The UK Court of Appeal confirmed on 18 January that an employee was not entitled to any compensation from his employer for the income generated by his patented inventions, as the returns did not amount to an “outstanding benefit” to his employer.

In general, inventions made by employees as part of their usual duties will belong to their employers – they have the right to exploit the invention as they wish without requiring the employee’s permission or paying any compensation. But the position is different when a patent is granted to the employer for the invention, if the invention is judged by the Comptroller of Patents as being of “outstanding benefit” to the employer. It may then have to pay compensation to the employee based on the value of the patent(s) to the employer’s undertaking (s.40(1) of the Patents Act 1977 (“PA 1977“)).

The claimant in Shanks v Unilever had built the first prototype of a device to measure glucose concentrations in blood. He had done this at home, in his own time, apparently using slides from his daughter’s toy microscope kit. The claimant’s employer obtained patents to the invention but did not use the invention itself; instead, it licensed it to other companies producing glucose testing kits. The value of the patent to the employer was determined to be £24.5m.

The inventor claimed that as the patent was of “outstanding benefit” to his employer, he was due compensation under the PA 1977. However the Hearing Officer rejected the inventor’s claim deciding that the financial benefit to the company was not “outstanding” (adding that, if it had been assessed as outstanding, then he would have awarded the claimant 5% as his fair share), in part because the benefit had to be calculated in relation to the employer’s group of companies, rather than the single entity holding the employment contract.

One of the arguments put forward by the inventor’s counsel was that his client’s case should not be prejudiced by the size of the undertaking for which he worked. It was argued that while s.40(1) PA 1977 requires the benefit to be assessed with regard to the size and nature of the employer’s undertaking, it would be unfair if the employees of larger companies, such as the employer in this case, were effectively exempt from the effects of the provision, as their turnover was so high that no one patent could ever be said to deliver an “outstanding benefit”, even if it led directly to hundreds of millions of pounds of sales.

The Court of Appeal, clearly anxious to avoid a “too big to pay” argument, accepted that if the Hearing Officer had simply compared the income from the patents and the profits of the employer group that would have been the wrong approach. The Court held that “outstanding” in the sense of s.40(1) is a relative concept, and that it may be necessary to have recourse to a wider consideration of the scope f the employee’s duties and the expectations the employer had about the level of return expected from its average research program.

The Court admitted that in the case of smaller companies a more direct comparison of profit with financial benefit may be sufficient to satisfy the test in s.40(1); the figures in some cases may be sufficient to speak for themselves (See for example the case of Kelly v GE Healthcare[2009] EWHC 181 (Pat), cited in the Judgment in this case).

The Court of Appeal in this case ruled that it was correct for the Judge to have taken a more nuanced approach, looking at the profits from the patents in the context of the group profits as a whole and balancing the financial return against the effort and cost involved, with regard to the employee’s duties and the way in which the invention came about.

The Patents Act provision was designed to deal with exceptional cases. Previous cases have established that the bar is set high. There must be an outstanding benefit to the employer’s undertaking, whatever size that undertaking may be. The “size and nature of the employer’s undertaking” is expressly recognised as something which must form part of the equation. This is not limited to group profits generated by patents – it includes the whole of the employer’s business. Although the receipts in licence fees from the claimant’s patents was considerable and far in excess of any other income of the same type, that was just one factor to be considered.

On that basis, the Judge and Hearing Officer had been correct to rule that there had been no “outstanding benefit”, though on the facts the case may well have been decided differently had the employer been a smaller company.