Employees' Inventions - Shanks v Unilever

Colworth House, Unilever's Research and Development Facility
Author  Lecomte99   Copyright waived by the author   Source Wikipedia Colworth House
















Jane Lambert

Supreme Court (Lady Hale, Lord Reed, Lord Hodge, Lady Black and Lord Kitchin) Shanks v Unilever Plc  [2019] UKSC 45 (23 Oct 2019)

Nowadays most commercially successful inventions in the United Kingdom are made by scientists, engineers or other technically qualified people working for companies, research institutes or universities at places like Colworth House in Bedfordshire.  Most of those scientists, engineers and technicians are paid very well for their work and many of them receive side benefits like company cars, private health insurance and stock options.

Employees' Inventions

It is for that reason that s.39 (1) of the Patents Acr 1977 provides:

"Notwithstanding anything in any rule of law, an invention made by an employee shall, as between him and his employer, be taken to belong to his employer for the purposes of this Act and all other purposes if -
(a) it was made in the course of the normal duties of the employee or in the course of duties falling outside his normal duties, but specifically assigned to him, and the circumstances in either case were such that an invention might reasonably be expected to result from the carrying out of his duties; or
(b) the invention was made in the course of the duties of the employee and, at the time of making the invention, because of the nature of his duties and the particular responsibilities arising from the nature of his duties he had a special obligation to further the interests of the employer’s undertaking."

The provision is an enactment within the meaning of s.7 (2) (b) of the Act that entitles the employer to the whole of the property in the invention in preference to the inventor.

In most instances, the inventor's salary and benefits are an adequate reward for his or her services but s.40 (1) recognizes that there are circumstances where an employee's invention has been of such outstanding benefit to his or her employer that it is just that the employee should be awarded compensation over and above what he or she will have received in salary and benefits. S.41 (1) further provides that any award of compensation to an employee under s. 40 (1) shall be such as to secure for the employee a fair share (having regard to all the circumstances) of the benefit which the employer has derived, or may reasonably be expected to derive from the invention or patent for the invention.

Prof Shanks's Employment

Ian Alexander Shanks is a Visiting Professor in the Department of Electronics and Electrical Engineering of the University of Glasgow.  Between May 1982 and October 1986, he worked for Unilever UK Central Resources Ltd. at Colworth House with the brief of developing biosensors for use in process control and process engineering.  He received an annual salary of £18,000 and a company car.  Unilever UK Central Resources Limited was a wholly-owned subsidiary of Unilever Plc.  It employed all Unilever's UK based research staff but was not a trading company as such.

The Invention

Following a visit to Professor Anthony Turner and Professor John Higgins at Cranfield University who were carrying out work on the use of biosensors for monitoring diabetes in July 1982, Dr Shanks (as he then was) wrote a paper entitled “Report on new opportunities afforded by electronic sensors”.   In that paper, he identified a number of “new product opportunities”, one of which was a limited re-use or disposable sensor for monitoring glucose, insulin or immunoglobulin levels in diabetics.  

He had often noticed how a droplet of liquid placed on the edge of the glass plates of a liquid crystal display (“LCD”) was drawn by capillary action into the 10-micron gap between them. He realized the same phenomenon would occur with other liquids such as blood or urine. He appreciated how it could be used with etched or the printed planar electrodes and enzyme electrochemical techniques he had seen at Cranfield to provide a system for measuring the glucose concentration in blood, serum or urine.  He made a prototype of such a system at home using Mylar film, slides from his daughter’s toy microscope kit, and bulldog clips to hold the assembly together.   That device used conductivity to monitor glucose in a patient's bodily fluids and is known as the Electrochemical Capillary Fill Device or "ECFD".   He also made a similar system that uses fluorescence rather than conductivity which is known as the Fluorescent Capillary Fill Device or "FCFD".

Patenting the Invention

There was no dispute that Unilever UK Central Resources Ltd. was entitled to apply for a patent for Prof. Shanks's inventions by reason of s.39 (1).  That company assigned its right to apply for patents for those inventions to Unilever Plc which reassigned the right apply for patents for the world other than the UK, Australia and Canada to Unilever NV.  Unilver NV assigned its right to apply for patents in the USA to Unilever Patent Holdings BV.

On 13 June 1986 Unilever Plc applied for a British patent for both ECFD and FCFD devices under application number GB8415018 with the title “Devices for Use in Chemical Test Procedures”.  Subsequent applications were made to the Europen Patent Ofice, the United States Patent and Trademark Office, the Japan Patent Ofice and other intellectual property offices for patents for the FCFD claiming priority from the British application.

Demand for products incorporating Prof Shanks's technology has increased for over the years.  Uses were found for it in pregnancy and fertility testing as well as glucose monitoring.   Further patents for improvements were sought and licences granted.   It was held in the proceedings before Mr Julyan Elbro that I mention below that Unilever had received £24,558,540.65 from licence fees and other revenues as a result of Prof, Shanks's inventions over the years from which prosecution, maintenance and licensing costs of £250,000 had to be deducted resulting in a net benefit of some £24 million. 

The Application

As most would regard £24 million as "an outstanding benefit" Prof, Shanks applied for an award under s.40 (1) on 9 June 2006.  

His application was heard by Mr Elbro on behalf of the Comptroller (see Shanks v Unilever Plc and others O/259/13 21 June 2013).  The hearing officer found that having regard to the size and nature of Unilever’s business, the benefit provided by the Shanks patents fell short of being outstanding.  He went on to consider what a fair share of the benefit would have been had he considered it to be outstanding. He had regard to the various matters set out in section 41 of the 1977 Act and concluded that 5% would have been appropriate, amounting to about £1.2m. 

Mr Justice Arnold

Prof. Shanks appealed to the High Court.  His appeal came on before Mr Justice Arnold.  In Shanks v Unilever Plc and others  [2014] RPC 29, [2014] WLR(D) 242, [2014] EWHC 1647 (Pat), the learned judge dismissed the appeal. He held that the hearing officer had made no error of principle in finding that the Shanks patents were not of outstanding benefit to Unilever. However, he continued, had he come to the opposite conclusion, he would have found that a fair share of the benefit would have been only 3%. He also held that it was not appropriate to take into account the time value of money.  In assessing the benefit of the patents to Unilever, he said that the sums that it had received should be discounted to reflect the payment of corporation tax.  I discussed the decisions of the hearing officer and judge in Patents - Employees' Compensation: Shanks v Unilever 2 July 2014 NIPC Law.

The Court of Appeal

Prof. Shanks appealed to the Court of Appeal (see Shanks v Unilever Plc and others (#2) [2017] EWCA Civ 2, [2017] WLR(D) 32, [2017] RPC 15, [2017] Bus LR 883).  The Court dismissed the appeal holding than the hearing officer had made no error of principle in considering the issue of outstanding benefit. However, the Lords Justices disagreed with Mr Justice Arnold's finding in relation to the deduction of corporation tax. Lord Justice Briggs and Lord Justice Sales also held that there would be cases where the change in the value of money over time would have to be recognized in determining whether a benefit was "outstanding".  Their lordships thought it would have been likely to have been relevant in assessing what amounted to a fair share of that benefit had they found for Prof Shanks.

The Supreme Court

Even though he had lost at every stage below, Prof Franks appealed to the Supreme Court.  Their lordships unanimously allowed his appeal and awarded him £2 million.  The full judgment in Shanks v Unilever and others  [2019] UKSC 45, which was delivered by Lord Kitchin, is available in HTML and PDF. There is also a press summary and a video showing Lord Kitchin reading out the summary. Videos of the p[arties' arguments on 6 and 7 Feb 2019 can be accessed from the Supreme Court's web page on the case.

The Issues

At paragraph [22] of his judgment, Lord Kitchin identified the following issues:

"i) What are the principles governing the assessment of outstanding benefit to an employer and did the hearing officer apply them correctly?
ii) How should a fair share of an outstanding benefit be assessed and were the hearing officer and Arnold J wrong in their assessment?"

He added at paragraph [23]:

"I must also consider whether, in assessing what amounts to a fair share of an outstanding benefit, it is appropriate to take into account the time value of money and any liability of the employer for tax."

The Law

Lord  Kitchin considered the provisions of the Patents Act 1977 as they were when Prof Shanks applied for compensation.  His lordship observed at paragraph [24]:

"These provisions have been amended by the Patents Act 2004 but only in relation to patents applied for after 1 January 2005. We are therefore concerned in this appeal with these sections in their form prior to their amendment by the Patents Act 2004."

The key provision was s.40 (1):

"Where it appears to the court or the comptroller on an application made by an employee within the prescribed period that the employee has made an invention belonging to the employer for which a patent has been granted, that the patent is (having regard among other things to the size and nature of the employer’s undertaking) of outstanding benefit to the employer and that by reason of those facts it is just that the employee should be awarded compensation to be paid by the employer, the court or the comptroller may award him such compensation of an amount determined under section 41 below."

He explained at paragraph [27]:

"The key amendment introduced by the Patents Act 2004 makes compensation payable when the invention (and not just the patent) has been of outstanding benefit."

His lordship then referred to s.41 and in particular subsections (1), (2) and (4). He also mentioned s.43 (2), (4), (7) and (8).

He summarized the law at paragraph [30]:

"An employee who makes an invention which belongs to his employer from the outset and for which a patent has been granted is therefore entitled to compensation if he or she establishes: first, that the patent is, having regard among other things to the size and nature of the employer’s undertaking, of outstanding benefit to the employer; and secondly, that, by reason of these matters, it is just that he or she be awarded compensation."

"What are the principles governing the assessment of outstanding benefit to an employer and did the hearing officer apply them correctly?"

Lord Kitchin considered first the principles governing the assessment of outstanding benefit to an employer and reduced this part of the first issue to the following three simple questions:
  • Who is the employer?
  • What is the benefit? and 
  • Is the benefit "outstanding"?
The answer to the first question was "the inventor's actual employer."   There was no dispute that the "benefit" means the benefit in the hands of the employer after deduction of any costs to the employer of securing that benefit.  The third question was the most difficult to answer.

Lord Kitchin approached that question by considering the cases in which the meaning of the word "outstanding" had been addressed. These were In GEC Avionics Ltd’s Patent [1992] RPC 107, 115, British Steel PLC’s Patent [1992] RPC 117, 122, Memco-Med Ltd’s Patent [1992] RPC 403, 41 and  Kelly and another v GE Healthcare Ltd. [2009] RPC 12, (2009) 32(5) IPD 32035, [2009] EWHC 181 (Pat), [2010] Bus LR D28.  His lordship considered those cases helpful to a point as illustrations of circumstances which were found to fall each side of the line but they provided no substitute for the statutory test which requires the benefit to be outstanding, an ordinary English word meaning exceptional or such as to stand out.

The learned Supreme Court justice noted that s.40 (1) (b) requires the court to have regard among other things to the size and nature of the employer's undertaking but that had given rise to two further questions. The first of those was "what is the employer’s undertaking for this purpose?" The second was "what is the relevance of that undertaking’s size and nature?" As to the first of those questions, Prof Shanks had argued that as his "actual employer" was Unilever UK Central Resources Ltd., his employer's undertaking must have been the undertaking of that company. Unilever, on the other hand, argued that the employer's undertaking was the undertaking of the whole Unilever group.  The problem with Prof Shanks's approach was that  Unilever UK Central Resources Ltd. did not trade and received only £100 for the assignment of the right to patent Prof Shanks's invention. The problem with the Unilever's was that it is difficult to reconcile with the language of the statutory provisions.

Lord Kitchin's solution at paragraph [49] was "to look at the commercial reality of the situation but to do so, in a case such as the present, from the perspective of the inventor’s employer." He added:

"Where, as here, a group company operates a research facility for the benefit of the whole group and the work results in patents which are assigned to other group members for their benefit, the focus of the inquiry into whether any one of those patents is of outstanding benefit to the company must be the extent of the benefit of that patent to the group and how that compares with the benefits derived by the group from other patents for inventions arising from the research carried out by that company."

That approach gave practical and commercial effect to the language of s.41 and involved a comparison of like with like. Ir was also the approach which sat most comfortably with the next aspect of the analysis, namely the relevance of the size and nature of the employer’s undertaking.

As the hearing officer, judge and Court of Appeal had taken the "employer's undertaking" to be that of the entire Unilever group it was inevitable that the application would fail.  £24 million is undoubtedly a lot of money for most people but for a multinational company like Unilever, it was small change.  Having defined Prof, Shanks's employer's undertaking more narrowly,  the extent of the benefit of the Shanks patents to the Unilever group and how that compared with the benefits the group derived from other patents resulting from the work carried out at Unilever UK Central Resources Ltd. became a highly material consideration.

At that point, Lord Kitchin considered how the amount of corporation tax that companies in the Unilever group would have had to pay should be taken into account.  Mr Justice Arnold had reduced the global benefit that Unilever had derived from the patents for Prof. Shanks's invention by 30% on the basis that that was the amount of corporation tax that those companies would have had to pay. The Court of Appeal had rejected that approach and so did the Supreme Court.  In Lord Kitchin's judgment, "the first step is to quantify the benefit and the next is to decide how much compensation would secure for the employee a fair share of it. The employee must account for any tax due on that share and the employer must account for any tax due on the balance." The approach for which Unilever had contended, on the other hand, would have meant that the employer had only to pay to the employee a share of the benefit net of tax but could take the benefit of any available relief from tax in respect of the moneys it had paid, whilst the employee would be liable to account for tax on the moneys that he or she has received from the employer.

Lord Kitchin also considered whether it was right to take into account that the Unilever group had enjoyed the use of the revenues from the exploitation of then patents for Prof Shanks's inventions from the moment that they had been received and that the nominal value of those revenues had been eroded by inflation. Lord Justice Briggs and Lord Justice Sales had held that those considerations were circumstances to be considered within s.41 (1) and the Supreme Court agreed.

Mr Elbro had found that the Shanks patents had produced a very high rate of return; that Unilever had made a very small effort to commercialize Professor Shanks’ invention, that Unilever’s licensing efforts were serious but not exceptional, and that Unilever had generated the benefit that it had derived from the Shanks patents at no significant risk. In drawing his conclusions, the hearing officer had held that the benefit was a substantial and significant one in monetary terms, and that in comparison with the benefit to Unilever of other patents, it did stand out.  In Lord Kitchin's opinion, "all of these matters point strongly to the conclusion that the Shanks patents were an outstanding benefit to CRL having regard to the size and nature of its undertaking" (paragraph [71]).

Lord Kitchin then asked how the hearing officer had come to a different conclusion and found that it was because he had compared the £24 million generated from the patents with the Unilver group's total revenues.  In his lordship's view, Mr Elbro had erred in the following respects:
(1)   He had taken the wrong starting point by treating the employer's undertaking as that of the whole of the Unilver group rather than the business of  Unilever UK Central Resources Ltd, which was to generate patentable inventions.
(2)    The hearing officer had taken into account the whole of Unilever's business which ranged from ice cream to deodorants rather than the specific business for which Prof. Shanks's invention had been directed.  By so doing, he had taken into account facts and matters that were irrelevant.
(3)   Mr Elbro had attached too much significance to Unilever's bargaining power in negotiating licences for the relevant patents. Unilever had not invested much time or effort into licensing and it had certainly not used or threatened to use its financial muscle in the licensing negotiations.
(4)  Despite appearing to disavow a comparison of the licensing revenues with the overall revenues of the group, that was in practice what he had done.
For all of these reasons, the Supreme Court held that the hearing officer's decision was wrong and that the Court of Appeal and Mr Justice A|rnold had been wrong to uphold it.

"How should a fair share of an outstanding benefit be assessed and were the hearing officer and Arnold J wrong in their assessment?"

At paragraph [87] of his judgment, Lord Kitchin considered the hearing officer's assessment:

"In assessing what would have been a fair share of the benefit Unilever had derived from the Shanks patents, the hearing officer duly addressed each of the matters set out in section 41(4). In so doing he had regard to the nature of Professor Shanks’ duties and that he was employed to invent; Professor Shanks’ remuneration, which was commensurate with his level of responsibility; the effort and skill Professor Shanks expended in making the invention; the contribution made by Unilever to the making, developing and working of the invention; and Unilever’s licensing effort which, the hearing officer observed, was serious but not exceptional. The hearing officer also had regard to the evidence before him about the percentage award rates in company and university employee compensation schemes. Having regard to all of these matters, the results of a literature review and the parties’ submissions, he held that 5% would have been the appropriate fair share of the benefit, had it been outstanding."

Mr Justice Arnold had considered that percentage to be too high and would have reduced it to 3% had he found that the benefit of the patents from Prof. Shanks's inventions had been "outstanding".  Lord Kitchin could find no basis for such a reduction. Prof. Shanks had argued that the percentage had been too low and contended that 10 to 20% would be a fair share.  His lordship was similarly unpersuaded that the percentage should be increased.  He observed at [91]:

"The hearing officer found that the invention was made in the course of his contractual duties, although its subject matter was not the main focus of his work. Moreover, as the hearing officer also found, Professor Shanks was employed to invent and, in making the invention, did what he was employed to do. I accept that the patent generated a new stream of income for Unilever, but it did not do so without its input. To the contrary, it was brought to fruition by Unilever’s negotiation of the licences, and that is something in which Professor Shanks played no part. Finally, it is true that Unilever made only a relatively small effort to commercialise the invention and exploited the Shanks patents at no real risk to itself, but these were matters which the hearing officer took into account in arriving at his figure of 5%. I am satisfied that the hearing officer made no error in the way he approached this issue and it would not be appropriate to interfere with the conclusion to which he came."

He upheld Mr Elbro's assessment of 5% but applied an uplift from £1.2 million to £2 million to take account of 2.8%  annual inflation since 1999.

Comment 

The reason why the appeal succeeded in the Supreme Court but failed at every stage below is that Lord Kitchin defined the employer's undertaking as the business of the Unilever Group's research facility at Colworth Park rather than that of the whole Unilever Group.  That will not be the case with every employee's invention.   In Kelly's case, for example, it had been right to consider the whole undertaking of the company for Dr Kelly's inventions had transformed the fortunes of Amersham International.

At paragraph [51] of his judgment, Lord Kitchin opined that there is no single answer to the question, what constitutes an "outstanding benefit" for the purposes of s.40 (1) (b):

"Many different aspects of the size and nature of the employer’s business may be relevant to the enquiry. For example, the benefit may be more than would normally have been expected to arise from the duties for which the employee was paid; it may have been arrived at without any risk to the business; it may represent an extraordinarily high rate of return; or it may have been the opportunity to develop a new line of business or to engage in unforeseen licensing opportunities."

In other words, each case must be determined on its own facts.  But that does not mean that there are no generally applicable lessons from this appeal.  One that could be applied to all employees' inventions cases is that the employer's undertaking has to be assessed by looking at the commercial reality of the situation from the perspective of the inventor’s employer.   Another is to compare like with like. that is to say the applicant's invention with inventions of the same kind or from the same source when determining whether the benefit of the applicant's patent is indeed "outstanding".

Anyone wishing to discuss this case note, or employees' patents, in general, may call me on +44 (0)20 7404 5252 during UK office hours or send me a message through my contact form.

Comments

Popular posts from this blog

What to do about the new Practice Direction - Pre-Action Conduct

Tasty - Levola Hengelo BV v Smilde Foods BV

Software Patents: January Patents Limited's Application