Shanks v Unilever - not “too big to pay”
UK law [see note 1 below] provides that in certain circumstances an inventor is entitled to compensation in respect of an invention which is owned by their employer and for which a patent is granted.
Two scenarios are considered:
- the invention automatically belongs, as-of-right, to the employer (for example, because it arose as a normal part of the employee’s role); and
- the invention initially belongs to the employee, but is subsequently assigned to the employer.
This case, heard by the UK Supreme Court [see note 2 below], was brought under provisions for the first scenario. These provisions provide for compensation to be paid to the employee if the benefit arising to the employer is “outstanding”, having regard to “among other things … the size and nature of the employer’s undertaking” [see note 3 below].
Professor Shanks was the sole inventor, in 1982, of a technique which became widely used in the field of home blood glucose testing kits, and for which various patents were granted.
The benefit to Unilever of the patents in question was around £24m, coming from licences and the sale of the patents.
However, Unilever argued that in the context of its turnover and profits, this did not constitute an “outstanding” benefit, and this argument had prevailed at hearings at the UKIPO [see note 4 below], the English High Court [see note 5 below] and the English Court of Appeal [see note 6 below].
Some 13 years after the initial application by Professor Shanks for compensation, the Supreme Court has overturned the decision of the lower tribunals, finding that in fact the benefit was “outstanding”, and awarding Professor Shanks a 5% share of the £24m, uplifted to account for inflation since the 1990’s when the benefit accrued to Unilever.
Together with the earlier judgments, this provides useful guidance on assessing applications for employee compensation.
Although not in dispute by the time the case reached the Supreme Court, assessment of the benefits was a matter of dispute in earlier hearings, and the judgments from these provide useful guidance. The law applicable to this case considered only the benefit arising from the patent, but was amended by the Patents Act 2004 to refer to “the invention or the patent (or the combination of both)”.
It was held that the benefit was to be assessed net of directly associated costs – that is, in this case, excluding costs which arose only as a result of the patent. The hearing officer held that costs which would have been incurred whether or not a patent application had been filed could not be deducted. Accordingly, patent application and maintenance fees were deducted, but research and development costs related to the field of the invention were not taken into account, there being no evidence that these activities occurred only because of the patent [see note 7 below].
Similarly, benefits which are not directly attributable to the patent are not to be taken into account. In this case, this was straightforward: since licensing income was dependent on the existence of the patents, the benefit was equal to the licence fees received, less costs.
It may therefore be helpful for companies to record when decisions to carry out future work (for example, R&D and marketing) result directly from, or are dependent on, a particular invention or patent, in order to facilitate any subsequent assessment of the associated costs and benefits.
The Supreme Court also gave guidance on the effect of tax (holding that it is not to be considered in assessing the benefit) and the time value of money (finding that in assessing the benefit for the purpose of determining compensation, inflation should be taken into account).
“Connected persons” and the paradigm case
Professor Shanks’ employer was a company within the Unilever group called Central Resources Ltd. After Central Resources Ltd assigned the rights in the invention to Unilever plc for a nominal sum, Unilever plc filed applications for the patents.
Section 41(2) sets out how to assess the “fair share” (the compensation to be awarded) when there has been an assignment between “connected persons”. The Court of Appeal considered that the intended effect of section 41(2) was to map the facts of the case onto a “paradigm” scenario in which the same company was both the employer of the inventor and the recipient of the benefits, and that the actual benefits received by the connected assignee should be taken into account. This applies also for the assessment of the benefits for the purposes of the “outstanding” test in section 40 [see note 8 below]. It is important to note that this does not follow directly from the language of section 41(2).
This provides much-needed clarity and can (as in this case) avoid the need for the assessment of the terms of a hypothetical “arms-length” transfer. Instead, by considering the “paradigm scenario”, the actual benefits received by the assignee can form the basis of the assessment.
The commercial facts of the case also led to difficulties in determining what was to be considered “the employer’s undertaking”, the nature and size of which is required to be taken into account for the purposes of section 40(1). Here, although the group received the licence fees, the Supreme Court held that it was wrong to consider the group to be “the employer’s undertaking” [see note 9 below].
In assessing whether the threshold (“outstanding”) test was satisfied, the Supreme Court held [see note 10 below] that in this case, it was necessary to consider how the benefit of the patents to the group compared with the benefits derived by the group from other patents arising from the work of the subsidiary (Central Resources Ltd). This reflected both the commercial reality (that the benefit accrued to the group) and the requirements of the law to consider the employer (Central Resources Ltd in this case).
On the facts of this case, Unilever had achieved a very high rate of return at a very low risk, and for little effort, from the Shanks patents. In fact, all but one of the licensees had approached Unilever to request a licence. Other Unilever patents were exploited through product manufacture, which required high expenditure and generated much lower relative returns. The Shanks patents thus “stood out” from other patents.
The Supreme Court was highly sceptical of a simple comparison of the benefit to the overall turnover or profits of a group, Lord Kitchin writing “I find it hard to see how a failure materially to affect the [overall turnover/profit of the business] could, in and of itself, justify a finding that the benefit of a patent has not been outstanding” [see note 11 below].
Instead, the Supreme Court held that the benefit was indeed outstanding based on a comparison of the benefit from the Shanks patents with benefits resulting from other patents for Central Resources Ltd inventions.
Corporate structures seldom correspond to the “paradigm scenario” considered by the Court of Appeal, and the present case illustrates the challenges in scenarios where the benefit accrues to a legal entity which is not the inventor’s employer, but is somehow connected. Nevertheless, the UK courts and the UKIPO will now be less afraid to seize this particular challenge to arrive at a pragmatic outcome.
The Supreme Court has firmly dismissed as inappropriate a simple comparison of patent benefits against overall company financial figures, endorsing a broader assessment which may include factors such as the risk and rate of return associated with the patent and the employee’s duties12. This judgment thus removes a significant hurdle for employees claiming compensation in similar circumstances.
- UK Patents Act 1977, sections 40-43.
-  UKSC 45.
- UK Patents Act 1977, section 40(1).
- BL O/259/13.
-  EWHC 1647 (Pat).
-  EWCA Civ 2.
- OL/259/13 at 179-183 and  EWHC 1647 (Pat) at 58.
-  EWCA Civ 1283 at 27-28.
-  UKSC 45 at 79.
-  UKSC 45 at 48.
-  UKSC 45 at 54.
-  UKSC 45 at 51.