Apples and Oranges: Shanks v Unilever

Shanks v Unilever [2019] UKSC 45

For many years there has been little or no guidance as to what might constitute “outstanding benefit” for the purposes of section 40(1) Patents Act 1977 (“PA 1977”), since no claim made under this section had ever been successful. All that changed in the late 2000s when the High Court awarded Kelly and Chui ￡1.5 million for their patented invention “Myoview”: Kelly and Chui v GE Healthcare Ltd. [2009] EWHC 181 (Pat) (“Kelly”). In the Kelly case, the patent was found to be of “outstanding benefit” for a number of reasons, not least because, without it, the company Amersham International plc. - for whom Kelly and Chui worked when the invention was made – would have been in significant financial difficulty but for the patent. Evidence was presented that the total sales of “Myoview” over a five year period had been in the region of ￡1 billion, and Floyd J assessed that the benefit to the employer from these sales was no less than ￡50 million. It was perhaps not difficult to reach a conclusion of “outstanding benefit” in the Kelly case given these facts. However, a seemingly very high bar had been set for any future claimants.

Background

Professor Shanks was employed by Unilever UK Central Resources Ltd. (“CRL”) from 1982 to 1986 to develop biosensors for use in process control and process engineering. For this he received an initial salary of ￡18,000 and a Volvo car, later rising to ￡29,000 and a BMW.

Shortly after joining CRL, Professor Shanks became interested in biosensor devices for diagnostic applications such as the monitoring of glucose, insulin or immunoglobulin levels in diabetics. In late 1982 he built a prototype device in his home using Mylar film slides from his daughter’s science kit held together with bulldog clips. His prototype device became the Electrochemical Capillary Fill Device (ECFD).

CRL was a wholly owned subsidiary of the Unilever group which employed all of Unilever’s UK-based researchers, but CRL was not itself a trading company. Professor Shanks accepted that his inventions belonged to CRL by operation of law under section 39(1) PA 1977 and, as such, the rights to the invention were assigned by CRL to Unilever for ￡100. Unilever obtained and maintained patents in various territories for the inventions. However, they had no interest in developing a glucose testing business and so little was done with the patents or the technology.

The glucose testing market exploded in the late 1990s and 2000s and the ECFD technology which was the subject of the Shanks patents became important, eventually being used in most glucose testing products. Most companies in the sector were therefore willing to pay significant licence fees for the right to use it.

Unilever did not consider licensing of patent rights to be a key part of its business strategy and so, in most cases, prospective licensees of the ECFD technology approached Unilever to initiate licensing deals. In all, after considering costs incurred by Unilever for maintaining and licensing the patents, the total benefit to Unilever from the Shanks patents was around ￡24 million.

Earlier Proceedings – The Comptroller

Professor Shanks made a claim under section 40(1)  PA 1977 to the Comptroller of the UK Patent Office in 2006, the hearing for which took place in early 2012 (BL O/259/13). The hearing officer found no “outstanding benefit” having regard to the size and nature of Unilever’s undertaking. In reaching this decision the hearing officer considered a number of factors including the ￡24 million benefit provided to Unilever by the patents, the comparison of this benefit to profits made on other patented inventions, and the effect of this amount on Unilever’s overall profitability. Whilst the hearing officer acknowledged that ￡24 million is a significant sum, he did not believe it to be outstanding in view of profits of “orders of magnitude greater” made by Unilever on other patented products which they manufacture and sell, albeit at a much lower rate of return. The hearing officer also observed that this was not a case such as Kelly, where the employer would have faced a financial crisis were it not for the existence of the patent.

Despite his finding no “outstanding benefit”, the hearing officer went on to decide what a “fair share” under section 41 PA 1977 would be. In reaching a figure, the hearing officer considered the matters set out in section 41(4) PA 1977 including the nature of Professor Shanks’ duties, the fact the he was employed to invent, his remuneration, his effort and skill in making the inventions, the contribution made by Unilever in terms of facilities, network, management expertise etc., and its licensing efforts. In view of the fact that the invention and the subsequent licence fees seemed to have fallen into the lap of Unilever without a great deal of effort on its part, the hearing officer decided that a 5% share of the ￡24 million benefit would be a “fair share”, 2% above the 3% share awarded in Kelly.

Earlier Proceedings – Appeal to the High Court

Professor Shanks appealed to the High Court ([2014] EWHC 1647 (Pat)) but fared badly as Arnold J not only held that the hearing officer made no error of judgement in finding that there was no “outstanding benefit”, but also found that a “fair share” should be 3% in line with Kelly. He furthermore held that it was not appropriate to take into account the time value of money and, that in assessing the benefit of the patents, the sums that Unilever received should be discounted to take account of corporation tax.

Earlier Proceedings – Court of Appeal

Professor Shanks’ appeal to the Court of Appeal (Shanks v Unilever plc (No 2) [2017] EWCA Civ 2) was also dismissed, the court agreeing with Arnold J that the hearing officer had made no error of principle on the issue of “outstanding benefit”. Nonetheless, the court did overturn Arnold J’s finding that corporation tax should be deducted from the sums that Unilever received when assessing the benefit of the patents, and held that there would be cases where the change in the value of money over time would need to be recognised when determining whether the benefit was “outstanding”, and that the time value of money was also likely to be relevant to the assessment of what constitutes a “fair share”.

Appeal to the Supreme Court – The Issues

The appeal to the Supreme Court focused on two main issues: 1) what principles govern the assessment of “outstanding benefit” and did the hearing officer apply them correctly; and 2) how should a “fair share” be calculated and were Arnold J and the hearing officer wrong in their assessments. The court also considered whether it is appropriate to take the time value of money into account and the liability of the employer for tax.

In the decision Lord Kitchin notes that the starting point for an assessment as to whether an employee is entitled to compensation is the identification of the employer who is the inventor’s actual employer, in Professor Shanks’ case this was CRL.

The next step is to identify the benefit “in the hands of the employer” which is “the benefit which the inventor’s actual employer has derived or may reasonably be expected to derive from the patent, or from the assignment or grant to a person connected with him of any right in the patent”. Lord Kitchin further noted that “in assessing the benefit derived or expected to be derived by an employer from an assignment of the patent to a person connected with him, the court must consider the position of the actual employer and the benefit which the assignee has in fact gained or is expected to gain.” Lord Kitchin also clarifies that, although not explicit in the statute, section 41(2) PA 1977 (dealing with assignments to connected persons) is to be interpreted as having effect for the purposes of section 40 PA 1977 for the legislative scheme to operate effectively.

The court considered various case law concerning the question of “outstanding benefit”, including Kelly, but did not identify any definitive criteria for assessing this. In paragraph 39 of the decision, Lord Kitchin notes “these cases are helpful as illustrations of circumstances found to have fallen each side of the line. But they provide no substitute for the statutory test which requires the benefit to be outstanding. This is an ordinary English word meaning exceptional or such as to stand out”. He then goes on to pose the questions: In relation to what must the benefit from the patent be outstanding? And which factors may be taken into account when making that assessment?

Section 40(1) PA 1977 tells us that the court must have regard among other things to the size and nature of the employer’s undertaking, but Lord Kitchin observes “what is the employer’s undertaking for this purpose, and what is the relevance of that undertaking’s size and nature”? Lord Kitchin observes that it will often be relatively straightforward to identify the undertaking as it will be the whole, or if divided into economic units, the relevant unit of the employer’s business. However, in this case the situation is more difficult as CRL is part of a larger group which exploits the work of CRL’s employees as a whole. So is CRL the relevant undertaking or is it the whole or a smaller part of the Unilever group?

The problem experienced by Professor Shanks in the earlier instance cases was that no one (judge nor hearing officer) thought that casting CRL as the relevant undertaking reflected the commercial reality of the situation since the entire benefit of the patents was generated by the license operated centrally by Unilever. The hearing officer (and subsequent tribunals) therefore considered the Unilever group to be the relevant undertaking and assessed the ￡24 million benefit against the group’s profits as a whole, an approach which made the ￡24 million appear vanishingly small.

Counsel for Professor Shanks characterised this approach to the assessment of “outstanding benefit” as “too big to pay”, and argued that it would be all but impossible for an employee to establish “outstanding benefit” of a patent to a company the size of Unilever. The Court of Appeal had sympathy for this argument and Patten LJ observed that this raises the fundamental question as to the relevance (emphasis added) of the size and nature of an undertaking to the assessment of “outstanding benefit”.

Lord Kitchin observes that section 40(1) PA 1977 is concerned with the benefit of the patent to the employer and the assessment of whether this benefit is outstanding having consideration to the size and nature of the employer’s undertaking. It is not an inquiry into the value of the benefit to the group of which the employer is part relative to other unrelated aspects of the group’s business (emphasis added). Where, as here, 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 enquiry 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 arising from the research company. This gives practical and commercial effect to the language of section 41 and involves a comparison of like with like (emphasis added). 

Lord Kitchin provides guidance as to what might need to be considered when assessing “outstanding benefit” in paragraphs 51 to 54 of the decision where he notes that “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 be an extraordinarily high rate of return, or it may have been an opportunity to develop a new line of business, or engage unforeseen licensing opportunities”. He goes on to note that in some cases it may be possible to find “outstanding benefit” by looking at the size and profitability of the whole business (as in Kelly) but that a tribunal should be very cautious about accepting that a patent has not been of “outstanding benefit” simply because it has not had significant impact on its overall profitability. Here Lord Kitchin notes “profits may have been generated by a range of different products which have nothing to do with the technology of the patent; the parts of the business responsible for them may not have contributed to any commercial success of the patented invention; and they may be a very poor guide to whether the benefit the employer has derived is out of the ordinary”.

Appeal to the Supreme Court – The Decision

The Supreme Court unanimously found that Professor Shanks’ patent had been of “outstanding benefit” to his employer CRL. In the reported decision, Lord Kitchin reviews the findings of the hearing officer in relation to the fact that there was an extreme disparity between the benefit that Unilever received and the regular salary and assignment fee that Professor Shanks was paid. Unilever provided no evidence that there was another licence in existence which provided an income at the same levels as the Shanks patents. The Shanks patents provided a very high rate of return, Unilever made little effort to commercialise the technology, and experienced little risk in deriving the benefit from the Shanks patents. Lord Kitchin notes in paragraph 71 “In my opinion, all of these matters point strongly to the conclusion that the Shanks patents were an outstanding benefit to CRL”.

In his comments regarding the hearing officer’s findings, Lord Kitchin notes that an essential part of the hearing officer’s reasoning is that Unilever made vast profits from the manufacture and sale of ice cream, spreads and deodorants which had patent protection, and that these profits gave an indication of the sort of benefits generated by highly successful products. It is this that the hearing officer cast as “profits an order of magnitude greater on other inventions”. However, Lord Kitchin finds that this reasoning is problematic as Professor Shanks’s actual employer was CRL who operated a research facility for Unilever. CRL’s undertaking for the purposes of section 40 PA 1977 was the business of generating inventions for use by the wider Unilever group. “It was the size and nature of this undertaking, among other things, that the hearing officer was required to have regard in assessing the benefit to CRL and Unilever of any such patent”.

In his summary, Lord Kitchin highlights that Professor Shanks made the invention using his own initiative as his brief was to work in the area of biosensors for process control and process engineering, and he was made to understand that he should not stray too far from it. This was a new product area for Unilever which the group did not get behind and push. It was regarded as far from a key technology and one in which they had only made a modest investment. Unilever did obtain and maintain patents for the invention, and expended significant effort in licensing negotiations. However, the rewards it enjoyed were substantial, generated at no significant risk, obtained a very high rate of return, and stood out in comparison with the benefit that Unilever enjoyed from other [comparable] patents. Furthermore, the benefit could not be attributed to Unilever’s wider business infrastructure or assets (such as its manufacturing capability), and were not derived from any leverage that Unilever could exert because of its size.

Having found “outstanding benefit” the court went on to agree with the hearing officer’s assessment of what might constitute a “fair share” of the benefit and awarded Professor Shanks 5% of the ￡24 million. Also finding that the benefit should be calculated before tax and that the time value of money should be taken into consideration, Professor Shanks was awarded ￡2 million.

What Does the Future Hold?

Many commentators have posed the question: will the Shanks decision lead to more employee inventors making claims under section 40 PA 1977? It seems to be common opinion, and I agree, that this is not likely. However, as others have observed before me, there are certainly now more weapons in the armoury for the employee inventor, particularly for pre-action negotiations. This case seems to have put paid to the notion of “too big to pay” and has clarified that the assessment of “outstanding benefit” needs to be made in the light of the specific undertaking of the inventor’s employer, in the context of the employer’s raison d’être within any larger organisation, and in comparison to like profit making activities. It is clear that the “outstanding benefit” does not need to be transformative of the business as it was in Kelly, and that the benefits concerned need not be visible when compared to a group’s overall profits.

From the employer’s perspective, we now know that the contribution of the employer to the success of the patented invention may be crucial when assessing both “outstanding benefit” and “fair share”. Had Unilever “got behind” the new income stream, actively sought licensees, and tried to obtain more profitable license terms, perhaps the outcome would have been different. It is true that the patents may have potentially made more than the ￡24 million for Unilever, but perhaps this benefit would then be less tied to CRL’s specific undertaking and more tied to Unilever’s efforts and influence in making the invention a success. In any event, these actions may well have left the “fair share” at 3% in line with Kelly.

The above is pure conjecture, but what we do know for certain is that the employer’s specific undertaking in the context of a larger group is critical to the assessment of “outstanding benefit”, as is the comparison of like with like when reviewing revenue streams in a large organisation such as Unilever.