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.