The Supreme Court has recently handed down a judgment (Shanks (Appellant) v Unilever Plc and others (Respondents))  UKSC 45) clarifying when (and how much) compensation is owed to employee inventors under s40(1) Patents Act 1977. We have been reporting on this case for many years, including on the judgment in May 2014 from the High Court on appeal from the UK Intellectual Property Office (High Court rules no compensation for inventor Shanks) and then on the Court of Appeal ruling in January 2017 (Does inventor Shanks now diagnose defeat after Court of Appeal ruling?)
Under s40(1) of the Patents Act, an employee can apply to the court for compensation in respect of an invention they have made where: (i) the invention has resulted in a patent; and (ii) the invention and / or the patent is of 'outstanding benefit' to their employer (having regard to the size and nature of the employer's undertaking). That compensation must be such as to award the employee a 'fair share' of the benefit which the employer has derived (s41).
Mr Shanks applied for compensation from his employer's parent company, Unilever, under s40(1) after the company licensed certain glucose-testing patents – on which he was named as the inventor – for £20.3m. However, the UK Intellectual Property Office (IPO) initially found that, in the context of Unilever's overall revenues and profitability, the company did not derive an 'outstanding' benefit from Mr Shanks' inventions.
This decision was upheld by the High Court and Court of Appeal. The higher courts also grappled with the calculation of an appropriate 'fair share', in the event that Mr Shanks was owed compensation by Unilever. Mr Shanks appealed to the Supreme Court on these questions, as well as on his entitlement to compensation under s40(1).
The Supreme Court unanimously found that an outstanding benefit had been derived from Mr Shanks' inventions, holding that the IPO had made a number of errors in principle. In particular, the IPO had placed too much weight on the overall turnover and profits generated by Unilever, which makes a wide range of products – from Viennetta ice-cream to deodorants – that generate billions of pounds in sales. Kitchin LJ commented that "a tribunal should be very cautious before accepting a submission that a patent has not been of outstanding benefit to an employer simply because it has had no significant impact on its overall profitability or the value of all of its sales."
The Supreme Court also looked carefully at the 'fair share' that should be awarded to an employee inventor, and the factors that should contribute to its assessment. The size and nature of the relevant undertaking was found to be relevant in a number of ways, such as whether the invention brought about an "extraordinarily high rate of return", and whether it created the "opportunity to develop a new line of business or to engage in unforeseen licensing opportunities".
The court rejected the submission that any benefit derived by Unilever from Mr Shanks' inventions, and therefore any 'fair share' due to Mr Shanks, should be 'discounted' to take into account corporation tax. This would "artificially … reduce the size of the benefit" owed to the employee.
Further, the Supreme Court agreed with Mr Shanks that – given that Unilever received that benefit of his inventions in approximately 1999 – he should be entitled to an uplift in the compensation he received because of the time value of money (namely, the detrimental effect of time on the real value of money).
On that basis, the court awarded Mr Shanks a 5% share of the £24m benefit which was derived by Unilever. This was found to reflect his inventive input, but also Unilever's own efforts in commercialising the inventions, including negotiation of the relevant licences.
This decision clarifies how the UKIPO and courts should apply s40(1) and the factors which should be taken into account when assessing whether there has been an 'outstanding benefit,' as well as the 'fair share' owed to employee inventors. It also confirms that large corporations will not be considered 'too big to pay' such employees, even if the benefit received from the invention is only a small proportion of their revenue or profits. This will come as a welcome relief to anyone who is 'employed to invent,' particularly at multinational FTSE 100 companies. It could also mean a sharp increase in the number of employees applying for compensation under s40(1).
However, the Supreme Court decision also makes clear that the application of s40(1) is complex and highly fact-specific: it may be relevant that a particular company is able to exert greater leverage than a smaller company when negotiating licence fees, for example. Further, much may depend on the employer's corporate structure: does the invention benefit some group companies but not others, or is the benefit felt by the entire corporate group? Is that benefit outstanding in this specific context? These, and other questions, will be crucial in any future assessment of compensation due to an employee inventor.