The UK Supreme Court handed down its judgment today in Shanks v Unilever (link to Supreme Court judgment). This broadens the circumstances in which employers must compensate their employees for inventions made in the course of their employment and may impact all innovative businesses employing UK-based inventors.

Speed read: In a unanimous decision, the Supreme Court allowed Professor Shanks’ appeal and awarded him compensation of £2m, as a fair share of the ‘outstanding benefit’ of £24.5m which his 1980s invention had provided to his employer.

Slightly longer read: The Supreme Court broadened the circumstances in which a patented invention will be regarded as of ‘outstanding benefit’ to an employer, meaning the inventor is entitled to a fair share of that benefit by way of compensation, and clarified how that fair share should be assessed:

- Is the benefit outstanding? The Patents Acts 1977, s40, requires an employee to establish that the patent is of ‘outstanding benefit’ to the employer, having regard among other things to the ‘size and nature’ of the employer’s ‘undertaking’. This gives rise to two questions of central importance:

1) What is the employer’s undertaking? In many cases the identification of the undertaking will be comparatively straightforward. It will be the whole of the employer’s business or, if it is divided into economic units, the relevant unit. In other cases, such as this one, a more nuanced approach is required. To identify the relevant undertaking, the court is to look at the commercial reality of the situation. In this case, the employer was a Unilever group company (CRL) which operated a research facility for the benefit of the whole Unilever group. The work resulted in patents which were assigned to other group members for their benefit. CRL’s ‘undertaking’ for the purposes of s40 was the business of generating inventions and providing those inventions and the patents which protected them to Unilever for use in connection with its business.

2) What is the relevance of that undertaking’s size and nature? The Supreme Court warned that a tribunal should be very cautious before 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. Instead, many different aspects of the size and nature of the employer’s undertaking may be relevant to the enquiry – for example (amongst other factors given, see [51]) the benefit may be generated at no significant risk and may represent an extraordinarily high rate of return.

The Court said that in this case irrespective of the starting point (even if the ‘undertaking’ had been Unilever as a whole rather than CRLs invention-generating business), the hearing officer in the first instance judgment misdirected his focus and concentrated too heavily upon the overall turnover and profits generated by Unilever. Rather, the Supreme Court held that a highly material consideration was the extent of the benefit of the Shanks patents to the Unilever group and how that compared with the benefits the group derived from other patents resulting from the work carried out at CRL.

A further mistake of the hearing officer in his initial judgment was the failure to recognize that the size and success of Unilever’s business as a whole did not play any material part in securing the benefit it had enjoyed from the Shanks patents.

- What is a fair share of that benefit? The Patents Act 1977, s41(4) sets out the matters to be considered in determining the employee’s ‘fair share’. The Supreme Court held that the hearing officer duly addressed each of those matters and was correct in concluding that Professor Shanks was entitled to 5% of the benefit.

The Court held that when calculating the benefit received (and thus what the employee’s fair share should be) no account should be taken of the amount of corporation tax which the employer has had to pay, rejecting Unilever’s submission that only post-tax revenues should be used in the calculation.

Finally, the time value of money can be a benefit derived from a patent. Therefore, the Court held that Professor Shanks’ ‘fair share of the benefit’ should be increased to reflect the reduction in the real value of money during the substantial time between Unilever’s receipt of the licence fees and other revenue and its making of any payment of compensation.

Brief comment: This decision, and the substantial compensation awarded to the inventor, should be of interest to any innovative businesses with UK employees. Other significant patents may also represent very high rates of returns, or provide a company with an opportunity to develop a new line of business or to engage in unforeseen licensing opportunities, and may now be at greater risk of becoming the subject of similar claims. Carve outs in employment contracts for inventors, attempting to pre-empt such an inventor compensation claim, risk being found unenforceable by the UK courts. As is already the case for employee inventors based in other countries, this issue now takes greater prominence in due diligence when acquiring businesses where value is placed on patents with UK inventors. Although inventor compensation cases have historically been rare in the UK, at least as compared to some countries such as Germany, Japan and the Netherlands, this judgment decidedly increases the risk, including for past inventions.

Brief factual background for those new to the case: The case involved Professor Shanks, who was employed by CRL, a wholly owned subsidiary of Unilever plc, in the early 1980s. CRL at that time employed all of the Unilever group’s UK-based research staff. In the course of his employment – albeit in his spare time – Professor Shanks invented a device that measures glucose concentrations in blood, serum or urine. It was accepted that the rights to the invention belonged to CRL. CRL assigned all these rights to Unilever, which subsequently obtained patents over the invention. It licensed those patents to other businesses, but it didn’t use the invention itself.

Professor Shanks claimed against Unilever for employee compensation under the Patents Act 1977, which at the relevant time gave employees a right to claim compensation for a patent that was of ‘outstanding benefit’ to their employer (the test was later broadened to include the benefit from the invention as well as the patent).

The UK Intellectual Property Office concluded that the financial benefit to Unilever amounted to £24.5m, but that this was not an ‘outstanding benefit’ to Unilever under the Act, in particular given Unilever’s size. This conclusion was upheld by both the High Court and Court of Appeal. Professor Shanks appealed to the Supreme Court and the hearing was on 6-7 February 2019.