Yes, it matters – but it’s not all about size

The Court of Appeal has upheld the decisions of the High Court and the UK Intellectual Property Office (UKIPO) that Professor Shanks, an employee of Unilever, was not entitled to inventor’s compensation. The appeal court dismissed Shanks’ further appeal against the UKIPO rejection of his multi-million pound claim for inventor’s compensation against his former employer, Unilever, in respect of patents which he claimed to be of “outstanding benefit” to Unilever.

Shanks had worked as a research engineer at Unilever. The invention, an electrochemical device which had particular application for testing levels of glucose in blood samples and was therefore useful in the treatment of diabetes, did not relate to Unilever’s main business and Unilever did not commercialise the technology itself. Instead, the related patent was exploited under a licensing arrangement, which generated approximately £24.5 million in net benefit from the patents. Shanks sought compensation from Unilever under Section 40(1) of the Patents Act 1977.

At the UKIPO hearing, the hearing officer found that the benefit obtained by Unilever from the patents was not “outstanding”; instead it was found to be useful but not vital. However, if the benefit had been found to be outstanding, Shanks’s fair share by way of compensation would have been 5% of the benefit.

Shanks appealed the UKIPO decision to the High Court. Mr Justice Arnold dismissed the appeal, making further findings against the appellant as follows: 

  • Tax should have been taken into account when calculating the benefit obtained from the patents.
  • Regarding what would be the appropriate fair share for the inventor if the benefit had been found to be outstanding, Arnold stated that it should be no more than 3% in line with Kelly v GE Healthcare Ltd [2009] EWHC 181, where the invention in question had helped the employer to avoid a crisis in its business and transformed the fortunes of the company (for a full discussion of the High Court’s decision, please see "A measure of outstanding: employee inventor compensation in Shanks v Unilever"). Shanks appealed again.

Court of Appeal decision
Shanks repeated the point that, given the size of Unilever (annual turnover of over $50 billion), no inventor’s invention could ever be “outstanding” – the so-called 'too big to pay' argument. Shanks submitted that the hearing officer had incorrectly applied the too big to pay principle, using it to trump all other considerations.

Lord Justice Patten accepted that outstanding benefit cannot be determined by just comparing the income generated by the patent with overall turnover of the employer – in the case of Unilever, that approach would exclude most patents. Multiple factors needed to be taken into consideration, not just the size and turnover of the employer. Patten held that the hearing officer had correctly performed this necessary multi-factorial assessment in evaluating the merits of both sides – he did not decide the case purely on the basis that Unilever was “too big to pay”. However, even though outstanding benefit is a relative concept which must be measured against a number of factors, a straightforward profitability comparison might well be correctly used for making such a determination regarding a smaller undertaking, where the figures speak for themselves.

Lord Justice Briggs summed this up nicely, stating that while it may be going too far to say that Unilever was simply “too big to pay”, there was no escaping the fact that Shanks might well have succeeded if he had worked for a smaller undertaking than Unilever.

With respect to the time value of money (ie, the argument that the amount of compensation should also take account of the fact that Unilever had had the revenue for quite some time), Patten confirmed that it is the opening balance that counts – the financial benefit of Unilever to be considered here was limited to direct receipts from the exploitation of the patent rights, and did not include the fact that Unilever may have had the benefit of those receipts for some time before any compensation award under Section 41(1). Briggs and Lord Justice Sales had a slightly different view, and indicated that there might well be cases where the time value of money, or the “change in the real (rather than nominal) value of money over time” as Briggs phrased it, will need to be recognised (eg, where the income stream from the invention accrues over a long period of time and must be compared with the turnover and profitability of the employer, it may be necessary to adjust one or the other by reference to the change in the value of money over time if the two are not, or cannot be, compared at the same points in time). However, Briggs stated that the basis for this was simply to ensure that like and like were compared.

Regarding the issue of tax in relation to identifying the amount of the financial benefit to Unilever, Patten held that the £24.5 million should not be reduced to take account of corporation tax (an argument raised by Unilever) since, like the time value of money received, corporation tax is a consequence of the benefit rather than a part of it.

The appeal was dismissed in relation to outstanding benefit – the view of the Court of Appeal was that the UKIPO hearing officer had correctly performed the necessary multi-factorial assessment in ascertaining whether the benefit was outstanding. The court expressed no view about what should have constituted a “fair share”.

This case has confirmed that while in deciding whether the benefit from an employee’s invention is “outstanding”, the size of the employer’s undertaking should not be the sole consideration and a multi-factorial approach must be followed, such an approach might correctly be modified to some extent where the employer is a much smaller undertaking than Unilever. In such case, a simple profitability comparison might provide the answer. At the end of the day, the message seems to be that a UK employee inventor working for a small business stands a better chance of succeeding in a Section 41(1) compensation case.

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