Software: Ownership and Employment

March 25, 2007

Intellectual property law constantly lags behind technical development but this shortfall is now accelerating.  Innovation which is not linked to physical equipment or products as a wealth generator has never been more important.

One of the stated objectives of intellectual property law has been the encouragement of innovation, a phrase much vaunted in the recitals to European directives and yet the patchwork of rights relating to software is likely to remain fertile ground for litigation.

In the recent Court of Appeal Decision Liffe Administration and Management v Pavel Pinkava [2007] EWCA Civ 217, handed down on 15 March 2007, the Court of Appeal was faced with a dispute between employer and employee over who owned the intellectual property rights to highly innovative algorithms and concepts for ‘software’, which opened the potential to trade in financial instruments which would otherwise have been impossible.

The Judgment

The claim was brought, under the Patents Act 1977, s 39. The action did not proceed under copyright, since the value was not in code but in the concepts behind the code.

Section 39 sets out when the employer or employee owns an ‘invention’. The surprising element of this claim was that the parties accepted that the innovation was not capable of being patented in the UK. The employee applied for a patent for the software in the USA where, unlike in the European Union, software is not excluded from patentability.

Software is excluded from patent by Article 52 of the European Patent Convention and the Patents Act 1977, s 1(2) and is set to remain so excluded if recommendation 17 of the 2007 Gowers Report on Intellectual Property is followed by the legislature.

Notwithstanding exclusion from patentability, the court held that the innovation was owned by the employer. The Court of Appeal held, upholding the judgment of the lower court, that the particular software system was an invention (albeit not capable of being patented in the UK) owned by the employer. Neither party appears to have argued that the the Patents Act 1977, s 39 would not apply to non-patentable innovations. 

Lord Justice Jacob recognised that an argument potentially arose as to whether innovations which were excluded from patentability fell within s 39 but suggests obiter that had it been argued he would probably have held that the Act did apply to such innovations. It is not therefore clear how far the provision of s 39 extends and to what extent this section captures any idea, concept or innovation irrespective of patentability. The only safe commercial assumption is that all innovations, patentable or not and whether or not protected by other forms in intellectual property are within the scope of ss 39 and 42 of the Act.

The court does not appear to have considered the implications of s 40, namely the remuneration of employees for inventions which achieve the grant of a patent. If s 39 does properly apply to inventions which are patentable in other jurisdictions and which may be extremely valuable, it seems invidious that the employee should receive no benefit from something which is of ‘outstanding benefit’. If s 39 is to apply to the inventions (as a complete code) then, on the face of it, s 40 needs to be revisited to include inventions which are not patentable or which achieve patents in other countries. In either event this judgment creates some uncomfortable incongruities.

As matters stand, an employee’s innovation which is excluded from patent by s 1(2) of the 1977 Act will nonetheless belong to the employer where the circumstances of their creation fall within the ‘requirements’ of s 39. This means that business method patents, which are not claimable within the UK, can be claimed by a UK employer for registration in the USA as the employer’s property and for use in the UK. This creates a difficult position namely that confidentiality is destroyed by publication of the patent in the US and enables the world at large to use the innovation within the UK, all the world that is except the employee (or presumably ex-employee).  In this case no claim to confidentiality was made, but presumably this would form the basis for any future action, which would presumably include an injunction to restrain filing or publication of a non-UK patent.

Whilst both principal judgments arrive at the same conclusion on the facts, namely that the innovation was owned by the employer, the judgment of the Chancellor (Sir Andrew Morritt) and that of Jacob LJ disclose a significant difference in approach. If the patentability of the innovation in the UK had been in issue then perhaps more detailed consideration would have been given to the manner in which that innovation had been arrived at. Jacobs LJ eschewed the Chancellor’s forensic approach to this as unnecessary, a reaction which may prove a little hasty given the potential ramifications of the judgment.

Section 39 provides as follows (emphasis added):

(1) Notwithstanding anything in any rule of law, an invention made by an employee shall, as between him and his employer, be taken to belong to his employer for the purposes of this Act and all other purposes if –

(a) it was made in the course of the normal duties of the employee or in the course of duties falling outside his normal duties, but specifically assigned to him, and the circumstances in either case were such that an invention might reasonably be expected to result from the carrying out of his duties; or

(b)  the invention was made in the course of the duties of the employee and, at the time of making the invention, because of the nature of his duties and the particular responsibilities arising from the nature of his duties he had a special obligation to further the interests of the employer’s undertaking.

(2)  Any other invention made by an employee shall, as between him and his employer, be taken for those purposes to belong to the employee.

(3) Where by virtue of this section an invention belongs, as between him and his employer, to an employee, nothing done –
(a)  by or on behalf of the employee or any person claiming under him for the purposes of pursuing an application for a patent, or
(b)  by any person for the purpose of performing or working the invention, shall be taken to infringe any copyright or design right to which, as between him and his employer, his employer is entitled in any model or document relating to the invention.

The Chancellor and indeed Kitchen J (the judge at first instance) were at pains to examine the distinction between normal duties and those which were specifically assigned. Jacobs LJ preferred to take the issue ‘in gross’, contending that such a forensic approach was not necessary. If the boundaries of the innovations covered by the section extend beyond patentable material, one can envisage both employers and employees becoming very keen to determine whether any particular innovation falls within the scope of normal or specifically assigned duties.

The court held that Patents Act 1977 did not restate the common law prior to that date but provides a complete code for the ownership of rights relating to inventions.

In this regard, the draftsman’s temptation to extend ownership of rights beyond those that fall within the anticipated duties of the employee must be pursued with caution. Section 42(2) makes any term in a contract which diminishes the employee’s rights in inventions of any description…. ‘unenforceable against him’. With s 39 prescribed as a complete code covering a wide range of innovations, patentable and non-patentable, the only variable which remains is the de facto scope of employment.

The judgment of Jacob LJ makes it clear the court considered that s 39 must be a complete code because otherwise it would make a complete nonsense of s 42. The ownership of the invention can only be dealt with by s 39 and not by any contract.

The Implications

The determination that s 39 is a complete code when combined with the extension of the scope of s 39 to cover non UK/EU patentable material creates significant issues for creative industries, media, design houses, universities, development and research establishments and those who work for them.

If the employer and employee are to be clear who owns all innovations, whether capable of patent in the UK/EU or not, then the parties must be clear as to what constitutes normal duties and specifically assigned duties of the employee; for it is this which will determine ownership. Section 42 precludes any contractual manipulation, creative drafting or collateral agreements which either ascribes ownership in an employment contract (which would include a separate assignment) or which extends the ‘duties’ beyond those which are actually intended.

This ruling potentially exposes employers to retrospective claims for any rights which have been asserted by employers over innovations which they may have considered safely assigned by contract but which, on forensic analysis, might be found to have been created outside of the employee’s normal or specially assigned duties, rendering the assignment void.

The potential for inventions to arise spontaneously out of an employee’s performance of his contract but relating to a parallel application which he is not employed to investigate is set to become fertile ground for dispute. Litigation as in this case is likely to be funded by the deep pockets of potential suitors for the top echelons of innovative employees. By enticing the employee away from an employer, the new proprietor can gain the opportunity to acquire innovations which do not fall within the former employer’s rights of ownership. Prior to entering into an employment agreement, a suitor may seek assignment of any inventions which arose during the previous employment but not as part of the prior duties. Such assignments are not caught by s 42.

Section 42 effectively precludes the employer from doing anything contractually to provide certainty as to whether innovation may or may not fall within the ascribed duties as they may vary from time to time.

Section 39 is a provision which protects the employee; it leaves with the employee innovations which may arise out of his knowledge of the business of the employer but which he is not remunerated to develop or provide to that employer.

Both parties must be live to the fact that the scope of what constitutes normal duties is likely to evolve over time and something which is a specifically assigned duty could subsequently become part of the normal duties. Employers must be live to the need for policing the scope of the duties actually undertaken in any creative role and the need to review this regularly, documenting any changes and special assignments.

In the creative industries where skills may cross the border between the duty of one employee and another, ownership of any resulting innovation may become hotly contested. Innovations by one employee, employed in a specific creative or research capacity (eg visual design or product innovation), that produces a new idea, product or business process for another part of the business (such as software) may not be owned by the employer irrespective of any contractual provision.

In creative industries, research establishments, media and electronic money markets, innovation does not necessarily follow duty. When business processes, algorithms and concepts have inherent value, notions of employment duties and special assignments as the appropriate concept upon which to base ownership are difficult to reconcile with the real world.

Alexander Carter-Silk is a Partner at SpeechlyBircham and advises on contentious and non-contentious intellectual property and technology matters

© Alexander Carter-Silk March 2007