A big day for employee-inventors: £2m compensation for invention

In a landmark decision for employee-inventors, on 23 October 2019, the Supreme Court overturned the decisions of 3 lower tribunals regarding the employee compensation provisions in the UK Patents Act 1977 awarding an employee-inventor £2m (or 5% of the value of the invention adjusted for time) for his blood glucose testing invention. This is only the second successful claim brought by an employee in the UK for compensation under the Act and the largest award to date.

The case provides useful guidance on the meaning of “outstanding benefit” under section 40 of the Patents Act 1977 and how the “benefit” to an employer should be assessed. As Professor Shanks had lost overall in the UKIPO, High Court and Court of Appeal, this long running case had led some commentators to ask whether businesses of Unilever’s size were “too big to pay” when the gains from an invention, although significant, were dwarfed by the undertaking’s turnover? In reversing the decisions below, the Supreme Court has answered this question with a resounding “no”.

We wait to see whether this case prompts more claims by employees in the UK which has been seen as a difficult jurisdiction for employees to claim a share of the benefits resulting from their inventions.

Background

Section 40(1)(b) of the Patents Act 1977 currently provides that employees, who have made inventions during the course of their employment may apply for compensation where “having regard among other things to the size and nature of the employer’s undertaking, the invention or the patent for it (or the combination of both) is of outstanding benefit to the employer”. In the context of this case, the Supreme Court considered comparable provisions which applied before the Patents Act was amended.

In 1984, Professor Shanks invented a blood glucose measuring device for use in diabetes blood testing kits, 6 months after he started his employment with Unilever UK Central Resources Ltd (“CRL”), a wholly owned subsidiary of Unilever. Professor Shanks partially invented the testing kits at home but it was accepted that this work fell within the scope of his employment duties: Professor Shanks was “employed to invent” and had the “freedom to develop ideas” outside of his core remit of biosensors in process control and engineering.

The invention was assigned by CRL to Unilever. Unilever later filed patent applications and entered into several non-exclusive licensing arrangements, instead of commercialising the technology itself. This subsequently earned Unilever over £24m in royalties.

Professor Shanks brought a claim for compensation against Unilever on the basis that the Shanks patents had been of outstanding benefit to CRL and that he was entitled to a fair share of that benefit.

The previous decisions

UK IPO

The Hearing Officer found that the total gross benefit obtained by Unilever from the patents was £24.5m. He held that given all the circumstances of the case, including the size and nature of Unilever, the Shanks patents were not of “outstanding benefit” to Unilever although had they been, a fair share of that benefit for Professor Shanks would have been 5%.

High Court

The High Court upheld the UK IPO’s decision. However, Arnold J (as he then was) further concluded that the £24.5m gross benefit should be reduced to reflect the corporation tax paid by Unilever during the relevant period. In addition, Arnold J considered that had the Shanks patents generated an outstanding benefit to Unilever, a “fair share” of that benefit would have been 3%.

Court of Appeal

The Court of Appeal upheld the decisions of the High Court and UK IPO that the Shanks patents were not of “outstanding benefit” to Unilever. The Court of Appeal held that “outstanding” was an ordinary word meant to “identify the exceptional nature of the benefit”.

Unilever’s global profits dwarfed the royalties earned from the patents and it was held that there was no outstanding benefit when the amounts were viewed in the context of Unilever’s overall performance and business activities. The Court of Appeal agreed that “outstanding benefit” should not only be determined by the financial benefit derived from the invention. Patten LJ confirmed that a mere comparison of the income of the patents to the profits of Unilever was incorrect and could amount to an error in law: the benefit should be assessed in the overall context and in view of all the facts. However, turnover and profitability appeared to be determinative factors in the Court of Appeal’s reasoning.

The Court of Appeal also considered appropriate deductions from the benefit, namely corporation tax and the detrimental effect of time on the value of money. Patten LJ dismissed Unilever’s argument that corporation tax should be taken into account when assessing the benefit accrued to Unilever. Patten LJ held that corporation tax was a consequence of the benefit rather than a part of it.

Patten LJ also excluded the time value of money from the calculation of the benefit. Patten LJ stated that the benefit should be limited to direct receipts from the exploitation of the patent. However, Briggs LJ (obiter) thought that the time value of money may be relevant when assessing the outstanding benefit and the employee’s fair share in some cases, for example, where the benefit accrues over a long period of time.

The decision of the Supreme Court

In overturning the decisions below, and, in particular, criticising the Hearing Officer’s assessment of the facts, the Supreme Court has clarified the approach a tribunal should take in assessing employee compensation claims under the Patents Act. The 3 key aspects of the approach considered in the judgment are:

• how to identify the relevant undertaking;
• assessing the benefit of the patents to that undertaking (given the undertaking’s size and nature); and
• assessing what the employee’s fair share of that benefit should be.

Relevant employer undertaking

The employer for the purposes of the statutory provisions will be the employee-inventor’s actual employer. However, when identifying the relevant undertaking (for the purposes of establishing the benefit) the Court should consider the commercial reality. The relevant undertaking could be the whole or a division of the employer’s business. Where a group company operates a research facility for the benefit of the group and the work results in patents which are assigned to other group members, the focus must be the benefit of the patents to the group as a whole and how that compares with the benefits derived by the group from other patents. Here, CRL’s undertaking for the purposes of section 40 was the business of generating inventions and providing those inventions (and the patents which protected them) to the Unilever group for use in connection with Unilever’s business.

Benefit to the employer

The Supreme Court opined that previous cases on applications for inventor compensation are helpful to a point, but they provide no substitute for the statutory test, which requires the benefit to be outstanding. That is an ordinary English word meaning “exceptional or such as to stand out” and it refers to the benefit (in terms of money or money’s worth) of the patent to the employer rather than the degree of inventiveness of the employee. It is, however, both a relative and qualitative term and requires consideration of the context.

The Supreme Court issued a strong word of caution to tribunals assessing the benefit of patents to an employer. A tribunal should be very cautious about accepting a submission that a patent has not been of outstanding benefit to an employer simply because it has had no significant impact on its overall profitability or the value of all of its sales. This put to bed the “too big to pay” effect which inevitably resulted from the decisions below. Unilever’s central argument had been that the gross benefit of £24.5m was dwarfed by the turnover and profits of the Unilever business as a whole, particularly in light of its wide range of products.

The Supreme Court indicated that many different aspects of the size and nature of the employer’s business may be relevant to the enquiry. For example, the benefit may be more than would normally have been expected to arise from the duties for which the employee was paid; it may have been arrived at without any risk to the business; it may represent an extraordinarily high rate of return; or it may have been the opportunity to develop a new line of business or to engage in unforeseen licensing opportunities. A large undertaking might also be able to generate significant revenue by harnessing its goodwill and sales force in a way that a smaller undertaking might not be able to do.

In this case, the Supreme Court’s view was that the Hearing Officer had made a series of striking findings which suggested that the benefit to Unilever from the patents was in fact “outstanding”, namely (i) there was an extreme disparity in numerical terms between the benefit Unilever received and Shanks’ salary and the £100 assignment fee that he was paid; (ii) there was scant evidence of Unilever’s other licensing activities and no example of another licensing deal which had provided Unilever with an income at or above the level of the Shanks patents; (iii) the Shanks patents had produced a very high rate of return; (iv) Unilever had made a very small effort to commercialise Professor Shanks’ invention; (v) Unilever’s licensing efforts were serious but not exceptional; and (vi) Unilever had generated the benefit it derived from the Shanks patents at no significant risk.

“Indeed, the Hearing Officer recognised that, in terms of the benefit which Unilever’s patents had generated, the Shanks patents stood out.”

Fair share

Having concluded that the patents were of outstanding benefit to Unilever and corporation tax should not be deducted, the Supreme Court saw no reason to disturb the Hearing Officer’s assessment of the employee’s fair share of that benefit as being 5%. Disagreeing with the Court of Appeal and the High Court, the Supreme Court went on to say that this figure should be adjusted to take into account the amount of time that Professor Shanks had been deprived of that benefit and awarded him a total sum of £2m.

Conclusion

The Supreme Court’s judgment is surprising given that Professor Shanks had been unsuccessful in his claim at all levels below. The decision will give hope to employees employed to invent in the UK that their contribution to outstanding inventions (or the patents protecting them) will be recognised by the Courts. This judgment will impact any business with an R&D division or where employees are developing valuable technology for the business. Prudent employers should consider tailoring the employment contracts of their “innovative employees” and draft bespoke compensation and incentive provisions to clarify how employees will benefit from their inventions, to ensure they are in line with the thinking of the UK’s highest court.