Patents: compensation for employee inventions

14 March 2017

Audrey Horton

The Court of Appeal has held that an employee was not entitled to compensation under sections 40(1) and 41 of the Patents Act 1977 (1977 Act) (section 40(1)) (section 41).

Background

For patents applied for before 1 January 2005, an employee may be awarded compensation where he has made an invention belonging to the employer for which a patent has been granted and the patent is of outstanding benefit to the employer (section 40(1)). The court will take into account the size and nature of the employer's undertaking when considering "outstanding benefit".

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 (section 41).

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.

In Kelly v GE Healthcare Ltd, the Patents Court awarded two employees a total of 3% of the benefit which their employer had derived from the patents, amounting to a total of £1.5 million ([2009] EWHC 181 (Pat)).

Facts

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. The IPO concluded that, although the benefit to U from the patents was £24.5 million, it was not outstanding. The IPO thought that if the benefit had been outstanding a fair share for S would have been 5%. S and U appealed.

The High Court dismissed the appeals (www.practicallaw.com/8-572-1368). It held that the patents were not of outstanding benefit to U, and therefore S was not entitled to compensation under section 40(1).          

S appealed, arguing that, if the benefit could not be regarded as outstanding compared to the overall scale of U’s business, large organisations would never be liable to pay employee compensation.

Decision

The court dismissed the appeal. It held that S was not entitled to compensation under sections 40(1) and 41.

Although an "outstanding" benefit to U was required to trigger compensation, there was no statutory definition of that word, so it must have its ordinary meaning. Attempts to redefine the meaning in the case law were generally unhelpful, but it was useful to consider whether the benefit to U exceeded what would normally be expected to result from the work for which S was paid, bearing in mind that the focus was on the benefit to U and not the inventiveness of S. The IPO hearing officer had made careful findings of fact, and had not misdirected himself on the law.

A simple comparison between the income from the patents and the overall turnover and profitability of U was not the right approach and so it was not necessary to show that financial benefit from the patents exceeded a particular percentage of U's total profits. "Outstanding" was a relative concept which had to be judged in the overall context of a multi-factorial assessment of the relevant factors in each case. In a large conglomerate like U, turnover and profitability were relevant factors but not the only factors. There was no statutory definition of "undertaking" and the correct approach required assessment of the economic and business realities of U's business.   

The court rejected S's argument about the overall scale of U’s business. The size and nature of the employer’s undertaking is specifically referenced as a factor in section 40(1). It was not limited in terms of group profits generated by other patents and must be capable of including the whole of the employer’s business. Here, it was relevant to take into account the fact that, although the patents produced a high rate of return in terms of licence fee income at little risk or cost to U, much of U's profit would come from manufactured products derived from patents and not from licence fees.

While the issues of the effect of tax on the benefit to U and the time value of money did not have to be decided, the court agreed that corporation tax should not be deducted. However, only two of the three judges thought that the time value of money should be taken into account when calculating the employee's fair share of the benefit.

Comment

Unusually, here all the benefit to U from the patent came from licensing because the invention was outside the scope of U's business. In view of its finding of no outstanding benefit, this decision does not provide any further guidance after Kelly on the appropriate percentage to be awarded as a fair share. However, the decision has provided general guidance as to what should be taken into account in determining the amount of the benefit to the employer and whether or not it was outstanding.  

Both the adverse result, and the fact that this case has taken over ten years to be finally decided, are likely to deter employees from making similar claims.

Case: Shanks v Unilever Plc and others [2017] EWCA Civ 2.

First published in the March 2017 issue of PLC Magazine and reproduced with the kind permission of the publishers. Subscription enquiries 020 7202 1200.

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