judge found that it had acquired those copyrights by virtue of an agreement they had both entered into in November 2008.

The Court of Appeal's decision

The Court of Appeal decision focused on the November 2008 agreement because if it was effective in transferring the copyrights to MD5, the question of whether the works were created during the course of Mr Penhallurick's employment would not arise. The Court found that it did, dismissing Mr Penhallurick's appeal:

  1. The agreement was construed on the basis of the objective factual matrix available to both parties at the time the agreement was reached, not the parties' subjective intentions. Accordingly, Mr Penhallurick's argument that he did not intend to assign anything was dismissed.
  2. The agreement included the payment of a bonus to Mr Penhallurick, rather than a royalty or licence fee, which indicated an intention that the copyright belonged to MD5.
  3. It was clear from the language of the agreement that all copyright (including future copyright) was to vest in MD5:  it recorded that the software "developed at MD5 by yourself and sold as VFC is the sole property of MD5 Ltd …".

Implications

Whilst both the trial Court and Court of Appeal found in favour of the employer in this case, the time and expense involved in legal proceedings may have been avoided if clear contractual arrangements had been put in place from the outset. As mentioned above, employers should ensure that employment contracts contain clear wording in relation to the ownership of intellectual property and secure assignments of any pre-existing works they may wish to use. Whilst not relevant in the Penhallurick case, ensuring that clearly worded assignments are put in place to ensure that all intellectual property in works created by contractors rests with the business, not the contractor, is also important.

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