Software house owns copyright, not its customer

23 September 2005

Shirley McCulloch

The software house BusinessLinx Limited and its managing director, Mr Hargreaves (BL), successfully defended a High Court claim by their customer, Clearsprings Management Limited (CM), to be entitled to the copyright in a computer system which CM had commissioned BL to write.

CM provides accommodation and other services to asylum seekers under a contact with the Home Office. In July 2000, CM engaged BL to produce a new, web-based system to enable CM’s staff to access remotely via the internet various databases in order to allocate accommodation and generate reports for the Home Office. The new system was intended to replace CM’s existing system which was not web-based.

Mr Christopher Floyd QC, sitting as a deputy High Court judge, found that the contractual terms under which CM had engaged BL were contained in the written price estimate which CM had accepted. This set out the modules of software which BL would produce, but made no mention of ownership of copyright. These particular modules were prepared for a fixed cost and further work was invoiced by BL on a time and materials basis. Although there had been various meetings and negotiations between the parties in which the issue of copyright had been discussed, the judge found that there was no express agreement between the parties on this point.

The parties both accepted that BL, as author of the software, was the first owner of the copyright. However, CM argued that a term should be implied into the agreement between the parties whereby BL would either assign the copyright to CM, or that CM would have an exclusive licence to exploit the copyright in the software, including by selling or sub-licensing the copyright to third parties.

BL disagreed. They argued that there was no implied term regarding assignment of the copyright. Nor was it implied in the agreement that CM would obtain an exclusive licence. The only implied term was that CM should have a limited licence to use the copyright in the software for their own, internal business uses, without the right to sub-license. BL accepted however, that their ownership of the copyright was not unrestricted because the software incorporated information about CM’s specific business practices, which BL was not entitled to disclose. BL could not therefore sell or license the software as a whole to third parties. However, BL should be able to exploit for future projects the generic code which they had developed for CM’s software.

The judge reviewed the authorities on implied terms in contracts concerning the commissioning of copyright works. In the case of Robin Ray v Classic FM Plc[1], Lightman J had set out the law on implied terms which the parties have not expressly included in their agreement[2].

The implied term must:

1. be reasonable and equitable;

2. be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

3. be so obvious that “it goes without saying”;

4. be capable of clear expression; and

5. not contradict any express term of the contract.

Furthermore, if the court must decide which of various alternative terms should be implied, the choice must be that which does not exceed what is necessary in the circumstances[3].

The necessity (for business efficacy purposes) for an assignment of copyright would only be likely to arise in circumstances where the commissioner of the work requires the right to exclude the contractor from using the work and the ability to enforce the copyright against third parties. The court would have to consider the facts of each case individually. Where it was necessary only to imply a licence, rather than an assignment, the terms of the licence should be no wider than what is required to secure for the client the rights which the parties intended that the client should have. The licence should therefore be limited to what was in the contemplation of the parties at the time they entered into the contract and should not extend wider so that the client is able to take advantage of a new and unexpected profitable opportunity.

The judge heard evidence from each side’s witnesses concerning the meetings and negotiations which took place between the parties with a view to agreeing on the ownership of the copyright. He found that the witnesses for BL had been truthful and fair, whereas one of the CM witnesses had not been convincing or reliable. Where there were inconsistencies in the evidence, the judge preferred the BL witnesses’ accounts of events.

On the issue of an implied exclusive licence, the judge found, on the evidence, that CM had agreed that, in order to write the CM software, BL would develop some of its pre-existing proprietary software. The judge did not accept CM’s evidence that they had specifically instructed BL to produce entirely bespoke software. Such an onerous restriction would have resulted in BL charging a much higher price than the £30,000 initially paid, as the software development would have taken longer.

The judge found that, unless there is a specific instruction, it is to be expected that software developers will import pre-existing code into the software being written for the client, as well as export it for other projects. Had an “officious bystander” been asked at the time the parties entered into the contract whether BL should be able to use the code developed for CM in future projects, the judge thought that the answer would be that BL should be able to use such code, provided that the code did not make use of CM’s specific operating procedures. It was not realistic to expect that BL should have to go back to its original, pre-existing code and repeat the development work from scratch for future projects. The grant of an exclusive licence to CM would prevent BL from re-using generic parts of the code in this way.

The judge therefore ruled that it was not necessary to imply into the agreement between the parties a term that would give CM exclusivity in relation to the software copyright. The only terms necessary for business efficacy were the grant of a licence to CM to use the software for their business and a restriction on BL to prevent them using information about CM’s operating procedures for any purpose other than producing the software for CM. Following this logic, if an exclusive licence were not necessary for business efficacy, it necessarily followed that an assignment of copyright was also not necessary.

On the issue of a licence with the right to grant sub-licences, CM had adduced email evidence to demonstrate that BL knew that CM wanted to acquire ownership of the copyright in order to sell or license it to third parties. However, the judge found that “the evidence comes miles short of establishing that the parties knew CM would be selling and licensing the software to others”. Work had already begun on the development of the software under the terms of BL’s written estimate which made no mention of copyright. It could not therefore have been in the joint contemplation of the parties that CM should be able to sell or license the software to third parties. Even if CM had communicated to BL their desire to obtain ownership of the copyright at an early enough point in the negotiations between the parties that it would have been possible for this to form the basis for implying a term into the agreement, the judge did not believe that it would be a necessary implication that CM should acquire, without further payment, the copyright or the right to sub-license. There was no evidence that CM had, at that time, had a clear plan to exploit the software by sale or licensing and so this could not have been a purpose of the agreement between the parties. This was a future, but indistinct, business opportunity requiring further negotiation between the CM and BL.

The implied term which the judge found was that CM should have a non-exclusive, personal licence to the copyright in the software, without any right to sub-license. This licence was perpetual, irrevocable and royalty-free and would permit CM to repair, maintain and upgrade the software in accordance with its business of providing accommodation for asylum seekers.

This case will be seen by software houses as a just result and serves as a reminder that commissioners of copyright work should agree appropriate copyright terms with the software developer to ensure that the commissioner obtains all the rights they require. Simply paying for the creation of software does not, of itself, imply into the agreement any wider benefit to the commissioner than that which is strictly necessary to give business efficacy to the agreement. This is particularly so, as it is common practice in the industry that, in the absence of a contrary term in the agreement, software developers can use pre-existing code when developing new software for their client and also, in turn use codes from the resulting the new software in future projects for other clients.

First published in the September 2005 issue of World Licensing Law Report.

[1] [1998] FSR 622, at pages 641-643

[2] Following the House of Lords decisions in Liverpool City Council v Irwin [1977] AC 239 and Philips Electronique v British Sky Broadcasting Ltd [1995] EMLR 472 at 481 and the Privy Council guidance in BP Refinery (Westernport) Pty Ltd v The President, Councillors and Ratepayers of the Shire of Hastings [1978] ALJR 20, at 26

[3] Per Lord Wilberforce at 245F-G in Liverpool City Council v Irwin [1977] AC 239