Landmark Decision for Employee Compensation under UK Patents Act: Unilever not "too big to pay"
Under section 40 of Patents Act 1977 (PA 1977) an employee may be awarded compensation for his/her patented invention, if the patent or invention has provided an "outstanding benefit" to the employer.
When considering possible compensation for an employee under s. 40, it is important to review the concept of "outstanding benefit" to the employer in the context of the business within the whole group, rather than just comparing in cash terms the benefit from a patent against turnover and profits.
The Courts below the Supreme Court had incorrectly applied the principles when considering the concept of "outstanding benefit" and Professor Shanks was entitled to a "fair share" of his invention, amounting to 5% of the outstanding benefit received by the Unilever group.
What's it about?
Between May 1982 and October 1986, Professor Shanks was employed by Unilever UK Central Resources Ltd (CRL), a wholly owned subsidiary of Unilever plc (Unilever). CRL was not trading but employed the UK based research staff of Unilever.
During that time, Professor Shanks invented a device for measuring glucose levels, the rights to which belonged to CRL from the outset under PA 1977. CRL assigned those rights to Unilever for £100 who was ultimately granted several patents (the Shanks Patents) from which, over time, Unilever derived a net benefit of around £24.3m.
In June 2006, Professor Shanks made an application for compensation under PA 1977 s 40. This section allows an employee to be awarded compensation for a patented invention if he or she establishes: (i) that the patent is of outstanding benefit to the employer; and (ii), that, by reason of these matters, it is just that he or she be awarded compensation.
In assessing "outstanding benefit", the PA 1977 provides that a court must have regard, among other things to the size and nature of the employer’s undertaking. The hearing officer of the Comptroller General of Patents (Hearing Officer) followed this guidance by deciding that any outstanding benefit had to be measured by comparing in cash terms the benefit from the patents against the turnover and overall profitability of the Unilever group as a whole. This led to a finding that the value of £24.3m from the Shanks Patents, though not inconsiderable, was dwarfed by the turnover and profits of Unilever from products such as ice cream, spreads and deodorants which also had the benefit of patent protection. The Hearing Officer, and on appeal, the High Court and the Court of Appeal, all held that the benefit provided by the Shanks Patents therefore fell short of being 'outstanding'.
In a unanimous and landmark decision, the Supreme Court has however allowed Professor Shanks' appeal and held that the benefit that Unilever enjoyed from the Shanks Patents was outstanding within the meaning of s.40. While the lower courts were right to consider the benefit of the Shanks Patents to the whole of the Unilever group (in light of the role that CRL played by operating a research facility for the benefit of the group), the Supreme Court highlighted that there may be many different aspects of the "size and nature of the employer undertaking" which may be relevant to the enquiry of an "outstanding benefit", affirming that an employer cannot be "too big to pay". Factors such as the activities and purpose of the employer should be taken into account as well as the degree to which the benefit is generated by licensing or selling patent rights (as opposed to the harnessing of the group's manufacturing capacity, sales and distribution facilities or goodwill). In this regard, as against Unilever's other patents, the Shanks Patents stood out
The Hearing Officer had concluded that 5% would have been a "fair share" had an outstanding benefit been found and the Supreme Court held it would be inappropriate to interfere with that finding. Consequently Professor Shanks was awarded £2m by way of compensation.
Why does it matter?
First, there has been little case law relating to the application of s.40 PA 1977 and the case law to date has generally supported the perception that the "outstanding benefit" test sets a very high bar. This latest judgment should lead employers (especially larger ones) to consider seriously any claim by an employee for statutory compensation.
The right to statutory compensation under PA 1977 also applies notwithstanding anything in any relevant employment contract or other agreement (other than a "collective agreement"). The fact that Professor Shanks was paid bonuses, salary and incentives, was not enough to amount to fair compensation for the value of the Shanks Patents to the business.
Employers should have a procedure in place for assessing whether any employees may qualify for compensation under s.40.
The assessment of such claims can be supported by adopting a clear "IP Policy" and retaining accurate records of who has invented what, when and how.
Where an "outstanding benefit" is made out, an employee may be entitled to a "fair share" of the benefit received by the employer, which requires regard for the adequacy of the employee's remuneration, the effort and skill the employee expends in making the invention; the contribution made by the employer to the making, developing and working of the invention; and the employer's licensing efforts. In Shanks v Unilever, the Hearing Officer also had regard to evidence about the percentage award rates in Unilever and university employee compensation schemes. Consequently employers should be mindful that any discretionary compensation awards may be relevant for statutory compensation claims.
In an M&A context, purchasers and sellers of any patent-owning businesses or companies should also be mindful of the risk of future employee claims. Purchasers should seek comprehensive warranty protection that there have been no claims for employee compensation nor is there any reasonable prospect of such claims being made. Sellers of businesses including patents should also be mindful that, where any sale proceeds can be attributed to any particular patent or invention, the employee who made such inventionmay be entitled to further compensation from the seller.