In the rush and bustle of modern commercial life, we all have a habit of just "getting it done" – often without sufficient thought about some of the details.

When you had the computer programmer design that add-on program that your stock control people now absolutely depend on (and would be lost without) or had someone write an important manual or design (or re-design) a form that is now part of your daily system, did you give any thought as to who might actually OWN the rights to it? Because someone owns them!

Even when these "issues" do not surface before, they often arise when the business feels the need to dispense with the services of the person who was involved in the actual development of the "work" (that is what it is called in legal terms) – and with the pending economic conditions, "downsizing" is a possibility for many businesses. The people concerned (perhaps not entirely unreasonably) feel that, if they are not going to be part of the future of the business, neither should what they designed. So they make a claim that the business must stop using THEIR work and/or must pay them for usage (maybe both past and present) – and then the "fun" really begins.

The executive who was responsible for arranging it all usually feels rather foolish ("I feel pretty silly in hindsight"). And yet another legal dispute begins.

It is all so easily, and inexpensively, avoidable.

Read on – and make sure this does not happen to you.

Regards,

David Heidtman

Commercial Group
Heidtman & Co Lawyers

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Protecting Intellectual Property created by Employees/Contractors

30 July 2008

Businesses need to be very mindful of just who owns the rights in works created by people who work for them – whether those people be employees or contractors.

In a recent decision - Centrestage Management Pty Ltd v Riedle (the "CMA Case") – the Court held that where a company engages the services of an independent contractor, and that contractor creates new intellectual property, there will be a presumption that the contractor will be the legal owner of that new intellectual property.

The Case

A computer consultancy company, Centrestage Management Services Pty Ltd ("CMS"), and its director, Mr Roberts, wrote a computer software application for the Salvation Army. In 2003 the Salvation Army instructed CMS and Mr Roberts to upgrade that program. As Mr Roberts was not able to carry out the upgrade himself, he engaged an independent contractor – Mr Riedle – to do the work. The program upgrade was to be carried out in three stages. Mr Riedle provided stage one. Stage two did not proceed, and some work was done by Mr Riedle on stage three.

Eventually a dispute arose about the ownership of the rights (copyright) in the upgraded computer program.

The Copyright Act

The Copyright Act provides that, unless there is an arrangement to the contrary, the "author" (or creator) of a "work" (and a computer program is regarded as a "work") is the owner of the copyright in it.

There is an exception where the "author" of the "work" is an employee.

In other words, unless there is an arrangement to the contrary, an employer usually owns the copyright in a "work" created by an employee and an independent contractor usually owns the copyright in a "work" created under an independent contractor arrangement (whether it is in the form of a formal written arrangement or otherwise).

Independent Contractors v Employees

Often it is very clear whether a person is an employee or a contractor, but sometimes it is not. In resolving the difference, courts have taken a 'case by case' approach; and over the years decisions of the courts have provided some recognised "factors" in drawing the distinction. For example, the degree of control over the way work has to be done is quite critical – so that a high degree of control exercised by one person over another tends to demonstrate an employer/employee relationship. In the CMS case, the Court looked at the following factors:

• the person's freedom to engage in business with other clients separately;
• the person's entitlement to benefits usually given to employees including holidays, superannuation benefits, workers compensation insurance coverage and sick pay;
• the extent to which the person pays for equipment and resources required to carry out the work;
• the form of remuneration; and
• the tax arrangements between the parties – particularly GST and PAYG income tax.

The Court looked at these factors and found that Mr Riedle worked for CMS as an independent contractor. It followed that the copyright in the computer program was owned by Mr Riedle, not CMS.

One further issue to examine in these situations is, even if ownership of the copyright belongs to the independent contractor, whether the independent contractor has given an "implied licence" to the person who engaged the contractor to use that intellectual property for the purpose for which it was created. In the CMS case, it was argued that Riedle gave CMS such a licence – to use the computer programme upgrade for the Salvation Army. The Court held that Riedle did give CMS such a licence to use the upgrade, but this did not mean that Riedle had to give CMS the source code for the software because CMS could still use the upgrade without also needing the source code.

What this means for you

In Australia, when someone creates a "work", unless there is an arrangement to the contrary, copyright is automatically created in favour of the author/creator. As with this case, "work" obviously includes creation or improvement of a computer software program; but it could equally apply to the creation or improvement of some logo, diagram, manual or other vital document used in your business (and which it could be very expensive to find out your business does not actually own – maybe it is owned by that former employee you just put off).

The CMS case is authority for the proposition that companies must consider the nature of their relationship with parties they engage to create or work on intellectual property issues, and deal with that relationship in a manner designed to protect their interests: if a company intends to retain the copyright in valuable intellectual property created by a contractor, it must ensure that the engagement document contains an express term giving ownership of the copyright to the company.

Employment contracts should clearly stipulate that copyright in all intellectual property created by an employee during the term of their employment contract (including outside business hours) belongs to the employer.

Many companies enter into large contracts with third parties – and agree to assign certain rights to those third parties – on the assumption that what they produce belongs to them. It could be very expensive if that assumption is wrong, and they are not able to deliver what they have promised to deliver.

It is essential that your employment contracts and arrangements with independent contractors are prepared properly. This is neither difficult nor expensive.

If you have any questions, or want further information, regarding any of this, please contact David Heidtman, Elizabeth Lee or Michael Tzirtzilakis.

Author: Michael Tzirtzilakis - Commercial Group

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