No compensation, no consolation -- or no thanks, Shanks

While she may be officially on sabbatical, Catherine Lee (alias Cat the Kat) has not taken her eye of the array of recent judicial attractions that have flowed like water into a host of eager in-boxes. One such attraction has ended up in a blogpost from her. It's Shanks v Unilever Plc & Others [2014] EWHC 1647 (Pat), a Patents Court for England and Wales ruling of the indefatigable Mr Justice Arnold. Like the judgment, this blogpost is of some length. But never mind, it's well worth the read. Writes Catherine:

Having drafted the odd confirmatory patent assignment in her time, this Kat knows that employee inventions are always a controversial issue. On one hand, employees are engaged and paid as part of their normal duties to invent, so any financial benefit flowing from their inventions should belong to their employers. However, if that financial benefit to the employer is so great, should the employer keep all of the financial benefit while the employee merely receives their standard wage?

This Friday Mr Justice Arnold delivered the latest decision in the proceedings involving Professor Ian Shanks, Unilever plc and an invention which led to a patent for measuring activities which was later used in diabetes blood testing kits [Kat plot-spoiler alert: after 124 paragraphs of his usual high structured thoroughness, Arnold J at [123] dismissed Professor Shanks' appeal against the decision of the Comptroller General of Patents that the patents on his invention were not of outstanding benefit to Unilever and that, therefore, he was not entitled to an award of employee compensation under section 40(1) of the Patents Act 1977. For earlier episodes in this long-running drama, see Katposts here and here].

Background

This was an appeal by Professor Shanks against a decision of 21 June 2013 on behalf of the Comptroller-General of Patents (BL O/259/13), dismissing his claim against Unilever for employee compensation for European Patent (UK) 0 170 375 (“EP375”) and related patents (collectively “the Shanks Patents”) under section 40(1) of the Patents Act 1977. After hearing extensive witness testimony and reviewing significant volumes of documentary material, the hearing officer concluded that (a) the benefit to Unilever from the Shanks Patents was £24.5m, (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%. Both sides challenged this decision. Professor Shanks challenged both the hearing officer’s conclusion that the patents were not of outstanding benefit and his conclusion as to fair share. By a respondents’ notice Unilever challenged his conclusions as to the amount of the benefit and as to fair share.

The value of a confirmatory assignment?

For those who are new to these proceedings, Professor Shanks was employed by Unilever UK Central Resources Ltd (CRL) from 5 May 1982 to 3 October 1986. CRL employed all of Unilever’s UK-based research staff: it was not a trading company, but a wholly-owned subsidiary of Unilever plc. It is common ground that, as between Professor Shanks and CRL, the rights to any inventions created by Professor Shanks belonged to CRL according to section 39(1) of the 1977 Act. In accordance with standard Unilever policy, CRL assigned the rights in the invention to Unilever plc for £100. Professor Shanks was asked to sign, and did sign, two confirmatory assignments, for which he received $1 each. The application for EP375 was filed by Unilever on 12 June 1985 with Professor Shanks and two other inventors claiming priority from two UK patent applications of which Professor Shanks was the sole inventor -- 8414018 (for an Electrochemical Capillary Fill Device (ECFD)) and 8415019 (for an Fluorescent Electrochemical Capillary Fill Device (FCFD)). EP375 was granted on 16 May 1990; other patents for this invention were also obtained in Australia, Canada, Japan and the USA. All the Shanks Patents expired on 11 June 2005 except for the US Patent, which expired on 25 August 2009.

Between 1992 and 2001 most of the companies operating in the blood glucose testing field took fully paid-up non-exclusive licences for the remaining life of the Shanks Patents under which 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. In 1994 Unipath, a subsidiary of Unilever, took over the bulk of Unilever's medical diagnostics business. In 2001 Unipath was sold to Inverness Medical Inventions. As noted above, the hearing officer calculated that the total gross benefit which Unilever obtained from the Shanks Patents was £24.5m.

What was the benefit to Unilever?

Both sides challenge the hearing officer’s conclusion that the benefit which Unilever derived from the Shanks Patents was £24.5 million. Professor Shanks contended that the hearing officer ought to have included an additional sum to reflect the time value of the money to Unilever (ie Unilever had the use of the money and that was in itself an economic benefit to Unilever which should be taken into account). Unilever contended that the hearing officer ought to have reduced the total to reflect (i) corporation tax paid by Unilever, (ii) research and development costs and (iii) a greater percentage of the licensing income being attributable to non-Shanks Patents.

Providing
a benefit

Arnold J rejected Professor Shanks' argument and gave five reasons why it was not a 'benefit … derived … from' the Shanks Patents within the meaning of section 41(1) of the 1977 Act. On the three Unilever arguments, Arnold J agreed with Unilever on the corporate taxation point, namely that in the circumstances of this case, the benefit derived by Unilever from the Shanks Patents is the benefit net of tax. However, in determining the benefit derived from the Shank Patents, Arnold J agreed with the hearing officer 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 technology from 1984 to 1994 (at [58]). Further, Arnold J agreed that the hearing officer was wrong not to allocate a greater percentage of the licensing income being attributable to non-Shanks Patents (at [60]).

Was the benefit outstanding?

It was common ground that the test of outstanding benefit is a qualitative one (at [66]). The hearing officer considered the benefit from a number of different perspectives: in the light of Unilever’s profits and turnover; in relation to patents in general; in the context of Unilever’s licensing activities; in view of Unilever’s patent activities; and compared to Unilever’s activities in general. In particular he stated that 'there was no suggestion from either party that the Shanks patents were crucial to Unilever’s success. In my view, taking account of the size and nature of Unilever’s business, the benefit provided by the Shanks patents falls short of being outstanding.'

Professor Shanks challenged the hearing officer’s conclusion that the benefit was not outstanding on no fewer than seven grounds: In particular, his criticisms were that the hearing officer (a) was wrong to decide that the benefit which Unilever obtained from the Shanks Patents was not outstanding because of the large profits which Unilever ordinarily made in the course of its business (ie £23m in royalties was not a lot by Unilever standards, although it may be for smaller companies of a different nature); (b) failed to take into account the disparity between what he received from the Shanks Patents and what Unilever received; (c) was wrong to conclude that how the benefit was obtained (ie primarily by licensing and selling them, rather than exploitation by manufacture) was irrelevant; (d) placed insufficient weight on Unilever obtaining the benefit from the Shanks Patents with very little commercial risk and at a very high rate of return; (e) was wrong to conclude that the benefit was not outstanding in the context of the Unilever group as a whole given his own findings; (f) failed to take account the inability of Unilever to establish the benefit obtained from any of their other patents; and (g) overlooked significant concessions made during cross-examination by Unilever’s witness as to the significance of the Shanks Patents to the sale of Unipath.
Arnold J was not satisfied that the hearing officer made any error of principle in concluding that the Shanks Patents were not of outstanding benefit to Unilever.

What would a fair share have been?

For completeness, Arnold J considered the points on fair share. As noted above, the hearing officer concluded that if (contrary to his earlier finding) the Shanks Patents were of outstanding benefit, a fair share of the benefit for Prof Shanks would be 5%.

Professor Shanks contended that 5% was too low for no fewer than nine different reasons. For Arnold J, the main points that require consideration under this heading were that the hearing officer (a) wrongly distinguished this case from the situation envisaged by Floyd J in Kelly v GE Healthcare in 2009 (ie university practice of typically paying academic inventors a third of exploitation income -- noted very briefly on this weblog here); (ii) failed to take into account the time value of money; (iii) failed to take into account the costs incurred by Professor Shanks in bringing this claim and that his representatives acted on CFAs; (iv) failed properly to appraise Unilever’s licensing activities (ie Unilever's efforts to licence the Shank Patents were poor in that they could and should have negotiated higher royalties) and (v) failed to take into account the very high rate of return obtained by Unilever. Arnold J systematically rejected each of these arguments. 

In response, Unilever contended that 5% was too high for three main reasons:  these were that (a) the hearing officer failed properly to consider the contribution made by the employer (ie the critical role of Unilever’s size and financial clout in extracting licence fees and seeing infringement proceedings through to the end, particularly in circumstances where there was unchallenged evidence that the validity of the Shanks Patents was open to question); (b) the hearing officer failed properly to consider the relative contribution of Professor Shanks and his co-inventors in making the invention so that Professor Shanks as lead inventor had 'scooped the pool'; and (c) the award was inconsistent with that in Kelly where 2% was awarded to the lead inventor. Arnold J accepted Unilever's submission on (a) and (c) . However, with some hesitation, Arnold J did not accept Unilever's submission in respect of (b).

The IPKat notes Arnold J's obvious displeasure that 'a claim of this nature should take seven years to reach a first instance determination', and endorses his I'm-throwing-no-stones' exhortation to the UK IPO 'to ensure that such claims are determined within a reasonable time of commencement' at [124].

Merpel's just glad she's not an inventor.  The Patents Act 1977's employee compensation scheme provides an incentive to litigate, but not much more comfort than that.