Working from home – what happens to the copyright in the works employees create? And how do you prove it?25 February 2021
The recent judgment in Penhallurick v MD5 Limited  EWHC 293 (IPEC) touches on what is likely to be a sore spot for many employers going forward: where employees work at home, just what are they doing, and when they come up with something in which there are valuable rights (such as software), just who owns those rights as between employer and employee?
Software is of course protected as a literary work under the Copyright, Designs and Patents Act 1988 (see section 3(1)). By section 11, the author of a literary work is the first owner of the copyright in that work unless it “is made by an employee in the course of his employment”, in which case it belongs to the employer. This sounds simple, but the question then focuses on what is meant by the words, “course of employment”.
Some attention was given to this recently in Mei Fields Designs Ltd v Saffron Cards and Gifts Ltd  EWHC 1332 (IPEC) where the court suggested a number of factors that could be taken into account including who provided the materials to enable the work to be produced, where the work was created and whether it was done during “normal office hours”. Of course, these factors have become harder to apply in the pandemic when employees will likely be working from home, doing so flexibly according to their own schedules and using their own laptops.
The dispute concerned the ownership of copyright in various works connected with a software product licensed by MD5 known as “VFC”. VFC’s principal function was to assist in the analysis of a hard disk by imaging it and then investigating it without altering the data stored on the original disk. This could be done manually, but VFC automated the process and did it much more quickly. It had an obvious market for police forces. Indeed, Penhallurick, the claimant employee, had previously worked as a policeman.
Penhallurick became an employee of MD5 in November 2006. By early 2007, Penhallurick had developed an early version of VFC for MD5. MD5 started to license the software to customers in March 2007. While there was a number of employment contracts, there was also a letter in November 2008 whereby Penhallurick received a bonus equal to 7.5% of sales (later increased to 10%) and a further document shortly before he left MD5’s employment in April 2016. While employed by MD5, there were three further versions of VFC, all based on the first version and all developed by Penhallurick. The only question was who owned the copyright in VFC.
The judge (Judge Hacon) rejected Penhallurick’s evidence that he had created the underlying code for the software prior to joining MD5. Attention then turned to the terms of his employment contract as well as the other documents and the circumstances surrounding his development of VFC.
Penhallurick claimed that he had worked round the clock in his personal time to develop VFC and that the scope of his duties as employee was limited to carrying out computer investigations, preparing witness statements and attending court to give evidence where necessary. MD5 on the contrary said that the scope of Penhallurick’s duties was more extensive and included the creation of VFC.
Penhallurick’s employment contract was perhaps equivocal, indeed referring to the forensic analysis of computers but also casting the net far more widely and requiring Penhallurick to take on other duties as required from time to time. Judge Hacon found that, in fact, Penhallurick was early on dedicated to developing VFC. The fact that Penhallurick might have been working a lot from home made no difference in this case to the outcome that VFC was developed in the course of his employment and therefore the copyright in the software belonged to MD5.
Reference was made above to a document in November 2008. In reality, this was in the form of a letter from MD5 providing for the 7.5% bonus but also providing,
“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.”
While this might be seen as putting the matter beyond any doubt, these simple words gave rise to a considerable dispute about what they meant. Was it in fact a binding contract? What was meant by “access code”: did it in fact refer to just the object code licensed to end users rather than the source code, the rights in which were retained by Penhallurick? Was it effective to assign future copyright, rather than just existing copyright?
While the judge resolved these matters in favour of MD5, it is a good illustration of the risks in drafting such a document: unless it is clear enough to put the matter beyond doubt, it has the potential to create further disputes rather than resolve matters. The reference to “access code”, which could be taken to be a reference to a password, was there because MD5’s director who drafted the document was not sophisticated and was confused by the terminology.
Shortly before Penhallurick left MD5’s employment, he signed another document. Again, from a lawyer’s perspective, it did not perhaps conclude matters without giving rise to yet further argument. One paragraph of the document read,
“Whilst this agreement is in place MD5 will have exclusive rights to VFC methodologies including those previously developed by Michael Penhallurick.”
What did this mean? What exactly are “methodologies”? The reference to “exclusive rights” does indeed suggest that Penhallurick retained all rights in VFC and was only licensing them to MD5. Again, the judge resolved this in favour of MD5 and held that it did nothing to displace his earlier finding that copyright in VFC was and remained vested in MD5.
This sort of dispute is likely to become more prevalent. If someone is employed to create software but is working from home, he may well go on to create valuable software but do so working at the kitchen table, on his own laptop, in the evenings. What then? Many employment contracts are deliberately open-ended and refer to the employee doing such duties as are assigned by the employer from time to time but then it becomes more important to show that the employer knew what the employee was doing and was showing supervision and direction in the exercise of that employee’s day to day duties.
The more the employer encroaches on the employee’s time and privacy, other concerns come to the fore – privacy not the least, but other HR concerns arise. A happy compromise needs to be found. Perhaps this case is useful to illustrate that, where valuable rights are concerned, it does pay to ensure that the documentation created to record or assign those rights leaves the matter in no doubt, rather than creating further disputes about what they mean.
Note: this article was written to discuss one recent case, it is not and cannot be general advice. Please take specific advice before acting on anything you see in this article.