Who owns the intellectual property created during employment?

“This code is my code, this code is your code, oh wait that’s my code” – who owns the intellectual property created during employment?

The recent case of Penhallurick v MD5 Limited heard in the Intellectual Property Enterprise Court serves as a welcome reminder that work undertaken by an employee in the course of employment generally belongs to their employer.

Intellectual property rights: legal position 

Under the laws of England and Wales, intellectual property rights in work produced by employees in the course of their employment automatically belong to their employer. Where there is any doubt about whether an employee or their employer owns intellectual property rights in the fruits of their labour, the relevant legislation largely favours employers.

Copyright is one type of intellectual property right (and is the one which was considered in this case). Copyright exists in various works, including written software code. Under the Copyright, Designs and Patents Act 1988, where a literary work is made by an employee in the course of employment, any copyright in the work belongs to the employer in the first instance.

Under this legislation, for an employer to be able to claim copyright in a work, (1) the creator of the work must be an employee and (2) they must have created the work in the course of their employment. 

If works are created at home using the employee’s own resources (for example, their own laptop) and outside office hours, this can give rise to arguments that the rights belong to the employee rather than their employer. However, the mere fact that work is done outside normal working hours does not necessarily mean that the work is not done in the course of employment as, for many employees, there is often no clear demarcation of the hours of work. The more crucial question is whether the work was the kind of work which the employee was employed to do.

What happened?

MD5 is a company which specialises in virtual forensic computing software. MD5’s software is heavily used by police forces in collating evidence as part of its police investigatory work. In simple terms, MD5’s software allows data to be extracted from a hard drive without altering the hard drive itself. 

MD5 hired Mr Penhallurick as a computer forensic analyst and he started his employment with them in 2006. During his employment, he entered into various employment contracts under which Mr Penhallurick received his salary and various bonuses (depending on the terms of each contract). 

Mr Penhallurick resigned from his employment with MD5 in April 2016. After leaving MD5, a dispute arose about the ownership of software which he had created. Mr Penhallurick brought claims of copyright infringement against MD5. As part of his claim, he sought ownership of eight works, all relating to a technique called "Virtual Forensic Computing".

Mr Penhallurick alleged that although he had developed this software while employed by MD5, he had worked on writing the code for the software at home on his personal computer and that he had done so in his free time. He alleged that the copyright in the software he had created belonged to him and that he had merely licensed it to MD5. Mr Penhallurick went as far as suggesting that the bonuses he had received were a licence royalty rather than bonus payments. 

MD5 disputed this, arguing that writing and creating software was a key element of Mr Penhallurick's employment.  This was what he was paid to do under the terms of his various employment contracts and it therefore owned the copyright in the code he developed in the course of his employment. 

What did the court decide?

The Judge agreed with MD5. Although none of the contracts between the parties had been drafted by lawyers or with “precision”, from the evidence it was clear that creating this software “fell squarely within the duties for which Mr Penhallurick was employed” and was a central task for which he was being paid by MD5. That was a strong indication that the work was created in the course of his employment. The fact that he did some of the work at home on his own computer did not change the fact that it formed part of his employment duties. The software had been created in the course of his employment and belonged to his employer. 
 
Although Mr Penhallurick had claimed that he had licensed his software to MD5, he did not produce any evidence of such a licence and this allegation was swiftly dismissed.

The Judge also ruled that was copyright was assigned to MD5 under an intellectual property clause in an agreement between the parties.

What does this mean for employers?

This case is a welcome reminder that intellectual property created in the course of employment typically belongs to the employer. It also serves as a cautionary tale that ownership of software can be heavily contested by employees who believe that copyright should belong to them. 

Ownership of intellectual property is of crucial importance to employers, especially those developing new products, manufacturing processes or new software. Understandably, employers will want to ensure that they are the ultimate owners of any intellectual property created by their employees. It is crucial that employment contracts are drafted with “precision” to avoid disputes down the line and that they include appropriate clauses assigning intellectual property rights to the employer.