Summary and implications

An employee who made an invention in respect of which his employer secured a patent was entitled to a fair share of the employer’s £23m actual royalties. The employee could not recover a share of the £1bn profits which he argued the employer could have derived from the invention if “it tried harder”.

In reaching its decision, the Court of Appeal confirmed that:  

  • An employer’s obligation to award a fair share of the benefits derived from an invention made by an employee is limited to a share in actual, not estimated hypothetical, benefits derived from the invention;  
  • This holds true even where the employer assigns the invention to another company. The focus throughout remains on the actual benefit derived by the actual employer.  
  • However, in the case of intra-company assignments, one also asks what amount the employer could reasonably be expected to have derived in an open market, bearing in mind the benefits it had in fact obtained.  

Following on from this decision, and the outcome of another High Court litigation in 2009, employers are advised to review their contractual arrangements, to ensure they reflect their commercial interests as well as comply with the current legal position.

The facts in Unilever plc v Shanks are straightforward. Professor Shanks, an employee of Unilever UK, invented a precise measuring device to be used in blood testing kits. Unilever UK patented the invention which it then transferred to another group company (Unilever plc) for various commercial reasons. 10 years later, Unilever plc licensed and sold the invention in return for £23m in royalties. Relying on the Patents Act 1977, Mr Shanks brought a claim against Unilever UK, Unilever plc and the Unilever Group. He sought a fair share of £1bn, the benefit he claimed the defendants could have derived from his invention. The High Court agreed, but the Court of Appeal reversed this decision, holding that a “fair share” under the Act relates to “actual” benefits which the employer could reasonably be expected to have derived in open market, always taking into account the actual profits it has made.

Bearing in mind that employers cannot contract out of the statutory compensation scheme, and that employees can postpone making a claim until shortly before the expiration of a patent, employers could benefit from the following contractual arrangements:

  • A statement to the effect that any decision whether to exploit an invention and, if so, in what manner and to what extent, rests entirely within the company’s discretion;  
  • A confirmation that the company retains absolute discretion and power to assign any invention to any other entity, whatever the impact on exploitation of the invention and subsequent benefits; and  
  • Voluntary arrangements for “fair share” valuation.  

Finally, employers with international businesses should carefully review their arrangements for compensation for employees’ inventions. The UK’s patent legislation applies to UK employees wherever the ensuing monopoly rights are registered. Therefore, for example, a US employer should not assume that its contractual arrangements will always prevail. If these arrangements short-change a UK employee, the UK legislation is likely to provide a remedy.