Posted on 30/10/2019

Shanks v Unilever – Compensating employee inventors

The Supreme Court recently gave its judgment in the long-running employee compensation case of Shanks v Unilever.

The Supreme Court recently gave its judgment in the long-running employee compensation case of Shanks v Unilever Plc.  The case, brought by inventor Professor Shanks, related to an inventor seeking a share of the benefit gained by his employer, a subsidiary of Unilever, on the basis that the patents resulting from his invention provided his employer with an “outstanding benefit”.

The background

In 1982, whilst employed by Unilever UK Central Resources Ltd, Professor Shanks invented a system for measuring the glucose concentration in blood, urine or serum using capillary action.  Unilever Plc filed a number of patents (the ‘Shanks patents’) for this technology.  The patents were not exploited by Unilever itself, but instead Unilever granted licences to various companies for a total sum of around £20 million.  Unilever later sold the patent portfolio resulting in a total benefit from the Shanks patents of around £24 million.

The law

Section 40(1) of The UK Patents Act 1977 defines the situation in which compensation can be awarded to an employee for inventions belonging to the employer. According to this provision, it is required that “having regard among other things to the size and nature of the employer’s undertaking, the invention or the patent for it (or the combination of both) is of outstanding benefit to the employer” (emphasis added).

The exact amount of the compensation is to be determined in accordance with Section 41 of The UK Patents Act 1977, which requires that the employee is awarded a “fair share” of the benefit which the employer has derived (or may reasonably be expected to derive) from the invention and/or the patent.  Section 41(4) defines what constitutes a “fair share” by providing a number of matters that must be taken into account, including the nature of the employee’s duties and remuneration, the effort and skill which the employee has devoted to making the invention, the contribution of other employees (whether they are joint inventors or not) and the contribution of the employer to the making, developing and working of the invention by the provision of advice, facilities and other assistance.

There is no precise formula provided in Section 40 for determining whether an invention is of “outstanding benefit”, nor is there a precise formula for assessing what is meant by a “fair share”.  These questions have been left to the courts.

The decision

Professor Shanks applied for compensation at the UK IPO in 2006. The UK IPO decision (here) found that the benefit provided by the patents fell short of being outstanding. Critically, the UK IPO considered the benefit derived from Professors Shanks’ invention relative to Unilever’s overall profits, not just the profits from the subsidiary in which Professor Shanks was employed (Unilever UK Central Resources Ltd).  Professor Shanks appealed this decision to the High Court (decision here) and then the Court of Appeal (decision here) but was unsuccessful on both occasions.

The Supreme Court gave permission to appeal.  The Supreme Court disagreed with the reasoning of the previous instances and found that the Shanks patents were of outstanding benefit to Unilever, and that Professor Shanks was entitled to a fair share of that benefit.

In the decision of the Supreme Court, it was emphasised that the word ‘outstanding’ is an ordinary English word meaning exceptional or “such as to stand out”.  In the Shanks’ case, the sum of £24 million gained from the Shanks patents was insignificant when compared to Unilever’s overall profits.  However, many potential claims would be against larger corporations, which are frequently structured in ways that make it difficult to quantify the “outstanding benefit” and thus lead to the notion that an employer can be “too big to pay”.

Moreover, determining the relevant benefit of the Shanks patents was complicated by Professor Shanks being employed by a small subsidiary of Unilever, yet it was Unilever as a whole which took the benefit.  Further, the relevant benefit was also limited to that which accrued to the employer.  After Unilever disposed of the patents (either by licensing or sale of the patent portfolio), other companies used the invention in the development of biosensors, including those for detecting blood glucose levels in diabetes. A number of these products have been hugely successful.

However, the Supreme Court took the view that just because the Shanks patents did not have any significant impact on Unilever’s overall profitability, it does not mean that the patents were not of outstanding benefit.  The Supreme Court took a flexible approach, it said “(I)n the circumstances of this case…a highly material consideration must be the extent of the benefit of the Shanks patents to the Unilever group and how that compares with the benefits the group derived from other patents resulting from the work carried out at Unilever UK Central Resources Ltd… The rewards it enjoyed were substantial and significant, were generated at no significant risk, reflected a very high rate of return, and stood out in comparison with the benefit Unilever derived from other patents.”

Thus, the Supreme Court confirmed that it is incorrect to simply focus on the overall profits generated by Unilever when assessing if there has been any outstanding benefit.

Professor Shanks was awarded £2 million compensation, roughly a 5% (fair) share of the £24m benefit derived by Unilever from the invention, uplifted from 1999 taking into account an average inflation rate of 2.8%.

The analysis

The Supreme Court’s decision is welcomed as there are very few decisions which address employee-inventor compensation.  The decision provides clarity as to the question of how an “outstanding benefit” should be calculated, and whether the profitability of a whole group should be taken into consideration, or not.

The decision of the Supreme Court improves the prospects of employee inventors being able to obtain compensation for the outstanding benefit generated by their inventions, particularly in circumstances where the employer is a large corporation.

Actions for patent owners

Employee compensation scheme – It is arguable that Unilever could have made use of the provisions of Section 40(3) The UK Patents Act 1977 in order to prevent this situation arising.  This provision provides that the compensation referred to in Section 40(1) The UK Patents Act 1977 “shall not apply to the invention of an employee where a relevant collective agreement provides for the payment of compensation in respect of inventions of the same description as that invention to employees of the same description as that employee”.  Thus, to limit the likelihood of a patent owner being exposed to claims for compensation by an employee for a successful invention, an employer can implement an employee compensation scheme so it is clear from the outset where the inventors stand with regard to compensation.

Be aware of company structure with regard to subsidiaries – businesses should be aware that if subsidiaries own intellectual property, and the benefit derived from an invention is outstanding relative to the activities of that subsidiary, then an employee of that subsidiary is far more likely to be awarded compensation.

The full text of the decision of the Supreme Court can be read here.

For more information on issues relating to patents, please contact one of our patent attorneys.

Wilson Gunn