Contributors
The Court of Appeal has considered the right of employee-inventors to apply for compensation from their employer where they have produced a valuable invention in the course of their employment. In Ian Alexander Shanks v Unilever plc, Unilever NV and Unilever UK Central Resources Limited [2017] EWCA Civ 2, the Court provided guidance on what considerations are relevant when assessing whether or not a patent for an invention has conferred an outstanding benefit on the employer – the factor under the Patents Act 1977 for determining if an employee-inventor is entitled to an award.
The Court confirmed that the size and nature of the employer's undertaking is highly relevant in assessing outstanding benefit. Whilst other factors must be taken into account, such as the cost to the employer of producing the invention, in many cases, the size and nature of the employer will be the decisive factor.
Employees of large businesses with significant turnover therefore face an uphill battle in seeking to persuade a court that their patented invention has reached the benchmark, since the monetary returns from the patent are likely to be greatly exceeded by the employer's overall revenues. Single patents are unlikely to be crucial to the success of such undertakings and it therefore appears that many employers are simply 'too big to pay'.
Employee-inventor compensation under the Patents Act 1977
The case concerned section 40(1) of the Patents Act 1977, as it was prior to its amendment by the Patents Act 2004. Under section 40(1), an employee may apply for compensation from his employer in respect of an invention he has made which belongs to his employer and for which a patent has been granted, where that patent is of outstanding benefit to the employer. If it is considered just for the employee to be awarded compensation, they will be entitled to a fair share of the benefit received by the employer.
Background
The claimant, a professor who specialised in the field of liquid crystal displays, was employed by Unilever UK Central Resources Limited between 1982 and 1986 to develop biosensor technologies. During this period he invented two capillary fill devices which could be used in blood glucose testing kits.
The rights in the inventions belonged to Unilever UK Central Resources Limited (as his employer), and Unilever's policy required that these rights be assigned to Unilever plc, which then divided the territorial rights between itself and Unilever NV.
Unilever plc first filed UK patent applications in respect of the inventions on 13 June 1984, with European, Australian, Canadian, Japanese and American patents being obtained shortly thereafter ("Shanks Patents").
Whilst Unilever elected not to utilise the inventions protected by the Shanks Patents itself, the glucose testing market experienced a period of rapid growth during the 1990s and 2000s, and operators in that market were prepared to pay millions of pounds to be able to use the inventions. As a result, the majority of operators in the industry took non-exclusive licences of the Shanks Patents in exchange for significant licence fees.
The claimant's initial application for compensation under section 40(1) in respect of the Shanks Patents was rejected by the hearing officer of the UK Intellectual Property Office a decision which was upheld on appeal by Arnold J in the High Court. The claimant appealed the High Court's decision to the Court of Appeal, which examined the approach taken by Arnold J.
The High Court decision
At first instance, Arnold J agreed with the UK Intellectual Property Office that the monetary benefit Unilever had received in respect of the Shanks Patents was approximately £24.5m. This was comprised of £20.3m in licence fees, as well as a proportion to reflect the value of the Shanks Patents and associated licence fees in the sale of Unipath, the Unilever business responsible for the management of the Shanks Patents.
The High Court decision therefore boiled down to the question of whether this £24.5m monetary benefit constituted an outstanding benefit to Unilever.
The claimant argued that several factors pointed towards outstanding benefit, including:
- The inventions had been developed by him largely in his own time and at very little cost or risk to Unilever. As a result, the Shanks Patents generated a very high rate of return, far in excess of any of Unilever's other patents. In this sense, the Shanks Patents were said to 'stand out' from Unilever's other patents.
- Unilever did not intend to exploit the inventions itself, nor did it usually license out its patents to third parties. The claimant stressed that this meant that the Shanks Patents, which commanded significant licence fees, conferred a benefit on Unilever which was not only substantial but also quite unusual in the context of Unilever's ordinary business activities and its approach to licensing.
Unilever contended that, whilst £24.5m was not an insignificant amount of money, in the context of its overall global turnover (billions of pounds in sales and hundreds of millions of pounds in profit), it could not be said to represent an 'outstanding' benefit for Unilever. To that effect, Unilever relied on the wording of section 40(1) which states that the size and nature of the employer's undertaking is relevant to a determination of outstanding benefit.
Counsel for the claimant characterised this as a 'too big to pay' argument and asserted that this approach would ensure that employees of large businesses would rarely (if ever) be able to claim compensation under section 40(1).
Arnold J upheld the decision. Whilst characterising the Shanks Patents as conferring a benefit on Unilever which was 'substantial', 'significant' and 'exceptional', and as 'standing out' in the context of Unilever's other patents, this benefit was not 'outstanding' when viewed in the wider context of Unilever's vast global profits.
The claimant appealed to the Court of Appeal, contending that Arnold J had wrongly focused upon this single one factor in assessing outstanding benefit i.e. the size and nature of Unilever's undertaking.
Court of Appeal decision
The Court of Appeal was not required to assess whether or not the Shanks Patents conferred an outstanding benefit on Unilever. Rather, it would only overturn Arnold J's decision if it appeared that he had made an error as to the law, had wrongly taken certain factors into account or had failed to take certain relevant factors into account. The Court stated that, if it appeared that Arnold J had only considered the 'too big to pay' argument, then this would amount to an error in law; 'outstanding benefit' should not be reduced to an over-simplified comparison of the patent's benefit as against the employer's turnover alone.
Whilst noting that the Shanks Patents had generated 'considerable' licence fees, far in excess of Unilever's income from other patents, the Court of Appeal upheld Arnold J's decision. The means by which the benefit was obtained is not relevant, nor is it helpful to focus on a simple comparison of an undertaking's various patents in order to decide outstanding benefit.
The Court of Appeal concluded that the High Court had adopted a multi factorial approach and had considered and attached some weight to the claimant's arguments as to outstanding benefit, but had reasonably come to the conclusion that, given the size and nature of Unilever's global undertaking, the benefit conferred by the Shanks Patents was not outstanding. Arnold J had therefore not made an error in law, and the Court of Appeal would accordingly not interfere with his decision.
The Court referred to the decision in Kelly and Chiu v GE Healthcare [2009] EWHC 181 as representing the sort of situation where a benefit would be deemed to be outstanding.
That decision involved a £50m benefit from a 'blockbuster radiopharmaceutical' which transformed a relatively modest undertaking into a highly marketable global operator, and to the success of which the relevant patent was absolutely crucial. Whilst the Court stressed that a patent does not necessarily need to have quite such a transformative effect on the employer's business as in Kelly, it remains the only reported successful claim under section 40(1) in the provision's forty-year history.
The Court also held that, if it had decided that the patent had resulted in outstanding benefit for Unilever, then the amount payable to Professor Shanks would had been <5% of the sums earned by the company – not the 33% that he sought.
Conclusion
Despite being variously characterised by Arnold J and the Court of Appeal as having conferred a benefit on Unilever which was 'substantial', 'significant' and 'exceptional', the Shanks Patents were viewed as not reaching the threshold of 'outstanding'.
In light of the precedent set by Kelly, the Court was clearly of the view that compensation under section 40(1) should be reserved to truly exceptional cases, which, it appears, are unlikely to involve large and successful undertakings. Whilst commenting that the claimant's claim may well have succeeded were he employed by a smaller undertaking, Briggs LJ agreed with Patten LJ (who gave the leading judgment), that the size of the employer's undertaking was clearly a highly relevant factor, given Parliament's decision to expressly refer to it.
It seems from the Court of Appeal's decision that the size and nature of the employer's undertaking will often be the decisive factor, particularly if the patent has not transformed the fortunes of or been integral to the success of the relevant undertaking. Kelly therefore sets a high hurdle to reach. It follows that employees of large businesses such as Unilever will rarely create an invention, the patent for which will transform the fortunes of the business to quite the same extent as in Kelly. In the context of employees of large, successful and global undertakings, it seems that their employer will often be deemed simply too big to pay.
