Sprint Electric v Potamianos: High Court finds an implied copyright assignment based on equitable title

IPKat focuses its lens on a decision  given last year [Merpel says: "it is never too late to inform IPKat readers"] by the UK High Court in Sprint Electric Ltd v Buyer’s Dream Ltd [2018] EWHC 1924 (Ch). There, the court addressed who owned what copyright in computer software developed by a service provider, but where the express contractual provisions left a lacuna as to IPR ownership.

Factual background

The dispute arose between Sprint Electric Ltd (SEL), the claimant in this case, and Dr Aristides Potamianos, a former director of SEL and the author of the source code of the software used by SEL in digital direct current motor controllers, which SEL was in the business of designing, developing and selling. Dr Potamianos had been working on digital drives long before his engagement with SEL, starting with his work for the PhD thesis.

Buyer’s Dream Ltd (BDL), Dr Potamianos’s service company, entered into three written agreements with SEL for the provision of programming services. In effect, the defendant was solely responsible for the development of all digital aspects of SEL’s products.

BDL controlled access to the source code, providing to SEL only compiled object code sufficient so as to enable SEL to load and execute the firmware on the motor controllers. However, in order to enhance, modify or fix bugs in the program, it is essential to have access to and the right to edit the source code. When Dr Potamianos ceased debugging and development work, lack of access to source code became an existential threat to SEL’s product viability and indeed to the survival of the company itself. SEL sued Dr Potamianos and BDL, claiming breach of contract and SEL’s right to an order for delivery up of all the source code and associated documentation.

The question before the court was whether Dr Potamianos and BDL were obliged to provide SEL with access to the source code for the computer software and related documents. If so, who held the copyright to such software (both source and object code) in light of relationship between the parties and the contracts entered into between them.

Employee or independent contractor?

Presumably for tax purposes, the parties used a service company model rather than a direct employment between SEL and Dr Potamianos. The precise  nature of this relationship  is critical  to the issue of IPR ownership, because should  Dr Potamianos  be  regarded as an employee of SEL, under section 11(2) of the Copyright, Designs and Patents Act 1988 (CDPA), the copyright of code  that he wrote during the course of his employment would be deemed to belong to SEL.

Dr Potamianos contended that in the absence of an employment agreement, he had never been an employee of SEL. The court took issue with this formulation, noting that—

 “whether he was an employee depends on the true relationship between the parties, and not the label which they chose to use to describe that relationship”.  

Here, there were a multiple  terms indicative of an employment relationship, such as the payment and bonus structure; termination provisions that were “not inconsistent with a contract of employment for a senior employee whose services are of a fundamental importance;  and the exclusivity of the relationship (BDL had no other personnel and Dr Potamianos worked solely for SEL full time using SEL’s office space and resources). Further, the court pointed out that it was “unsurprising” that the agreement between the parties did not provide for the degree of control to be exercised by SEL-- “nobody else at SEL had any or any significant skill and knowledge in his area of expertise".

The court concluded that the true relationship between the parties under the contract was that of an employer and employee and, on that basis, SEL was the owner of copyright in accordance with 11(2) CDPA. If that ruling were wrong, the court then would agree with BDL and Dr Potamianos that the contract did not confer on SEL any entitlement, such as access, to be provided with the source code and documents, let alone assign any copyright to SEL.

Implication of an assignment

The parties had entered into three different agreements but none of them contained an express assignment of copyright. SEL relied on the High Court judgment in Griggs v Evans and argued that such an assignment should be implied, relying on the  reasoning  of Mr Prescott QC in that case:

“Because the designer is not an employee of the company the legal title to the copyright belongs to him, because the Copyright Act says so; but the equitable title belongs to the company. This means that the designer can be called upon to assign the legal title to the copyright to the company; and, if he refuses, the law will compel him to do so …It seems to me that when a freelance designer is commissioned to create a logo for a client, the designer will have an uphill task if he wishes to contend that he is free to assign the copyright to a competitor. This is because, in order to give business efficacy to the contract, it will rarely be enough to imply a term that the client shall enjoy a mere licence to use the logo, and nothing more. In most cases it will be obvious, it will “go without saying”, that the client will need further rights. He will surely need some right to prevent others from reproducing the logo.”

Officious bystander says "No"

Jacob LJ, on appeal, in the Griggs case, considered an alternative to the assignment, namely a limited licence. He focused on the intent of the parties through the perspective of an officious bystander at the time of contract and concluded that if such bystander were to think that the copyright of a commissioned work was to belong to the provider, his/her answer would surely have been “of course not.”

Further, SEL submitted that at the time of the execution of each contract, it was obvious that SEL would need access to, and the right to edit, use and compile, the source code as well as access to any associated documents. Otherwise, SEL would be “unable to develop or enhance its products or to fix bugs or implement features which have been advertised but which do not work as described” or, if the current version of hardware became obsolete, significant additional programming, while perhaps needed, would be well-nigh impossible. If Dr Potamianos became unable or unavailable, or if decided to leave SEL and work for another company, potentially a competitor of SEL, serious business continuity risks would arise for SEL.

In other words, access to source code (and not only to object code) was a necessity rather than merely an additional source of potential income for SEL (as had been submitted by the defendants). The court reasoned that while Dr Potamianos continued working at SEL, the need to access and exploit the source code was satisfied by directing requests to him. Hence, SEL’s contractual rights were fully observed and preserved.

BDL and Dr Potamianos argued that “consideration of implied terms only arises where there is no express term dealing with copyright ownership”, but in the present case there were no such lacunae that allowed for such judicial implication.  The defendants sought to rely on   Robin Ray v Classic FM (summarised here by The IPKat).

The court considered that the reasoning in Griggs v Evans applied to the present case:

“A contract under which SEL agreed not only that it should pay for the creation of the Source Code and Related Documents but also that it should be denied ownership of, or even any right of access to, those materials, and be confined instead to a right to exploit the Object Code, is one which no reasonable persons in the position of SEL and Dr Potamianos would have made, and which lacks commercial and practical coherence.”

The court rejected defendants’ assertion that section 90(3) of the CDPA required an assignment of copyright to be executed in writing and signed by the assignor in order to be effective. It stated that “this provision refers to the legal ownership of copyright: it does not affect the equitable ownership, or the right to call for an assignment of the legal title.”

For these reasons, the court held that the implied term satisfied the conditions that: (1) it was reasonable and equitable; (2) it was necessary to give business efficacy to the contract; (3) it was so obvious that “it goes without saying”; (4) it was capable of clear expression; and (5) it did not contradict any express term of the contract. Hence, BDL and Dr Potamianos were obliged to provide SEL with the source code to the extent that the same code had been created by Dr Potamianos during the existence of the contract between them.

Not for the first time, this judgement underscores why it   the transfer of copyright ownership in consulting or contractor arrangements is best achieved through an express assignment clause.  

Image credits: lisa sulaiman