Supreme Court rules on employee rights to patent compensation

Out-Law News | 24 Oct 2019 | 9:13 am | 5 min. read

The benefits a whole group of companies derive from patented technology will in some cases be relevant to claims raised by employees that those benefits are 'outstanding', and that they are therefore entitled to a 'fair share' of them, the UK's top court has said.

UK patent law provides employees with qualified entitlement to compensation from their employer in cases where they have made inventions which their employer has subsequently obtained patent protection for.

The rights to compensation only apply where, among other criteria, the patent is of "outstanding benefit" to the employer. In such cases employees are entitled to "a fair share" of the benefit which the employer has derived.

In a new judgment, the Supreme Court has confirmed that the concept of 'employer' can, in some circumstances, extend to a whole group of companies, and not just the subsidiary of that group that the employee was directly employed by, for the purposes of assessing the benefits of a patent and associated employee claims of entitlement to compensation.

"The commercial reality of the situation" in each case will dictate how broad the scope of 'employer' should be applied, the court said.

However, it confirmed circumstances in which group companies operating research facilities can be considered as the 'employer' rather than the individual subsidiary that directly employs the inventor researchers.

"Where … a group company operates a research facility for the benefit of the whole group and the work results in patents which are assigned to other group members for their benefit, the focus of the inquiry into whether any one of those patents is of outstanding benefit to the company must be the extent of 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," Lord Kitchin said in his leading judgment in the ruling.

The Supreme Court was considering the issue of employees' patent compensation claims in a case involving a dispute between Unilever and professor Ian Shanks. Shanks previously worked at a research laboratory operated by Unilever UK Central Resources Ltd (CRL), a Unilever group subsidiary, in the 1980s.

While employed by CRL, Shanks invented a system for measuring the glucose concentration in blood, serum or urine. The invention has subsequently been used for controlling diabetes.

Unilever owned the rights to Shanks' invention from the outset and the company subsequently was granted patent protection for the invention. According to the judgment, Unilever's net earnings stemming from the subsequent licensing and sale of the so-called Shanks patents total approximately £24 million.

In 2013 a hearing officer acting for the comptroller general of patents at the UK's Intellectual Property Office (IPO) ruled that the benefit provided by the Shanks patents fell short of being 'outstanding' and that therefore Shanks was not entitled to specific compensation for his invention.

Shanks' subsequent appeals on the question of 'outstanding benefit to the employer' before the High Court and then the Court of Appeal were rejected. However, the Supreme Court has now ruled that the Shanks patents "were of outstanding benefit to Unilever and CRL" and that Shanks is entitled to a fair share of that benefit, which the court determined is £2m.

In its ruling the Supreme Court clarified how both the principle governing the assessment of outstanding benefit to an employer and the principle of a fair share of an outstanding benefit should be assessed.

Intellectual property expert Mark Marfé of Pinsent Masons, the law firm behind Out-Law, said: "The Supreme Court has provided useful guidance on the question of employee-inventor compensation, in particular how 'outstanding benefit to the employer' should be assessed in the context of large as well as small businesses."

Relevant to the court's assessment of outstanding benefit is the size and nature of the business, but the Supreme Court confirmed there is no single way to assess the relevance of this factor to whether the benefits of the patent are 'outstanding'. It said "many different aspects of the size and nature of the employer’s business may be relevant to the enquiry".

"For example, the benefit may be more than would normally have been expected to arise from the duties for which the employee was paid; it may have been arrived at without any risk to the business; it may represent an extraordinarily high rate of return; or it may have been the opportunity to develop a new line of business or to engage in unforeseen licensing opportunities," the Supreme Court said.

The court suggested that the benefit of patents to a group could be measured against benefits the group has derived from other patents too, and that "in some cases it may be possible to see that a patent has been of outstanding benefit to an employer by looking at the size and profitability of the whole business".

It said "a straightforward comparison of profitability" may be possible in some cases, but highlighted that the ability of larger organisations to "exert greater leverage" from patents than smaller companies would also be a factor to be considered when factoring the size and nature of a business into the 'outstanding benefit' assessment.

The Supreme Court confirmed, though, that it cannot automatically be assumed that a patent has not been of outstanding benefit to an employer "simply because it has had no significant impact on its overall profitability or the value of all of its sales".

On the assessment of what constitutes an employee's 'fair share' of the outstanding benefits derived from patents, the Supreme Court also provided guidance.

It said "the time value of money" can be a benefit derived from a patent, and that therefore employee inventors can obtain an "uplift" in compensation in some cases for "the deleterious effect on the real value of money" that can arise, for instance, in cases where there is a delay between when employers receive patent royalties or other moneys and the employee obtaining a 'fair share' of those benefits.

The court said it is open to tribunals to apply inflation when assessing what should constitute a 'fair share', and rejected arguments that this would "encourage delay" from employees in bringing patent compensation claims forward.

The Supreme Court further clarified that employers' tax liabilities stemming from patent benefits should not be deducted before the benefits of those patents have been quantified or before it is determined how much compensation would represent a 'fair share' of those benefits.

"The employee must account for any tax due on that share and the employer must account for any tax due on the balance," Lord Kitchin said. "The approach for which [Unilever's legal representative] contends, on the other hand, would mean that the employer has only to pay to the employee a share of the benefit net of tax but can take the benefit of any available relief from tax in respect of the moneys he has paid, whilst the employee will be liable to account for tax on the moneys that he or she has received. In my judgement the former approach is both fairer and consonant with the legislative purpose of these provisions."