Supreme Court rules no employer is “too big to pay” employees for inventions of outstanding benefit

Written on 28 Oct 2019

A recent Supreme Court ruling supports the right for employees to receive compensation for inventions that lead to an outstanding benefit; and highlights the benefit for employers of putting in place compensation schemes that encourage and reward inventiveness.

Under English law (section 40 of the Patents Act 1977), employees are entitled to compensation from their employers for inventions made during their employment, and for which patents have been granted. In order to qualify for such compensation, two conditions must be met:

  1. the patent is of ‘outstanding benefit’ to the employer; and
  2. it is just to award compensation.

In a recent Supreme Court decision, Shanks v Unilever Plc, which is only the second successful claim brought under this law, the meaning of “outstanding benefit” was considered in detail.

What was the dispute about?

The employer, a major multi-national corporation, patented a system invented by its employee, Professor Shanks, to measure the glucose concentration in blood, serum or urine. When the glucose testing market expanded considerably over 10 years later, the employer sold licences of the patents, netting a profit of around £24 million.

Professor Shanks applied for compensation under the Act in 2006. It has taken over 13 years for him to now achieve victory in the Supreme Court.

When his case was initially heard by a hearing officer, his claim was rejected on the ground that, although £24 million is a considerable sum, it was not significant given the size of the employer. The Supreme Court has now, finally, reversed that decision; in effect, finding that no employer is “too big to pay”.

The Supreme Court’s decision

The Supreme Court’s key findings were as follows:

  • In a group company situation, it is necessary to first identify who the employer is for the purpose of section 40. In this case, Professor Shanks was employed by a subsidiary operating a research facility for the whole group. The hearing officer had erred in considering the group, and not the subsidiary, as Professor Shank’s employer.
  • In this case, it was straightforward for the court to ascertain the benefit generated by the patents because of the amount paid for the licences. That is often not the case in a section 40 application and employee inventors can face significant challenges in establishing “the benefit” obtained by the employer when the employer has also developed and exploited the invention for its own commercial ends.
  • ‘Outstanding benefit’ is not defined in the statute. The Supreme Court held that it means ‘exceptional’ or ‘stand out’. The statute requires the court to have regard to, amongst other things, the size and nature of the employer’s undertaking. Crucially, the Supreme Court held that “a tribunal should be very cautious before accepting a submission 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“.
  • The success of the invention had not been down to the size and success of the employer: licensees had approached the employer.

As a result, Professor Shanks was entitled to a fair share of the profit derived from the patents. He was awarded a 5% share of the £24 million, plus interest – £2 million in total.

Osborne Clarke comment

Before this case, only one other case had produced a successful result for the employee inventor. This was the case of Kelly and Chiu v GE Healthcare [2009], in which Osborne Clarke partner Will James acted. In that case, which did not involve licences, it was shown that the employer would have faced a financial crisis had the invention not been made. The evidence from GE’s own senior executives was that the patents were critical to protecting its core business. Although started at the same time as the Shanks case, the decision in Kelly reached a successful conclusion over 10 years ago, in a first instance decision which was not appealed.

The position in the UK might be contrasted with that of Germany, where all employee inventors are rewarded according to a scale for every invention that is commercialised. Although the precise amount of the award is often disputed, German employers are clear about the existence of their duty to reward inventors. The UK law concerning when a reward is due is less developed – but this decision reinforces that that the right does exist and will be triggered in the right circumstances.

Section 40 was amended to its current form in 2005 to extend the circumstances in which a claim could be brought; the Kelly and Shanks decisions show a willingness on the part of the judiciary to give teeth to the provision.

At its heart, section 40 is intended to reward innovation and creativity. Employers may be able to avoid the need for litigation, and encourage inventiveness by their employees, by devising appropriate compensation structures for inventions which benefit the business. Our IP and employment teams in the UK, Germany and other jurisdictions, can advise on such employee schemes.