Court of Appeal decision highlights issues around employee-created IP

England and Wales

Summary

The Court of Appeal decision in Penhallurick v MD5 Ltd ([2021] EWCA Civ 1770) highlights some key issues for any business which relies on software which is developed by employees. Ultimately, the Court found in favour of the business rather than the employee in this case. However, it took three years (the claim was first issued in December 2018) and no doubt considerable irrecoverable cost in order to secure this decision, which might have been avoided had certain steps been taken at an earlier stage.

Background

Whilst a student, Mr Penhallurick, a former police officer, developed a Virtual Forensic Computing (“VFC”) method of retrieving an image of a computer hard drive without writing on it and then viewing the image on a virtual machine. VFC allows enforcement agencies to extract and investigate evidence from a computer’s memory without corrupting or altering the source files. After finishing his studies in 2005, Mr Penhallurick joined MD5 in 2006 and MD5 subsequently offered software performing the VFC method to its customers in 2007.

There was no question that Mr Penhallurick had developed the VFC software. However, Mr Penhallurick claimed that he owned certain aspects of the VFC software because they were developed either before he joined MD5 or in his own time, albeit whilst employed by MD5. MD5, by contrast, said that it was the owner of all the VFC software because either (a) it was developed in the course of Mr Penhallurick’s employment and therefore MD5 was the first owner pursuant to S11(2) of the Copyright and Designs Act 1988, or (b) it was assigned by Mr Penhallurick to MD5 pursuant to an agreement between the parties in 2008.

Mr Penhallurick’s claim was dismissed at first instance in IPEC. The judge held that Mr Penhallurick had abandoned any software he had developed prior to joining MD5 and that all software developed after joining MD5 was created in the course of his employment. In particular, the judge made it clear that the quantity of work done by an employee at home or on a home computer is not the determinative factor, but rather the nature of that work and whether it falls with in the scope of his duties. In any event, the judge held that the copyright had been assigned to MD5 in 2008.

The Appeal Decision

On appeal, the court focused on the interpretation of the 2008 agreement since, if that were effective in assigning the relevant rights, it would not be necessary to consider who was the first owner. The court held as follows:

  1. There was nothing in the factual matrix to suggest that the agreement was intended to operate as a licence and no commercial logic for the assertion that ownership of the copyright in the software was to be split. Payment as a “bonus” rather than a royalty or licence fee was suggestive of an assignment rather than a licence.

  2. An assignment of software “developed at MD5” did not identify only software developed in the course of employment or when physically located at MD5’s premises, but all software whilst an employee of MD5.

  3. The use of the word “confirm” did not necessarily mean the agreement merely set out the existing position and therefore did not operate as an assignment at all. Parties frequently use “confirmatory assignments” to put beyond doubt legal ownership of copyright.

  4. The agreement also assigned the future copyright in the software developed by Mr Penhallurick. The ongoing “bonus” to be paid to Mr Penhallurick was effective consideration for the assignment of his rights.

The court therefore held that the 2008 agreement was effective in assigning all existing and future copyright in the VFC software from Mr Penhallurick to MD5.

IPEC as an appropriate forum

There was also brief discussion regarding the use of IPEC as a forum, which arose out of the late disclosure by both parties of evidence relating to the source code of the VFC software. This evidence could have assisted the IPEC judge, but was properly expert evidence which neither side had applied for, and was too confusing and inconsistent to admit at a late stage. Lord Justice Arnold felt that this was a case where the IPEC procedure of limiting the materials which can be placed before the court was not appropriate and the parties should have transferred the case to the High Court or at least applied for an adjournment to increase the trial estimate of two days.

Practice Points

The main thrust of Mr Penhallurick argument on appeal was that, had the parties intended the entirety of the copyright in the VFC software to vest in MD5, they would have chosen words which made this much clearer. The court ultimately rejected this argument, not least because Mr Penhallurick’s proposed interpretation was even less clear, but it emphasises one of the two practice points for businesses to come out of this case:

  1. When taking on a new employee who arrives with some existing ideas which may be important for the business in the future, it is key to secure an assignment of the IP rights in any materials they may have already created relating to those ideas. Even if the idea appears to be in nascent form, an early assignment limits the risk of an employee later looking for ways to claim that it is the owner of the IP rights only after the idea has been made a success.

  2. The clear drafting, at any stage, of agreements relating to the assignment of IP is critical in avoiding issues down the line. Even if no employees ever seek to claim ownership rights over company IP, any purchaser or investor into a business will want to see unambiguous chain of title of IP rights into the business they are acquiring or investing in.