Ian Alexander Shanks v (1) Unilever PLC (2) Unilever BV and (3) Unilever UK Central Resources Limited
This is a rare case concerning the matter of employee-inventor compensation and illustrates the very high bar that must be met for an employee to obtain compensation for an invention from an employer. The legal test for determining whether an employee-inventor is entitled to compensation is that the invention or the patent must be of outstanding benefit to the employer. In this case, it was found that the invention was not of outstanding benefit to the employer. In arriving at this decision, the Court considered a number of factors, with the size and the turnover of the employer compared to the benefit accrued from the invention playing a major role in the decision.
This case related to an appeal against a dismissal by Arnold J ( EWHC 1647 (Pat)) of an appeal against a decision on behalf of the Comptroller-General of Patents (BL O/259/13). The further appeal related to an unsuccessful claim by Professor Shanks against Unilever PLC, Unilever NV and one of their subsidiaries (collectively "Unilever") for employee compensation in respect of European Patent (UK) No. 0170375 and related patents (collectively "the Shanks Patents").
In the first instance case, the Hearing Officer concluded that (i) the benefit to Unilever from the Patents was £24.5 million; (ii) that this benefit was not outstanding; and (iii) if (contrary to his conclusion) the Shanks Patents were of outstanding benefit, a fair share of the benefit for Professor Shanks would be 5%. Professor Shanks challenged both the Hearing Officer's conclusion that the Shanks Patents were not of outstanding benefit and his conclusion as to fair share.
Professor Shanks was employed by Unilever UK Central Resources Limited (CRL) from 1982 to 1986. CRL was a wholly-owned subsidiary of Unilever plc and employed all of Unilever’s research staff in the UK. It was common ground that, in accordance with section 39(1) Patents Act 1977, the rights to any inventions created by Professor Shanks in the course of his employment belonged to CRL.
Further, in accordance with standard Unilever policy, CRL assigned the rights in the invention to Unilever PLC. Professor Shanks signed two confirmatory assignments, for which he received $1 each.
Between 1992 and 2001 the majority of companies in the blood glucose testing field took non-exclusive licences for the remaining life of the Shanks Patents. Under the terms of the licence, the licence fees were payable in instalments. Professor Shanks had little involvement in the licensing of the Shanks Patents and did not develop the technology, nor push forward the commercial exploitation, in any other way.
The Hearing Officer’s conclusion that the benefit which Unilever derived from the Shanks Patents was £24.5 million was challenged by both parties. Professor Shanks contended that an additional sum should have been included to reflect the “time value” of the money to Unilever. In other words, Unilever had use of the money which was in itself an economic benefit to Unilever. It was argued that this was a “benefit” within section 43(7). Arnold J dismissed this on appeal and agreed with Unilever’s submissions that the benefit derived by Unilever from the Shanks Patents is the benefit net of tax.
On appeal, Arnold J also agreed with the Hearing Officer’s determination that the research would have been undertaken, even without a patent. Therefore, the judge upheld the Hearing Officer’s conclusion that £250,000 for the costs of filing, prosecuting, maintaining and licensing the Shanks Patents could be deducted, but not the £1.75m research and developments costs attributable to the development of the technology.
Finally, on appeal Arnold J commented on what comprised a fair share:
In my judgment this is where the Hearing Officer's failure to take Unilever's ability to extract licence fees due to its size and financial resources into account becomes important. He awarded Prof Shanks a larger percentage than Dr Kelly because Unilever did not put substantial resources at risk, whereas Amersham did. That is true, but it overlooks the fact that the benefit which Unilever derived from the Shanks Patents was obtained purely from licences which Unilever was able to conclude at least in part because of its size and financial resources. In those circumstances I do not think it would have been right to award Prof Shanks a greater percentage than Dr Kelly and Dr Chiu together, that is to say, 3%.
In summary, Arnold J decided that the Shanks patents were not of outstanding benefit to Unilever and dismissed the appeal.
Permission to appeal was granted by Floyd LJ for this second appeal on the basis that it raised important issues of principle in relation to what constitutes outstanding benefit and how it should be calculated.
Professor Shanks challenged the decision of the Hearing Officer as affirmed by Arnold J that the patents did not confer an outstanding benefit on Unilever and repeated the submission that the calculation of benefit should include an allowance for the “time value” of money. He also contended that a fair share of the benefit to Unilever would be at least 33 per cent rather than the 5 per cent which the Hearing Officer would have awarded. Finally, he invited the Court of Appeal to overturn Arnold J’s conclusion that the financial benefit should be calculated net of tax.
The Court first noted that there was no statutory definition of “outstanding”. The Court first considered the established case law and noted:
Although attempts to re-define the statutory test by the use of a variety of synonyms are to some extent inevitable as part of the process of statutory construction, I agree that they are largely unhelpful. Outstanding is an ordinary English word with a readily understood meaning and was doubtless chosen by Parliament to identify the exceptional nature of the benefit that must exist. It may be useful for this purpose to consider whether the benefit to the employer exceeded what would normally be expected to result from the work for which the employee was paid so long as one bears in mind that the focus of s.40(1) is on the benefit to the employer and not on the degree of inventiveness of the employee. For that reason, I would not adopt the suggestion made in British Steel PLC's Patent (quoted above) that the patent must stand out from the rest except in the sense of its return or value to the employer.
Unilever’s central argument on outstanding benefit was that the £24.5m, although not an inconsiderable sum in itself, was simply dwarfed by the turnover and profits of the Group as a whole. Unilever manufactures a wide range of highly successful products from Viennetta ice-cream to deodorants which on the evidence generated billions of pounds in sales over the life of the patents and hundreds of millions of pounds in profits. Although it was accepted that the rate of return on many of those products is much lower than on the Shanks patents, that was said not to be enough to make the benefit from the Shanks patents outstanding when regard is had to the size and nature of the employer's undertaking which it must be in accordance with section 40(1).
This argument was described by Shanks as “Too big to pay“. Shanks argued that if section 40(1) calls for no more than a simple comparison between the value of a patent and the turnover and profitability of the employer's undertaking, it must follow that in relation to companies like Unilever it would be all but impossible for any employee to establish that the benefit generated by the relevant patents had been outstanding. Therefore, the compensation regime contained in section 40 would have no possible application to a whole raft of major research industries.
Before deciding this point, the Court first considered three specific issues that had a direct bearing on the calculation of the financial benefit to Unilever. They were: (i) what constituted the employer's undertaking for the purpose of section 40(1); (ii) whether the £24.5m should be increased to reflect the time value of the money to Unilever; and (iii) whether the £24.5m should be reduced to take account of corporation tax.
In relation to the undertaking (i), the Court decided:
An assessment of what constitutes the undertaking based on the economic and business realities of the employer's organisation is the correct approach. If one takes a strictly legal approach to the construction of the statute it can be said that the employer is CRL and that CRL's undertaking in financial terms is limited to the nominal payments it receives on the assignment of the patent rights. But if that approach is to govern s.40(1) it must also apply to s.41(1) with the consequence that the benefit derived from the patent is limited to those sums and does not include the £24.5m subsequently received by other companies in the Group from licence fees.
The Court thus concluded that the undertaking included Unilever plc and Unilever NV.
ii) Time value of money
The Court first noted that there was no doubt that the time value of money was a quantifiable financial benefit so that its loss can be the subject of an award of compound interest as part of a claim in restitution. However, the Court drew a distinction between a claim for damages or unjust enrichment and Professor Shanks' right to statutory compensation under the terms of section 41(1) which limit any award to a fair share of the benefit derived by the employer from the patent.
The Court therefore upheld the decisions of Arnold J and the Hearing Officer:
I agree with Arnold J that this is limited to direct receipts from the exploitation of the patent rights and does not include an allowance for the fact that the employer has had the benefit of those receipts for a period of time prior to any award under s.41(1). As he pointed out, the monies received would have been employed in other activities which were either profitable or loss-making but the results of bringing that into account could be random and unpredictable and bear no relation to what the patent produced for the Group. It is the opening balance which counts. I think that the Hearing Officer was also right to point out that if the calculation of benefit is to include an allowance for the 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.
Shanks challenged Arnold J's reduction of the amount of the benefit by reference to the amount of corporation tax which Unilever paid on the licence fees. The judge's decision was, it was argued, wrong in principle and results in tax being deducted twice; first by the allowance for corporation tax and secondly because the award would be taxable in Professor Shanks' hands.
The Court agreed with this argumentation and rejected Arnold J’s approach that the benefit to be assessed is the benefit net of tax:
I think that the judge was right to reject an analogy with the calculation of damages as unhelpful because the first stage in any s.41(1) calculation is to determine the benefit derived from the patent. But I think that he fell into error in treating that amount as the licence income net of tax. An adjustment of the gross sum to take account of corporation tax would require an investigation into the employer's tax position taking into account years of loss as well as profit; the possibility of carrying losses forward and an assessment of whether and to what extent any payment to the employee would be deductible. I do not consider that this was what Parliament can have intended when it referred to the benefit derived from the patent. The incidence of tax is unconnected to the financial benefit which the patent produced for the employer. Its deduction is no more part of the calculation of what constitutes the benefit than the time value of the money received. Both are consequences of the benefit rather than part of it. The £24.5m should not therefore be reduced to take account of corporation tax.
Too big to pay
On the “too big to pay“ point, the Court reviewed the facts of the case and essentially dismissed this ground of appeal on the basis that the Hearing Officer had not considered this as the sole factor in determining the benefit:
The argument that  of the decision embodies a misdirection can only succeed if what the Hearing Officer decided was that the only relevant and determinative factor was the size of the profits generated by the Shanks patents in comparison to the overall profits of the Group. As I mentioned earlier, Mr Green put it in argument in terms of this being simply a comparison with total profitability. If the correct reading of the decision is that the Hearing Officer did carry out an analysis of the other factors which were pressed on him as relevant but concluded that on balance they did not make the benefits outstanding then it would not be right in my view for this Court to interfere. The weight to be given to those factors was a matter of judgment for the Hearing Officer.
What I think does matter is that he properly took all these matters into account but was not persuaded that the benefits which the patents did bring could be described as outstanding when looked at in the context of the overall performance of the Group. That seems to me to be what he was required to do under s.40(1). There is, I think, something to be said for Mr Alexander's argument that if all that the patents produced was money then it is not irrelevant to look at the benefit they brought largely in money terms. In any event, it is a misreading of the decision to suggest that the Hearing Officer reached his conclusion solely on the basis that the income from the patents was a small part of Group income in the relevant years. Ground 1 therefore fails.
Therefore, the appeal was dismissed. However, Briggs LJ noted in a secondary judgment:
I agree that this appeal should be dismissed, for the reasons given by Patten LJ. I do so with some reluctance because this does appear to be a case in which the sheer size of the employer's undertaking was, at the end of a careful and balanced analysis by the Hearing Officer, the key factor in his conclusion that the benefit which Unilever derived from Professor Shanks' invention was not 'outstanding' within the meaning of that word in s.40(1) of the 1977 Act. It may be going too far to say that Unilever was simply 'too big to pay', but there is no escaping the fact that Professor Shanks might well have succeeded had his employer had a much smaller undertaking than did Unilever.
The other grounds of appeal were dismissed on the facts. Therefore, Shank’s appeal failed.