The Supreme Court has handed down its judgment in the 13-year saga of Shanks v Unilever  UKSC 45. It held that Professor Shanks, the inventor of a patented glucose concentration testing method that yielded £24 million for Unilever, was entitled to inventor’s compensation of £2 million because his contribution to the patent was “outstanding”.
Background to the Shanks case
Prior to this judgment, there had been many failed attempts for inventor’s compensation with only one successful claim Kelly and Chiu v GE Healthcare Ltd. In Kelly, an imaging agent patent yielded £1.3 billion against costs of £2.5 million, which the inventor argued had kept the employer’s business solvent. The Court considered that “outstanding” meant “out of the ordinary” and was a higher threshold than “substantial”. This set the bar high for any inventor to be able to prove their invention is “outstanding”.
Professor Shanks worked for a company called CRL an R&D subsidiary of Unilever. He was “employed to invent.” In October 1982, he invented an electrochemical capillary fill device used in glucose testing for diabetics – originally using slides from his daughter’s toy microscope in his prototype. CRL assigned the resulting patents to Unilever plc for a nominal sum. This technology was ancillary to Unilever’s core business, a wide range of foods and consumer goods, but it received a net benefit of £24 million by licensing the patents. Unilever’s overall profits were measured in the hundreds of millions of pounds at the time.
Professor Shanks brought his claim on 9 June 2006. There were numerous appeals, but the Hearing Officer (the first instance decision) and the Court of Appeal both found that the benefit was not “outstanding” relative to the overall profits of Unilever. Where the benefit is assessed relative to the employer’s undertaking, in this case Unilever’s entire corporate group, it can lead to a “too big to pay” issue.
How was the outstanding benefit assessed?
On appeal, the Supreme Court assessed “outstanding” in terms of several factors.
The first was relative to the employer’s undertaking. Identifying the undertaking as only the employing entity, CRL, was not appropriate as this would set the benefit to the nominal sum received. However, it also wasn’t appropriate to compare the benefit received by the entire corporate group to the profitability of the employing entity only. The Supreme Court sought a middle ground between these – assessing the “benefit of that patent to the group and how that compares with the benefits derived by the group from other patents for inventions arising from the research carried out by that company”. Essentially the Supreme Court is comparing “like-for-like” by looking at the patent in question against other patents of the same business.
The Supreme Court pointed to other examples of where the benefit could be “outstanding” – whether the benefit was more than would normally have been expected from the duties of the employee, if the benefit arose at no cost to the business, if the rate of return was extraordinarily high or if it led to a new line of business or unforeseen licensing opportunities. Another factor was that a large undertaking may be able to harness its goodwill, sales force or licensing team in a way that a smaller undertaking could not (which could reduce the net benefit). On the facts, the Supreme Court found that the benefit was outstanding relative to the benefit from Unilever’s other patents, entitling Professor Shanks to compensation.
What is fair share of the benefit?
In this case to calculate a fair share of the benefit, the Hearing Officer considered the nature of Professor Shanks’ duties, his remuneration, the fact that he was employed to invent, the effort and skill involved in the invention, the contribution made by Unilever to making, developing and licensing the invention as well as extrinsic evidence about typical awards for corporate and university employee compensation schemes.
The Hearing Officer decided on a figure of 5% of the benefit. The Supreme Court upheld the 5% figure, applied it to the £24 million figure and then applied an adjustment for inflation to reach a final compensation figure of £2 million.
Who does this apply to?
Under section 39(1)(a) of the Patents Act 1977 (the “Patents Act”), an employer automatically acquires ownership of patentable inventions made by its employees in the course of their duties. This applies where an invention might reasonably be expected to result from their duties. This does not apply to inventions if the duties of the employee are non-technical, i.e. where there wouldn’t be an expectation that the employee would invent anything.
Section 40 goes on to provide that an employer must pay compensation to an employee who invents a patentable invention that is of “outstanding” benefit to that employer. Compensation is calculated as a fair share of that benefit taking account of all the circumstances. This has potentially wide application, particularly to tech businesses. Depending on the circumstances, it can apply to businesses that file thousands of patents as much as those that file only a handful.
What should I be doing?
Businesses with existing patent portfolios should assess their patents to see whether any of them are vulnerable to claim – for example because they are significantly more valuable than the other patents in the portfolio. Start-up businesses filing their first patents may be particularly susceptible if the patent protects their only technology or a key aspect of their technology. If so, businesses can take steps to prepare for potential claims.
It’s helpful to keep track of the cost and effort involved in developing patents – such as the investment in specific technology and the cost and revenue of any licensing using those patents to gain a more accurate picture of the benefit. In the case of Shanks, the revenue related to the patents was easy to calculate as it was royalties from licensing. By contrast, in other cases the success of a business’s patented product will flow from a combination of product design, effective marketing, a brand, or a slogan as well as the value of the invention to the customer and the protection from competition offered by the patent. It will be up to the business to document this to the extent possible. In a dispute, this may require independent expert evidence.
Businesses can expect the 5% fair share figure from Shanks to have an anchoring effect. However, it may be worth exploring arguments as to whether a lower figure would be appropriate in unusual circumstances.
Another avenue to explore is whether a business should implement its own compensation scheme. While you cannot contract out of the statutory scheme (under section 42 of the Patents Act), the presence of a voluntary scheme may satisfy inventors or even motivate potential inventors and may result in fewer claims. You should consider whether the compensation scheme should sit outside of the employment contract, so that it can be amended or revoked where necessary. You may also want to provide that any rewards would be repaid or deducted if the employee sought compensation under section 40, so that they would only be compensated once.
What happens now?
While the judgment falls short of opening the floodgates, it is likely to encourage more claims over time and we can expect further cases to follow on the heels of Shanks. Businesses can expect inventors to be more assertive in negotiations in reliance on this judgment.
Going forward, it will be more difficult for a business to refuse to pay inventor’s compensation on the basis that the benefit from an invention was not “outstanding” relative to the business’s overall profits – in other words that it’s “too big to pay”.
How can we help you?
We have a long history of advising tech companies on all aspects of their businesses, including protecting and monetising their IP and drafting in-house inventors and engineers employment contracts. We can advise clients on the different aspects of inventor compensation discussed above.
For more information or advice, please contact Rebecca Steer firstname.lastname@example.org.