A measure of outstanding: employee inventor compensation in Shanks v Unilever

On May 23 2014 Mr Justice Arnold of the High Court dismissed Professor Shanks’s appeal and upheld the UK IP Office (UKIPO) decision not to award Shanks employee inventor compensation. In reaching this decision, the judge had to consider whether the patent was of “outstanding benefit” to the employer. This case illustrates that for an employee to succeed in any such claim, the patented invention must be transformative.

Background
While employed by Unilever, Shanks invented an electrochemical device which had particular application for testing levels of glucose in blood samples, and was therefore useful in the treatment of diabetes. Unilever obtained patent protection for the invention in a number of countries. Unilever did not directly exploit the technology itself, but concluded substantial licensing deals under the patents before selling the patents as part of the sale of Unipath to Inverness Medical Innovations in December 2001.

The law
Section 40(1) of the Patents Act 1977 provides for employee inventors to be paid additional compensation for an invention on which a patent has been granted when the patent or invention is of “outstanding benefit” to the employer. In assessing whether the benefit is outstanding, regard should be had to the size and nature of the employer’s undertaking. Whether the patent or the invention is assessed is a matter of the law applicable at the time. In the present case, it was the patent which had to be taken into account.

Was the patent of outstanding benefit?
As noted by the judge, this was an unusual case. The fact that the patents were licensed by Unilever to third parties made it relatively easy to identify the monetary benefit obtained by the patentee from the patents, as opposed to the invention.

The UKIPO estimated that the total gross profit obtained by Unilever from the patents was £24.5 million, with a net benefit of £24.3 million after costs incurred by Unilever in prosecuting, maintaining and licensing the patents were taken into account.

The hearing officer concluded that while this was a significant sum, when considered in light of Unilever’s commercial activities taken as a whole, including the nature and size of the business, it was not outstanding. 

Both sides challenged the UKIPO hearing officer’s conclusion that the benefit derived from the patents was £24.5 million.

Shanks’s argument centred on the fact that the case had taken a long time to reach a conclusion and during that time Unilever had the use of that money, which was in itself an economic benefit to Unilever. While the judge expressed concern that a claim of this nature should take so long to reach a first-instance determination, he dismissed the arguments put forward on a number of grounds, including that even if the time value of the money is a benefit, it is not a benefit derived from the patent.

Unilever argued that the UKIPO hearing officer ought to have reduced the benefit to reflect a number of factors, including the R&D costs and tax. The judge agreed with the hearing officer that the benefit derived from the patent should not be reduced by the R&D costs of Unilever, because as a point of fact the research and development would have been undertaken in any event.

However, with respect to the tax element, the judge agreed with Unilever that the benefit derived by Unilever from the patents is the benefit net of tax. Thus, this case makes it clear that the benefit to the employer may be after the deduction of corporation tax.

Therefore, the total net benefit derived by Unilever from the patents was estimated to be £17 million. This represents an average of a little over £2 million a year over the eight-year period in which Unilever received licence fees in respect of the patents.

Was this of outstanding benefit to the employer, having regard to, among other things, the size and nature of the employer’s undertaking?

The first consideration was to determine the relevant undertaking in the circumstances of this case. The UKIPO hearing officer considered that the reality of the situation was that researchers were doing work that was going to be exploited by the Unilever group as a whole, and thus it was necessary to consider whether the benefit from the patents was outstanding in the context of the Unilever group as a whole. The judge considered this reasoning to be impeachable. Thus, the judge clarified that the meaning of 'employer’s undertaking' is not necessarily limited to the specific company which entered into the employment contract with the relevant employee, but may well include a wider group.

With respect to whether the benefit was outstanding, the judge considered that the hearing officer’s decision was a valued judgment involving a multi-factorial assessment. The assessment did not look simply at overall turnover or profits and thus, because of the size of Unilever, made it impossible for any individual inventor’s contribution to be outstanding. However, it was acknowledged that different undertakings will have different leverage to be able to make more or less benefit out of their activities. Ultimately, there is no simple test – it is a matter of looking at the benefit in the overall context and determining whether, in view of all the facts, the benefit to the employer was outstanding.

Thus, the judge dismissed Shanks’s appeal.

Comment
This case illustrates that for an employee to succeed in any such claim, the patented invention must be of really exceptional value to the employer.

The case represents good news for employers with research and development based in the United Kingdom, and may encourage other employers to base their innovation here. However, the outcome may provide little incentive for inventors to work in the United Kingdom. The overall effect on UK innovation is therefore not a straightforward equation.