04 November 2019

New judgment on how employees should be compensated for inventions

On 23 October 2019, the UK Supreme Court handed down a judgment that is causing employers of inventors to pause for thought after one inventor was given compensation for his persistence throughout a 13-year legal battle.

In only the second case considering this specific issue, the Court reversed earlier decisions and decided to award an employee, Professor Shanks, with £2m. The Court determined that the sum amounted to a fair share of the £24m benefit that his invention had yielded for his employer. The case throws up some interesting points on intellectual property rights and possible considerations for employers looking to design compensation packages for their inventor employees in future. 

When an employee, whose job it is to invent for their employer, creates inventions during the course of their normal duties, all intellectual property rights in those inventions will be owned by the employer. The employee is regarded as being appropriately compensated for this principle by being paid their salary and other benefits. 

However, this principle can be subject to adjustment when the employee has developed something of such outstanding benefit that perhaps their salary and benefits package is not quite proportionate to the outcome they’ve achieved for their employer. For this reason, section 40 of the Patents Act 1977 set out the right of an employee to be compensated additional sums in such circumstances.  For section 40 to apply, the situation must be one where the employee has created an invention which is owned by their employer on creation and for which a patent has then been granted. If that employee can then demonstrate that the patent is of outstanding benefit to the employer and that, as a result, it would be just for the employee to receive an award of compensation, this can be awarded in order to give them a fair share of the benefit which the employer has derived.

In the scenario of Professor Shanks’ inventions, this has thrown up a few different points of deliberation for the Supreme Court, including:

  • Who his actual employer was and what amounts to an undertaking in respect of a group company structure?
  • How does one assess ‘outstanding benefit’ when required to consider it in light of, among other things, the size and nature of the employer’s undertaking?
  • Is it just to award compensation and, if so, what is a ‘fair share’ in these circumstances?

Background to the dispute

Professor Shanks began his action in 2006, but it relates to his time employed by a subsidiary of the Unilever group of companies, a research company known as CRL back in 1982. It was never in dispute that the invention Professor Shanks developed at that time, a device for measuring glucose levels using capillary action, was owned by his employer, CRL, from the outset. CRL was a wholly owned subsidiary of Unilever plc, employing all the group’s UK-based research employees at that time.

CRL sold the rights it had in Professor Shanks’ invention to Unilever plc for £100, which in turn assigned some of those rights to its parallel parent company, Unilever NV. During 1984 and 1985 each of Unilever plc and Unilever NV filed various patents in the territories that each company operated in. These patents, once granted, were not considered to be in a field which the Unilever group wished to develop, but instead they became the subject of various licences granted by each of Unilever plc and Unilever NV to a number of licensees. 

It was these licences which were granted for consideration totalling a net figure of around £19.5m and a subsequent sale of the patents and associated licences in 2001 yielded a further £5m for the Unilever group. Therefore Unilever’s total earnings from the patents granted in the inventions devised by Professor Shanks came to a figure which the hearing officer rounded down to £24m.

What is an undertaking in a group structure setting?

The Patents Act requires that the question of ‘outstanding benefit’ is considered by having regard to the size and nature of the employer’s business. On this question, the hearing officer in 2013 had determined that the benefit of £24m, although a sizeable figure, when viewed in light of the billions of profit generated by so many other patented goods developed and sold by Unilever group, could not be regarded as outstanding.

The Supreme Court determined that, where the previous hearing officer had erred in finding Professor Shanks’ employer to be the Unilever group, it was actually CRL. However, it is clear that CRL only received a fairly nominal value for the patents, given its function as a research facility designed to pass on the benefit of its researchers’ work to the wider group. As a result, and in order to address the commercial reality of the group situation, the Supreme Court found that where the group operates with a subsidiary research facility which acts for the benefit of the group as a whole, assessing whether the patents were of outstanding benefit must be done in comparison to the extent to which other patents benefitted the whole group.

The common practice of setting up separate entities to hold intellectual property rights or conduct research and development, therefore, does not stop an assessment of the commercial realities of activities which benefit a whole group.

Relevance of size and nature of the undertaking

This then brings up the issue of whether, as Unilever argued, the £24m benefit was simply dwarfed by Unilever’s global turnover and profits and so could not amount to being an outstanding benefit in such a scenario. This gave rise to the argument that if this was the correct conclusion then certain companies would always be simply ‘too big to pay’ any fair share and no employee could ever benefit from the section 40 right to a compensation award.

Perhaps somewhat unfortunately, the only previous case on this issue, Kelly and Chiu v GE Healthcare Ltd [2009] EWHC 181 (Pat); [2009] RPC 12, had set a very high bar to this argument. In this case, the patents in question had been developed in a situation of near financial ruin for the employer, but their development had then transformed the fortunes of the business. The inventions had cost under £2.5m to develop, but achieved sales with a value in excess of £1.3bn. Clearly this was a relatively unique situation, in which it would be challenging to argue against such a turnaround amounting to an outstanding benefit.

The above arguments therefore present two extremes, which perhaps are not helpful to moving the case law on in the circumstances of Professor Shanks’ claim. The Supreme Court’s judgment gives a useful assessment considering the different potential factors. It determined, as a result, that Unilever had enjoyed substantial and significant returns which were generated without it taking any significant risk. Essentially the high rate of return was key, together with a consideration of the comparison with the benefit derived from other patents by the Unilever group. On appeal, therefore, the earlier judgments were overturned and the patents in question were found to be of outstanding benefit within the meaning of section 40 of the Patents Act 1977.

The conclusion to be drawn is that no employer is ‘too big to pay’, but by assessing the risk and cost of developing the invention together with the proportion of returns and comparing this with the benefit from other inventions, it is possible to determine in any size of business whether it has had an outstanding benefit.

What’s a fair share?

Several questions came up in the discussion of what amounts to a fair share. First of these was the impact of the amount of time which had passed since Unilever had received the monetary benefits. The patents were granted back in 1984 and the revenue received was during the period from 1996 to 2004, so substantively before Professor Shanks’ compensation claim was first raised in 2006. Lord Kitchin found that he felt it only fair that Professor Shanks should be entitled to an uplift, to represent the substantial time that had passed since Unilever’s receipt of the licence fees and the making of any compensation payment.  As a result, Unilever also did not benefit from having failed to address this issue years ago.

Secondly, an issue was discussed as to the application of tax to the benefit Unilever had received when determining the fair share to be awarded to an employee. The Supreme Court found the question to be different from when considering an account of profits in a patent infringement action, so determined that the benefit being assessed should not be net of tax.

Finally, Lord Kitchin agreed with the hearing officer’s original assessment of several factors, including Professor Shanks’ duties, his remuneration level and also research on compensation schemes in comparable settings.  He found that 5% would be an appropriate fair share and the Supreme Court found no reason to alter the conclusion of the hearing officer on this point.

So, in applying these outcomes, the Supreme Court applied an average inflation rate of 2.8% to the 5% share of the £24m benefit, giving a compensation award of £2m to Professor Shanks.

Lessons to learn

The case is interesting for several reasons, not least the appetite of the Courts to provide meaningful compensation to an employee inventor in order to give weight to the section 40 right. The Supreme Court has gone further to set out some helpful indicators of appropriate factors to consider when assessing key issues such as the question of determining an undertaking and whether an invention is of ‘outstanding benefit’.

Whilst this case underlines the point that intellectual property cases are not for the faint hearted and few employees will have the persistence to pursue such a lengthy action in a hurry, it also shows that employers fail to compensate appropriately at their peril.

If you would like more information on the topic covered above, or would like to discuss how this might affect your business in more detail, please contact any member of our Commercial team whose contact details can be found here.