On 23 October 2019, the Supreme Court handed down its judgment on whether Professor Ian Shanks is entitled to compensation under section 40 of the Patents Act 1977 for his contribution to an invention for determining blood sugar levels made while he was employed by Unilever. We analyse whether there has been a shift in approach to the application of this law.
Background
An inventor is employed to invent; thus, under section 39 of the Patents Act 1977, any invention made in the course of their normal duties belongs to their employer. Section 40 of the Patents Act 1977 goes on to say the employee is entitled to compensation if their invention and/or the patent for it “is of outstanding benefit to the employer”. Although this is to be determined “having regard to the size and nature of the employer’s undertaking” (section 40(1)(b) PA 1977), the term “outstanding” itself has no legal definition in this context and introduces a subjective element in the determination of whether an employee is entitled to compensation for their invention. As a result, it has historically been difficult for employees to successfully claim compensation from their employers for their inventions.
Prior to yesterday’s Supreme Court ruling ([2019] UKSC 45), the only successful claim for compensation under section 40 of the Patents Act 1977 was in Kelly v GE Healthcare ([2009] EWHC 181 (Pat)). In this case, it was stated that “‘outstanding’ means ‘something special’ or ‘out of the ordinary’ and more than ‘substantial’, ‘significant’ or ‘good’”. The outstanding nature of Kelly’s patented invention was deemed to be in the fact that it helped the company stay afloat at a particularly difficult time. This case set a high bar for meeting the outstanding benefit requirement, the implication being that the contribution of the employee’s invention needs to ensure the future success of the company or indeed rescue it from collapse.
Shanks v Unilever
While employed by Unilever in the 1980s, Professor Shanks invented a device designed to measure glucose concentrations in blood, serum or urine. The rights and patents associated with this invention belonged to his employer Unilever plc and its subsidiaries, who later licensed them out to third parties for financial benefit.
Professor Shanks initially began proceedings against Unilever at the UK Intellectual Property Office (IPO) in 2006. The Hearing Officer determined ([2013] UKIPO BL O/259/13) that the Shanks patents were worth £24.5 million to Unilever over the course of their lifecycle, largely from licencing fees received. This sum was deemed, at the time, to not be “of outstanding benefit” to Unilever as the company’s total profit margins were orders of magnitude greater. To arrive at this conclusion, the Hearing Officer took the approach outlined in Kelly v GE Healthcare; that is to “assume that the work had gone ahead, but there were no Shanks patents, and consider how Unilever’s income would have been affected”.
The inventor subsequently appealed this decision at both the High Court ([2014] EWHC 1647 (Pat)) and the Court of Appeal ([2017] EWCA Civ 2) on the grounds that any company with profit margins as large as Unilever would always be “too big to pay”. The Hearing Officer’s original decision was upheld at both appeals.
The Supreme Court’s decision
Yesterday the UK Supreme Court (SC) overturned the decisions of the Hearing Officer and the lower courts and awarded Professor Shanks £2 million compensation for his work in obtaining the Shanks patents. The SC cited four flaws in the Hearing Officer’s analysis in support of its decision ([2019] UKSC 45 at [79]-[82]).
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The hearing officer considered Shanks’ employer to be the entire Unilever group. In reality, Shanks was employed by Unilever UK Central Resources Limited (“CRL”), a subsidiary whose undertaking was the business of generating inventions. In particular, it was the size of this undertaking that was ruled to have been improperly considered when evaluating the benefit of the patents to the company.
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The SC asserted that the hearing officer should not have focused on “overall turnover and profits generated by Unilever, as illustrated by the size of its business in making and selling ice cream, spreads and deodorants”. While a proportion of the revenue generated from these products may be attributable to related patents, this proportion may be limited for products such as ice cream, spreads and deodorants.
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It was further acknowledged that the majority of income generated from the Shanks patents was from low cost, low risk licensing and therefore directly attributable to the patent. Notably, all but one of the licensees approached Unilever. Therefore, the SC asserted: “the size and success of Unilever’s business as a whole [did not play] any material part in securing the benefit it has enjoyed from the Shanks patents”.
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Finally, the SC deemed that comparing benefit derived from a patent with total company revenue would leave certain companies “too big to pay”. While the hearing officer initially rejected this kind of comparison, they subsequently applied it nonetheless in arriving at their decision.
The result
This judgment outlines a more reasonable approach for assessing whether a patent is of outstanding benefit to the employer. Dominant factors influencing the SC’s decision were decoupling of the research branch in which Professor Shanks was employed from the entire Unilever umbrella and the income from the patent arising through licensing and with minimal effort on the part of Unilever. While the approach of comparing total profits of a company to the financial benefit of a patent has not been entirely dismissed by the SC, the SC has ruled that contextual factors, such as those discussed above, must be taken into account, if relevant.
It remains to be seen whether this judgment will open the door to further employee compensation actions. However, we note that in both this judgment and in Kelly, contextual factors played a key part. In our view, cases where pure monetary value is attributable to a patent without supporting contextual factors may be unlikely to meet the “outstanding benefit” threshold required by section 40 of the Patents Act 1977. It is also worth remembering employers should keep a record of specific contributions made by inventors to inventions and the context in which those contributions were made, in case such evidence is ever required in proceedings that might not be initiated for several years after the inventions were devised and patent applications filed.
Please contact Tom Leonard, Gregory St Clair Jones, Alexander Crew or your usual Kilburn & Strode advisor with any questions.