We've paid for it: what do you mean it's not ours?

Picture the scene…

You ask an independent consultant to design your new website. You pay him for his work. A couple of years later you decide to redesign the site yourself to reflect your changing business model. The consultant you originally engaged contacts you and tells you that you are infringing his copyright. You phone your solicitor who tells you that in the absence of an express agreement, it is the consultant who owns the copyright in the website, not your company. What do they mean you don’t own the software? You paid for it!

This perennial problem arises because parties often, when making arrangements with software developers, fail to discuss intellectual property rights, and companies do not realise that they do not own the copyright in their computer systems or websites. Unfortunately this can leave them high and dry when they eventually find out.

Authorship and ownership

Where an employee of a company designs a website or a computer program and this falls within their job description, no problem arises. The copyright of work designed by an employee belongs to their employer. The situation is less clear cut where an employee designs software at work but not in the course of their employment. The determining factors in deciding who owns the copyright in this case are whether the author of the copyright is an employee (not only in name but by considering for example the employee’s employment contract), and whether the work was created in the course of employment. 

Where a self-employed person or freelance worker has been engaged to write a computer program and there is no explicit agreement as to the ownership of the copyright, the copyright will vest with the original software designer and not the company. The fact that a client has paid for the software is not enough to give them authorship of the copyright. It was held in Clearsprings Management Ltd v Businesslinx Ltd [2006] FSR 3 that where Parliament intended that the authorship of copyright would belong to the party commissioning the work, this has been expressly provided for in the legislation – for example in the case of unregistered and registered design rights. The judge was clear that clients have to establish their entitlement to the copyright under some express or implied term of the contract.

In a situation where no agreement exists, what intellectual property rights does a company actually have?

Limited rights

Well, the rights a company will have are very limited. The company paying for the computer program will of course be able to use the software, even though they do not own the copyright in it. The courts will imply a licence to allow the client to continue using or exploiting the program. The extent of this licence may not, however, go as far as companies would like. The courts will only imply a licence to the extent that it is compatible with the original agreement between the parties and the circumstances.

In general, in the absence of any agreement regulating the copyright to the contrary, it will be possible, applying the principles of British Leyland Motor Corp Ltd v Armstrong Patents Co Ltd [1986] AC 577 for the company buying the software to be able to correct errors in the software. If the software developer is a major player in the market for software, refusing to allow a client to maintain the software package they have bought may even constitute a breach of European competition law.

The position regarding improvements made to software packages is less clear. In Saphena Computing Ltd v Allied Collection Agencies Ltd [1995] FSR 616 the contract between the parties was silent with respect to copyright. The parties agreed that the company paying for the software would be provided with a copy of the object code but not the source code. Despite the agreement, the company that paid for the software had obtained copies of the source code and then subsequently used the source code to make improvements to the software. In this case it was held that the company could legitimately repair any bugs within the software but that by making improvements they were infringing the software developers’ copyright.

It was stated in Saphena that if the contract between the parties had provided for the company to be given the source code (bearing in mind that the contract was silent with regard to copyright), the courts would imply a licence to allow the company to repair and improve the software. This clearly illustrates that the facts of the case were fundamental to the judge’s findings.

Bespoke v off-the-shelf

It is also important to point out that Saphena was a case involving the development of bespoke software. Companies paying for bespoke software have, in general, more of an interest in being able to modify software and for this reason it is important that they contemplate this issue before entering into a contract with a software developer.

Companies buying off-the-shelf software such as Microsoft and Apple will usually find explicit terms in their licence agreements to the effect that software may not be modified in any way. There are, in general, very few issues with off-the-shelf software licence agreements as they are usually very comprehensive, so the question of implied terms does not arise.

Business efficacy

In the absence of a licence agreement, however, the courts will only imply terms necessary for the business efficacy of the contract. Following Clearsprings Management Ltd v Businesslinx Ltd it seems that the courts are taking a very restrictive approach to implying terms into a licence, and in this case these did not extend to exclusivity, assignation or sub-licensing.

The court was keen to point out that whether a term is implied will depend entirely on the individual circumstances. Although the court gave examples in its judgment of terms necessary for the business efficacy of the contract, it stated that there may be circumstances which would necessitate the transfer of ownership or exclusivity, albeit not in that case. The judge stated that “the circumstances in which a copyright work may be created by an independent contractor are extremely varied”, but that the starting point would always be that copyright belongs to the author of the work.

Where there is no agreement, software developers also have an implied obligation to keep confidential the information and insights that they gain into a company and how it operates from generating the software package.

Statutory exceptions

It is important for companies to remember that the Copyright, Designs and Patents Act 1988 contains certain general exceptions to copyright infringement which a company that has commissioned work to a software developer can make use of, no matter what terms a court may or may not imply where there is no agreement regulating the copyright to the contrary. First, by section 50A a company paying for a computer program is entitled to make a backup copy so long as this will be used for lawful purposes. It may also copy or adapt a computer program if this is necessary for its lawful use: section 50C. Under section 296A another exception will be made to copyright infringement where a company observes, studies or tests the performance of a computer program in order to become familiar with the ideas and principles which lie behind the program. Finally, under limited circumstances a company wishing to develop new software that will be compatible with the existing commissioned software is entitled to decompile the software in order to ascertain how this is possible: section 50B. Certain conditions must be met before decompilation is permissible. These conditions are fundamental to how far the exception to copyright infringement extends.

The task of trying to unravel what was agreed between parties some time after the work was carried out can be easily avoided by having a detailed licence agreement in place between your company and any independent software developer you employ. By having a licence agreement, you can be confident of your rights in your software from the beginning and avoid unwanted problems or surprises at later dates!

Valerie Surgenor is an associate with MacRoberts, Glasgow