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On January 18, 2017, the Court of Appeal handed down its judgment in the long running case of Shanks v Unilever, on whether Shanks is entitled to compensation under the employee compensation provisions of the UK Patents Act 1977. The case can be found here.
The UK Patents Act 1977 provides for employee inventors to be paid additional compensation in the event that their patent/invention is of outstanding benefit to their employer. In assessing whether or not such a benefit is “outstanding”, regard should be had of the size and nature of the employer’s undertaking. It must also be “just” in the circumstances that the employee receives compensation and such compensation should be a “fair share”.
We previously reported on the background of the case. In short, Professor Shanks was an engineer, working for Central Research Laboratories (CRL) the research arm of Unilever as a control process personnel. The invention was not core to Unilever’s business, and the patent was exploited by licensing. Professor Shanks sought compensation against his employer for his patented invention.
Before the Intellectual Property Office, the Hearing Officer found that the benefit obtained by Unilever from the patents amounted to around just over £24 million, and was not “outstanding”. The Hearing Officer found that the invention was useful but not vital, and that Unilever’s size enabled it to gain favourable royalty rates with its licensees. He then held that had the benefit been outstanding, his fair share by way of compensation would have been 5 per cent of the benefit.
Shanks appealed the decision to the High Court with Unilever cross appealing on how much would be a “fair share”. Arnold J dismissed the appeal, making further findings against the appellant. He held that tax should have been taken into account when quantifying the benefit obtained from the patents. The benefit after relevant tax was assessed as £17 million. Furthermore, he reduced the appropriate fair share (had the patent been outstanding) to 3 per cent, which was more appropriate when considering the share which was awarded to the inventors in the case of Kelly v. GE, which was 2 per cent to the lead inventor and 1 per cent to another inventor. In that case, the invention was a major breakthrough which saved the employer from a crisis.
Shanks further appealed to the Court of Appeal on several grounds, relating to the determination of “outstanding benefit”, “amount of benefit” and “fair share”. The appellant’s overarching point remained the same as that before the High Court, being that the employee compensation scheme was to address an extreme disparity of benefit between the employer and inventor employee, and so he should be entitled to compensation given that the patent gave Unilever an extraordinary rate of return at minimal cost to Unilever, there being no other comparable example at Unilever. Shanks also repeated the point that, if as the Hearing Officer held, the benefit could not be regarded as “outstanding” compared to the overall scale of Unilever’s business, large organisations would never be liable to pay employee inventor compensation.
He further submitted that the calculation of benefit should include an allowance for the “time value of money” and that a “fair share” of the benefit would be at least 33 per cent rather than the 5 per cent that the Hearing Officer would have awarded.
The Court of Appeal unanimously dismissed Shanks’ appeal. The lead judgment was given by Patten LJ, with Briggs LJ and Sales LJ concurring.
“too big to pay”
Concerning “outstanding benefit”, the appellant submitted that in relation to issues such as inventiveness, rate of return and disparity of outcome, he was largely, if not wholly, successful. The Hearing Officer only found against him on the issue of “outstanding benefit” by reference to a single factor - the relative size of the return from the patents, compared with the Unilever group profits. Unilever was “too big to pay” which was used to trump all other considerations.
Patten LJ confirmed that an adoption of a simple comparison between the income from the patents and the profits of the Unilever group, to the exclusion of all other factors, is not the right approach and would amount to an error in law. He stated that it is in fact a matter of looking at the benefit in the overall context and determining whether in view of all the facts the benefit to the employer was outstanding.
However, Patten LJ held that the Hearing Officer did indeed adopt a multi-factorial test. Although the scale of the financial returns may be sufficient in some cases, in most cases the figures themselves will not provide a ready answer and it will be necessary to adopt a more nuanced approach balancing considerations of financial return against the effort and cost involved. However, s40(1) specifically references the size and nature of the employer’s undertaking so, Patten LJ held, this must form part of the equation and mandates a determination of “outstanding” benefit by reference to that comparison.
In relation to the Shanks case, Patten LJ stated, that the size and nature of the employer’s undertaking is not limited in terms of group profits generated by other patents and must be capable of including the whole of the employer’s business. For Unilever, he stated, that it will therefore be relevant to take into account the fact that much of the profit will come from manufactured products derived from patents and not from licence fees and Patten LJ rejected that total group profits are not to be included in what is meant to be the employer’s undertaking.
Patten LJ concluded that the Hearing Officer properly took all matters into account but that the Hearing Officer was not persuaded that the benefits of the patents were outstanding when looked at in the context of the overall performance of the Group.
What is clear from Patten LJ’s judgment is that size does matter, but size alone is not the sole factor in assessing whether there was an outstanding benefit to the employer’s undertaking. However, where a smaller undertaking is concerned this may go a long way in showing that the benefit is outstanding.
“failure to attach sufficient weight to the scope of Professor Shanks contractual duties and his insight, initiative and inventiveness”
The appellant further submitted that the Hearing Officer failed to attach sufficient weight to the scope of Professor Shank’s contractual duties and his insight, initiative and inventiveness. However, Patten LJ held, that to the extent they were relevant to “outstanding benefit” (as opposed to the determination of what amounted to a “fair share”), this was indeed taken into account by the Hearing Officer.
“failure to give any or sufficient weight to the use of the licence fee income to boost the profit and loss of Unipath Limited so as to enable it to be sold”
A further ground the appellant relied on was that the Hearing Officer failed to give any or sufficient weight to the use of the licence fee income to boost the profit and loss accounts of Unipath Limited to enable it to be sold. However, Patten LJ again held that this was taken into account by the Hearing Officer. Furthermore, he held that the use of the revenue by Unilever for the benefit of a particular entity within the group does not obviate the need to consider those figures in relation to the group as a whole. The appeal therefore also failed in relation to those two grounds.
“the time value of money” and “corporation tax”
Patten LJ also considered the appellant’s arguments that the calculation of the benefit should have included the “time value of money” but should not have been reduced by taking account of corporation tax. In relation to “time value of money” Patten LJ confirmed that it is the opening balance that counts. He agreed with the Hearing Officer that if the calculation of benefit allows for the inclusion of “time value of money” then a similar adjustment would need to be made to the calculation of group income in order to compare like with like. It should be noted that on “time value of money”, Briggs LJ took a different view with which Sales LJ agreed. Briggs LJ submitted that there may be cases where the “time value of money”, or as he referred to it, the change in the real (rather than the nominal) value of money over time, will need to be recognised when determining whether the benefit was outstanding. He provides the example that where an income stream for an invention accrues over time but needs to be compared to the size and nature of the undertaking, it may be necessary to adjust one or the other where that comparison cannot be made at the same point in time.
On corporation tax, Patten LJ held that this should not be taken into account as this would require a calculation into the employer’s tax position taking into account years of losses and profits, something that Patten LJ did not consider being what Parliament intended.
In relation to “fair share”, Shanks continued with the contention that it ought to be around 33 per cent or more, given that the patent had provided Unilever with an entirely new revenue stream. Shanks’ claim was based on Floyd J’s (as he then was) obiter comments in the Kelly case that, in such a case, the royalty rate could be 33 per cent or more. From the language used it is not clear how considered this view was.
In his judgment, Patten LJ preferred not to express a view as to what amounted to a “fair share”. This leaves us with the decision in Kelly and the comments and opinions expressed by the Hearing Officer and Arnold J in Shanks. It is worth noting that in Kelly the 3 per cent amounted to £1.5 million in compensation in total, split between Mr Kelly and his co-worker (£1 million and £500,000). In Shanks the amount of compensation was reduced from £1.2 million (5 per cent of £24 million) to £510,000 (3 per cent of £17 million). Although on the face of it the courts have taken quite a broad brush approach, it does appear from those two cases that there is a ceiling as to how much compensation would constitute a “fair share”. Clearly some guidance from the Court of Appeal would have been welcome in this regard.
Although this case failed to give further guidance on what amounts to a “fair share” it has provided useful judicial direction in what should and should not be taken into account when determining the “amount of benefit” and clarifying that size does matter, as long as it is considered as part of a multi-factorial approach, when determining what amounts to “outstanding benefit”.
COVID-19 has had and will continue to have impacts on virtually every corporation in Canada and globally.
As business resumes in the workplace and circumstances change, American companies must be ready.