Sometimes life just isn’t fair.  I recall the scene in our back garden when my sister tried to give away my favourite doll to a family friend. I snatched the doll back saying my sister had no right to give my doll away. Clearly, some four decades on, I’ve still not forgotten the injustice of being confined to my room for the rest of the afternoon.

This article is less about dolls /ownership of physical goods / the right to transfer ownership and more about intangible property, specifically the rights that exist when a website is developed (intellectual property rights).  The doll scenario is no real analogy other than it seems equally unfair (if not deal-breaking on occasions I’ve seen in the past), that if a business should procure and pay for a website to be designed and developed, the general position at law is that in spite of payment in full to the agency, the business will not own the intellectual property rights in the software underlying the website unless the business and the agency have signed a contract with an express provision to that effect.

Put simply, the customer may protest all it likes, “but I paid for it”, but without a battle in the courts, sufficient evidence of bespoke development and some serious investment in persuading the court to imply a transfer of ownership must have been intended, this changes nothing. If there is no written contract in place addressing ownership of intellectual property rights, the risk is that the agency can look back, thumbing its nose at the business saying “but we still own it”.

Assignment of intellectual property rights

This article looks at the website example in greater detail, shedding light on when a court might be prepared to imply an assignment of the intellectual property rights to a business.  The upshot most definitely has to be that if you’re the customer or acting for the customer, you absolutely must ensure a properly drafted agreement is signed which sets out which party will own the intellectual property rights in any deliverables in such a project.  This will prevent your being confined to reusing the same developer for future support or phase 2 development work. Or, as in the sorry example I witnessed, it could prevent the collapse of the sale of your business because it transpires when negotiating warranties that the business didn’t actually own the source code to that critical software developed without a contract by the Chief Technology Officer’s buddy some several years ago…

A closer look at Intellectual Property Rights arising in website developments

It is important to consider the various aspects of the website where intellectual property rights will exist.  In any website, there is likely to be the design (the ‘look and feel’ of the website), logos, text, pictures, functionality, possible underlying databases, software and of course the source code to that software.

Inevitably, the customer will want to provide content (text, bios, history of the business) and company logos to the developer for inclusion on the website. The content would be protected by copyright and if written by employees, in the absence of any agreement to the contrary, would be owned by the business; the logos may be protected by unregistered or registered trade mark rights.

The crown jewel, however, in any website development is the source code to the software that underlies the website. Copyright will arise in the source code. With ownership of the copyright come unfettered rights of use, adaptation, amendment, development, copying and so on. 

However, does a customer always need to own the copyright? In some cases, this will be a must; in other cases, a licence granting specific rights might also just do the job. We look at when a licence might be sufficient later in this article.

Position at law

The general rule is that the first owner of copyright will be the author of the work (section 11(1) of the Copyright, Design and Patents Act 1988)(“CDPA”). It is worth noting that there are some exceptions to this, including where the works are created by an employee in the course of their employment (section 11(2) CDPA) as touched upon above.   In such a case, subject to an agreement to the contrary, the first owner will be his employer. 

On the basis of the general rule, as far as the crown jewel source code to a website is concerned, the agency will own the copyright unless you have signed a written transfer of such rights in your favour. As we all know, however, software can be a complex mix of pre-existing software, open source software and bespoke software and all of this will need to be addressed in the contract. (Section 90(3) of the CDPA provides that an assignment of copyright is not effective unless it is in writing and signed by or on behalf of the assignor.)

When might a court be prepared to imply that ownership in the copyright in the source code has in fact transferred without a contract in place?

There have been a number of cases where the courts have been asked to imply an assignment of ownership of the IPR where a party has appointed a third party to undertake design works. The case of Clearsprings Management Ltd v Businesslinx Ltd and another [2005] EWHC 1487 (Ch), concerned the ownership of copyright in software generated by a third party software development company.  The parties had entered into a software development agreement but it was silent as to copyright ownership in the software.  The High Court refused to imply an assignment or exclusive licence due to there being insufficient evidence as to the software being bespoke and the court found that a non-exclusive licence would be sufficient.

The majority of the cases concerning a potential implied assignment of intellectual property rights have followed the principle set out in Robin Ray v Classic FM [1998] FSR 622, in which it was held, when called on to imply terms relating to copyright ownership, the court should only imply the minimum necessary term to give the contract business efficacy.  This could therefore be a limited, non-exclusive licence only. As such, it is always advisable to expressly set out in writing what has been agreed in respect of intellectual property rights ownership.

Full transfer of intellectual property rights v licence to use

When determining the scope of the intellectual property rights ownership provision, it is advisable to consider the following:

  • Is the software behind the website generic or will the designer have to create bespoke software for any parts of the website?
  • Do I want the ability to maintain, develop, alter or upgrade the website in the future without having to pay for this to be done by the original designer?
  • Do I want the ability to appoint a different designer to develop the website if the current designer is underperforming?
  • Is either party bringing to the table existing intellectual property rights?  If so, how is this to be covered in the agreement?
  • Is the website for my use only or for use by my client?  If the latter, what rights will my client need for their use?

Your answers to the above will help determine whether you require a full assignment of the intellectual property rights or whether a licence to use the intellectual property rights will suffice.  You may decide that a licence will be sufficient.  If this is the case, consider whether the licence is exclusive or non-exclusive.  If the website contains aspects which have been specifically produced for you then you will want either a perpetual, exclusive licence in respect of these, or better still, an outright assignment to ensure freedom to adapt and modify as needs require in the future.  Consider again that earlier example of the collapse of a sale of a business because it transpired it did not actually own the intellectual property rights in the core software that drove customer sales. If the development that you have procured is so business critical, as far as possible it should be assigned to the business with appropriate provisions around assignment where applicable in order to ensure maximum flexibility for the business should there be any notion of a sale in future years.

It is important to note that if any third party software or other works are used on the website, the designer may not have the right to grant assignment or an exclusive licence to use the applicable intellectual property rights.  Also, certain aspects of the software behind the website may be generic and not specifically developed for you.  In such cases, the designer may grant only a non-exclusive licence entitling you to use the intellectual property rights in the operation of the website.

With any licence, it is important that the terms of that licence are as wide as possible and will allow you to use the website and the associated intellectual property rights to the extent that you will need to.  Other aspects to consider include whether you will require a right to sub-licence, the duration of the licence and whether the licence is limited to specific territories.

In the event a licence to use the intellectual property rights is sufficient, or if the developer simply won’t let go of the ownership rights in the copyright, you may want to consider whether an escrow account should be set up for the software so that the source codes can be released in the event the designer becomes insolvent or some other event ‘triggers’ its release.  This will ensure that if such an event arises, a different designer can be used for any developments to the website.  Escrow is no cheap option, but if the software is so important to the business, consider it a form of insurance and be prepared to invest in order to protect the future of your asset.

Conclusion

In the event you look to appoint a third party to design and develop a website for you or your client it is essential to agree in writing who will take ownership of the intellectual property rights in the website.  You will need to consider both pre-existing intellectual property rights that each party brings to the table and any intellectual property rights developed specifically for the website.  Carving up of the intellectual property rights in this way is no strange phenomenon to any Intellectual Property lawyer. 

By accurately reflecting in writing what is agreed at the outset, there should then be no ‘life’s not fair’moment or worse still, risk of your business being devalued during the negotiations for its sale because it transpires that you don’t own what you think you own.

About the author

Mairead Powell Associate Solicitor

Mairead is a commercial lawyer and advises on commercial contracts, e-commerce and technology.