Reality trumps hypothesis

Reality trumps hypothesis - Court of Appeal overturns test for calculating the compensation to be paid to an employee inventor

This article was included in the spring 2011 issue of Innovate - the patents newsletter and the spring 2011 issue of snIPpets - the intellectual property newsletter.

Court of Appeal overturns test for calculating the compensation to be paid to an employee inventor

In Unilever plc and others v Ian Alexander Shanks [2010] EWCA Civ 1283, the Court of Appeal overturned the decision of Mann J (reported in the Spring 2010 edition of Innovate), in relation to "inventor's compensation" in situations where the employer owner transfers the rights to a patent/invention to a connected company (a parent or holding company, for example) for nominal consideration.

To apply for inventor's compensation under s.40(1) Patents Act 1977 the employee has two hurdles to overcome:

• 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 compensation to secure a fair share of the benefit the employer has derived, or may be expected to derive (which may include assignment).

S.41(2) specifically relates to when the rights to an invention are transferred, assigned or licensed to a 'connected person', the statute provides that;

'any benefit derived or expected to be derived by an employer from the assignment, assignation or grant of... [rights in the invention/patent] ...to a person connected with him shall be taken to be the amount which could reasonably be expected to be so derived by the employer if that person had not been connected with him.'

In 1984, whilst employed by Unilever UK Central Resources Ltd ("CRL"), Professor Shanks invented a capillary action measuring device which has now found large scale use in home diagnostic kits for diabetes. Pursuant to s.39(1) entitlements to the world-wide patents for this invention vested in CRL but these were then assigned, for a nominal sum, to the parent company, the Unilever Group.

The issue before the court was whether the assignment from CRL to Unilever made a difference by virtue of the operation of s.41(2), and how the benefits should be calculated therefore determining how much compensation Professor Shanks would be entitled to.

Thus it was contended on behalf of Professor Shanks that, if the invention had been assigned to an unconnected company such a company would have purchased the patent with the intention of vigorously exploiting it, and therefore it could have made royalties of up to 1 billion US dollars, compared with the actual "near-negligible" benefit of £23m royalties Unilever had received. It was also contended that the ambiguous wording in s.42(2) allowed for a 'putative benefit' to be applied and his compensatory entitlement was therefore sought upon this hypothetical billion dollar royalty.

At first instance, the UKIPO disagreed with this interpretation, but on appeal to the High Court Mann J agreed with Professor Shanks that his inventor's compensation should be calculated as if there had been a sale to a non-connected, arm's length person operating in the appropriate market at the appropriate time.

However, on appeal by Unilever, the Court of Appeal overturned the High Court's decision to formulate a hypothetical situation and commented that such a construction had to be rejected because a notional auction could lead to such serious absurdities that cannot have been intended.

It was held that s.41(2) requires one to consider the actual assignment from the actual employer to the actual connected person, and Lord Justice Jacob confirmed that this provision is not some kind of best endeavours to exploit, the acquirer must be taken 'warts and all'. Therefore Professor Shanks' compensation was to be based on the £23million royalties actually received over the lifetime of the patent - and not on some hypothesis of what might have been.

Lord Justice Jacob also stated that any language seeming to suggest a hypothetical situation should form part of the assessment was merely there to assist in situations where a patent had not yet expired.

The Court of Appeal realised that the High Court decision would have allowed for employees to be treated differently as regards to compensation entitlement simply because they were part of an organisation with centrally held IP (a commonplace corporate arrangement) despite no rationale for such a distinction.

Key points: The Court of Appeal has overturned the test set out by the High Court for the calculation of compensation for employee inventors. Following the Court of Appeal ruling, where an employer transfers the rights to an invention to a connected company, compensation to the employee inventor should be calculated according to the actual assignment that had occurred, and not on some hypothesis of what might have been.

This article was written by Jennifer Bradly and David Knight.