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Can Copyright be ‘Mentally Assigned’? – You be the Judge

Those of you who engage outside IT consultants will want to pay particular attention to this interesting case from the Federal Court of Canada. It centres around who owns copyright in several software computing programs developed by a consulting firm and its principals for a client organization.

In 1998, a Mr. Chari began developing software named “Petro Dispatch 2000” for use by a company called Roy Curran Transport Ltd. The software was designed to help transport companies with order inputting, dispatching, post-order reconciliation, invoicing, and forecasting delivery. At the time, Chari was working in a family-owned business called Atrimed Medical Supply Inc.

In early 2000, Chari was introduced to Mr. Foss of GA Foss Transport Ltd. and invited Foss to a demonstration of the Petro Dispatch 2000 he was developing for use on the Roy Curran Transport system. Foss was told that Atrimed was developing the software, and that it would be able to handle all of Foss’s haulage products. Foss was very interested in the software.

Shortly after this introduction, on March 16, 2000, Chari incorporated a company called Harmony Consulting Inc. and commenced software development work for Foss.

As it turned out, the Petro Dispatch 2000 software required significant modifications (done by Chari) in order to work in the Foss operating environment and to industry standards. Chari and Foss discussed the necessary changes, and Chari proceeded to adapt and install the Petro Dispatch 2000 for Foss. Because of the magnitude of modifications needed, Foss did not begin using the Petro Dispatch 2000 software until February 2001. On behalf of Harmony, Chari was subsequently engaged for two other software development projects by Foss. Those products were ultimately installed, operational and paid for in full by August 2000.

In addition to the software development work, a weekly agreement was in place between June 2001 and early 2004, under which Foss paid Harmony $1,000 per week to make fixes and other necessary modifications to all three pieces of software, as well as to develop additional modules. This work was all done by Chari under a letter of agreement of “licensing and professional fees.” No formal agreement was executed for the weekly arrangement.

While the relationship between Foss and Harmony was initially positive and beneficial for all parties, it had disintegrated by early 2004. Everything came to a head in the spring of 2004, when Foss discovered that Harmony had planted two time bombs in the software which prevented Foss from invoicing and then from dispatching products.

Foss remedied the time bombs and severed its relationship with Harmony. With some further modifications, Foss continued to use the software authored by Harmony employees until 2007. In July 2005, Harmony commenced legal action against Foss for copyright infringement.

The parties agreed that Chari was the author of all three of the main software products over which copyright was being disputed. All three software products were subject to software licence agreements between Harmony and Foss, which gave Foss a perpetual licence to use the software, including any fixes and modifications made. However, no written copyright assignment existed. Later, at trial, Chari stated that when he had incorporated Harmony, he had made a ‘mental assignment’ of the copyright in Petro Dispatch 2000 from Atrimed to Harmony – both companies wholly owned by him. He argued that the executed software licence agreement between Harmony and Foss relating to Petro Dispatch 2000 provided evidence of that mental assignment.

Who do you think owned copyright in the Petro Dispatch 2000 software? Can a mental assignment of copyright exist, where there is clear evidence of a subsequent licence agreement dealing with the software?

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In Harmony Consulting Ltd. v. GA Foss Transport Ltd., 2011 FC 540, our Federal Court navigated the tricky waters of copyright in computer software.

In an action for copyright infringement, there are generally three issues to be addressed:

  • Does copyright subsist in the computer programs?
  • Who owns the copyright in the computer programs?
  • Was the copyright infringed?

The burden of proof falls to the party who is alleging copyright infringement – in this case, Harmony. Because this was a civil action, the burden was to prove the allegations on the balance of probabilities. In other words, to prove that it was more probable than not that Harmony’s allegations were true. A key issue in the dispute was whether copyright in the software indeed belonged to Harmony as a result of Chari’s actions, or whether it continued to subsist with Atrimed.

After reviewing the legislation and the facts of this case, the Court concluded that copyright did indeed subsist in the Petro Dispatch 2000 software.

As to who owned copyright in the software, there was no specific documentation assigning copyright in Petro Dispatch 2000 to Harmony, and the Court declined to accept Chari’s argument about his “mental assignment.” The Canadian Copyright Act is clear that copyright must be assigned, in writing, after the product is created. The Court found, therefore, that copyright in the software was owned by Atrimed, which was not party to this litigation. Any claim for infringement of copyright in Petro Dispatch 2000 could only have been made if Harmony had been proven to be the copyright holder.

(It should be noted that the owner of the copyright in a computer program does not, as a matter of general principle, have copyright in the user’s data, unless there is an agreement to the contrary. So the Court had to examine each component of the software to determine whether there was, in fact, copyright that could have been infringed.)

After a detailed analysis, the Court concluded that Harmony had not proven, on the balance of probabilities, that there had been an infringement of its copyright. A key piece of evidence was the software licence agreements signed by the parties, which implicitly authorized the activities undertaken by Foss with respect to the software.

As a result, the action was dismissed, with costs to the defendant, Foss.

Originally published in The Legal Edge on May 5th, 2016

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Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case.  For any particular legal problem, seek advice directly from your lawyer or in-house counsel.  All dates, contact information and website addresses were current at the time of original publication.