Employee Copyright: Michael Penhallurick v MD5 Limited

Employee copyright can often become complex in the context of software development. This was demonstrated by the dismissed appeal made on 2^nd December 2021 in Michael Penhallurick v MD5 Limited [2021] EWCA Civ 1770. This case is a reminder that it is advisable for software companies to have enhanced clauses in their employment contracts to protect against potential copyright claims made by their employees, and in particular their developers (present or former). Employee copyright in software becomes particularly complex where ideas were developed before a developer becomes an official employee. This was the point extensively explored in the initial judgment made by the Intellectual Property Enterprise Court in February 2021 found here: Michael Penhallurick v MD5 Limited [2021] EWHC 293 (IPEC).

The law

Section 11 of the Copyright, Designs and Patents Act 1988:

“11. First ownership of copyright

• The author of a work is the first owner of any copyright in it, subject to the following provisions.
• Where a literary, dramatic, musical or artistic work, or a film, is made by an employee in the course of his employment, his employer is the first owner of any copyright in the work subject to any agreement to the contrary.”

Under Section 3(1) of the act, software (including any pre-code development documents) will come under the definition of literary works. Although the above law helps software companies with regard to employee copyright, it should not be relied upon entirely. If the software being developed can be proved to not be subject to the terms of employment, then a developer could still make a successful copyright claim. Software companies need to include enhanced intellectual property provisions in employee contracts to protect against such claims.

Employee copyright – facts of the case

The facts of the recent case Michael Penhallurick v MD5 Limited are as follows. Agencies, such as the police, may wish to extract evidence from the contents of a computer’s memory without corrupting or altering the source files and reducing the value of the evidence. Michael Penhallurick, a former police officer, worked on a method of retrieving an image of the hard drive of a computer without writing on it and then viewing the image on a virtual machine, allowing the contents to be investigated without causing damage. Penhallurick worked on this method whilst studying for an MSc degree at Cranfield University from 2002 to 2005.

On 6 November 2006 Penhallurick commenced employment with MD5 Limited. By early 2007 Penhallurick had developed a fully automated version of the Virtual Forensic Computing (VFC) software he first conceived whilst at university. It was this software which became subject to an employee copyright claim.

The arguments

Penhallurick asserted that the first version he created for MD5 Limited by early 2007 incorporated software which he had written before his employment commenced, and which therefore belonged to him.

MD5 Limited, by contrast, argued that the initial VFC method which Penhallurick had shown them was slow and cumbersome, and it was Mr Geoffrey Boyd (a director of MD5 Limited at the relevant time) and Mr John Green (then the chairman and managing director) who, at the meeting, which was around January 2007, suggested to Penhallurick the possibility of developing software to implement the method. MD5 contended that all such software was created following this suggestion, and all was created in the course of Penhallurick’s employment. Therefore, according to MD5, all the relevant copyrights belonged to MD5.

Employee copyright – was the software developed outside of employment?

Analysing whether the software could be deemed to have been created in or outside of employment, and therefore be potentially subject to an employee copyright claim, required what Judge Hacon described as a ‘multi-factorial assessment’ – first set out in the judgement in Mei Fields Designs Ltd v Saffron Cards and Gifts Ltd [2018] EWHC 1332 (IPEC). The relevant factors included:

• the terms of the employment contract;
• where the work was created;
• whether the work was created during normal office hours;
• who provided the materials for the work to be created;
• the level of direction provided to the author;
• whether the author can refuse to create the work/s; and
• whether the work is ‘integral’ to the business.

Penhallurick described the creation of the first fully automated version of the VFC software as follows: “I spent almost every waking hour of personal time developing VFC functionality at home whilst adding software and hardware-based security protection at work and ensuring that it worked against real world data… I would often test a piece of code at work and, when it didn’t function entirely as expected, I would… then go home and code; oftentimes it was commented on at work that the development was coming on at a rapid pace.”

However, as Judge Hacon found upon witnessing various cross-examinations: “There can be no doubt that making the VFC software was the central task for which Mr Penhallurick was being paid by MD5 from late January to March 2007… whatever the exact proportion done at home, it does not displace the strong and primary indication that it was work done in the course of employment.”

Judge Hacon went on to state that work that falls within the scope of the duties for which an employee is being paid, but that is done at home, will not generally work in the employee’s favour. Penhallurick was unable to rely on the fact that he had done some of his work on the VFC software at home or that he had done it on his own equipment because he had clearly been asked to do it as part of his employment. In a sense, it was argued, his employment was based primarily on his development of the software and hence no employee copyright claim could arise.

The appeal – did an assignment take place in writing?

In the initial judgement made by the Intellectual Property Enterprise Court in February 2021, Judge Hacon ruled that the relevant VFC software had been developed during Penhallurick’s employment with MD5 Limited and so copyright was vested in MD5 Limited as a result. Regardless of this conclusion, Judge Hacon then went on to rule that an agreement signed by Penhallurick in November 2008 had assigned all the relevant copyrights in any case.

However, on appeal, this question needed to be asked again because, before the start of the first hearing, a late disclosure of documents took place relating to the source code of the VFC software. At the appeal in the High Court these documents were to be properly considered. The documents showed that substantial writing of software had taken place in late December 2006, before the meeting with MD5 at which Penhallurick was authorised to devote his time to the development of the VFC software. Due to the confusion caused by this around whether or not Penhallurick had created the software during the course of his employment, Sir Christopher Floyd, at the appeal, sought to first consider whether or not the November 2008 agreement had assigned all rights in the VFC software to MD5 and thereby making this newly created confusion, caused by the late disclosure, obsolete.

Employee copyright – the November 2008 agreement

The November 2008 agreement was poorly drafted but included the following:

“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.”

The only formalities called for by the Copyright Designs and Patents Act 1988 for an assignment of employee copyright are that it be in writing and signed by or on behalf of the assignor (Section 90(3)). Two additional principles were common ground:

• A signed, written instrument may amount to an assignment of copyright even though the word “copyright” is not used, if, on its true construction, it was intended that copyright should thereby pass.
• It is not necessary that the words “grant” or “assign” be used if an intention to assign can be gathered from the context.

Although there was confusion around the meaning of access code this did not stop the November 2008 agreement from adhering to the above principles. The use of the word ‘bonus’ as opposed to ‘royalties’ or ‘licence fees’ was also important because use of latter terms would have suggested that Penhallurick was licencing the software to MD5.

It was therefore ruled, on appeal, that Judge Hacon had been correct in his conclusion that the November 2008 agreement had assigned the copyright to MD5 Limited. Therefore, it was not necessary for the appeal at the High Court to consider whether or not all the VFC software had been created during Penhallurick’s employment.

Be warned

Although the case fell in the software company’s favour, this was only after two hearings and a deep analysis / cross-analysis of the events and documents involved. Had Penhallurick been able to prove that he had created the software outside of employment or the November 2008 agreement hadn’t quite got past the post as it did, the outcome could have been very different. In order to avoid any such complications, software companies should include enhanced IPR provisions in their employment contracts, particularly for the developers on their team.

EM Law specialised in technology and employment law. Get in touch if you need advice on employee copyright in software or other technology law matters.