This article was first published in The World Intellectual Property Report (March 2008).
English High Court makes landmark decision to award compensation under the Patents Act to the employee inventors of a patent of “outstanding benefit”
Drs Kelly and Chiu have succeeded in their action for compensation under s40 Patents Act 1977 in respect of their inventive contribution to patents which were found to be of “outstanding benefit” to their employer, GE Healthcare Limited (“GE”). This decision represents the first time such an award has been made under the scheme since it was established under the 1977 Act. In the judgment, Floyd J reviewed the law relating to inventor compensation, attributed a monetary value to the benefit derived by GE from the patents and determined such ‘fair share’ of that value as should be paid to the employees by way of compensation. Dr Kelly was awarded £1 million, Dr Chiu £500,000.
Drs Kelly and Chiu were employed by Amersham International Plc (now GE) as research scientists. In June 1985, Dr Kelly was appointed head of the new “Pioneer Section”, which was mandated to do work relevant to GE’s current R&D goals but which went beyond the scope of the then current in-house activities. GE’s main research goal at that time was to produce a radioactive heart imaging agent using Technetium, a radioisotope well suited for clinical imaging purposes due to its ready availability, low cost and short, 6-hour half-life (the “Heart Project”). The amount of time and effort which the Pioneer Section put into the Heart Project was within Dr Kelly’s discretion; Dr Kelly chose to allocate significant resources to the Heart Project. In November 1985, Dr Kelly recruited Dr Chiu to the Pioneer Section. By November 1987, Dr Chui had succeeded in making a compound called “P53” which could be complexed with Technetium for use as a radioactive imaging agent and which was eventually sold under the trade mark “Myoview”. GE applied for and was granted patents in two families for Myoview including EP311352 and EP337654 (the “Myoview Patents”). Drs Kelly and Chiu were named as inventors in respect of both patent families. The Myoview product went on to generate revenues of over £1.3 billion for GE. Drs Kelly and Chui brought a claim under s40 Patents Act 1977 for a share of the benefit they argued had been derived by GE from the Myoview Patents.
s40(1) Patents Act 1977 makes provision for the payment of compensation. s40 was amended by the Patents Act 2005 so as to make compensation payable when the invention (and not just the patent) has been of outstanding benefit. However, because the amendment only affects patents applied for after 1 January 2005, it is the unamended section which stood to be considered by Floyd J. The unamended s40(1) provides “[w]here it appears to the court or the comptroller on an application made by an employee within the prescribed period that the employee has made an invention belonging to the employer for which a patent has been granted, 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 and that by reason of those facts it is just that the employee should be awarded compensation to be paid by the employer, the court or the comptroller may award him such compensation of an amount determined under section 41”.
s41(1) Patents Act 1977 provides: “[a]n award of compensation to an employee under section 40(1) or (2) above shall be such as will secure for the employee a fair share (having regard to all the circumstances) of the benefit which the employer has derived, or may reasonably be expected to derive, from … the patent for the invention”.
On passage of the Bill pertaining to s40 through the House of Lords, Lord Nelson of Stafford commented in Hansard of s40: “I have never seen such a collection of vague terms in my life. What compensation, who is responsible, what is outstanding benefit, what value is to be put on this and what on that?”. Perhaps because of these innate difficulties in determining the parameters of s40, there are no reported cases of an applicant succeeding in a s40 claim although several such claims have nevertheless been considered by the Patent Office and by the Patents Court. Some disparate principles to emerge from these cases include that:
(i) an application under s40 may relate to a foreign patent provided the application explicitly mentions the relevant foreign patent(s) ;
(ii) the term ‘outstanding’ means something out of the ordinary, something which would not normally be expected to arise from the duties for which the employee was paid: this is the reason for the reference in s40 to the size and nature of the employer’s undertaking. The benefit must be looked at in the total context of the employer’s activities. Thus, relevant factors to be taken into account include whether the invention lies in the main field in which the employer operates and, where the invention constitutes a part of the product sold by the employer, whether that part is an important and essential element of the product as opposed to a minor improvement . The fact that sales of a patented product are of vital importance to the employer is also relevant but should not be determinative because sales may also be due to the price and quality of the product or to the relationship between the seller and buyer ;
(iii) where the benefit to the employer represents less than 0.01% of turnover or 0.08% of profits, even if the benefit could be wholly ascribed to the patent, it should not be considered to be “outstanding” ; and
(iv) it would be very unlikely that a patent could be demonstrably of outstanding benefit as soon as seven months after grant .
Law on inventor compensation
In the judgment, Floyd J reviewed the law on inventor compensation and provided a succinct summary of the position . In this section, we discuss some of the interesting points arising from Mr Justice Floyd’s review.
Floyd J was asked to consider the meaning of the term “other protection” which forms part of the expanded definition of ‘patent’ in s43(4): “[a]ny references [in sections 39 to 42] above to a patent and to a patent being granted are respectively references to a patent or other protection and to its being granted whether under the law of the United Kingdom or the law in force in any other country or under any treaty or international convention.” The Claimants sought to argue that the regulatory data exclusivity (“RDE”) regimes enjoyed by new chemical entities should be considered “other protection” for these purposes. Counsel for the Claimants submitted that consideration of the benefit derived from the patent necessarily entails consideration of the benefit derived from RDE as well. Thus, in ascertaining whether the patent has been of benefit to the employer, the court should form an estimate of how the employer would have fared absenting RDE protection as well as absenting patent protection. Counsel for the Defendant argued that ‘protection’ in this context, is protection for the invention. By its nature, RDE is not protection for the invention but protection for the data. Floyd J held that there is “a fundamental distinction between a form of protection which grants a monopoly in respect of the manufacture and sale of a product or use of a process (such as a patent…); and a form of “protection” which merely makes it more difficult for a competitor to enter the market (as in the case of a product where the generic competitor has to generate his own safety and efficacy data”. Accordingly, Floyd J found that “other protection” in the context of the statute meant other monopoly protection, thus excluding any benefit derived from RDE.
As to the meaning of “outstanding”, Floyd J approved Aldous J (as he was then) in Memco-Med Ltd’s Patent finding that whilst it not advisable to redefine the word ‘outstanding’, it was nonetheless helpful to clarify the meaning of the term. Accordingly, Floyd J held: ““Outstanding” means “something special” or “out of the ordinary” and more than “substantial”, “significant” or “good”. The benefit must be something more than one would normally expect to arise from the duties for which the employee is paid. On the other hand it is not necessary to show that the benefit from the patent could not have been exceeded”.
Floyd J also approved Aldous J in Memco-Med Ltd’s Patent in relation to the correct method for determining whether the patent has been of benefit to the employer, holding that “the court must try to form an estimate of how the employer would have fared in the absence of patent protection.” Noting that this could be characterised as a ‘but for’ approach, Floyd J heard argument from both sides as to the correct test for determining whether benefit has been derived by the employer from the patent. Counsel for the Defendant submitted that a ‘but for’ approach merely functions as an exclusionary test to exclude irrelevant causes; the proper test should be whether the patent was the effective or dominant cause of the benefit. Counsel for the Claimants on the other hand argued that the draftsman of s40 understood that a patent for an invention could not earn benefits on its own: a product must be manufactured, promoted and, where appropriate, licensed. Accordingly, it is inevitable that there will be multiple causes for the benefits derived from a patent and implicit that a patent may be of benefit to the employer even where there are multiple causes for the profits under consideration. Floyd J preferred the Claimants’ submissions, acknowledging that the existence of multiple causes is not a reason for disregarding a given benefit altogether. Floyd J held that the test to be satisfied is whether the patent in question was a cause of the benefit. Where there is such a causal relationship, the next question is how much of that benefit can be attributed to the patent. This is the point at which the court should consider whether that benefit is outstanding.
As to the valuation of an ‘outstanding benefit’, Floyd J considered that it need not be too precise but should be undertaken “in light of all the available evidence as to what the patent has achieved, and may reasonably be expected to achieve. It is not a hypothetical valuation exercise to be performed at the date the invention was made”.
As to compensation, Floyd J held that this should be assessed “in the light of all the available evidence in accordance with section 41 so as to secure a just and fair reward to the employee, neither limiting him to compensation for loss or damage, nor placing him in as strong a position as an external patentee or licensor.”
Floyd J came to the conclusion that the Myoview Patents were of outstanding benefit to GE given that the benefit went far beyond anything that GE could normally have expected to arise from the sort of work the Claimants were doing. Floyd J found that the most obvious contribution that the Myoview Patents had made to GE was in protecting its business against generic competition and against reduced profits after expiry of RDE. However, Floyd J held that the benefit of patent protection should not be limited to profits from sales but should also take into account factors such as the part played by the Myoview Patents in facilitating GE’s acquisition of a stake in the companies Nihon Medi + Physics and Nycomed. These acquisitions transformed GE’s business, establishing it as a global player in the radiopharmaceuticals market.
Valuation of benefit
Floyd J heard argument from both sides as to the correct method for valuing, and the value of, the benefit. However, in finding that “[t]here is no doubt that both sides have adopted positions which overstate the strength of their cases”, Floyd J adopted a figure which fell between that suggested by the parties: £50 million. Floyd J did not express his reasoning for settling upon this figure, beyond saying that he had taken this “low figure … in fairness to [GE]”.
Share of benefit
s41 provides that the Claimants should be awarded a “fair share” of the value of the benefit; s41(4) prescribes a number of factors which must be taken into account when assessing such “fair share”. Having considered these factors in light of the facts, Floyd J concluded that the factors favouring the Claimants were that:
- the R&D costs were recouped within the first year of Myoview sales and were very low in proportion to profits generated;
- the Claimants’ jobs involved significant thought and creativity: they were not employed in routine operations; and
- the Claimants had adopted a “pioneering spirit” and had devoted a high level of effort and skill to the Heart Project which resulted in the development of the Myoview product.
On the other hand, Floyd J found that the following factors favoured the Defendant:
- the employees’ work was to a significant degree dependent on the opportunity provided by the employer to make inventions;
- the downstream work was well executed and involved the solution of some problems: Dr Kelly’s contribution to this was limited;
- US market developments assisted the working of the invention; and
- it was the employer who accepted the risk for the project.
Floyd J concluded that whilst the Claimants’ share could, in principle, lie within a range of from 0% to 33% of the benefit attributed to the patent, having regard to the factors set out above, the employees’ share should lie towards the bottom of the scale. Floyd J held, “I have taken a very conservative figure for the valuation of the benefit. Taking the same approach to the share of the benefit, I consider that 3% of the value of the benefit represents a just and fair award”. 3% of the £50 million value Floyd J attributed to the patent is £1.5 million. Floyd J held that this should be split between the Claimants such that Dr Kelly was awarded £1 million and Dr Chiu £500,000.
This case marks the first time the English Courts have awarded compensation to an employee inventor under the s40 statutory scheme. However, it remains to be seen whether this decision will open the floodgates to a raft of similar claims. The merits of any future claim will naturally depend on the particular facts; however, the very fact that a claim has now succeeded, combined with the amendment in the law which now allows the ‘outstanding benefit’ to arise from both the patent and from the invention, has arguably lowered the barriers to success. On the other hand, it may be possible to distinguish this case on the basis that the Myoview Patents were of great significance to both GE and to the industry at large. The gap between the benefit enjoyed by GE as a result of the Myoview Patents and the benefit to the employers in previous s40 claims is huge. Thus, in order to succeed in the same way as Drs Kelly and Chui, a future claimant will undoubtedly be required to satisfy a certain threshold regarding the benefit of his/her invention to his/her employer. It is also notable that the Myoview Patents had expired, thereby assisting the Court in attributing a value to the compensation. If a patent still has a substantial period to run, quantification of the benefit to the employer and thus of a fair and just share of such benefit will be more difficult and Courts may thus be less inclined to make such an award.