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Thursday, 9 February 2017

Too big to pay? Employee-inventor compensation in the Court of Appeal

Can an employer be 'too big to pay' employee-inventor compensation under s40(1) of the Patents Act?  The Court of Appeal has provided guidance on the relevance of this issue to the question of "outstanding benefit" in the long running dispute of Shanks v Unilever PLC and others [2017] EWCA Civ 2.  The headline summary is that the employer group's turnover and profitability are highly relevant factors in assessing whether the benefit to an employer is 'outstanding' - and can, as in this case, prove decisive.  The dispute was previously reported on the IPKat at High Court level here

The law and the claim

S40(1) of the Patents Act (prior to its 2004 amendment which was the version in force for this claim) provides as follows:

"40. (1) Where it appears to the court or the comptroller on an application made by an employee within the prescribed period that the employee has made an invention belonging to the employer for which a patent has been granted, that the patent is (having regard among other things to the size and nature of the employer's undertaking) of outstanding benefit to the employer and that by reason of those facts it is just that the employee should be awarded compensation to be paid by the employer, the court or the comptroller may award him such compensation of an amount determined under section 41 below." (emphasis added)
"Benefit" is defined by s.43(7) as "benefit in money or money's worth".  "Outstanding" is not defined in the legislation. 

To succeed in his claim Prof Shanks therefore needed to establish as a threshold issue that the patents had been of "outstanding benefit" to his employer, and also that it was just to award him compensation.

Factual Background

The factual background is set out in an appendix to the judgment.  Some salient facts are as follows:
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  • Prof Shanks was employed by Unilever UK Central Resources Ltd from 5 May 1982 to 3 October 1986; 
  • It was common ground that Prof Shanks was employed to invent;
  • He initially received £18,000 per year (plus a Volvo), rising to £29,000 (and a BMW);
  • He built an electrochemical capillary fill device (ECFD) during the course of his employment (albeit at home), and he also developed a fluorescent capillary fill device (FCFD);
  • The claim related to EP 0 170 375 and related patents (the Shanks Patents) which claimed priority from two documents on which Prof Shanks was the sole named inventor;
  • Most companies in the field of blood glucose testing took non-exclusive licences for the Shanks Patents. The Shanks Patents were the subject of an intra-group assignment, and were subsequently sold to a 3rd party;
  • The hearing officer concluded that the total gross benefit to Unilever from the Shanks Patents was £24.5M, but that this was not an 'outstanding benefit'.
Back to the Volvo...
Issues on appeal

Unilever's central argument was that £24.5m, although not an inconsiderable sum, was dwarfed by the turnover and profits of the Unilever Group as a whole.  Prof Shanks' legal team argued that this was essentially a 'too big to pay' submission. 

The Court of Appeal observed that "outstanding" was a relative concept, which must be measured against the relevant factors in each case.  What constitutes the undertaking for the purposes of the assessment under s40(1) must be based on the economic and business realities of the employer's organisation - rather than simply restricting it to the employing entity.  On the facts, the hearing officer had been entitled to conclude that there was no outstanding benefit to the employer.  Briggs LJ dismissed the appeal "with some reluctance" because Prof Shanks might well have succeeded had his employer been a much smaller undertaking than Unilever. The fact that it was the only matter which Parliament had made express reference meant that it could not be disregarded by the Court of Appeal. 

Another ground of appeal raised by Prof Shanks was that 'the time value of money' should be included in the calculation of the benefit to the employer, and also in calculating his fair share. Unilever was in receipt of licence fees from 1996 until 2004 and the Shanks Patents were sold in 2001.  Between those dates and the hearing at the UK IPO in 2012, Unilever had the use of the money which was in itself a financial benefit to the Unilever group.  Patten LJ (who wrote the main judgment) agreed with the High Court that the time value of money should be excluded from the calculation - it is the opening balance that counts.  Briggs and Sales LJ qualified this conclusion (obiter) in that the time value of money may need to be taken into consideration in assessing outstanding benefit and the employee's fair share in the event that the real value of money over time had changed (e.g. as a result of inflation or interest rates). 
 
The Court of Appeal also noted that corporation tax (which on the facts was significant at 30%) should not be deducted from the calculation of "benefit" to the employer. 

6 comments:

Anonymous said...

It's time this law was changed, to remove that "size and nature of the employer's undertaing" wording, which is clearly not at all fair.

Kant said...

What is not fair? As an engineer/scientist you can take a job with a small new-co "at the cutting edge" where your invention might become a world beater and be worth millions to you or you can take a job at a large multinational and accept that in return for a relatively secure position, the statutory reward for your invention might be somewhat lower.

Compo said...

I guess that the legislator may have intended that where a small entity derives a large contribution from a patent, that may be ascribed fully to the inventive activity resulting in the patent, deserving of a special reward, but where a large entity derives a large benefit, that may be ascribed to "building on the shoulders of giants", access to research resources, marketing channels, brand power, legal fighting funds and the like, so the contribution to the large benefit is proportionately smaller.

Anonymous said...

I think this case has been running for about 10 years and been through six hearings (IPO, High Court & Court of Appeal both on a preliminary point and then the main issue). I wonder what that has cost - as much as the inventors were awarded in Kelly v GE Healthcare?

Anonymous said...

This perpetuates a general public impression that large companies benefit disproportionately from our current IP system. Small companies are required to reward inventors for an outstanding invention, whereas large companies are not required to reward inventors for the same invention. I accept that the size of the large company may contribute to the invention's commercial success, so there may be an argument that the % reward should be smaller (inversely proportionate to the size of the company?), but surely not that there should be no reward whatsoever?

trin1728 said...

re:Kant

That is not the point. One of the principle foundations of the patent system is a reward for inventive merit per se. The absolute value of my invention on the market is irrespective of the size and nature of the company that markets it.

There is no doubt that the relative worth of say, £20 million, is different to a small Biotech start-up compared to a global multinational - but at the same time, I'm almost certain that the multinational will not just ignore an extra £20 million in the bank. Regardless, the fact that something is valued that much clearly shows, ultimately, a benefit to and demand from the public, classifying it as a worthwhile invention. What right does a third party have to then decide on the basis of poorly worded legislation that because of the nature of the employer (which I will argue has no bearing on the inventive skill shown by the inventor(s)), the inventors should somehow not be rewarded for their contribution to society?

Also, to think that working for a large multinational guarantees job security clearly shows that you have no experience in the modern science industry.

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