Employees & Intellectual Property

An interesting case was recently decided by the Victorian Supreme Court, which involved a complex dispute about, amongst other things, the ownership of intellectual property in software library code developed by an employee.

Many disputes arise over the ownership of intellectual property rights in relation to software, particularly when software has been partially written before commencing employment or is written to some extent in the employee's own time.

In the matters of Redrock Holdings P/L v Adam Hinkley & Ors and Hotline Communications and Ors v Adam Hinkley and Ors the Court was asked to consider several issues including the ownership of copyright in library code which was allegedly written by Mr Hinkley before commencing employment with Redrock Holdings P/L (“Redrock”) and then allegedly substantially rewritten during his period of employment with Redrock.

The library code in dispute was used by Mr Hinkley to develop a separate software program for one of Redrock's clients over several years.

Mr Hinkley resigned from Redrock whilst overseas allegedly on holiday in Canada where he had entered into negotiations with Hotline Communications P/L ( “Hotline” ) to develop software similar to that which he had developed for Redrock.

After Mr Hinkley notified Redrock of his resignation, Redrock discovered that the source code for the library code had been deleted from its servers and it was left in the difficult situation of having to service a client's needs without access to the necessary source code.

Ultimately the matter found its way to Court.

Mr Hinkley did not dispute that Redrock owned the copyright in the new program developed during the course of his employment, but he maintained that Redrock was only licensed to use an object code version of the library code and was not the owner of the copyright, nor entitled to the source code for same.

The fact that new programs required the library code to run (and make changes) was, in the view of Mr Hinkley, not relevant.

Mr Hinkley also maintained the library code was written outside business hours.

Redrock engaged expert witnesses to analyse the source code of both the library code and the new software program.

The conclusions of the expert evidence included that the library code written during the period of employment replaced the code written prior to the commencement of Hinkley's employment and that the relevant code was substantially written during business hours by virtue of the time stamps on the modified dates of the files and the amount of code written.

These conclusions were accepted by the Court.

The Court held that the copyright in the qualitatively and quantitatively different library code was vested in Redrock by operation of law, having regard to the fact that it was produced by Mr Hinkley in pursuance of the terms of his employment.

This being so, there is no requirement for there to be any transfer agreement or licence, either written or oral to transfer the copyright ownership in the library code from Mr Hinkley to Redrock.

Had Mr Hinkley been considered to be a contractor, the situation would have been quite different.

In the absence of a written document signed by Mr Hinkley, assigning the copyright ownership to Redrock, Mr Hinkley would have been deemed to be the copyright owner.

The Courts examine the question of whether a person is an employee or a contractor from a broad viewpoint, not merely looking to see whether there is direction or control by the employer over the employee's activities.

The “control test”, while being an important factor, is not the sole criteria used by the Court to determine whether a person is an employee or a contractor, particularly when the employee exercises a high degree of professional skill and expertise in the performance of their duties.

As a guide, the Court looks to see whether the employee is employed as part of the business and his work is an integral part of the business, or whether his work is not integrated into the business but only accessory to it.

Other evidence of “employee” status would include factors such as being on a fixed salary; having PAYG tax deducted from salary payments; being entitled to annual, long service and sick leave; superannuation payments being made by the employer on the employee's behalf; and the provision by the employer of the equipment necessary to enable the employee's duties to be performed.

It is important that in situations where an employee's or contractor's library code is to be used, or software development is carried out by an employee in their own time that the copyright ownership issues be formalised, preferably in writing, to minimise the chance of an expensive copyright dispute.