IP and IT Law Bytes: Patents: employee compensation

31 July 2014

The High Court has rejected an employee inventor's claim for compensation for an invention assigned to his employer, on the ground that the patent had not been of outstanding benefit to the employer.


For patents applied for before 1 January 2005, section 40(1) of the Patents Act 1977 (1977 Act) (section 40(1)) allows an employee to be awarded compensation where he has made an invention belonging to the employer for which a patent has been granted and the patent is (having regard, among other things, to the size and nature of the employer's undertaking) of outstanding benefit to the employer.

Section 41 of the 1977 Act (section 41) provides that an award of compensation to an employee under section 40(1) in relation to a patent for an invention must secure for the employee a fair share (having regard to all the circumstances) of the benefit that the employer has derived, or may reasonably be expected to derive, from the patent.


S was employed by a company within the U group, and was responsible for an invention in a series of related patents (the patents), which was used in blood glucose testing kits. The patents were transferred to an associated company for nominal consideration. That company was later sold to a third party for £103 million. The sale agreement provided for the buyer to receive expected licence payments of £2.9 million.

In 2006, S began proceedings in the Intellectual Property Office (IPO) claiming compensation under sections 40 and 41. Following a number of interim proceedings and an appeal to the Court of Appeal, the IPO concluded that although the benefit to U from the patents was £24.5 million, it was not outstanding. It said that if, contrary to its conclusion, the patents were of outstanding benefit, a fair share of the benefit for S would be 5%. S and U appealed.


The court dismissed the appeals, upholding the IPO’s decision that the patents were not of outstanding benefit to U, and therefore S was not entitled to compensation under section 40(1).

The court rejected S’s argument that the IPO had decided that the benefit that U obtained from the patents was not outstanding because of the large profits that U ordinarily made in the course of its business. The IPO had undertaken a multi-factorial assessment, which included a consideration of the benefit received by U, and the disparity in that benefit from the benefit S received, in the context of the size and nature of U’s undertaking.

The court also held that:

●            The mere fact that U received a benefit from the patents in a manner and amount that was unusual for it (by licensing and selling the patents rather than by manufacturing) was not, in itself, an indication that the benefit was outstanding.

●           Although U had obtained a benefit from the patents with very little commercial risk and at a very high rate of return, the IPO had taken this factor (in S’s favour) into account in reaching its overall conclusion.

●           The fact that S had gone beyond his brief (although not beyond his contractual duties) was not relevant to whether the benefit to U was outstanding.

●           Although U had failed to establish the value of any of its other patents, and so could not rely on this evidence to show that the patents were not of outstanding benefit, it did not necessarily follow that the patents were of outstanding benefit.

●           The fact that the patents were among the top 5% of patents generally in terms of revenue generated was not of assistance. A patent might be of outstanding benefit in the context of an employer’s undertaking even if it did not stand out among patents generally, and vice versa.

●           The IPO had taken the importance of the patents to the sale of U’s business into account.

As the appeals were dismissed, the court did not have to make a decision on fair share. However, the court commented that, in the circumstances of this case, the benefit derived by U from the patents would be the benefit net of tax. 

The court also said that the “time value of money”, which S had argued should be taken into account as U had use of the money until the date of the decision, was not a benefit derived from the patents and so would not have increased the amount of the benefit of which S might have received a fair share. The costs incurred by S in bringing his claim for compensation were also not part of the benefit that U derived from the patents.

The court noted that S had not created a new product for his employer as U never produced a blood glucose test. Nor did S produce a new income stream without any substantial input from his employer. Although S made the invention, the income stream was largely generated by U’s licensing department with little input from S. 


Few claims of this kind have succeeded in recent years. Section 40(1) was amended by the Patents Act 2004 to make compensation payable when the invention, and not just the patent, has been of outstanding benefit. However, the amendments only affect patents applied for after 1 January 2005 and were not relevant in this case. It is uncertain whether the outcome would have been different under the amended section.

The court commented that it was clearly undesirable that a claim of this nature should take seven years to reach a first instance determination. Although the interim proceedings were one factor, the IPO should attempt to ensure that such claims are determined within a reasonable time.

Lawyers or patent agents taking on a claim for employee compensation on a conditional fee agreement basis may prefer to bring the claim in the IPO, where the costs to be paid out if the claim fails are much smaller than if the claim is brought in the High Court.  However, the costs awarded if the claim does succeed will also be very much less than the amount expended by the employee, particularly as these cases involve expert accounting evidence.

Case: Ian Alexander Shanks v Unilever plc and others [2014] EWHC 1647 (Pat).