Patent Wars: A New Hope (or, the Inventor Strikes Back!)

On 23 October 2019, the Supreme Court of the United Kingdom handed down its highly anticipated decision in Shanks v Unilever Plc and others [2019] UKSC 45.

In this case, a former employee of the Unilever group applied for compensation under the Patents Act 1977 (UK) in respect of patents for an invention he had developed in 1982, on the grounds that the patents had been of outstanding benefit to Unilever.

The Supreme Court upheld Professor Shanks’ appeal, finding that the patents were of outstanding benefit to Unilever, and that he was entitled to a fair share of that benefit.

The Supreme Court’s decision was made despite the vast majority of previous cases having held in favour of the employer.  Although this decision will give new hope to employees, it remains to be seen whether this will lead to an increase in employee claims in the UK for additional compensation in respect of patents of outstanding benefit to employers.

In this article, we discuss key parts of the decision and the implications for UK businesses and multinationals with employees carrying out R&D in the UK.  Although there is no corresponding right under Australian law, we also look at best practice for Australian businesses in securing ownership of inventions and other intellectual property rights and related compensation considerations.

Background

From 1982 to 1986, Professor Shanks was employed by Unilever UK Central Resources Ltd (“CRL”) to develop biosensors for use in process control and process engineering.  CRL was part of the Unilever group, known for famous consumer brands such as Lynx, Dove, Magnum and Rexona.  At the time, CRL employed all of Unilever’s UK-based research staff.

After working at CRL for a matter of only months, Professor Shanks came up with two inventions for testing glucose levels in blood, serum or urine.  The rights in these inventions were owned by CRL because they were made in the course of Professor Shanks’ employment (section 39(1) of the Patents Act), and CRL later assigned these rights to two parent companies in the Unilever group for a nominal fee.

Unilever obtained patents for these inventions in the UK and in Australia, Canada, Japan and the USA.  At the time, Unilever was not interested in getting into the business of glucose testing, and did not consider the inventions to be of key importance to the business.  It made only modest investments to protect and licence the patents, but ultimately earned around £24m from licensing fees and ultimately selling the patents to a third party.

Procedural history

In 2006 (almost 20 years after leaving CRL), Professor Shanks applied to the Comptroller General of Patents for compensation under section 40 of the Patents Act 1977.

The hearing officer found that the benefit provided by the patents was not “outstanding” in light of Unilever’s enormous profits (including those from its highly successful products such as Viennetta ice cream, spreads and deodorants).  In coming to this conclusion, the hearing officer compared the case to Kelly and Chiu v GE Healthcare Ltd [2009] EWHC 181, where the patents in question were so crucial to the relevant entity’s success that without them, the entity would have faced a financial crisis.

Professor Shanks unsuccessfully appealed the hearing officer’s decision to the High Court, and to the Court of Appeal.  He then appealed to the Supreme Court, the final court of appeal in the UK, where his persistence finally paid off.

Supreme Court decision

The Supreme Court considered that in this context, the word “outstanding” had its ordinary English meaning, being “exceptional” or “such as to stand out”, having regard to the size and nature of the employer’s undertaking.  The Court held that the CRL’s undertaking here was the business of generating inventions and providing those inventions and patents to Unilever, and not (as the hearing officer had incorrectly determined) the whole of the business of the Unilever group.  The Court noted that in most cases, identifying the relevant “undertaking” is straight-forward, but this case was more complex because CRL was part of a larger group of companies, and its work was exploited by the Unilever group as a whole.  Of course, this is the commercial reality of many large corporate groups, particularly those with large research and development divisions.

Turning to the question of what is “outstanding”, the Court said that a straightforward comparison of profitability may, but will not always, give a sufficient answer.  This was one of the most anticipated findings of the Supreme Court’s decision, because Professor Shanks had argued in the courts below that under a purely profit-based analysis, businesses like Unilever would always be “too big to pay”.  This was particularly relevant here because the earnings from the patents were miniscule in comparison to Unilever’s earnings as a whole.

Ultimately, the Court approached the question of “outstanding benefit” by determining the extent of the benefit of the patents to the group, and how that benefit compared with benefits derived by the group from other patents for inventions arising from CRL’s research.  This was a markedly different approach to the approach taken by the courts below.

Applying this approach, the Court noted that Unilever enjoyed substantial and significant rewards from the patent at no significant risk, and that these rewards stood out from the benefits generated by other Unilever patents.  Furthermore, unlike the benefits Unilever derived its other product areas (which were often protected by patents), the benefit from the patents was not attributable to Unilever’s size or success (e.g. its “financial muscle” in licensing negotiations), or wider assets or infrastructure (e.g. its goodwill).  For this reason, the benefit was “outstanding” within the meaning of section 40 of the Patents Act, and therefore Professor Shanks was entitled to a fair share of that benefit.

In assessing what amounted to a “fair share” of the benefit, the Court considered that:

  • it was not appropriate to take into account the amount of tax paid by Unilever (ie to reduce the benefit to the amount net of tax); and
  • the “time value of money” was a benefit for the purposes of section 41, and so Professor Shanks was entitled to an uplift for inflation.

The Court agreed with the hearing officer’s assessment that 5% represented a fair share of the benefit, and therefore awarded Professor Shanks £2m in compensation.  In coming to this percentage, the hearing officer correctly (in the Court’s opinion) considered the nature of Professor Shanks’ duties; the fact that he was employed to invent (although ultimately invented something outside the main focus of his duties); his remuneration; the level of effort and skill he contributed; and Unilever’s contribution to the invention, including its efforts to license the invention, which here were regarded as “serious but not exceptional”.

Implications for businesses with UK operations

To date, there has been only a handful of decided cases on the application of section 40 of the Patents Act.  Up until the Supreme Court’s decision in this case, the bar for what amounts to an “outstanding benefit” was set very high.  In fact, the only employee to successfully claim compensation under the provision was one whose patent “transformed” the business of the employer, generated in excess of £1.3 billion and saved the business from a financial crisis (see Kelly, discussed above).

The Supreme Court’s decision in Shanks arguably sets a more reasonable and commercially realistic approach for what might be “outstanding” in the context of a large corporate group.  However, it is doubtful (or at least remains to be seen) that it will lead to a flood of compensation claims by inventors.  The bar for what is outstanding remains high, and in many cases a simple profitability assessment may still be an appropriate way to approach this question.  There are also a number of practical considerations that will continue to reduce the likelihood of claims (e.g. inventors wanting to avoid getting a reputation as someone who will bring a claim).

Importantly for businesses, the right to compensation for an invention applies regardless of anything to the contrary in an employment contract (except for collective agreements) – although bonuses and salaries will be taken into account in assessing what is a “fair share” of the relevant benefit.  Employers with employees carrying out research and development in the UK, and particularly employers in patent-heavy businesses, might want to consider devising compensation schemes to appease inventors and thereby reduce the risk of the statutory compensation regime ever being raised.

Practical tips for Australian businesses

In Australia, there is no corresponding provision in the Australian Patents Act or other legislation which affords employees a right to claim additional compensation for patents based on their invention that are of outstanding benefit to the employer.  In the absence of an express clause in the employment contract, the position in Australia is that an employer will own a patent that an employee develops while doing what they are ordinarily employed to do, during the term of their employment, during work hours and using the employer’s materials.  However, if an employee is not employed to invent and/or they develop a patentable invention in their own time, the employee may own the patent.

Therefore, as between employer and employee, ownership of inventions (and resulting patents) and other intellectual property rights, together with compensation payable for inventions developed by the employee (i.e. whether compensation is included in salary and benefits and/or additional bonus/payment schemes are payable), should be expressly addressed in the employment contract.

This article was prepared by Tegan Camm with the assistance of Fiona Tyas and Tom Gilbert.