On 18 January 2017, the Court of Appeal handed down its decision in Shanks v Unilver, rejecting an inventor’s claim for compensation on the basis that the patent did not constitute an “outstanding benefit”.
Patten LJ gave the lead judgement, with Briggs LJ and Sales LJ concurring, upholding Arnold J’s decision in the high court, which in turn upheld the original decision by the Hearing Officer for the UKIPO.
Section 40 of the UK Patents Act 1977 (the Act) provides for employee inventors to be compensated for their contribution when a patent granted for an invention made by them has been of ‘outstanding benefit’ to the employer’s undertaking.
The Act requires that, when assessing the benefit of the patent, regard should be had “to the size and nature of the employer’s undertaking”.
The amount of compensation awarded is legislated by section 41 of the act. Section 41 requires that the compensation is such that the employee will secure “a fair share (having regard to all the circumstances) of the benefit which the employer has derived, or may reasonably be expected to derive, from the patent”.
Professor Ian Shanks was employed by the Unilever Group in the early 1980’s in research and development role. During the course of his employment he invented an electrochemical test device, for which a patent was granted to Unilever (EP (UK) 0170375). The device was so successful that the approach underlying the invention was eventually adopted by most of the companies in the field.
Unilever did not develop a commercial product relating to the patent, but did derive benefit from the patent by first licensing it out, and then selling off part of its business along with the patent to a third party.
In the original UKIPO case the total value of the benefit to Unilever was held to be £24.5 million. The hearing officer deemed this not to be ‘outstanding’, and ruled that had it been outstanding a ‘fair share’ would have been 5% of said benefit.
Arnold J dismissed the High Court appeal, upholding the decision that the benefit of the patent was not ‘outstanding’. Arnold J went on to rule that tax should have been taken into account when assessing the benefit of the patent, leading to the value of the benefit being reduced from £24.5 million to £17 million. He also reduced the ‘fair share’ from 5% to 3%. It is worth noting that this is in line with the other major case in this area, Kelly v GE Healthcare Ltd, where 2% was awarded to the lead inventor and 1% to another inventor.
The Court of Appeal
A further appeal of the case was allowed as it was believed that it raised important questions regarding what constitutes ‘outstanding benefit’ and how it should be calculated.
Professor Shanks appealed the earlier decisions that the patent did not confer an ‘outstanding benefit’ on Unilever; he also maintained his submission that the calculation of benefit should include an allowance for the time value of money and that a fair share of the benefit would be at least 33% not the 5% or 3% of the earlier decisions. Finally, he requested that Arnold J’s ruling regarding the consideration of tax when calculating the benefit of the patent should be overturned.
The Court of Appeal judges were unanimous in their dismissal of Professor Shanks’ appeal. Patten LJ gave some useful insight regarding the calculation of the benefit and the decision of whether it is outstanding. Unfortunately, no decision was given regarding what would have constituted a ‘fair share’.
Patten LJ confirmed that a decision based entirely on comparing the income from the patents and the profits of the undertaking would amount to an error in law. This can be seen from the Act itself which states:
“the patent is (having regard among other things to the size and nature of the employer’s undertaking) of outstanding benefit to the employer”
It was further noted that, although ‘benefit’ is defined in s.43(7) of the Act, there is no statutory definition of ‘outstanding’. He stated that ‘outstanding’ is a relative concept and it is a matter of looking at the benefit in the overall context and determining whether in view of all the factors the benefit to the employer was outstanding. While turnover and profitability are relevant factors, they are not the only factors.
Patten LJ held that the Hearing officer had correctly used a multi-factorial approach and confirmed the earlier decision. He stated that the employer’s undertaking is not limited to other patents and must include the whole of the employer’s business.
The decision also confirmed that the Hearing officer was correct in the weight he attached to the scope of Professor Shank’s role, initiative and inventiveness, and that these factors were more relevant to what amounted to a ‘fair share’ than determining whether the benefit was outstanding.
It is worth noting that the decision regarding whether the benefit was outstanding was made despite Patten LJ ruling that corporation tax should not have been taken into account. Specifically, he considered that Arnold J was in error when considering the benefit as equivalent to a licence income net of tax.
“The incidence of tax is unconnected to the financial benefit which the patent produced for the employer.”
Accordingly, the benefit to the employer should be considered to be the original figure of £24.5m.
Time value of money
Patten LJ said very little regarding the Apellant’s submission that the time value of money should be considered when calculating the value of the benefit, he referenced and agreed with Arnold J’s earlier decision. However, Briggs LJ submitted a different view arguing that there will be cases where the time value of money will need to be recognised:
“Where for example the income stream from the invention accrues over a long period of time, but needs to be compared with the size and nature (including turnover and profitability) of the employer’s undertaking, 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. This is simply to ensure that like is compared with like, rather than to attribute to the benefit of the invention the employer’s use of the income from it after receipt.”
Sales LJ agreed with Patten LJ decision except with regards to the time value of money where he agreed with Briggs LJ. In any case, all three agreed that the hearing officer had correctly applied the law and that, in this case, it was not necessary to consider the time value of money.
Disappointingly, Patten LJ did not provide a view on what would have constituted a fair share. We are therefore left with the two lower court judgements and the decision in Kelly v GE Healthcare Ltd. In both cases the final assessment was 3% split between the inventors.
The present case has provided significant insight into both the calculation of the ‘benefit’ of a patent and the decision as to whether it is ‘outstanding’. In particular it has clarified that size does matter, and although Briggs LJ expressed reservations on the point, it does appear that some undertakings will just be ‘too big to pay’. Interested parties will, however, be left wanting more with regards to the assessment of a fair share particularly since both decisions ruled on 3% despite Floyd J noting values of up to 33% were in theory possible.