Today we have a guest post from David Knight of Field Fisher Waterhouse LLP on the Shanks v Unilever case and the issue of employee compensation. This article first appeared on the SnIPpets IP blog and is reproduced here with the permission of the author.
Three years have passed since we reported on the appeal on an interim point in the case of Shanks v Unilever, a case relating to Professor Shanks’ (a former employee of Unilever) right to compensation as an inventor of patents of outstanding benefit. (The patents related to a capillary action measuring device which has now found large scale use in home diagnostic kits for diabetes.)
Amazingly the case continues to rumble on, and the High Court (Arnold J) has recently issued a Judgment on appeal from the UK Intellectual Property Office (UKIPO) on the substantive part of the case.
By way of reminder, section 41 of the UK Patents Act provides that an employee inventor may be entitled to compensation if two conditions are satisfied:
- that the patent is of “outstanding benefit to the employer”; and if so
- that it “is just” that he should be awarded compensation.
Once these requirements are fulfilled the employee should receive such a fair share of the benefit the employer has derived, or may be expected to derive from the patent or the invention.
The case was brought in the UKIPO which, together with the courts, has jurisdiction to hear cases relating to employee compensation. After a marathon nine day hearing at the UKIPO, including three expert witnesses, the Hearing Officer decided that:-
- the benefit of the patents to Unilever was £24.5m;
- the benefit was not outstanding;
- but had the benefit been outstanding, Professor Shanks’ fair share would be 5%.
Professor Shanks appealed the second and third point above; Unilever appealed against the first and third point. Many issues were thrown up by the parties in support of their respective appeals; we comment below on those that are more likely to have general relevance in other employee compensation cases.
1. The Benefit of the Patents
This case was unusual in that Unilever had never made and sold products according to the patents; its sole benefit had been by way of licensing income and therefore was in some respects readily quantifiable. Unilever’s receipts from licensing and a subsequent sale of the patents was assessed by the Hearing Officer at £24.5m (after certain deductions including a 5% reduction to reflect that the revenue included a proportion attributable to another patent that Professor Shanks had not invented).
Unilever appealed this finding on three bases:-
- Tax should be deducted from this income figure so as to give a measure of the real benefit to Unilever. On this point the Judge agreed with Unilever.
- Research & Development costs also should be deducted. On this point Unilever’s appeal was not successful. The Judge held that there was no evidence that such costs would not anyway have been incurred without a patent – i.e. the Research & Development costs had no impact on the benefit derived from the patents.
- The 5% reduction to reflect the contribution from other patents was too low. On this point the Judge held that he was not persuaded that the Hearing Officer, who had the benefit of seeing the experts being cross-examined, was wrong in his conclusion, and accordingly the Judge upheld the Hearing Officer’s decision.
2. Was the Benefit Outstanding?
Professor Shanks asserted that the undertaking for the purposes of assessing ‘outstanding’ should be the actual business unit by which he was employed, as distinct from Unilever as a whole. The Hearing Officer held, and the Judge agreed that the Hearing Officer’s reasoning was unimpeachable, that the reality of the situation was that Professor Shanks’ work was done for the Unilever group as a whole, and therefore it is Unilever as a whole against which the benefit from the patents should be assessed.
Professor Shanks advanced a number of arguments in support of his appeal that the Hearing Officer had erred in deciding that the benefit was not outstanding, including:-
- Employees of large organisations would be disadvantaged if the hurdle to overcome increased as the size of the organisation increased, and this cannot have been the intention behind the provision of the Act 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“. However, in his decision the Hearing Officer stated that “ I think it is too simplistic to simply look at overall turnover, or profits, of an employer’s undertaking and then simply state that a given benefit is a small percentage of that. At the same time, it is necessary, as the statute says, to take account of the size and nature of the employer’s undertaking. Different undertakings will have different leverage to be able to make more or less benefit out of their activities. … it seems totally logical to me that a given monetary benefit might be outstanding for a small entity, but not for a larger one. Ultimately, I do not think this reduces to a simpler test than that laid down in the statute – it is a matter of looking at the benefit in the overall context and determining whether in view of all the facts the benefit to the employer was outstanding. Sometimes that might be because of the benefit being in fact a large portion of the employer’s profits or turnover. Other times it may be possible to see the outstanding nature from the effect it had … before determining its precise value in money terms.” The Judge concluded that the Hearing Officer’s decision could not be criticised on the basis he had considered all the points and made a multi-factorial assessment.
- Professor Shanks argued that Unilever’s normal business model was to make and sell things and that licensing (particularly for the sums of money that the Shanks’ patents had generated) in and of itself was outstanding. Dismissing this point the Judge agreed with the Hearing Officer that for the purposes of assessing whether the patents were of outstanding benefit one should consider the benefit derived from those patents, and not how the benefit was derived.
- As stated above, Unilever’s normal business model was to make and sell things where ordinarily the rate of return was vastly less than the rate of return derived from the patents, and (as argued by Professor Shanks) was outstanding. The Judge held that “This is the point which has troubled me most about the hearing officer’s assessment of whether the benefit was outstanding …”, but he went on to conclude that “I see no error of principle in the hearing officer’s approach which would justify my intervening in his decision. He accepted that the high rate of return was a factor in Prof Shanks’ favour, and he took that into account in reaching his overall conclusion. The weight to give this factor was a matter for him.”
3. What Would Have Been a Fair Share?
Both parties argued against the Hearing Officer’s assessment that a fair share would have been 5%.
When assessing fair share Shanks argued that the benefit first should be adjusted upwards to take account of what was termed the ‘Time value of money’ over the period from 1996 to 2004 (when Unilever received the income from the patents) to 2012 (the date of the UKIPO Hearing). (Shanks did not raise this point in the context of the argument as to what the actual benefit was, accepting that a benefit which was not outstanding at the date of receipt would not become outstanding merely because of the passage of time.) Shanks’ position was that Unilever had the use of the money from the patents and that this was a benefit in itself, and put forward alternative methods of calculating this benefit. The Judge dismissed this argument, and all the alternative ways of calculating the time benefit, on the basis that it was not a benefit derived from the patents.
The Judge felt that it was wrong that the value of an award should be thus increased by, for example, a delay in a claimant bringing a claim. That may seem harsh when ordinarily in a damages claim interest routinely is added to an award. However, in distinction to the court the UKIPO has no power to award interest; were the quantum of the benefit to be uplifted to compensate for the ‘Time value of money’ this would negate this distinction between the UKIPO and the Court.
As to the percentage that would be a fair share, Shanks put forward a number of arguments as to why 5% was wrong, and should instead have been at least 33%, some of which are discussed below.
The leading prior case on employee compensation for patents of outstanding benefit was Kelly & Chiu v GE Healthcare. In that case, the Judge (Floyd J, as he then was) referred to the fact that universities typically pay their employee inventors about one-third of exploitation income, and went on to say “I do not think that the position of academic inventors is comparable with the position of the inventors in the present case. I suppose if an inventor in industry made an invention which created an entirely new product and income stream for his employer without any substantial input from the employer, a share in this region or even higher might be justifiable.” Shanks seized upon this latter sentence, asserted that his situation was precisely as envisaged by Floyd J, and therefore a university level share of at least 33% was appropriate. The Hearing Officer disagreed and concluded that Professor Shanks’ position was very different to that of an academic. In the appeal the Judge agreed, and added (distinguishing from Floyd’s remark) that Professor Shanks did not produce a new product for his employer as Unilever never made and sold such a product; neither had Professor Shanks by himself created a new income stream.
Professor Shanks also argued that fair share should be adjusted upwards to reflect his legal costs and that in the UKIPO a successful party usually only recovers a very small proportion of their legal costs (contrary to the position in most high value claims in the court where the winner usually recovers all their reasonable costs from the losing party). Not surprisingly the Judge had short shrift for this argument: such costs are not part of the benefit derived by Unilever from the patent. He went on to add “It would be extraordinary if Prof Shanks could obtain a larger share of the benefit merely because he chose to bring his claim in a forum where he could not recover substantial costs (but equally was protected against a substantial adverse costs award).” – i.e. a case of Shanks having his cake and wanting to eat it.
Unilever also challenged the Hearing Officer’s decision that 5% was a fair share.
Unilever also argued that the Hearing Officer’s decision was inconsistent with the Kelly & Chiu v GE Healthcare case. In that case there had been two inventors who had received awards of 1% and 2% respectively, i.e. a total of 3%. Furthermore in that case Dr Kelly had devoted significant efforts to exploiting the patents, and the patents had a transformative effect on the business in contrast to the position in Professor Shanks’ case, and therefore it would be inconsistent with the Kelly case for Professor Shanks to receive a higher proportion.
Unilever referred to section 41(4)(c) of the Patents Act that provides that when assessing fair share consideration should be given to “the effort and skill which any other person has devoted to making the invention jointly with the employee concerned, and the advice and other assistance contributed by any other employee who is not a joint inventor of the invention“. Professor Shanks argued (unsuccessfully at both first instance and on appeal) that Unilever’s licensing efforts were poor. In challenging the Hearing Officer’s decision Unilever referred to what Professor Shanks’ expert had termed Unilever’s “formidable deal closing power” and that Unilever’s commercial clout had generated licensing revenue that other companies might not have achieved. On appeal the Judge agreed with Unilever that the Hearing Officer had erred in not taking this factor into consideration when assessing fair share.
The Judge therefore came to a conclusion that it would not “have been right to award Prof Shanks a greater percentage than Dr Kelly and Dr Chiu together, that is to say, 3%.”
The ground breaking Kelly case was the first time a decision was made as to what was a fair share for employee compensation claims. Prior to that case, it was the general view among practitioners that a fair share would be a few per cent, although there were some who felt that it should be much higher (as did Professor Shanks in this case). Arnold J’s decision in this case underlines that ordinarily, a fair share will be a few per cent, but leaves open the possibility for higher awards in extreme cases.
To some degree, Arnold J’s hands were tied – as an appeal court, he was obliged to respect the decisions reached by the Hearing Officer unless it was quite clear that the Hearing Officer had misdirected himself in law. In his Judgment, Arnold J is clearly dismissive of some of Professor Shanks’ arguments, but there are a number of references to his inability to challenge other of the Hearing Officer’s findings. One can only speculate as to whether if Professor Shanks had brought his case directly to the High Court (as he was entitled to do) there may have been a different finding on the question of ‘outstanding benefit’; certainly had Professor Shanks gone directly to the High Court he may have received this Judgment two years or so ago. Although Professor Shanks would largely have been protected from an adverse costs award as the losing party in the UKIPO, he is now likely to face a significant adverse costs award for his unsuccessful appeal to the High Court.
This article first appeared on the SnIPpets Intellectual Property Blog on 4 June and is reproduced on IPcopy with the permission of the author. Original post can be found here.