Court of Appeal copyright dispute ‘might never have arisen’ if parties had sought legal advice

Mark Marfé, intellectual property expert at Pinsent Masons, said the “bulk” of the Court’s judgement in Penhallurick v MD5 Ltd concerned a November 2008 agreement between the two, which had not been drawn up by lawyers.

In February 2021, Michael Penhallurick lodged a copyright infringement claim at the Intellectual Property Enterprise Court (IPEC) against his former employer, MD5, over its sale of several versions of a tool for forensically examining computers that he had developed.

Penhallurick argued that he owned the copyright in the software, called Virtual Forensic Computing (VFC), because he had originally begun developing it before he joined MD5 in 2006.

He also said that although he had finalised VFC while employed at MD5, it fell outside the scope of his contractual duties and he had done most of the work at home using his own computer equipment.

But lawyers for MD5 argued that an agreement drawn up by both parties in November 2008 had transferred any copyright that Penhallurick did own in VFC to the company.

Under the terms of the agreement, MD5 would pay Penhallurick an annual bonus of 7.5% of the sales of VFC in recognition of his “continuing contribution” to the software’s updates and development.

The IPEC held that MD5 did own the copyright in VFC, after evidence emerged during cross examination that Penhallurick had likely abandoned most of the software he had written for VFC prior to his employment with MD5.

Instead, he had restarted work on the project only after an oral agreement with his line managers that he would do so.

Upholding the IPEC’s ruling in its entirety at the Court of Appeal, Sir Christopher Floyd criticised the November 2008 agreement for its use of “wide” and “general” wording that made its terms unclear.

Marfé said: “It was unfortunate that the parties themselves had drafted this agreement and the wording used was ambiguous. Had they sought legal advice around the agreement, this dispute may never had arisen as the November 2008 agreement would then have made it clear beyond doubt that MD5 owned the copyright in the software.”

“The decision not to instruct lawyers to draft the November 2008 agreement may have been driven by the need to keep legal costs down. If that was the case, on such an important question as ownership of the IP rights in software which underpinned MD5’s business this was, in retrospect, the wrong decision - and ultimately MD5 incurred significantly higher legal costs by having to defend Mr Penhallurick’s legal action. Not all of those costs will be recoverable by MD5 in the proceedings,” he added.

Under UK employment law, employers generally own the copyright in any works created by their employees in the course of their employment, including software. However, Marfé said that “to put the issue beyond doubt”, employers of staff in development roles should ensure the position is clearly documented in employment contracts.

Gill Dennis, intellectual property expert at Pinsent Masons, said: “Software is the key business asset for tech companies, but it only has value as an asset if the company owns the copyright in it, otherwise they cannot sell or otherwise use the software to generate profit.”

“Factual disputes like the one involving Mr Penhallurick and MD5 are difficult to resolve and often end up in court. A better approach would have been for the parties to carefully document the software development process, including whether the starting point was existing software provided by the employee or whether the development process began from a blank screen,” she said.

Penhallurick had argued that he developed the software while working at home, using his own equipment, and that therefore the work should be classed as having been done outside of the course of his employment. However the Court of Appeal, upholding the IPEC’s findings, ruled that although these were factors to be weighed in the balance in assessing whether he developed the software in the course of his employment, neither was determinative.

“A broader assessment of all of the circumstances around the employee’s work activities was needed,” said Dennis. “This is a particularly pertinent finding given the much increased levels of home working during the pandemic.”

While he agreed with Sir Christopher Floyd, Lord Justice Arnold also criticised both parties for choosing the IPEC when they were directly at odds over the facts of the case.

He said that the IPEC was a forum for more straightforward, evidence-light cases and that the appropriate forum for more complex cases, involving cross examination of witnesses and expert evidence resulting in a trial lasting for more than two days, is the High Court.

Dennis said: “This case illustrates that establishing ownership of the IP rights in software can be an evidentially burdensome process and therefore expensive.”

“As Lord Justice Arnold noted, the IPEC procedures are not well suited to dealing with substantial factual disputes. Ideally a business will have in place appropriate IP terms in its employment contracts and clear assignment agreements to safeguard its IP rights,” she said.