28 October 2019 - Authored by:Rafi Allos
In Shanks v Unilever Plc and others, the UK Supreme Court has, for the first time, handed down a decision on employee compensation for patented inventions. The Supreme Court overturned the previous decisions in the case and decided that Professor Shanks, an employee of Unilever’s UK research subsidiary, CRL, had made a patented invention that had been of outstanding benefit. This was principally assessed according to how the benefit of Prof Shanks’ patents to the Unilever group compared with the benefit to Unilever derived from other patents arising from research work carried out by CRL. As a result, the Supreme Court awarded Prof Shanks £2m as his fair share of the £24m net benefit that Unilever had derived from Prof Shanks’ patents.
This case is important in assessing how a benefit is to be deemed ‘outstanding’. In particular, whether larger companies might be considered ‘too big to pay’ in the sense that the benefit conferred by a patent, whilst significant, is not considered to be ‘outstanding’ in comparison with the overall turnover and profits of a company. Under the applicable provisions of the Patents Act 1977 in Shanks v Unilever, certain employees (principally those who are mainly employed in the UK) are entitled to receive compensation of a ‘fair share’ of the benefit which an employer has derived, or may reasonably be expected to derive, from a patent (whether granted under UK law or any other law) belonging to an employer provided that the patent is of ‘outstanding benefit’ to the employer ‘having regard … to the size and nature of the employer’s undertaking’.
Prof Shanks’ relevant invention was that of the Electrochemical Capillary Fill Device which facilitates the measure of glucose in blood. Prof Shanks accepted that rights to his invention belonged to CRL and CRL assigned those rights to other Unilever group companies which filed patents in various territories. Unilever did not commercially exploit Prof Shanks’ invention itself but through licensing the patents and later selling them, it was found to have received a net benefit attributable to them of £24m.
Lord Kitchin, giving the judgment for the Supreme Court, answered two principal questions:
- What are the governing principles to correctly assess outstanding benefit to an employer?
- How should a fair share of an outstanding benefit be assessed?
(1) Outstanding benefit
The starting point of the outstanding benefit analysis is the identification of the ‘employer’ which Lord Kitchin held is the inventor’s ‘actual employer’, i.e. CRL.
As to the meaning of ‘outstanding’, Lord Kitchin held this is an ordinary English word meaning “exceptional or such as to stand out”. However, it requires asking in relation to what must the benefit from the patent be ‘outstanding’ and which factors may be taken into account when making that assessment. As the Patents Act 1977 specifically states that the Court must have regard to the size and the nature of the employer’s undertaking, the points of greatest wider relevance from the Supreme Court’s judgment are the definition of ‘the employer’s undertaking’ and the relevance of the undertaking’s size and nature.
Lord Kitchin assessed the ‘employer’s undertaking’ in this case to be the research that CRL was conducting for the Unilever group as opposed to the entire business of the Unilever group which would include aspects of Unilever’s business that is unrelated to the business of CRL. This was due to the commercial reality of the relationship between the parties as Prof Shanks was employed by CRL to create inventions for the benefit of the Unilever group.
It was therefore important that the benefit was not analysed by reference to the ‘overall turnover and profits generated by Unilever’ including all products, but instead the relevant inquiry was to compare the benefit derived from the Shanks patents with the benefits derived from other research work carried out by CRL. This would avoid the potential effect of making large companies ‘too big to pay’ by looking at their overall turnover. As the hearing officer at first instance had focused on a comparison of Unilever’s overall income and profits with the benefits Unilever derived from the Shanks patents, Lord Kitchin concluded that an error of principle had been made which required the first instance decision to be overturned.
Lord Kitchin concluded that the Shanks patents were of outstanding benefit based on the hearing officer’s findings: the Shanks’ patents had produced a very high rate of return; Unilever had made a very small effort to commercialise them; and by licensing the patents, Unilever had generated substantial benefit at no significant risk. This benefit was monetarily significant in comparison with the benefit to Unilever of other patents.
(2) Fair Share
Lord Kitchin agreed with the hearing officer that the appropriate figure for a ‘fair share’ of the outstanding benefit was 5%. He rejected Prof Shanks’ argument that 10-20% of the benefit would represent a fair share on the basis that, while the patent generated a new ‘stream of income’ for Unilever, this was brought to fruition by Unilever negotiating licences and Prof Shanks played no part in this. Furthermore, Prof Shanks was employed to invent and, in making the invention, did what he was employed to do. Lord Kitchin therefore awarded Prof Shanks with compensation of £2m accounting for the time value of money by factoring in an average inflation rate of 2.8% on the net attributable benefit of £24m.
The Supreme Court’s judgment means that Courts will have regard to the commercial reality of a situation in assessing outstanding benefit in the context of inventors working within corporate groups by looking at the benefit a patent confers to an entire corporate group where an inventor’s actual employer is carrying out research for the benefit of the whole group. However, when assessing whether the benefit is ‘outstanding’, the Court will not simply look at the income derived from a patent as compared with the overall turnover and profitability of the corporate group but instead draw a comparison with other research carried out by that employer for the group.
This post has been co-authored by Alexandra Woolhouse.