The rise of knowledge-based industries and software development has intensified disputes over intellectual property created by employees. Employers often assume that anything developed by an employee during their tenure automatically belongs to the company. However, the recent Ontario Court of Appeal decision in Nexus Solutions Inc. v. Krougly challenges that assumption and provides critical guidance on when an employer can claim ownership over employee-created works.
This case highlights a nuanced but highly consequential legal issue: what does it mean for a work to be created “in the course of employment”? The answer has significant implications not only for software developers and tech companies but for employers across all industries where innovation and independent initiative intersect.
Competing Software Developed During Employment
The dispute arose between Nexus Solutions Inc., a software company specializing in emissions monitoring systems, and its former employee, Vladimir Krougly. While employed as a senior software developer, Krougly secretly developed a competing software product known as “Limedas.” After leaving Nexus, he attempted to commercialize the product, including targeting Nexus’s clients.
Nexus brought an action asserting, among other things, that it owned the copyright in Limedas under section 13(3) of the Copyright Act. That provision states that employers are the first owners of copyright in works created by employees “in the course of employment.”
At trial, the court rejected Nexus’s copyright claim. The Ontario Court of Appeal upheld that decision, concluding that Limedas was not created in the course of Krougly’s employment, even though it was developed while he was still employed and directly competed with Nexus’s product.
Section 13(3) of the Copyright Act
The Court of Appeal clarified that three conditions must be met for an employer to claim copyright ownership under section 13(3):
- The creator must be an employee;
- The work must be created “in the course of employment”; and
- There must be no agreement stating otherwise.
In this case, only the second requirement was in dispute.
The central question was whether Limedas was created as part of Krougly’s employment responsibilities or as a separate, independent venture.
“In the Course of Employment”: A Contextual Inquiry
The Court emphasized that determining whether a work is created “in the course of employment” is a fact-specific, contextual exercise. It is not enough that the work is similar to the employee’s duties or could have been assigned by the employer.
Instead, the analysis focuses on the employee’s actual responsibilities, not their theoretical or potential duties. The Court endorsed a multi-factor approach, including consideration of:
- The employee’s job description and contractual terms;
- Whether the work was created during working hours;
- Whether employer resources were used;
- The degree of employer direction or control;
- Whether the work was integral to the employer’s business; and
- Whether the employee was expected or instructed to create the work.
No single factor is determinative. The ultimate question is whether the work was something the employee was asked or expected to do as part of their employment.
Why the Employer’s Claim Failed
Despite the troubling facts, particularly that the employee secretly developed competing software, the Court found that Limedas fell outside the scope of employment.
Several key findings drove this conclusion.
The Work Was Not Assigned or Directed
The Court placed significant weight on the fact that Krougly had not been instructed, either expressly or implicitly, to develop a new software product like Limedas. His role was limited to maintaining and improving Nexus’s existing product, not creating new competing systems.
Importantly, the Court rejected the argument that it was sufficient that Nexus could have directed him to create such software. What matters is what the employer actually required.
The Work Was Done Independently
The evidence showed that most of the development work occurred outside of normal working hours and without the use of Nexus’s equipment or resources.
This strongly suggested that Limedas was a personal side project rather than part of the employee’s job.
The Employer Did Not Fund or Assume Risk
The Court also noted that Nexus did not expend resources on developing Limedas and did not assume any financial or operational risk associated with it.
This aligns with the underlying rationale of section 13(3): employers are granted ownership when they have effectively paid for and directed the creation of the work.
No Agreement Addressed Ownership
Critically, there was no written employment agreement addressing intellectual property ownership.
This left Nexus with no recourse but the statutory default rule, which ultimately did not apply.
A Harsh But Principled Result
The Court acknowledged that the outcome may seem unfair. The employee had clearly engaged in questionable conduct by secretly developing a competing product while employed.
However, the Court emphasized that copyright law is not designed to punish disloyal employees. Rather, it governs ownership of creative works based on defined legal principles.
Employers may still have recourse through other legal avenues, such as:
- Breach of fiduciary duty;
- Breach of the duty of loyalty;
- Breach of contract; or
- Misuse of confidential information.
But those claims were not before the Court in this appeal.
Lessons for Ontario Employers
This decision underscores several important lessons for employers, particularly in technology and innovation-driven industries.
Clearly Define Employee Responsibilities
Employers should ensure that job descriptions explicitly state whether employees are expected to develop new products, ideas, or intellectual property. Ambiguity in roles can undermine later claims to ownership.
Use Written Agreements to Allocate IP Rights
The absence of a written agreement was a critical weakness in this case. Employment contracts should clearly address:
- Ownership of intellectual property;
- Rights to inventions created during employment;
- Restrictions on outside projects; and
- Post-employment use of intellectual property.
Without such provisions, employers may be forced to rely on the uncertain “course of employment” analysis.
Monitor and Manage Side Projects
While employees may be permitted to work on personal projects, employers should establish clear policies regarding:
- Disclosure of side projects;
- Conflicts of interest; and
- Use of company resources.
Proactive governance can prevent disputes before they arise.
Understand the Limits of Copyright Law
Even where employee conduct appears improper, copyright law may not provide a remedy. Employers should consider broader legal strategies when addressing potential misconduct.
Implications for Employees
Employees should also take note of this decision. While the Court recognized that independent work may remain the employee’s property, this does not give the employee carte blanche to develop competing products during employment. Such conduct may still expose employees to liability under other legal doctrines.
Employees should carefully review their employment agreements and seek legal advice before engaging in side ventures that overlap with their employer’s business.
Haynes Law Firm: Providing Dynamic Employment Law Services in Toronto & Across Ontario
Disputes over employee-created intellectual property can have significant financial and strategic consequences for businesses. Whether you are seeking to protect proprietary assets, enforce employment agreements, or respond to employee misconduct, experienced legal guidance is essential.
Paulette Haynes, founder of Haynes Law Firm, advises employers and employees on complex workplace disputes, including intellectual property ownership, restrictive covenants, and breach of fiduciary duty claims. The firm provides practical, results-driven solutions customized to your business and legal objectives. To book a consultation, please contact us online or call (416) 593-2731.
