Relying on trust: Hidden Gem and the perils of unwritten IP licences

January 2016  |  SPECIAL REPORT: INTELLECTUAL PROPERTY

Financier Worldwide Magazine

January 2016 Issue

January 2016 Issue


A recent decision of the UK Intellectual Property Enterprise Court provides a useful reminder of the inherent risks of using third parties to develop intellectual property. Where intellectual property provisions are not properly documented, there is a significant risk that the court’s interpretation of the arrangements may differ from what was intended at the outset. Having clear and precise intellectual property provisions in contracts with commissioned third parties should therefore be considered non-negotiable.

Undocumented intellectual property commissions are an increasingly common finding in intellectual property due diligence. This is a problem for companies of all ages but particularly start-ups and young companies, which often lack the awareness or budget to involve intellectual property lawyers during their early stages. Finding that a target does not own its intellectual property can be a dealbreaker in a transaction, and can certainly lead to price renegotiations.

This is a key risk area for companies with valuable intellectual property rights and can be complex and expensive to resolve. If the parties have not reached a written agreement, neither are they likely to have an unwritten agreement (especially on the finer commercial details). If a company has not acquired legal title to the rights in question and does not have a licence, it is at risk of an infringement claim from the commissioned third party (or a successor in title). The rights may have acquired substantial value since they were created, so by the time litigation arises there is more at stake on both sides.

The perils of undocumented intellectual property provisions were highlighted in Hidden Gem Jewellery. The claimants owned a jewellery business and its assets included a logo and promotional photographs. The parties were, for a time, in negotiations to establish a joint venture but the idea fell apart. They took written notes of meetings discussing their venture, but no written agreement was ever drafted. The defendants funded and carried out preparations, including promotional campaigns; they claim to have been licensed to use the claimants’ copyright. At trial, it was undisputed that the claimants had granted a licence but while the defendants argued it was a broad licence to use the assets as they saw fit, the claimants argued that it was limited to the promotion of their joint enterprise. The court held that the claimants had given the defendants “fairly free rein” to use the assets. A broad licence was implied in favour of the defendants, so broad it included a right to grant a sublicence that survived termination of the defendants’ head licence.

Under English law, the starting position is that the author of a work is the first owner of copyright subsisting in that work. If, however, an author creates a relevant work in the course of employment the first owner of copyright will usually be the employer. In a third party commission, copyright will be owned by the third party and not the commissioning company in the absence of a written agreement to the contrary.

So what can be done for a commissioning party that fails to include adequate intellectual property provisions in the contract? The courts have an interpretative function which they may use to imply terms. They will not rewrite a contract but may imply a term if it is: (i) reasonable and equitable; (ii) necessary for ‘business efficacy’; (iii) so obvious it must have been the intention of the parties; (iv) capable of clear expression; and (v) not a contradiction of a term of the contract. Over the last 20 years, the courts have used this interpretative function in a number of copyright disputes relating to unwritten intellectual property arrangements.

In Cala Homes, the ownership of copyright in architectural plans was in dispute. Cala Homes instructed draughtsmen to produce drawings and worked closely with them during the process. The terms of appointment did not address intellectual property in any detail. The draughtsmen copied the designs in producing drawings for McAlpine, and Cala Homes claimed that providing the drawings to McAlpine was an infringement of copyright or otherwise a breach of an implied term of exclusivity. The court held that Cala Homes had invested significant skill and effort in producing the drawings and as such was a joint owner of the copyright in the drawings. Obiter, it indicated that an implied term of exclusivity would have been found if needed.

In Robin Ray, Classic FM engaged a consultant to create a music catalogue. The parties negotiated and signed a contract, but it did not address intellectual property. The High Court held that any copyright generated by the consultant vested in him, but implied a licence in favour of Classic FM. Why a licence and not an assignment? Only a licence was necessary to give effect to the agreement and the courts take a minimalist approach to implied terms. The scope of the implied licence extended only to the UK, as use outside the UK was found not to have been in the contemplation of the parties at the date of the agreement.

Griggs commissioned an agency to produce a new logo for Dr Marten’s Airwair. The Court of Appeal considered two questions – did ownership of the logo vest in the claimants? If not, did the claimants have a licence for the logo? A licence would not have been sufficient to enable Griggs to exploit the developed logo worldwide, so the court found that the parties must have intended that Griggs would own the logo. Griggs had equitable title to the copyright in the logo, but having failed to document this intention he had to endure lengthy and costly litigation to obtain this finding and compel the defendants to assign their title.

Undocumented intellectual property provisions were the key issue in Fresh Trading earlier this year. The company behind Innocent smoothies employed an agency to create their ‘dude’ logo. Their contract was unsigned, so there was no effective legal assignment of copyright. Ultimately, the court held that there had been an equitable assignment under the terms of the contract. The outcome was positive for Fresh Trading, but still not the transfer of full legal title that the parties initially intended.

In the absence of a clear written agreement between two commercial parties, the questions of ownership of and rights to intellectual property rights are left to the courts. While the rules on implied terms are well-established, the conclusion the court will come to on construction can never be certain. The approach of the courts will be fact-based and while principles can be gleaned from case law, each case will be context-specific. If a company is developing or exploiting intellectual property rights with a third party, its priority must be to agree and document clear and definitive intellectual property provisions. Such provisions should identify whether there is any transfer of ownership and if not whether a licence is granted (and the terms of that licence). The time and effort invested in doing so will be in the interests of all parties in the long run.

 

Sophie Lees is an associate at Norton Rose Fulbright LLP. She can be contacted on +44 (0)20 7444 5122 or by email: sophie.lees@nortonrosefulbright.com.

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