Insights Court of Appeal dismisses appeal on ownership of copyright in computer software

Mr Penhallurick, a former employee of MD5 Ltd, claimed ownership of copyright in eight literary works consisting of computer software underlying a tool for the forensic examination of computers that he that he had written and named “Virtual Forensic Computing” (VFC). MD5 utilised at least some of the works in software products that it marketed under the same name, VFC.

Mr Penhallurick issued proceedings for infringement of his copyright against his former employer.

MD5 denied infringement and counterclaimed for a declaration that it was the owner of the copyright because it had all been created in the course of Mr Penahllurick’s employment under a contract of service or, alternatively, because it had been assigned to it by an agreement of November 2008. It also counterclaimed for infringement by Mr Penhallurick by making an adaptation of the works without MD5’s consent or by retaining copies of the works.

At first instance, His Honour Judge Hacon held that the works were created by Mr Penhallurick in the course of his employment under s 11(2) of the Copyright, Designs and Patents Act 1988. HHJ Hacon also held that even if MD5 was not the owner of the copyright, it had acquired it by virtue of the November 2008 agreement. HHJ Hacon dismissed MD5’s counterclaim for infringement.

Mr Penhallurick appealed against the judge’s order dismissing his claim, challenging both the findings as to ownership and the conclusions as to the effect of the November 2008 agreement. MD5 cross-appealed from the judge’s order dismissing its counterclaim.

Sir Christopher Floyd noted that if the subject matter of the November 2008 agreement was, as the judge had held, all the copyright in software written by Mr Penhallurick since he started working for MD5, and if, as the judge had also held, it amounted to an assignment of those copyrights, then Mr Penhallurick’s case had to fail because, following cross-examination, it became clear that none of the pleaded works existed before Mr Penhallurick started working for MD5.

Considering the November 2008 agreement, Sir Christopher said that while it was true that the question of whether the agreement was effective to assign the copyright to MD5 only arose if HHJ Hacon had been incorrect that the copyright was owned by MD5, he disagreed with HHJ Hacon that the agreement had to be construed on the basis that the copyright was owned by Mr Penahallurick. Rather, the agreement had to be construed on the basis of the objective factual matrix available to both parties at the time the agreement was reached. This included all the background that had been available but excluded evidence about their subjective intentions.

The factual matrix in November 2008 was that in the period leading to the agreement being signed, Mr Penhallurick had been complaining about the amount of work he had done on VFC and what he thought were his rights in the software. There was also evidence that Mr Penhallurick had made claims that much of the research and development for VFC had been done in his own time. However, the factual matrix did not include, as Mr Penhallurick argued, the conclusion that Mr Penhallurick owned the copyright in the core functionality of the VFC software, because that conclusion was the subject of dispute, and was not one that was at that stage reasonably available to the parties to the agreement. Therefore, Sir Christopher found that there was nothing in the objective factual matrix to suggest that the agreement was intended to operate as a licence, or as a licence only in respect of the core functionality of VFC.

As for the language in the agreement, Sir Christopher found, against the factual background of Mr Penhallurick’s claims to ownership of the copyright while he was employed by MD5, that it was obvious that the intent of the agreement was to ensure that the copyright in the software, including any not already vested, became vested in MD5. The parties’ subjective intentions were irrelevant, Sir Christopher said.

Sir Christopher also rejected Mr Penhallurick’s argument that the language of the November 2008 agreement pointed towards the division of the copyright into core VFC functionality and licensing/security aspects, and that the assignment of copyright only related to the latter aspects and not the core functionality aspect. Again, Sir Christopher said, this did not fit with carrying out an objective interpretation of the agreement; the exercise of construction could not be approached on the basis that there was a common understanding that copyright in the core functionality was vested in Mr Penhallurick, and it was not possible to infer that the copyright referred to in the agreement was something other than the core functionality.

Finally, Sir Christopher agreed with the judge that there were clear indications in the agreement that it was intended also to operate as an assignment of any future copyright first owned by Mr Penhallurick whilst at MD5. It was plain that the agreement contemplated the continued involvement of Mr Penhallurick in the development of the software (as indeed happened), and it made no commercial sense for the agreement to draw a line in the sand and for future copyrights which would inevitably arise to be vested in Mr Penhallurick. Sir Christopher disagreed that the agreement to pay Mr Penhallurick a bonus, as provided in the November 2008 agreement, could not be consideration for the assignment.

Accordingly, Sir Christopher held that the judge had been correct to find that, in any event, MD5 had acquired the copyright by virtue of the November 2008 agreement. It followed that it was not necessary to consider the challenge to HHJ Hacon’s finding that the works were created by Mr Penahllurick in the course of his employment. The appeal was dismissed.

As for the cross-appeal, it became clear that the purpose of it was for an order for delivery up of copies of the software that might be in Mr Penhallurick’s possession. Mr Penhallurick had no objection to such an order if his appeal was dismissed. Accordingly, there was no need to consider the merits of the cross-appeal. (Michael Penhallurick v MD5 Ltd [2021] EWCA Civ 1770 (2 December 2021) — to read the judgment in full, click here).