Introduction

The long-running case of Shanks v Unilever concerning employee inventor compensation (sections 40 and 41 of the Patents Act 1977) started back in 2006. In its decision dated 21 June 2013, the UK Intellectual Property Office (UKIPO) dismissed a claim brought by Professor Shanks against Unilever for employee inventor compensation. The case was subsequently appealed by Professor Shanks to the UK High Court. In a decision dated 23 May 2014, Mr Justice Arnold has upheld the UKIPO decision not to award Professor Shanks any employee inventor compensation, and has further pushed back on the levels of compensation payable for successful employee claims.

Background

Professor Shanks was hired in May 1982 by Unilever UK Central Resources Ltd (CRL), a non-trading research company. He left in October 1986. His role included research and development in relation to sensors for process control and process engineering, with a particular focus on biosensors. The Shanks invention related to an electrochemical device and a method for manufacturing it. The device had particular application for testing levels of glucose in blood samples and was therefore useful in the treatment of diabetes, where such monitoring is necessary. Unilever was however not involved in diabetes management research and therefore did not directly exploit the invention; instead it licensed the technology to a number of major corporations directly involved in the field. Unilever received in excess of £20 million from its various licensing deals. Professor Shanks subsequently claimed that he should be paid additional compensation under the employee compensation provisions of the UK Patents Act 1977. An unusual feature of this case was that the monetary benefit obtained by Unilever from the patents was very easily identifiable, because the patents were licensed by Unilever to third parties for specified sums.

The law

The UK Patents Act 1977 provides for employee inventors to be paid additional compensation in the event that their patent/invention is of outstanding benefit to their employer. In assessing whether or not such a benefit is “outstanding”, regard should be had of the size and nature of the employer’s undertaking. It must also be just in the circumstances that the employee receives compensation and such compensation should be a “fair share”. The hurdle as to whether the patent/invention passes the test has always been set relatively high and it was only in 2009, in Kelly v GE Healthcare, that an employee first succeeded with such a claim before the UK High Court.

The Kelly case concerned patents for the heart imaging agent Myoview; a product that was critical to Amersham’s success (Amersham subsequently became part of GE). Mr Justice Floyd (as he then was) held that without the patents Amersham would have faced a crisis. Given this finding, it is perhaps not surprising that the judge went on to hold that the patents were of outstanding benefit and that it was fair to award Kelly compensation calculated at £1 million. This number might at first glance seem large, but when viewed in the context of the runaway success of Myoview and the cost to the employee of bringing the proceedings, it cannot be said that the sum was so large as to encourage a flood of employee inventor claims in future – and indeed the floodgates have not opened. The problem facing would-be employee inventors is that in many instances their invention forms just one part of the product or its success; how then to say that the particular patent/invention should be considered responsible for that success?

Whether it is the patent or the invention which is to be considered outstanding is a matter of timing. The law when first enacted required it to be the patent. The Patents Act 2004 amended the relevant provisions so that for patents filed after 1 January 2005 it is the invention that must be of outstanding benefit. Both the Kelly and the Shanks cases relate to pre 2005 patents; it was therefore the level of the benefit provided by the patent that was assessed.

The decision of the UKIPO

The UKIPO hearing officer, Mr Elbro, made the following findings, having considered the evidence:

  • The benefit to Unilever from the patents was substantial, around £24.5 million.1
  • It was relevant that the patents gave a very high rate of return (crudely put, more than ten times the cost), considering the fact that, even on Unilever's case, the expenditure amounted to no more than about £2 million.
  • Unilever's core business was in selling branded consumer products, rather than patent licensing. In this context, the significant royalty income arising from Professor Shanks' patents stood out; but how the benefit was derived was nevertheless not relevant to whether it was judged to be outstanding. Some of Unilever's successful products made profits that were an order of magnitude greater, although the rate of return was lower owing to the huge costs involved in bringing these products to market.
  • Unlike the Kelly case, Unilever's success did not depend on the patents.
  • Whether or not the benefit is classed as “outstanding” is not dependent on whether the benefit was created by the work of one person or a thousand.

Taking these points together, Mr Elbro decided that the benefit was not outstanding, having regard to the size and nature of Unilever's business. He emphasised that in coming to his conclusion, he was not driven by the specific figure of the benefit.

While Mr Elbro found that the contribution was not outstanding, he still went on to consider the “fair share” figure that he would have awarded to Professor Shanks had his claim succeeded. On this, he gave a royalty of 5%.

The decision of the UK High Court

Professor Shanks appealed the decision of the UKIPO to the UK High Court (Patents Court). Professor Shanks challenged both the hearing officer's conclusion that the patents were not of outstanding benefit and his conclusion as to fair share. Unilever cross-appealed the hearing officer’s conclusions as to the amount of the benefit and as to fair share.

The decision of Mr Justice Arnold was handed down on 23 May 2014. Arnold J chose to take a relatively staged approach in assessing the decision of the UKIPO and in reaching his conclusions, rather than a more holistic approach involving an indication of whether he felt the views of the UKIPO were correct overall. At the outset of his judgment, Arnold J emphasised that the function of an appellate court is not to retry the case. Arnold J also referred to the warning given by Baroness Hale of Richmond in AH (Sudan) v Secretary of State for the Home Department, namely that decisions of the UKIPO should be respected, and unless it is quite clear that a hearing officer has misdirected himself in law, appellate courts should not rush to find misdirections simply because they might have reached a different conclusion on the facts or expressed themselves differently.

As to the substance of the appeal and cross-appeal, Arnold J made the following findings:

Benefit to Unilever

In relation to the benefit to Unilever derived from the patents (which was valued at £24.5 million by Mr Elbro), Arnold J agreed with the hearing officer (and Unilever) that no additional economic benefit should be attributed to the use of the money Unilever had from the dates of receipt of the licence fees until the date of the hearing officer’s decision, because those sums were not “derived from” the patents. On this, Arnold J also made the point that the hearing officer has no inherent powers to award interest, and so it would be inconsistent with the statutory scheme for the benefit to be increased to reflect the time value of money effectively as a substitute for an award of interest.

Arnold J also agreed with the hearing officer that the amount of £24.5 million should not be reduced by the £1.75 million research and development costs of Unilever, because the hearing officer found as a fact that the R&D work would have been undertaken in any event (without a patent), and because counsel for Unilever did not show Arnold J any evidence which demonstrated that the R&D work would not have been undertaken without a patent.

However, contrary to the view of the hearing officer, Arnold J held that in order to determine the benefit which Unilever received from the patents, the gross sums it received should be discounted to reflect the fact that Unilever paid corporation tax on those receipts. Thus in the circumstances of this case, the benefit derived by Unilever from the patents was the benefit net of tax. The total net benefit derived by Unilever from the patents was therefore £17 million (and not the higher amount of £24.5 million determined by Mr Elbro).

“Outstanding” benefit to employer

Section 40(1) of the Patents Act 1977 requires the tribunal to consider whether the patent is of “outstanding” benefit to the employer having regard to, among other things, the size and nature of the “employer's undertaking”. In relation to the meaning of the latter expression, Arnold J held that the view of the hearing officer was impeachable. The Court of Appeal had previously equated the benefit of the patents to Professor Shanks' employer with the benefit received by Unilever plc and Unilever NV, and so it should follow that the relevant undertaking was the wider group companies of Unilever plc and Unilever NV (and not just the direct employer of Professor Shanks, CRL).

As to whether the £17 million benefit was “outstanding”, Arnold J agreed with the hearing officer that it was not. In making his decision, Arnold J emphasised that the test of outstanding benefit is a qualitative one; that it was clear that the hearing officer's decision was a value judgment involving a multi-factorial assessment, and accordingly, it should not be disturbed unless a distinct and material error of principle had been made. Although Professor Shanks advanced a number of criticisms in relation to the decision made by the UKIPO on the meaning of “outstanding”, these were each dismissed in turn by Arnold J. Three of these criticisms are worth noting in particular:

  1. The first involved a submission that Mr Elbro made an error of principle in deciding the benefit was not outstanding, because it amounted to saying that Unilever was too big to pay employee compensation, contrary to the obiter remarks of Jacob LJ in the Court of Appeal.2 On this, Arnold J determined that the hearing officer did not decide that Unilever was too big to pay; nor that no benefit could be outstanding however large because of the size and nature of Unilever's business; nor that £24.5 million was not an outstanding benefit simply because it was an arithmetically small sum compared to Unilever's profits. Arnold J concluded that the hearing officer had correctly undertaken a multi-factorial assessment and therefore no such error had been made.
  2. The second involved an allegation that the hearing officer did not take due account of the disparity between what Professor Shanks received from the patents and what Unilever received. Arnold J rejected this proposition on the basis that the hearing officer had openly accepted that a disparity existed and so there was no reason to suppose the hearing officer did not take this factor into consideration.
  3. The third criticism was that the hearing officer erred by not taking due account of the fact that Unilever obtained benefit from the patents with very little commercial risk and at a very high rate of return. Although Arnold J held that no such error had been made, he did however comment that the very high rate of return obtained by Unilever from the patents was a “striking feature” of the case and it was the point which troubled him the most.

Fair share of the benefit

In relation to the issue of what a “fair share of the benefit” ought to be (if the benefit had been found to be outstanding), Arnold J was of the view that this should be no more than 3%. The main factor that the judge took into account was that in the Kelly v GE Healthcare decision, a total of only 3% was awarded, together with the fact that the benefit which Unilever derived from the patents was obtained purely from licences which Unilever was able to conclude at least in part because of its size and financial resources. This would mean that the theoretical fair share would be in the region of £510k (as opposed to ~£1.2 million, using the hearing officer’s analysis).

Comment

The judgment of Arnold J (in our view correctly) keeps the hurdle as to what constitutes an outstanding benefit to the employer - having regard to the size and nature of the employer's undertaking - very high. Not only does Arnold J make it clear that the “benefit to the employer” in this context may well be net sums (i.e. after deduction of corporation tax), he has also held that a financial benefit of a magnitude of £17 million was not (in this case) an “outstanding” benefit. Arnold J further clarified that the meaning of “employer's undertaking” is not necessarily limited to the company which entered into the contract with the relevant employee; rather, the “employer’s undertaking” can (and in this case, did) comprise the wider employer group of companies.  In addition, Mr Justice Arnold capped the theoretical “fair share of the benefit” to 3%, following the case of Kelly.

This decision provides some assurance to innovative companies with UK-based employees and UK-based research and development. The logic behind an employee inventor being entitled to bring an additional claim for compensation against his or her employer has always been questionable in any event. It begs the question why an inventor ought to be awarded such additional rights, given that innovation in business can take several forms: this can be through new software, new business ideas, new slogans etc. All of these categories of innovation may well be critical to the employer’s business and lead to an outstanding benefit of sorts, yet these other classes of innovation are not afforded any employee compensation rights.

Links to the decisions