The relevant undertaking

"Under-cat" A different kind of undertaking...

Section 40(1) UKPA states that, when considering if an employee should be awarded compensation for his invention, the court should have "regard among other things to the size and nature of the employer’s undertaking". In the UKSC decision, Lord Kitchin reasoned that the Hearing Officer and lower courts had erred in their interpretation of the appropriate "undertaking" of Professor Shanks employer. The "undertaking" to be considered, according to the UKSC, was not that of Unilever as a whole. The relevant undertaking was instead that of the Unilever subsidiary by which Professor Shanks was directly employed (CRL), whilst also taking account of the commercial relationship between CRL and Unilever as a whole.

In order to establish the correct "employer undertaking" in the case in question, Lord Kitchin observed that in many situations relating to employee compensation, identification of the appropriate undertaking "will be comparatively straightforward. It will be the whole or, if it is divided into economic units, the relevant unit of the employer's business" (para. 41). However, the case in question was a different and more difficult case.

Unilever argued that the relevant undertaking was Unilever as a whole. In particular it was argued that it was "unreal to treat CRL as the relevant undertaking because it never generated any material revenues, was not the beneficiary of the royalties in question and is and was simply a service company for the Unilever group" (para. 45). Furthermore, the £24.3m benefit from the Shanks Patents went to the Unilever group as a whole. By contrast, Professor Shanks argued that the relevant undertaking was that of CRL. Particularly, CRL was Professor Shanks' direct employer and the entire Unilever group could not sensibly be described as CRL's undertaking (para. 45).

Lord Kitchin opted for an approach that lay between these two extremes. The analysis, according to Lord Kitchin, should have a more practical and commercial focus. In particular, the question to ask was what would have been the expected benefit of a patent originating from a research facility such as CRL, operating as part of the larger Unilever group, to Unilever as a whole?

Size and nature (among other things)

Lord Kitchin asked to how much the size and nature of an employer's undertaking should be taken into account when considering if a benefit to the employer was outstanding (as per Section 40(1) UKPA). As may be expected from a UK judge, Lord Kitchin thought there could be no single answer to this question. Importantly however, Lord Kitchin confirmed that in many circumstances, "a straightforward comparison of profitability may be sufficient, in the case of a smaller company, to show an outstanding benefit" (para 52.). On the other hand, Lord Kitchin warned against only considering the effect of a patent on overall sales of profitability when considering if the patents had been of outstanding benefit to an employer (para. 54).

Outstanding benefit

Lord Kitchin had therefore established, in contrast to the lower courts, that the relevant undertaking was the expected contribution of CRL to Unilever, and not the undertaking of Unilever as a whole. Lord Kitchin then applied the "outstanding benefit" test. Importantly, this test still involved a comparison of benefit from the Patent and total sales and profits of the "undertaking". The difference was the definition of the undertaking, essentially removing Unilever's ice cream and deodorant business from the equation (para. 79.).

Having established a different starting point to the lower courts, Lord Kitchin also noted that the Shanks Patents stood out as providing an abnormally high benefit given Unilever's normal business model. In Unilever's main business, branding was of far greater significance than patent protection. Unilever had been unable to point to any other patents within its portfolio providing as great a benefit as the Shanks Patents. Lord Kitchin also observed that the size and success of Unilever's business as a whole had not played any material part in securing the benefit provided by the Shanks Patents. In particular, Unilever's manufacturing capacity or sales and distribution facilities had not played any role in securing the £23.4m benefit.

Unilever ice-cream

The UKSC therefore concluded that the Hearing Officer had been wrong in principle. In particular, there had been no "justification here for simply weighing the sums Unilever generated from the Shanks patents against the size of its turnover and overall profitability in products such as Viennetta ice cream, spreads and deodorants". To look at it another way, had Professor Shanks invented a new type of ice cream or deodorant providing a £24.3m benefit to Unilever, the outcome of the appeal may have been very different.

Therefore, having first established that it was the undertaking of CRL and not Unilever as a whole that was relevant, the decision of the UKSC to award compensation to Professor Shanks is not surprising. The case primarily went against Professor Shanks in the lower courts because the £24.3m benefit provided by the Shanks patents had been compared to, and dwarfed by, the turnover and profits of Unilever as a whole. Lord Kitchin did not conclude that it was wrong to take account of the overall profits and sales of the employer. On the contrary, Section 40(1) UKPA indicates that these should be considered. Lord Kitchin merely differed from the Hearing Officer and the lower courts as to the scope of the relevant undertaking in a case where the inventor is employed by a subsidiary, and wherein the subsidiary's business activities are very different to the company as a whole. The UKSC decision is therefore only likely to be of concern to large companies with multiple and diverse fields of business, particularly where technologies not fitting in with the main business have been out-licensed.
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Appendix: A note on the amount of compensation

£2m compensation is the largest amount of compensation that has been awarded to an employee-inventor under Section 40. Lord Kitchin agreed with the Hearing Officer that a "fair share" of the benefit derived by Unilever from the patents was 5%. Lord Kitchin disagreed with Professor Shanks' argument that a fair share would have been between 10-20%, given that, amongst other factors, the patent had been exploited at no risk to Unilever. Lord Kitchin agreed with the Hearing Officer at first instance that 5% was fair given that 1) Professor Shanks was employed to invent and, in making the invention, did what he was employed to do. Furthermore, the benefit of the patents was brought to fruition by Unilever's negotiation of the licences (something in which Professor Shanks played no part) (para. 91).

Lord Kitchin disagreed with the Hearing Officer, that the time value of the money should be taken into account. The £2m awarded to Professor Shanks therefore took account of the average inflation rate of 2.8%.

Image credits: under-look

This morning the UK Supreme Court handed down its decision in Shanks v Unilever ([2019] UKSC 45) concerning Professor Shanks' long battle to receive compensation for his invention from his former employer, Unilever. Professor Shanks failed in his previous attempts to receive compensation at a UK IPO Hearing, in the Patent Court and in the Court of Appeal. Today's UKSC decision, led by Lord Kitchin, dramatically upheld his appeal. In an unanimous decision, the UKSC awarded Professor Shanks £2 million compensation from Unilever. 

Deciding the fair share

The Supreme Court decision

IPKat is still digesting the UKSC decision and will provide a more detailed analysis in coming days. In summary, the UKSC, led by Lord Kitchin found that the Hearing Officer had incorrectly applied the test for outstanding benefit. Particularly, the UKSC found 4 things wrong with the Hearing Officer's approach:

1. The Hearing office started his analysis from Unilever as a whole, as opposed to the research arm of Unilever (CRL) at which Professor Shanks was employed.

2. Irrespective of the starting point, the analysis should have focused on the extent of the undertakings of CRL, and should not have focused "upon the overall turnover and profits generated by Unilever, as illustrated by the size of its business in making and selling ice cream, spreads and deodorants"

3. The Hearing Officer did not properly take into account the fact that the size and success of Unilever’s business as a whole did not play any material part in securing the benefit it has enjoyed from the Shanks patents.

4. The Hearing Officer, having warned against applying an analysis that would render certain employers "too big to pay", had proceeded to apply such an analysis:

the hearing officer appeared rightly to disavow an approach which involved assessing the extent and nature of the benefit derived from a patent simply by comparing it to the patent owner’s overall turnover or profits. But he also indicated these matters might be relevant if, for example, an undertaking’s size enabled it to exert greater leverage. Yet, having apparently rejected such an approach, he then adopted it. There was no justification here for simply weighing the sums Unilever generated from the Shanks patents against the size of its turnover and overall profitability in products such as Viennetta ice cream, spreads and deodorants and yet this formed an important part of his assessment

The UKSC has therefore reaffirmed that the assessment of "outstanding benefit" should not render an employer too big to pay. Has Lord Kitchin ruled out any comparison between the total profits of an employer and the benefit of the patent? It seems perhaps not. The difference between the business activities of Unilever as a whole and the research arm in which Professor Shanks was involved was emphasised as a determining factor throughout the decision of the UKSC to award compensation. Furthermore, throughout its entire passage up through the courts from the Hearing Officer's decision, there was agreement that an employer shouldn't be "too big to pay". 

The different approach by the UKSC appears, at least to this Kat, was merely to divorce the activities and purpose of the diagnostics research arm of Unilever from Unilever as a whole. The UKSC decision therefore reaffirms the importance of the appropriate context for determining the meaning of "outstanding benefit". Context is the crucial element in avoiding an analysis in which an employer will always be too big to pay.

Further commentary on the UKSC decision can be read here. 

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.