Entitlement of employees to additional compensation for patented inventions

January 2020  |  SPECIAL REPORT: INTELLECTUAL PROPERTY

Financier Worldwide Magazine

January 2020 Issue


In October, the UK’s Supreme Court handed down a decision of importance to businesses whose employees develop new, patentable inventions and particularly for those whose research and development (R&D) is carried out in group companies that are not also responsible for other commercial activities. The Court overturned a series of decisions of the lower courts and awarded an employee substantial compensation.

Under section 40 of the UK’s Patents Act 1997, if an employee makes an invention, the rights to which belong to their employer, for which a patent has been granted, and the invention or the patent is of outstanding benefit to their employer, the employee may claim compensation. To date, very few successful claims have been made. The requirement that the invention or patent must be of ‘outstanding benefit’ to the employer provides an intimidating threshold.

In one of the few successful claims, Kelly and Chiu v. GE Healthcare Ltd, the patented invention transformed the fortunes of the employer, Amersham, which was subsequently acquired by GE Healthcare. Without the patents Amersham may have faced financial crisis; with them an invention that cost about £2.5m to develop achieved sales between 1993 and 2007 in excess of £1.3bn.

The position in Shanks v. Unilever Plc and others was rather different. Professor Shanks was employed by Central Resources Ltd (CRL), a part of the Unilever group, from 1982-1986. At the time, CRL was not a trading company, but did employ all of Unilever’s UK-based research staff. Professor Shanks’s main responsibility was to develop biosensors for process control and process engineering. Early in his employment he conceived of an invention, of which there were two variants, concerning the use of biosensors to measure glucose concentration in bodily fluids, something that could be employed in the monitoring and treatment of diabetes.

Unilever successfully registered a number of patents relating to the invention. Though the invention was slightly outside Professor Shanks’ brief, both sides accepted that the rights to the patents belonged to CRL from the outset.

Unilever did not initially invest in developing the inventions. It did, however, maintain the patents, and was able to sell some of the patents and licence others. After deducting the relatively minimal costs incurred by Unilever in protecting and marketing the patents, the financial benefit derived from them was considered to be about £24m.

In 2006, Professor Shanks brought a claim before the Comptroller General of Patents against CRL, and other members of the Unilever group, for compensation, claiming an entitlement to a fair share of the benefit.

At first instance, the hearing officer considered that the whole of the Unilever group’s business operations needed to be taken into consideration when assessing whether the patents were of ‘outstanding benefit’ or not. In dismissing Professor Shanks’s claim, he held that in the context of Unilever’s multi-billion pound operations as a whole, £24m was not an outstanding benefit. The hearing officer’s decision was upheld on appeal by both the High Court and Court of Appeal.

The key question before the Supreme Court was whether the hearing officer was correct to assess the benefit of the patents in light of the whole of the Unilever group’s profits. Two ancillary, but significant, points of law were also examined, concerning the correct assessment of what a ‘fair share’ of an outstanding benefit is. Firstly, whether corporation tax can be deducted from the benefit to the employer, and secondly, whether the time value of money, for example its change in real value over time due to inflation, ought to be considered.

The Court unanimously ruled in Professor Shanks’s favour and awarded him £2m in compensation. It found that a fundamental error had been made by the hearing officer and lower courts in comparing the benefit of the patents to the revenue generated by the Unilever group as a whole. This approach failed properly to contextualise the patents and the benefits derived from them.

Various factors are relevant to the determination of whether a patent is of outstanding benefit. The rate of return on the patent, the level of risk taken by the company in developing the inventions, whether the benefit was anticipated, and the level of effort required on the part of the company to exploit such a benefit were all considered among these factors.

The Supreme Court determined that in this case the correct approach was to consider whether the benefit to the Unilever Group was outstanding, relative to the benefit to it of patents for other inventions emanating from CRL. It held that they were. The patents had generated a better rate of return than most Unilever group patents, with Unilever having had to make relatively little investment or effort to secure licensees of the patents.

As to the assessment of the fair share, the Supreme Court considered it to be unreasonable to deduct corporation tax from the benefit – corporation tax was levied on the benefit, not before it was accrued. Further, the employee would have to account for tax themselves on any share given to them, such that deducting corporation tax would effectively tax them twice on their share. It was also fair to account for the time value of money, as failure to do so would not account properly for the deleterious effect of inflation on the sums involved.

The Supreme Court’s decision will be welcomed by employees and of concern to employers. Although the bar for employees successfully claiming compensation for creating a patented invention remains a high one, in light of the Supreme Court’s decision an invention does not have to be as transformative for a business as previously thought. The decision is particularly relevant for large corporate groups who focus the employment of their UK-based researchers in non-trading subsidiary companies, as the test for whether the employer has received an outstanding benefit will in the future be applied based on the output of the subsidiary, and not the group as a whole.

Following the judgment, large corporate groups may need to consider restructuring their R&D functions in the UK, by including them within trading companies, to make a finding of an ‘outstanding benefit’ somewhat less likely. Employers should also reassess their own internal, employee compensation schemes, if any, to take account of the judgment, to ensure that any claims can be dealt with appropriately without the need for lengthy and expensive legal proceedings.

 

David Fyfield is an associate solicitor and Daniel McDonagh is a trainee solicitor at Charles Russell Speechlys LLP. Mr Fyfield can be contacted on +44 (0)20 7203 5200 or by email: david.fyfield@crsblaw.com.

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