Two cases reported on BAILII this week emphasise the importance of dealing with IP issues when you set up companies to save tax.
Both cases were heard by a deputy High Court judge, Richard Spearman QC. IP Draughts had not heard of him before now, but apparently he is a go-to barrister for gagging orders (also known as super-injunctions). Based on these two cases, he is fast becoming a specialist, albeit part-time, judge on the subject of implied IP terms in contracts.
Chadwick v Lypiatt
The first case, Chadwick & Ors v Lypiatt Studio Ltd & Anor  EWHC 1986 (Ch) (31 July 2018), concerns the estate of the late Lynn Chadwick, a respected British sculptor and artist, who is particularly known for his work during several decades after the Second World War. On the advice of his accountant, and for tax reasons, he formed a company, Lypiatt Studio Ltd in 1973. He transferred certain existing assets into the company in 1973 and thereafter conducted most, if not all, of his artistic activities through that company.
The dispute before the court was essentially whether Chadwick’s sculpture and artwork, and the copyright in them, belonged to the company or remained with the artist’s estate. Specifically did he transfer existing copyright into the company in 1973, and was he an employee of the company thereafter such that the company would be the first owner of any copyright that he created after 1973? The answer to these questions determined which of Chadwick’s descendants would benefit from these assets and in what shares.
Unfortunately, the documentation to address these issues was scanty.
There was no formal written transfer of property to the company in 1973, such as a deed of gift or a written contract, and certainly no formal assignment of copyright. There was no written employment contract between the company and Mr Chadwick for the period after the company started trading, but some payslips and other indirect evidence were before the court.
Ultimately, the judge agreed with the company’s barrister that the evidence was sufficient to indicate an oral transfer of assets, including beneficial ownership of the copyright existing in 1973. A beneficial owner may call for a formal assignment. And there was sufficient evidence to indicate that Chadwick was an employee of the company from 1973 onwards. Thus, the company owned the post-1973 works in dispute and the copyright in them.
IP Draughts’ reaction is that, while this may be the right decision, it is rather a stretch on the basis of the evidence mentioned in the case report.
Sprint Electric v Buyer’s Dream
The second case before deputy judge Spearman, reported this week, is Sprint Electric Ltd v Buyer’s Dream Ltd & Anor  EWHC 1924 (Ch) (30 July 2018).
This case is a dispute between shareholders in a software business (SEL). The minority shareholder, Dr Potamianos, alleged that his service company, BDL, owned the copyright in the source code of some software that he wrote, which was being commercialised by SEL. He also alleged “unfair prejudice” by the majority shareholder in its conduct of the business of SEL, to his disadvantage as minority shareholder. This article will focus on the copyright aspects.
When Dr Potamianos joined SEL, the founder of SEL had invited him to form a company through which he would provide services to SEL. The founder pointed out that he and his co-founder had done this some years earlier, for tax reasons, and that “we have been using our service companies since 1989 with no problems”. As an aside, IP Draughts finds this an unpersuasive argument that he hears too often from commercial parties in relation to legal issues. What it really means is that the Revenue had not critically examined the arrangement from a tax perspective – so far.
As well as the service company, the parties entered into various agreements with a view to ensuring the benefit of “rollover” tax relief under the Enterprise Investment Scheme. The judge was distinctly unimpressed with some of the evidence he heard on tax issues, and spent some time considering how the tax avoidance activities of the parties should affect his analysis of the contractual relationships.
In the end, he decided that Dr Potamianos was, from a legal perspective, an employee of SEL despite there being no written employment contract between them and, to the contrary, an agreement between SEL and BDL for the latter to provide his services to SEL. The judge held that copyright created by Dr Potamianos in the course of his employment with SEL belonged to SEL, and not to BDL.
In both of these cases, the parties established companies with a view to obtaining favourable tax treatment of income, and with little attention being given to the ownership of intellectual property. Partly, this is down to the fact that they took advice from accountants and not from lawyers. IP Draughts hopes that any competent commercial lawyer would have thought about the ownership of IP in work done by, in the first case Mr Chadwick, and in the second case Dr Potamianos, and would have ensured that appropriate agreements were in place to ensure that the IP was held by the correct legal entity. In this way, the parties might have avoided lengthy and expensive litigation.
Unfortunately, some parties are not prepared to spend time and money in getting the contractual details right, or to focus on IP issues. More fool them.