Intellectual property has outgrown tangible assets to account for the majority of the world’s corporate value. In an era in which Apple, Microsoft and Google are the world’s most valuable companies, protecting the ‘special sauce’ of your business IP is more important than ever. One protection method lies in the domain of copyright law. Below we discuss circumstances where a business, despite commissioning and paying for the creation of copyright work, may not own it. Businesses need to understand how to avoid misstepping here, which is surprisingly easy to do.
According to Everedge Global, today intangible assets account for more than 87% of all company value. This includes assets such as literary and musical works, software code, databases, trade marks and brands, confidential information, inventions, patents, industrial know-how and design rights. In an increasingly Web 3.0 world [link to our web 3.0 article], essentially every modern business, to a greater or lesser degree, is built around these kinds of intangibles. These intangible assets – things that are not physical in nature – are now the primary driver of company profitability and growth.
There are various ways to protect the value of intangible assets, one of which is through claiming copyright in literary and musical works that have been created. Beyond the obvious examples, literary works can include any original ideas reduced to material form, such as business plans, pitch decks, advisory reports, financial and legal documents, policies, drawings, plans and blueprints, photographs, graphic designs and computer software code.
Unlike some other forms of IP protection, in Australia there is no register of copyright. Instead certain forms of expression reduced to material form are automatically covered by copyright under the Copyright Act.
As copyright owner, you are exclusively entitled to control the use of the creative work, and prevent others using it.
The general rule of copyright ownership is that the author is the copyright owner of a work. This right is protected by section 35(2) of the Copyright Act. In the copyright context, the author is the person who first put the work into material form (for example, the person who first developed the source code of a computer program).
This principle was tested in the Avtex Case in the Federal Court.[1] In this case, the operators of a flight school wanted to establish a school teaching flying theory. The Respondents were engaged to help establish the flight school and proposed a computer-assisted interactive class learning system (later known as the ‘ACE System’). The Applicants paid the majority of the expenses in setting up the course, but the ACE System itself was essentially created by an independent contractor engaged by the Respondents.
There were never any discussions regarding copyright ownership in the ACE System.
When the relationship soured, the question of ownership of copyright ownership became contentious. Whilst recognising that the development funds were largely paid for by the Applicants, the Court held that copyright ownership vested in the independent contractor engaged by the Respondents to develop the system. This was due to the fact that copyright vests in the author, and needs to be assigned in writing to displace this principle.
Under the Copyright Act, an assignment of copyright (whether total or partial) does not have effect unless it is in writing signed by or on behalf of the assignor. Therefore, in the absence of a specific agreement copyright in works created by independent contractors will remain in their hands.
An exception to the author principle lies under section 35(6) of the Copyright Act, which provides that copyright in work produced by an employee ‘in pursuance of the terms of [their] employment’ is owned by the employer. Determining when a work falls under this section involves examining the employee’s duties and whether the work resulted from the employee performing those duties.
This principle was tested in EdSonic Pty Ltd v Cassidy in 2010.[2] From 2001 to 2002, EdSonic Pty Ltd and its director, Robin Lick, worked with Barbara Cassidy to adapt teaching materials she had previously developed into a format that could be delivered online (Online Materials). Ms Cassidy was to be compensated for her work with shares in EdSonic and royalties from any sale of the Online Materials.
During this same period, Ms Cassidy was offered a contract to write materials for the Property Council of Australia (PCA Materials). Ms Cassidy asked EdSonic to enter the contract on her behalf to avoid the paperwork required of independent contractors. EdSonic agreed and employed Ms Cassidy to develop the PCA Materials. The professional relationship between Mr Lick and Ms Cassidy later broke down, and EdSonic claimed ownership of the Online Materials.
In this case, the central issue was the interpretation and application of section 35(6) of the Copyright Act. In particular whether Ms Cassidy was an employee of EdSonic, and whether the online materials were produced in ‘pursuance of the terms’ of her employment?
The Court noted the following principles:
The central question was whether the author made the work ‘because the contract of employment required or authorised the work to be made.’ Ms Cassidy’s employment contract with EdSonic was limited to the development of the PCA Materials and did not include the Online Materials. Ownership of copyright in the Online Materials was governed by the separate agreement between the parties, and copyright ultimately lay with Ms Cassidy.
The decision illustrates the importance of clearly identifying the nature and scope of an employment relationship, as well as considering the status of any pre-existing works which may potentially be further developed or completed during the period of the relationship.
As discussed in the ACE Systems case above, where a business has engaged an independent contractor to develop a software program, whether a website, mobile site or some other form of digital application, express contractual assignment is required or the business will not own copyright in the program.
Although the commissioning the work might give rise to a licence to use it or other equitable rights, difficulties will arise if the company subsequently seeks to dispose of the work or the business itself, for this will risk infringing the contractor’s rights.
Note to business owners: Ensure that your agreements with independent contractors include express assignments of copyright and other IP rights in works they create in this capacity.
In summary, businesses should understand the following copyright principles:
The consequences of getting this wrong can be dire for the business and its shareholders, especially where the value of the business lies largely in its intangible assets. If you require advice on any copyright or intellectual property related matters, please contact us below.
[1] Avtex Airservices Pty Ltd v Bartsch (1992) 107 ALR 539.
[2] EdSonic Pty Ltd v Cassidy (2010) 272 ALR 589.
[3] Per the decision of the Supreme Court of Victoria in Victoria University v Wilson [2004] VSC 33; (2004) 60 IPR 392 which concerned the intellectual property rights to a patentable invention and two related computer programs.
[4] Per the decision of the Full Federal Court in University of Western Australia v Gray [2009] FCAFC 116; (2009) 259 ALF 224.
