In bed with software developers—consider the divorce before the marriage takes place

How did the High Court deal with a recent case where a software developer who was a company director, consultant and then an employee of one company, transferred that company’s software to a competitor?

In IT Human Resources plc v Land [2014] All ER (D) 182 (Nov), [2014] EWHC 3812 (Ch), the defendant director provided the copyright protected software of the claimant company to another company. The claimant brought proceedings for copyright infringement and breach of fiduciary duty. The Chancery Division, in allowing the claim, held that, among other things, the defendant had not acted with the claimant’s permission, and the claim was not time barred.

What was the factual background to this claim?

The claimant, IT Human Resources (ITHR), was incorporated in 1998. Its original directors were Mr Gallagher and the defendant, Mr Land. In 2004, Land became an employee of ITHR. Land was also a director of TBS Ltd, a software development and IT consultancy. The software the subject of the dispute was a multi-user software system designed to assist in the conduct of a recruitment business for IT technical staff, called Interact. It was created by Land. There was a February 1999 agreement between ITHR and TSB for the development and provision of the Interact software. It was not disputed that ITHR owned the copyright in the Interact source code.

Land provided IT services to various clients. Land developed and provided services for a computer recruitment system called Esprit to NTU Ltd, a competitor of ITHR. In early 2002 Land tried to broker a deal between ITHR and NTU to allow NTU to acquire a version of Interact (to replace Esprit) from ITHR. Gallagher and NTU could not agree a price for Interact and so these negations came to an end. However, Land provided versions of Interact to NTU for about a year without Gallagher’s knowledge. The name of the system was changed from Interact to Impact. Land invoiced NTU for a total of £8,000 in relation to Interact/Impact.

By July 2005 ITHR was planning a new recruitment system to be called Interact.net using different technology to Interact, which would require a rewrite by Land. Land started work on Interact.net in 2009. An ex-employee of NTU joined ITHR in 2009 and immediately recognised that the Interact system was identical to the Impact system he had used at NTU. He told Gallagher, Gallagher was apparently shocked, but did nothing apparently because he was concerned that confronting Land might jeopardise the Interact.net project.

By August 2010 Interact.net appears to have been ready for use albeit with some problems. In May 2011 Land unexpectedly resigned as a (non-executive) director of ITHR and in July 2011 Gallagher raised the issue of Land’s copyright infringement and other issues.

What were the legal issues?

Copyright infringement

Land accepted that ITHR owned the copyright in the Interact source code and that in the absence of permission from ITHR his actions would amount to copyright infringement but he claimed he had permission, given orally by ITHR, to do the otherwise infringing acts.

Breach of fiduciary duty

It was alleged that Land was a director of ITHR and owed the company certain fiduciary duties (see para [117] of the judgment) which he had breached by providing ITHR’s copyright protected material to NTU and by failing to disclose his wrongdoing to ITHR.

Issues of limitation

An action for damages for copyright infringement is founded on tort and may not be brought after the expiration of six years from the date on which the cause of action accrued. Since the claim form in the present case had been issued in October 2011, acts of infringement prior to October 2005 were outside the six-year limitation period. Only one act was within the six-year limitation period. However ITHR claimed that the relevant period of limitation did not begin to run when the cause of action accrued because facts relevant to the right of action were concealed from ITHR so that the period of limitation was postponed until ITHR discovered the concealment or should have discovered it with reasonable diligence.

What did the High Court decide?

Land failed to convince the court that he had ITHR’s permission to provide the software to Nationwide. By providing copies of the software to NTU he had infringed ITHR’s copyright in that software.

Land was also in breach of his fiduciary duty to ITHR. Each time he committed copyright infringement he committed a breach of his fiduciary duty to ITHR. Disclosure by him of his wrongdoing would have been in the best interests of ITHR and he did not disclose this wrongdoing in breach of duty.

Land had been under a duty to disclose his conduct to ITHR if he either thought it was in ITHR’s best interests to know of it or he would have considered it was in its interests if he had thought about it in good faith. He had not. Instead he had deliberately concealed facts relevant to his liability. Therefore, the six-year limitation period had not begun to run until October 2009, when ITHR had acquired knowledge of the infringement and wrongdoing.

What should lawyers take from this case?

IT consultants who develop bespoke software often work for a number of different customers, including competing companies. There are a number of issues worth considering in such circumstances:

Consider the divorce before the marriage takes place

The 10 February 1999 contract between ITHR and TBS was brief and sketchy—having a comprehensive written agreement in place before the work starts is crucial.

Decide in advance the position on ownership of the relevant software

If the copyright in the software is assigned to the customer, then the issue of it also being used by a competitor should not arise, but, such an arrangement is likely to be more costly. If the software is going to be licensed, what is the scope of the software licences granted? Licences can be exclusive or non-exclusive (does the customer want the software to be available to a competitor?), transferable or non-transferable, subject to territorial restrictions or restricted to certain business activities. For more see our Practice Note: Key issues in software contracts.

Deal explicitly with changes in the provision of services and hardware

Land became an employee in 2004 and this changed the ownership position with regards to software developed after that time. It is important to acknowledge this change in position and make the new arrangement clear.

Consider including an ADR clause in the contract between software developer and the customer

It is difficult to judge the personalities involved in this case based on reading a court judgment but this case seems like it might have been an ideal candidate for mediation.

Consider highlighting the sums that are likely to be recoverable

The sums recoverable by ITHR for Land’s infringement of copyright are likely to be modest—consider making this clear to clients. Although there may be other reasons for issuing proceedings; in this case it appears that the claim was brought in the context of another claim—a ITHR shareholders’ dispute.

Provide expressly for modifications

The contract between TSB and ITHR provided that the Interact software became ITHR’s property in February 2002. After this time Land made modifications to Interact. In 2004 Land became an employee of ITHR. Without express terms dealing with the ownership of these modifications, the ownership position of them for the period 2002–04 is uncertain (although it is likely that ITHR was the copyright owner in equity) because Land was both a director of TBS and of ITHR—modifications should be expressly provided for in a software development contract.

Highlight where the burden of proof falls

For those acting for software developers it is worth pointing out to them that the burden of proving the existence of a licence is on the person who asserts that a licence was granted, in this case Lane—agreements made orally will make this a much more difficult task.

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