The Court’s decision rested on whether the patents provided outstanding benefit to the employer’s undertaking.
By Deborah J. Kirk and Catherine Marie Hughes
On 23 October, the UK Supreme Court (UKSC) handed down its highly anticipated ruling in Shanks v Unilever  UKSC 45 — the conclusion to an extensive campaign by Professor Shanks to obtain compensation for an invention he created in 1982, during the course of his employment with Unilever. The UKSC upheld Shanks’ appeal from the lower courts and in a unanimous decision ruled that Shanks was entitled to £2 million compensation from Unilever.
Section 40 of the Patents Act 1977 (the Act) makes provision for the payment of compensation to employee inventors in certain circumstances. Namely, where the employee makes an invention for which a patent has been granted and that patent is considered to be of outstanding benefit to the employer (taking into account things such as the size and nature of the employer’s undertaking), the court may award the employee compensation in the form of a fair share of the benefit received by the employer from the patents, with the amount determined under Section 41 of the Act.
Invention for which a patent has been granted
Shanks was employed by Unilever UK (CRL) as a researcher and during his time as an employee at CRL, invented technology for use in glucose testing for diabetics. The wider Unilever group filed patents for the invention however had no interest itself in developing glucose testing due to the saturation in the market.
Unilever instead commoditised the patents, licensing the technology out to a number of licensees. This exploitation of the patents relating to Shanks’ inventions resulted in Unilever receiving over £24 million in profits. Unilever eventually sold the patents for the technology, along with the benefit of the licences.
Shanks first brought the case before the UK Intellectual Property Office (UKIPO) under Section 40 of the Act in 2012 in a bid to obtain compensation for his invention.
The question at the core of Shanks’ claim for compensation was whether the patents provided “outstanding benefit” to the employer’s undertaking. What amounts to an “outstanding benefit” has been the subject of varied case law in terms of the approach taken. When considering whether the patents were of “outstanding benefit” in this case, the UKSC held that the fundamental principle to consider is the employer’s size and undertaking.
One of the main points of controversy throughout the proceedings was whether CRL should be considered as the undertaking or whether it should be the wider Unilever group. The UKSC highlighted the importance of the commercial reality of the case, noting that where a company operates a research facility (CRL) for the benefit of the whole group (Unilever), consideration must be had as to how the benefit of the patent in question compares with the benefits derived by the whole group from other patents arising out of research carried out by CRL. The UKSC ruled this analysis had been incorrectly perceived by the Hearing Officer and the lower courts.
Size and Nature
Both the Hearing Officer and the Court of Appeal considered the concept of “outstanding benefit” in terms of a basic comparison between the benefits obtained from the patents and the overall profits of the Unilever group, rather than taking into consideration CRL as part of the undertaking.
Unsurprisingly, the result of this exercise results in the profits received as a result of the patents paling in comparison with the overall profits of the Unilever group. The UKSC held that this purely economic analysis failed to take into consideration wider factors that could result in a benefit being considered outstanding. Aside from a comparison exercise between the benefit from the patents in question and other patents developed by CRL, some other factors to consider provided by the UKSC included:
- the benefit received from the patents being far more than expected in the usual course of an employee’s duties;
- the benefit being received with no risk to the business;
- the benefit representing an extraordinarily high rate of return; and
- the benefit representing an opportunity to develop a new line of business or the ability to engage in unforeseen licensing opportunities.
This wider analysis by the UKSC reaffirms that the assessment of “outstanding benefit” should not render an employer too big to pay and confirmed that the patents in this case did amount to an “outstanding benefit”.
At the UKIPO, the Hearing Officer calculated that the sum of the benefit obtained by Unilever as a result of the patents totalled approximately £24 million and that, had the benefit been considered as outstanding, 5% of this total would have been appropriate compensation for Shanks. The Court of Appeal disagreed with this conclusion and held that 3% was a more appropriate figure.
The UKSC accepted the 5% figure proposal by the Hearing Officer and found that the Court of Appeal had erred in their analysis to reduce the figure. Other considerations made by the lower courts when assessing what would be considered a “fair share” of the benefit included tax and the time value of money.
- Tax – the UKSC held that a deduction in the calculation based on corporation tax would not be appropriate and that such a consideration should take place only after quantifying the benefit.
- Time value of money – the Court of Appeal held that it would be inappropriate to increase the benefit simply due to the passage of time. The UKSC disagreed and confirmed that an uplift to reflect the deleterious effect on the real value of money over time was appropriate.
The UKSC concluded that based on the facts, a 5% share of the calculated benefit, plus an uplift to reflect the time value of money was a “fair share” of the benefit and therefore an appropriate level of compensation. Professor Shanks was therefore awarded a compensating figure of £2 million.
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