If an invention made by an employee belongs to the employer the employee may nonetheless be entitled to compensation. s40 Patents Act 1977 regulates the circumstances in which an employer is obliged to pay compensation to an employee.
In relation to inventions the patent for which is applied for on or after 1 January 2005 the court or Patent Office may only order compensation to be paid where three requirements are satisfied:
- the employee has made an invention belonging to the employer for which a patent has been granted;
- 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; and
- by reason of those facts it is just that the employee should be awarded compensation to be paid by the employer3
For inventions the patent for which is applied for before 1 January 2005, the second requirement is stricter, as it must be the patent which is of outstanding benefit to the employer.
If such an outstanding benefit can be demonstrated, the court must ensure it secures for the employee “a fair share (having regard to all the circumstances)” of the benefit the employer has derived or may reasonably be expected to derive from the invention or the patent for the invention, which can include from its assignment or license.
In the UK there have been few decided cases in relation to employee compensation. Kelly v GE Healthcare is the only decided case to date in which it was decided that compensation was to be paid to an employee inventor.
In Kelly, “outstanding” was held to mean “something special” or “out of the ordinary”; more than merely “substantial”, “significant” or “good”. The statute also requires that "outstanding benefit" be considered "having regard to the size and nature of the employer's undertaking".
The assessment to apply to determine whether the invention or patent has been of "outstanding benefit" to the employer is qualitative and involves a value judgment with a multi- factorial assessment. Reference should be made to the size and nature of the employer's undertaking but the benefit should be looked at in the total context of the activities of the employer.
In Kelly the judge considered the meaning of “fair share” depended on the evidence available, but that it should not be thought of in the same way as loss or damage, or seek to put the inventor in the same position as an external patentee.
Unilever v Shanks
A series of cases in relation to employee compensation are those between Unilever and Ian Shanks. In this case, an employee inventor (Shanks) was seeking compensation from his employer (Unilever UK Central Resources). However, the benefit of the invention had accrued not to the employer, but to a third party (Unilever Plc) to whom rights in the invention had been assigned. Unilever Plc then licensed the patent in exchange for the payment of royalties totalling approximately £24.5 million. Shanks claimed that had his invention been licensed sooner it would have raised closer to £1 billion in royalties.
In relation to a preliminary issue, the Court of Appeal had to decide whether the sum the inventor was entitled to in compensation should be based on the actual amount made by the licence to the patent or the hypothetical amount that the licence could have made. The Court overturned the earlier Patents Court decision, and held that the inventor should receive a sum based on the amount of £24.5 million that was actually paid, not a hypothetical sum.
When the full trial took place the Patent Office (upheld by the Patents Court on appeal) determined that Unilever's gross benefit of £24.5 million resulting from the patents from the employee's invention was not "outstanding" within the meaning of s40(1) Patents Act 1977. As Unilever Plc made profits at orders of magnitude greater from other inventions, and the patents were not critical to Unilever's success (as was the case in Kelly), the patents in question were not considered an "outstanding benefit". Further, the income stream from the inventions had been primarily generated from Unilever's licensing team, rather than by Shanks' effort and invention.
The Court of Appeal upheld this decision, concluding that the term 'outstanding' is a relative concept which must be measured against the factors in each case. Turnover and profitability are relevant factors to consider, among many others. They further determined that the £24.5 million should not be reduced to take into account corporation tax or increased to include the time value of money, as both were considered consequences of the benefit rather than part of it.
If an invention for which a patent application has been filed has been made by an employee, the employee is by law entitled to the patent unless the nature of the employment entails the use of the employee’s special knowledge for the purpose of making inventions of the same kind as that to which the patent application relates. In the latter case the employer is entitled to the patent. This is stipulated in article 12(1) of the Patent Act 1996. Employer and employee can contractually deviate from this statutory provision and in practice they often do by agreeing that all inventions made by an employee belong to the employer.
In case the employer is entitled to patent the employee’s invention – whether by application of the aforementioned statutory rule or by contract – and the employee cannot be deemed to have been compensated for loss of the patent, whether in the salary he earns or the pecuniary allowance or extra remuneration he receives, the employer shall be obliged to award the employee a reasonable compensation. This rule is laid down in article 12(6) of the Patent Act 1995.
Such (additional) compensation will, however, only be granted in exceptional circumstances. In Hupkens v. Van Ginneken the Supreme Court ruled that if the employee's special knowledge was applied for the purpose of making inventions of the same kind as that to which the patent application relates, it can generally be assumed that the agreed salary of the employee inventor already comprises a compensation for loss of the patent. This will for example be the case if an employee is specifically hired to do R&D. In TNO v. Ter Meulen the Supreme Court confirmed that (additional) compensation is only awarded in exceptional circumstances and stated that the following circumstances should be considered when assessing whether such compensation should be awarded: the position and function of the employee within the employer’s organisation, the salary and other employment conditions of the employee, the nature and financial significance of the invention, and the extent of the employee’s contribution to the invention. The lower courts have also considered other factors to be relevant, such as the role played by other employees in the invention and the extent to which the employer has provided the necessary facilities and research opportunities and/or assisted with the exploitation of the invention. The lack of a specific salary component representing compensation for the employee’s loss of the patent is neither sufficient nor required for compensation to be awarded.
Turning to the question how to determine which amount of compensation is reasonable, article 12(6) Patent Act stipulates that the compensation to be paid must relate to the monetary value of the invention and the circumstances under which the invention was made. Limited guidance is provided in case law. In Hupkens v. Van Ginneken the Supreme Court emphasized that the financial value of the invention is only one of several circumstances which must be considered in determining a fair compensation, and that the relation between the employee and employer should not be equated with a relation between a licensor and a licensee. Moreover, according to the Supreme Court, equity does not dictate that the compensation for loss of the patent should be aligned to the advantages obtained by the company as a result of the use of the invention in a manner decided by that company.
Finally, it should be noted that it is not possible to contractually exclude application of the statutory provision on the compensation of the employee inventor. However, any right of action on the part of the employee inventor for compensation shall lapse after the expiry of three years from the date of the grant of the patent. In practice, the right to compensation is rarely litigated in the Netherlands, most probably because such litigation is lengthy and costly and has the likely outcome that no or only a very low compensation will be granted.
In Germany, employee inventor compensation is governed by the German Employee Inventions Act. The German Employee Inventions Act is based on the so-called “inventor principle”: the rights in an invention originally belong to the employee. The employer is entitled to have the rights in the invention assigned by unilateral claiming of the invention or to release the invention to the employee. The decision is at the employer’s sole discretion. An employer who claimed the invention is solely entitled to the rights in the invention. If the employer has released the invention, the employee retains full and unrestricted ownership.
If the employer claimed the invention, the employee is always entitled to a “reasonable compensation” for the entire term of the patent during which the employer makes use of the invention. Moreover, if the commercial value of the invention later proves to be substantially higher or if the compensation otherwise appears “inequitable”, the employee can claim additional compensation. If the application for a patent is later refused by a final and binding decision or if the patent is subsequently revoked or declared invalid, the employee is not entitled to any further compensation from that moment on. Any previously paid compensation cannot be claimed back by the employer.
In view of the abovementioned principles, the crucial question under German law therefore is not whether an employee is entitled to compensation at all – as in Unilever v Shanks – but rather how much compensation the employee is entitled to.
Calculating the inventor compensation
The inventor compensation is a percentage of the commercial value of the invention taking into account, for example, the turnover generated by the employer with the sale of the patented products or the revenue made by selling or licensing the invention or the patents issued on it.
The general formula for calculating the employee’s compensation is:
compensation = value of invention x share factor x co-inventor share
- The calculation of the value of invention depends on how the employer makes use of the invention. In cases as in Unilever v Shanks where the rights to an invention or patent are transferred by the employer to another group company, the basis for the assessment of the value of the invention is in general the internal sales price agreed between the employer and the group company. The revenues generated by the group companies themselves are not of relevance. In cases where the rights to an invention or a patent are transferred without any compensation, however, the employee is entitled to be treated as if the rights had been transferred to a third party, not to a group company. If compensation was actually paid but is too low, the sales price must be calculated on a hypothetical basis according to a fair market rate. The employee is then entitled to an additional compensation in the amount of the difference between the actually paid compensation and the sales price according to the fair market rate. In cases where the group can be considered an economic unit it may in some cases be adequate to assess the value of the invention not on the basis of hypothetical sales prices but on the basis of the revenues of the individual group companies making use of the invention or the patent. An economic unit under German law requires close intertwining of the group companies with intra-group division of research, production and distribution tasks. The relevant net sales price is multiplied by a conversion factor of 40 %. If the assessment of the net sales price is difficult, the gross sales price (without VAT) can be multiplied by a conversion factor of 25 %.
- The share factor takes into account that an employee, unlike a free inventor, does not carry the economic risk involved in developing and exploiting the invention. It is determined by three aspects: the assignment that led to the invention, the solution to the problem, and the employee’s responsibilities and role in the employer’s business.
- The co-inventor share reflects the share of each inventor of a team in the invention.
Therefore, if the case Unilever vs Shanks had to be decided by a German court, it can be assumed that the court would come to the conclusion that Mr. Shanks is certainly entitled to appropriate inventor compensation. Given the fact that the invention had been assigned by Mr. Shanks’ employer Unilever UK Central Resources Ltd to Unilever Plc for an amount of only £100, it is very likely that a German court would assess the compensation on a hypothetical basis according to a fair market rate. If, alternatively, the court came to the conclusion that the Unilever Group is an economic unit, it is possible that the court would calculate the compensation based on the revenue actually generated by Unilever Plc, i.e. royalties of £24.5 million.
Lump sum compensation systems
Calculating the employee’s statutory inventor compensation is usually highly complicated as well as time-consuming for the employer and barely transparent to the employee. Therefore, many German employers meanwhile use lump sum compensation systems to remunerate their employee inventors. In lump sum compensation systems, employers usually generalise certain remuneration parameters (for example the royalty rate, reference size, share factor) by making use of empirical values. Lump sum compensation systems are typically introduced to reduce the employer’s administrative efforts while at the same time tapping the employees’ innovative potential, rather than to save expenses to the employee inventors’ disadvantage; lump sum compensation systems are widely accepted among both employees and employers and are increasingly in demand.