Copyright changes proposed in discussion paper

In March 2006, the Ministry of Economic Development released a discussion paper called "The Commissioning Rule, Contracts and Copyright Act 1994" as a starting point for submissions and possible legislation changes involving the application of the "commissioning rule" to copyright-protected works such as photographs, art pieces and computer programs.

Lawmakers have in their sights a very real opportunity to back the efforts of New Zealand technology innovators and they should grab it.

The question over who should own first copyright of a computer program its original creator or the person who has paid to have the program developed -  has long been debated, legislated and litigated.

Commissioning rule and the discussion paper

New Zealand law currently applies what is known as the "commissioning rule" to copyright-protected works such as photographs, art pieces and computer programs. That is, where the works or programs are commissioned, the person commissioning them is the first owner of copyright, as opposed to the creator.

In March 2006, the Ministry of Economic Development released a discussion paper called The Commissioning Rule, Contracts and the Copyright Act 1994, as a starting point for submissions and possible legislation changes.

The paper reaches no firm conclusions but highlights issues that raise doubts over the rationale for the commissioning rule, particularly as it applies to business products such as commissioned software.

The doubts are well-founded. The commissioning rule should be abandoned when it comes to computer programs.  But  new measures should also be introduced to provide protection to software users who are dependent on third parties for ongoing software support protection not currently offered under the Copyright Act.

How does the commissioning rule work?

Under the Copyright Act, the author will normally be the first owner of a copyright work unless the work is created in the course of employment, where the first owner will be the employer. There are a number of exceptions to the general rule including the commissioning rule.

As highlighted earlier, this rule vests first ownership in the person who commissions and agrees to pay for the creation of copyright works. So if you commission a painting or sculpture, you are the first owner of the copyright as the person who commissioned that work, not the painter or the sculptor.

The rationale is that works such as paintings and sculptures are often commissioned for private businesses or homes and it is not right that the creators should be the first owners in these circumstances.

The same rationale cannot be so easily applied when a commercial organisation commissions another to develop a software program. As the discussion paper points out, in other countries the commissioning rule (to the extent it survives) is normally limited to photographs, portraits, sculptures, engravings and sometimes to films and sound recordings.

Added to this, the commissioning rule is not in fact compulsory.  It can be reversed or modified by contract. This means that ownership of new computer programs remains a live and contentious issue when it comes to negotiating technology contracts.

The rationale for the commissioning rule

The argument most often used by a commissioning party as to why it should be first owner is "we are paying for it".  If the commissioning rule is followed without qualification this means ownership of the copyright work by the customer from the point of its creation.

It also means that the original developer ceases to have any "interest" in the software once it is commissioned even though it is the software developer that is usually best placed to commercialise the product.

Special contractual arrangements can be made such as joint ownership of the new software or appointing the software company as the customer's licensed distributor.

But these arrangements raise a whole set of other issues, among them the sharing of future royalties. Understandably most customers are not keen to take this track.

An alternative to the commissioning rule

The obvious alternative is to abandon the commissioning rule and for the software company to assume copyright ownership of newly developed programs, while the customer holds a software licence.

This is not as bad as it may seem. Most of the benefits of ownership can be conferred by licence in any event rights to access, to reproduce, to use and even to modify the software product.

The arrangement also gives the customer the opportunity to negotiate a discounted price in return for giving up its statutory right to be first copyright owner.

But problems can arise over the nature and scope of these licence rights. Most suppliers are content to license access and use rights (for the purposes of the customer's business), but are not happy to allow the software to be reproduced or modified since they see this as a threat to future cash flows money made from selling further licences or the sale of support services for the software once it has been developed, tested and is in production.

It is at this point that contract negotiations often get stalled partly because the real issues are not about ownership at all but other things. Most customers don't look at software ownership as inherently valuable by itself but very often instead see it as a control mechanism to help users manage their risks.

Risks could include over-reliance on the original developer to help with later software adaptations (as the customer's IT environment evolves) and to provide ongoing support for the developed software over time.

The commissioning rule and computer programs

The commissioning rule as it applies to computer programs limits opportunities for software to be commercialised and this is in contrary to the Government's declared aim of minimising regulatory barriers to innovation.

The rule also fails to minimise the wider costs to society of copyright protection. As already noted, the commissioning rule may be overridden by contract. Contract negotiations over software ownership can become more protracted as a result.

Also, the support costs for commissioned software may be higher in a statutory environment that gives little or no protection to the commissioning party or to licensed users where the developer goes out of business or withdraws support from the market.

The position in Australia

These kinds of protections are afforded to owners and licensed users in Australia. Australia's copyright legislation was amended in 1999 with the introduction of a set of "statutory licences" which authorise the reproduction of licensed software to allow for the retention of a back up copy.

There is a New Zealand equivalent statutory provision already - section 80 of the Copyright Act 1994. However this statutory licence can be overridden by contract in contrast to the Australian position.

The Australian amendments also allow adaptations of licensed software to enable it to inter-operate with other computer programs and for the purpose of correcting errors (including the correction of security flaws).

These statutory licences apply notwithstanding any conflicting contractual term. This means that the parties need not waste time in contract negotiations litigating issues concerning ownership or extended licence terms.

For their part, suppliers should not fear being "ripped off" by any misuse of these statutory licences. The rights to modify and reproduce conferred by the statutory provisions are tightly circumscribed by use and purpose limitations.

In addition any adaptation of licensed software without consent has statutory sanction only where the information needed to build the relevant interface or to resolve a security flaw is not readily available from another source.

Conclusion

Introducing these kinds of reforms, together with abandoning the commissioning rule, will go some way to establishing a better balance between the interests of New Zealand's technology sector in its drive to commercialise new software products - and the interests of the software end users whose self-help efforts should not be thwarted by an overly restrictive copyright regime.

The discussion paper is available on the Ministry of Economic Development website at www.med.govt.nz.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.