A Tale of Caution: Know Your Intellectual Property Rights

by Reed Smith
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On 17 May, Mrs Justice Asplin delivered a judgment in the Chancery Division of the High Court of Justice. The dispute concerned intellectual property rights in hedge fund computer software that was the "cornerstone of the success" of the investment business IKOS.

Executive Summary

  • The decision in favour of the defendants, although turning on the specific facts of the case, highlights the crucial importance of establishing ownership of intellectual property early on, especially when embarking on a new business venture.
  • Ownership of copyright in software will not be inferred when: (i) to do so would conflict with a partner’s fiduciary duties to the partnership; and (ii) the partner in question fails to assert their ownership. There is also a rebuttable presumption that property will be partnership property if it is used as such. Therefore, a partnership deed should clearly establish the parties’ roles within the business and which assets are partnership assets.
  • Centring on a marriage breakdown, a web of lawsuits arose out of the basic arguments of this case, across several jurisdictions. Caution should be taken in cases where there is an extremely close correlation between business and personal affairs, as evidence given in its regard may be considered "tainted by…obvious and deep animosity" (Justice Asplin).

Background

The partnership, created in the 1990s by a husband (Mr Coward) and wife, provided hedge fund management services. Due to a complex tax-beneficial business structure, Mr Coward’s formal position in the IKOS business was as chairman and director of one of the four defendant companies. It was undisputed that he held this position until December 2009, during which time he wrote the hedge fund software in question. When the marriage broke down, Mr Coward left the IKOS business to set up a rival company, and a dispute arose over the ownership of the intellectual property in the software.

The Judgment Justice Asplin decided in favour of the defendants, applying copyright and partnership law.

1. Copyright

Under the Copyright Designs and Patents Act 1988 (and according to IBCOS Computers Ltd v Barclays Mercantile Highland Finance Limited [1994]) infringement is a question of:

  • What the works were in which the claimant claimed copyright
  • Whether each work was original
  • Whether there was copying from that work
  • If a substantial part of that work had been reproduced

As computer software was in question, the Software Directive 2009 provides it shall be "original" if it is the author’s own intellectual creation.

There was no question that the software was protected, but the question of which party had infringed copyright depended of ownership, which turned primarily on partnership law.

2. Partnership

Citing the Partnership Act 1890, Justice Asplin held that it was clear that "the existence of a partnership can be inferred from the conduct of the parties: a legally binding partnership can be created wholly informally, by parties commencing business together with a view to sharing profits". Justice Asplin referred to the definition of partnership property as "all property originally brought into the partnership stock or acquired exclusively for the purposes and in the course of partnership business". Unless the contrary can be shown, there is a presumption that property used in such a way is partnership property.

Did a partnership between Mr Coward and his wife exist before a partnership deed was executed in December 1992?

It was held that a partnership commences when the partners embark upon the activity in which they have agreed to be engaged, which can be long before the actual business activity commences. Evidence such as Mr Coward describing IKOS as "our business" contributed to the conclusion that in September 1992, when Mr Coward began writing trading software, the partnership was formed (the "September Partnership").

Was the software an asset of the September Partnership?

Despite Mr Coward’s argument that the software was only licensed to the partnership, Justice Asplin held that the software was "the bedrock of the business", trading would not have gone on without it and it was therefore a partnership asset. Mr Coward should have expressly stated his ownership of the software. He held a duty to the partnership not to engage in any other business other than that of the partnership and to carry on the business for its utmost benefit.

Was the software brought into the "IKOS Partnership" (the partnership formed by deed in December 1992)?

The Partnership Act 1890 creates a presumption that when an asset has been used by the partnership and treated as its property, it has been brought in the common stock. This presumption can be overridden by contrary agreement by the parties. In this case, there wasn’t sufficient evidence to rebut this presumption and the software was treated as an IKOS Partnership asset.

Was the software written by Mr Coward in his capacity as a partner?

Mr Coward conceded that he wrote the software as a partner of the business. Consequently, the defendants did not pursue their alternative argument that it was written in the course of his employment as an employee of the IKOS Partnership.

Outcome

Justice Asplin decided the case in favour of the defendants. Despite a very public fall out between husband and wife, prompting theatrical press headlines like "Love at IKOS Hedge Fund Sours as Ambrosiadou Fights Coward" and allegations of spying and stealing, Mr Coward is said to be considering appealing the judgment.

The parties have been granted permission to make further submissions at a later date regarding the counterclaim for database infringement and breach of confidence, alleged in respect of Mr Coward’s continued use of the partnership’s software in his new company. Whether any remedies will be granted to the defendants, such as an order for delivery up and destruction of the software, remains to be seen.

Comment

It is an overstatement to suggest Justice Asplin’s decision "strengthens the case for an overhaul of the European laws regarding protection of intellectual property", as Mr Coward’s wife suggested in a press statement. Rather, this case offers a simple, cautionary tale to those who embark on a business venture together.

For many start-ups, taking measures to avoid future conflict is usually last on the "to do" list, particularly in the exciting early stages of a venture. This case illustrates how important it is in the early stages to:

  • Clearly outline the terms of the business relationship
  • Establish ownership of property associated with the business (including intellectual property)

In this instance, failure to do so ultimately led a wife to put tracking devices on her husband’s car and to wire-tap their family home in an attempt to get him sent to prison. The long court battle and damaging press headlines that ensued could easily have been avoided by the parties’ execution of a partnership deed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

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