IP case tests code ownership

A legal decision over the ownership of intellectual property in a software development contract is set to have IT firms rushing to their lawyers to protect their base development code.

A legal decision over the ownership of intellectual property in a software development contract is set to have IT firms rushing to their lawyers to protect their base development code.

The judgement in the High Court in Hamilton effectively hands ownership of code from the developer’s software library to a customer.

Pacific Software Technology is to appeal the ruling, which decided that Hamilton-based Perry Group owned the intellectual property in gaming database software developed by Pacific for Perry Group subsidiary United Gaming. Both parties have agreed to a stay of execution on the judgement and proceedings.

In December Perry Group gained an interim injunction after it took Pacific to court to force it to return source code for software it had developed for the gaming machine database. The dispute over copyright ownership centred around the issue of whether database work done by Pacific had been commissioned by United Gaming or been independently created by Pacific and subsequently offered to Perry Group.

In the Perry/Pacific judgement, Justice Williams in the High Court in Hamilton said that Perry Group had commissioned the software and thus owned the copyright in not only the gaming database but the pre-existing “library” code developed by Pacific and used in other clients’ software.

Baldwin Shelston Waters lawyer Breon Gravatt says the decision is bad news for software developers, noting that without a clearly written agreement developers risk losing ownership of software code, including library code.

However, AJ Park partner Ken Moon says despite what he sees as some ambiguity in the ruling, the inclusion of pre-existing library code owned by Pacific “was neither here nor there”.

Moon says “properly speaking” pre-existing library code would have been owned by Pacific and licensed to Perry, but only a written contract would have stated this expressly.

Tim Jeffcott, of Pacific’s legal team at IT Law, says he can’t talk about the grounds of the appeal, pointing to a press release that states only that his client did not agree with some parts of the judgement and that it may have significant implications for the software development industry.

Auckland developer Ian Mitchell, an expert witness in the Perry case, advises retention of all correspondence, written and verbal, between developer and customer. Personally he would retain copyright, he says, and urges developers to clarify exactly what is being sold, such as a right to use.

Perry Group systems manager and accountant Stephen Burkhart would only say that the agreement to stay execution had to do with “the protection of [Pacific’s] rights”.

The case to date ...

The dispute arose over whether database work done by Pacific Software Technology had been commissioned by Perry Group subsidiary United Gaming, which sells and services gaming machines. United Gaming used the Pacific-developed Q + A database as part of a service providing monitoring and metering services for the machines. United Gaming wanted to develop and upgrade the system to provide electronic collection and processing of data.

In the case, Perry Group and United Gaming argued that they were the owners of the VB/Access database source code commissioned by them in February/March 2000 and was a development of Q + A, as well as the SQL database developed by Pacific since June 2001 (a matter on which the parties did not seek a decision at this stage). Both parties accepted that all work done on VB/Access after June 22, 2000 was for Pacific on the commission of Perry Group. For this work Pacific was paid $13,500 ex GST.

Perry Group systems manager and accountant Stephen Burkhart claimed in court that intellectual property only became an issue during negotations over a possible joint venture and ownership only asserted by Pacific after those negotiations ceased.

Pacific argued that the creation of the VB/Access database from March 2000 was a project developed independently by Pacific and not the result of a commission at the time. It also argued that the commissioned work amounted to less than 15% of the overall development work on the database.

AJ Park partner Ken Moon says since the parties agreed, it was taken as a commissioned development on the basis that Perry/Pacific’s business processes and the like were incorporated within the software, which would be unlikely if the software was written for the industry at large and offered to Perry on spec.

The judgement notes that there was little documentary material relating to whether the question of whether the production of the VB/Access database to June 2000 was commissioned or created independently.

Ian Mitchell, an expert witness in the Perry case, said in evidence that it is common for software developers to retain ownership over components not specific to a project. He said it is normal practice in the industry that where there is no formal documentation there is no restriction on the developer owning, using and selling source code while retaining rights to components existing prior to the development. Rights to those components are usually formally assigned if the customer intends to on-sell the product, but Mitchell said it would be rare for all intellectual property to pass to the customer.

Moon notes that it is only since the 1994 Copyright Act that the party which commissions a work owns the copyright in it. Before 1994 it was exactly the opposite, he says.

In December Perry Group systems manager and accountant Stephen Burkhart maintained that the company always understood that it was commissioning work and would pay for it and that copyright in the programs developed belonged to Perry Group.

In the Perry/Pacific judgement Burkhart said development of the VB/Access database by Pacific was conducted no differently than previous projects — without formal written commissioning contracts and the source code routinely delivered on completion of the project.

  • The New Zealand Computer Society is to hold a seminar on the law of intellectual property in Auckland on tomorrow. Clive Elliot, one of Pacific’s defence team, will be speaking.

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