The UK Court of Appeal has issued a judgment on the ownership of copyright in works created by an employee in the course of his employment. It provides helpful guidance for employers and employees in sectors where employees play a significant role in generating IP as part of their employee duties.

The key lessons from the judgment are:

  • Clarity is key. Parties should be clear when setting out an employee’s duties, particularly if these might change in the course of the employment. Parties should also ensure that agreements that aim to assign ownership of any IP rights are drafted carefully to accurately reflect the intentions of each party.
  • In M&A, do thorough due diligence on who owns employee-generated IP. Due diligence might include a review of employment contracts and any assignment agreements. A purchaser might also want to review any policies that give a holistic overview of the treatment of employee-generated IP and any duties on employees relating to IP.
  • Seek professional advice. The legal position can be complex - and it varies across jurisdictions. Although the UK regime is broadly employer-friendly, the precise facts of a case will dictate whether copyright vests in an employer or employee.
  • Consider the most appropriate forum. If a dispute arises, consider whether the IP Enterprise Court (IPEC) might be the right forum. If the dispute becomes more complex than first envisaged, consider the options available to extend a trial, request an adjournment, and in some instances transfer the case to a different court.

For more details of the case, read on.

Background to the case

The appellant, Mr Penhallurick, started researching and developing a methodology relating to a technique called ‘Virtual Forensic Computing’ (VFC) as a student and further developed multiple versions of the VFC software, a graphical user interface and a user manual (the Works) while employed by the respondent, MD5 Limited. VFC provides crime enforcement agencies with a tool to extract evidence from the contents of a computer’s memory without corrupting or altering the source files and reducing or extinguishing the value of the evidence. Mr Penhallurick demonstrated it to MD5’s directors and, from March 2007, MD5 used and marketed the Works to its customers.

The parties signed an agreement in November 2008, the terms of which was a key issue disputed by the parties. The terms included:

Michael, this letter is in confirmation of the verbal agreement we have regarding the annual payment of the 7.5% bonus of the *qualified VFC sales MD5 pay you for your continuing contribution to VFC. This payment will only be applicable while you are an employee of MD5 Ltd and you are continuing your involvement and development of VFC software or future versions.

[…]

I would also like to take this opportunity to confirm with you for our records, that the software developed at MD5 Ltd by yourself and sold as VFC is the sole property of MD5 Ltd, including the access code ……………….. I would also like confirmation that this code will not be modified or changed without the consent of the Managing Director.’ 

After leaving MD5’s employment, Mr Penhallurick claimed that MD5 was infringing his copyright in the Works, arguing that he had started developing the Works before he joined MD5 in 2006 and that the relevant software development occurred outside the scope of his employment because he had done most of the work at home using his own equipment.

Appeal

Two questions were considered, both at first instance, in the IPEC, and by the UK Court of Appeal: (a) which party was the owner of the copyright in the Works?; and (b) what was the effect of the November 2008 Agreement? 

The Court of Appeal upheld the entirety of the IPEC’s decision; the key elements of the decisions are explained below. 

‘In the course of his employment’

Under s11 Copyright, Designs and Patents Act 1988 (CDPA 1988), the default position is that the author owns the copyright. The position differs in the context of an employee who creates the works ‘in the course of his employment’, in which case the employer owns the copyright.

The parties agreed that Mr Penhallurick was the author, but disagreed that the Works had been created as part of his employee duties, and therefore ‘in the course of his employment’.

Location and tools of work 

At the IPEC, HHJ Hacon cited the judgment in Mei Fields Designs Ltd v Saffron Cards and Gifts Ltd [2018] EWHC 1332, which sets out a non-exhaustive list of factors which may be considered when determining whether works have been created in the course of employment. The multi-factorial assessment takes into account all the circumstances of the case in question. This may include the terms of the employment contract, where the work was created, whether the work was created during normal office hours and who provided the materials for the work to be created.

Although HHJ Hacon considered the factors set out in Mei Fields, he noted that determining whether the Works were created in the course of employment simply by considering which way the majority of the Mei Fields factors pointed was not correct. The fact that Mr Penhallurick partly developed the Works at his home and on his personal computer did not displace the ‘strong and primary indication that it was work done in the course of his employment’; the fact that Mr Penhallurick used his own equipment was irrelevant to the question in dispute, as he was being paid to carry out a task as agreed with his employer. HHJ Hacon concluded that the overriding factor to determine whether the Works were created in the course of an employee’s employment is the nature of the work undertaken.

Scope of duties 

A further point of contention between the parties when arguing whether the Works were created in the course of Mr Penhallurick’s employment was the scope of the duties assigned to him. Mr Penhallurick’s original employment contract did not specify that he would be developing software for MD5; however, it did include language which alluded to flexibility in duties which may be ‘reasonably required of you commensurate with your position and capabilities’. HHJ Hacon found that the facts strongly suggested that, at least following the knowledge and encouragement of the directors of MD5, development of VFC software was the central task for which Mr Penhallurick was being paid by MD5 for at least part of his period of employment.

The Court of Appeal concluded that - before considering the first ground of appeal, on who owned the copyright - it should first consider the second ground. If HHJ Hacon was correct in his conclusion that the November 2008 Agreement validly assigned ownership of the copyright to MD5, it would not be necessary to consider the question of ownership.

Assignment of ownership in the Works

Mr Penhallurick argued that the November 2008 Agreement was intended to operate as a licence under which he received licensing royalties and not an assignment of ownership. In addressing this argument, Floyd LJ examined:

  • the formalities required for an assignment of copyright;
  • the objective factual matrix; and
  • the actual language used by the parties in the November 2008 Agreement.

(a) Legal formalities for a valid assignment

The formalities required under CDPA 1988 are simple: a copyright assignment must be in writing and signed by or on behalf of the assignor. These formalities apply to copyright already in existence and future copyright coming into existence after the date of the instrument, if the assignee is entitled to require the copyright to be vested in him on the copyright coming into existence. It is also accepted that in order for an assignment of copyright to be valid the words ‘copyright’, ‘grant’ or ‘assign’ need not be used, if the intention can be gathered from the context.

(b) Objective factual matrix 

Floyd LJ explained that any interpretation of the November 2008 Agreement should include ‘all the background which was available to both parties at the time the contract was made, but exclude evidence about their subjective intentions’. Mr Penhallurick argued that he did not intend to assign anything, and that the purpose of the November 2008 Agreement was to record the financial terms relating to the bonus he was due to receive.

Floyd LJ noted that ‘it can often happen that the objective construction of an agreement does not align perfectly with the subjective intention of either party’. This is brought into focus by the parties failing to seek professional advice when drafting the November 2008 Agreement, which led Floyd LJ to criticise the language used as ‘wholly inapt to convey the meaning of the agreement contended for by the appellant’.

(c) Language contained in the November 2008 Agreement 

The Court of Appeal held that:

  • the word ‘confirm’ in the November 2008 Agreement did not simply set out the existing position between the parties. The word ‘confirm’ was to be understood as a method by the parties to put beyond doubt the legal ownership of copyright, in the vein of confirmatory IP assignments;
  • the word ‘bonus’ in the November 2008 Agreement was valid consideration for the assignment of copyright in the Works to MD5 and was not, as argued by Mr Penhallurick, a royalty or licence fee; and
  • the November 2008 Agreement was clearly intended to also operate as an assignment of any future copyright first owned by Mr Penhallurick while at MD5, notably because it contemplated his continued involvement in the development of the VFC software (as actually happened).

Taking into account the reasons considered above, the Court of Appeal concluded that HHJ Hacon had arrived at the correct conclusion in relation to the November 2008 Agreement and MD5 was the owner of the copyright in the Works.

Procedural guidance 

In the Court of Appeal’s decision, Arnold LJ also recognised that the IPEC was not suited to hear this case at first instance. The IPEC has tight restrictions on the materials that can be placed before court and the procedures are not well suited to resolving substantial factual disputes involving extensive disclosure of documents, cross-examination of factual witnesses and expert evidence.

Michael Penhallurick v MD5 Limited [2021] EWCA Civ 1770