Copyright in Works Created by Employees - Penhallurick v MD5 Ltd.

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Intellectual Property Enterprise Court (HH Judge Hacon) Penhallurick v MD5 Ltd [2021] EWHC 293 (IPEC) (15 Febr 2021)

This was a dispute between MD5 Ltd., a leading digital forensics company, and Michael Penhallurick, its former employee, over ownership of the copyrights in 8 works that relate to a technique called virtual forensic computing ("VFC").  The action was brought by Mr Penhallurick, the author of those works. He claimed copyright in the works and alleged that they had been infringed by MD5. MD5, for its part, claimed to own the copyrights and counterclaimed for copyright infringement and breach of contract. 

Copyright in Works created by Employees

Questions on who owns the copyright in literary and artistic works created by employees are asked frequently in my IP clinics and occasionally in formal instructions even though they rarely get as far as trial.  The default position is that the author of a work is the first owner of any copyright in it pursuant to s.11 (1) of the Copyright, Designs and Patents Act 1988 ("CDPA") but that is subject to s.11 (2):

"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."

It is also worth mentioning that s.91 (1) of the CDPA provides for the assignment of future copyrights. The usual issues that I consider are whether: 
  • the author is an employee or agent or contractor
  • the work was created in the course of the employee's employment, and
  • there was an agreement between the parties and if so what were its terms.
In MEI Fields Designs Ltd v Saffron Cards And Gifts Ltd and another  [2018] EWHC 1332 (IPEC) (6 June 2018) which I discussed in this blog in Copyright: MEI Fields Designs Ltd v Saffron Cards and Gifts Ltd. on 8 Aug 2918, Mr David Stone, sitting as a deputy judge of the High Court, said at para [42] of his judgment:

"I accept, as put to me by both counsel, that there is no single test to be applied. Rather, it seems to me that the question of whether or not given acts were carried out in the course of employment for the purposes of s.11 of the CPDA is a multifactorial assessment, to be based on all the circumstances of the case. In most situations where an employment relationship has been conceded, there will be some factors which point to the copyright work being created in the course of that employment and some factors which point otherwise. The relevant factors may include:
(a) the terms of the contract of employment;
(b) where the work was created;
(c) whether the work was created during normal office hours;
(d) who provided the materials for the work to be created;
(e) the level of direction provided to the author;
(f) whether the author can refuse to create the work/s; and
(g) whether the work is 'integral' to the business."

The Works

The works in question were as follows:
  • First Work: The earliest version of the VFC source code, said to have been created before Mr Penhallurick's employment with MD5;
  • Second Work: The object code compiled from the First Work;
  • Third Work: A fully automated version of the First Work, referred to as "VFC version 1";
  • Fourth Work: The graphical user interface ("GUI") for the Third Work;
  • Fifth Work: Version 2 of the VFC source code released on or about 4 April 2008;
  • Sixth Work: Version 3 of the VFC source code released on or about 12 May 2014;
  • Seventh Work: Version 4 of the VFC source code released on or about 10 August 2016.; and 
  • Eighth Work: The user guide for v.2 VFC source code created during Mr Penhallurick's employment with MD5.
The Trial

The action and counterclaim came on for trial before His Honour Judge Hacon on 2 and 3 July 2021. His Honour delivered judgment in Penhallurick v MD5 Ltd [2021] EWHC 293 (IPEC) (15 Feb 2021)

Development pf VPM

Mr Penhallurick studied VPM as a graduate student at Cranfield University between 2002 and 2005. He wrote a thesis on the topic for which he was awarded a master's degree in 2005.  He claimed to have developed the First and Second Works before he was offered a job at MD5 on 6 Nov 2006. After hearing his evidence and that of MD5's management the judge found that any software that Mr Penhallurick had written before he joined the company would not have amounted to much.   The judge concluded at para [55] of his judgment the First and Second Works were irrelevant to Mr Penhallurick's claim if indeed they had existed at all.

From 6 Nov 2006 MD5 employed Mr Penhallurick in the following capacity:

"You are employed as a Computer forensic analyst, reporting to the Director. Your role will involve carrying out a range of duties relating to computer and mobile phone analysis. This includes, but is not limited to, forensic analysis of computers and other data storage equipment including mobile phones. Due to the nature of our business you will be expected to be flexible in your approach and undertake other duties as may be reasonably required of you commensurate with your position and capabilities. This may involve a change in job title, duties and, or, reporting online."

Clause 15 of his contract of employment was as follows:

"[MD5] shall be the legal and beneficial owner of the copyright in, and all other rights to, all work produced by you in the course of your employment."

His main responsibility as an employee was to create the Third to the Seventh Works which he did at work and sometimes at home.  Judge Hacon found at [68] that the Third Work was created by Mr Penhallurick in the course of his employment.  Accordingly, MD5 was the first owner of the copyright in it.   As the judge could find no separate considerations in relation to the Fourth Work,  it followed that MD5 was the first owner of the copyright in that work too,   At [69] the judge said the same considerations applied to the Fifth, Sixth and Seventh Works.

The Severance Agreement

Mr Penhallurick remained in MD5's employment until 30 April 2016.   On 20 April 2016 they entered an agreement on the following terms:

"The purpose of the agreement is to ensure that
1. The intellectual property rights of any version of VFC are not disclosed to any other party in the world. The intellectual property rights include database rights, confidential information, trade secrets, know-how, methodology, processes, trade names, trademarks and service marks.
2. VFC is supported fully by responding to support enquiries from VFC license holders (customers) and potential customers as well as MD5 employees.
3. VFC is regularly updated and developed to keep at the forefront of technology with updates to current processes and routines as well as new features and scope of use.
Whilst this agreement is in place MD5 will have exclusive rights to VFC methodologies including those previously developed by Michael Penhallurick.
This agreement will exist whilst MD5 pay Michael Penhallurick £5000 in advance of each month to be paid on the 1st of each month. An invoice for this amount is to be provided on the last week of each month."

Mr Penhallurick characterized that agreement as an exclusive licence while MD5 contended that it was a consultancy agreement.

The judge interpreted that agreement as follows:

"[105] Leaving aside my findings above as to the ownership of the VFC software, on its face I do not read the 2016 Agreement as a licence to commercialise the VFC product. The first numbered paragraph restrains both Mr Penhallurick and MD5 from disclosing the IP rights in VFC, which obviously makes no sense. Construing it to mean a restraint on the disclosure of VFC source code would make more sense. The second and third numbered paragraphs should I think be read in association with the final paragraph. MD5 was to pay Mr Penhallurick £5000 per month for something, and the something was to assist in responding to enquiries from licence holders, to supply VFC updates and to allow MD5 the exclusive rights referred to in the penultimate paragraph.
[106]  It is the penultimate paragraph which implies the grant of an exclusive licence to MD5. But the licence relates to Mr Penhallurick's methodologies, not software. In my view it was a recognition by both parties that the VFC software was based on Mr Penhallurick's methodologies and that those had been created before his employment with MD5. In case this gave Mr Penhallurick any right which could be exercised against MD5 to restrain its marketing of VFC software, MD5 wished to ensure that there was a licence and was willing to pay for it as well as for Mr Penhallurick's support services."

Termination of the 2018 Agreement

MD5 stopped the £5,000 monthly payments to Mr Penhallurick in Jan 2018. 

Mr  Penhallurick brought these proceedings in response.

Mr  Penhallurick's Claim

The judge held at [107] that the last paragraph of the 2016 agreement entitled MF5 to bring the agreement to an end whenever it wished. 

The Counterclaim  

MD5 argued that it was entitled to bring the agreement to an end because Mr Penhallurick had failed to respond to enquiries or do any work on developing the VPM software in the last 3 months of 2017.  It also alleged that he had supplied a third version of the source code after he had left the company which was impossible or difficult to use for further development.   It contended that this amounted to an attempt to sabotage MD5's ability to develop the software without Mr Penhallurick's cooperation.

MD5's contention rested on the evidence of a director of a company called Data Synergy UK Ltd.  That evidence was essentially an opinion.  As neither party had permission to adduce expert evidence Judge Hacon refused to admit that evidence.   Consequently, MD5's breach of contract counterclaim failed.

Disposal

At para [114] His Honour dismissed Mr Penhallurick's claim for copyright infringement and indicated that he would grant MD5 a declaration that it was entitled to copyright in the Third to Eighth Works.

Conclusion

This judgment supplements Mr Stone's in  MEI Fields Designs and the two can conveniently be read together.  I shall certainly bear them both in mind when I receive further enquiries about the copyright in works created by employees.  Anyone wishing to discuss this article may call me on 020 7404 5252 during office hours or send me a message through my contact page.

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