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Employee inventor compensation and Shanks: a 13-year battle German law would never have waged

Employees beware!


Despite bringing an air of positivity, recent successful awards of compensation do not signal a liberalising approach to the Patents Act 1977 (PA 1977)’s employee compensation scheme.[1] Shanks v Unilever offers another example of a lengthy battle over confusing terminology.[2]


Unfortunately, UK employee inventors still struggle against mountainous thresholds for compensation, far higher than their German counterparts. Instead of continuing to interpret the exceptional requirements, now is a good time to seek inspiration from the continent.


A Brief Background


Section 39 PA 1977 provides that the exclusive rights over an employee invention will generally accrue to the employer, if either of the tests set out in (a) and (b) are satisfied. The UK supplements this with a mandatory scheme for employee compensation in sections 40-41 of PA 1977. The inclusion of employee compensation into statute reflects a growing international desire to provide employees with compensation commensurate to their inventive efforts.[3]

A simple statutory sum? Well, that would be no fun!


From the get-go, Lord Brown was frank in recognising the difficulty of formulating a compensation scheme without getting too involved in an otherwise private relationship.[4] Unsurprisingly, the UK’s hesitancy to grant compensation has resulted in an overly complex set of provisions which have been characterised by 40 years of little to report in the way of successful claims.[5]



Original artwork by Mieke Filler

Shanks v Unilever: the provisions in action


Following only one previous award under PA 1977, the UK’s highest judicial body ruled in favour of awarding Professor Shanks compensation for the patents relating to his blood glucose-imaging invention.[6] Shanks was ‘employed to invent’ by CRL,[7] a subsidiary which assigned its rights for a nominal fee to Unilever. The ‘Shanks patents’ generated approximately £24 million.[8] Overturning the decisions of the lower courts, the Supreme Court held that the patents conveyed an ‘outstanding benefit’ and Prof Shanks finally walked away with a ‘fair share’ of £2 million lining his pockets.[9] Condensing the 28 pages of judgment, the Supreme Court dealt with two key provisions.


1. Section 40: Compensation of employees for certain inventions.


PA 1977 provides that a compensation claim may only arise where it can be proven that a patent has been granted, and the patent and/or invention is of outstanding benefit to the employer.[10] Not explicitly defined, reference should be made to the size and nature of the employer’s undertaking, where it is held to be just to award compensation.[11] The judiciary then takes charge of assembling the legislature’s jigsaw of factors.


1.1 Outstanding Benefit


After the IPO, the High Court and Court of Appeal had already considered the issue. Lord Kitchin turned to older judgments to determine the meaning of ‘outstanding’ and confirmed that it should bear its plain meaning, something exceptional or stand out.[12] Interpreting ‘outstanding benefit,’ the court devoted the most time to assessing the size and nature of Unilever’s undertaking.

1.2 Employer’s Undertaking


Usually, an employer’s undertaking would mean the normal unit of the employer’s business.[13] Confusingly, Shanks was employed by a subsidiary. If ‘undertaking’ referred to Unilever as a whole, the invention would be dwarfed by a portfolio of hugely successful commercial enterprises such as Viennetta ice cream,[14] rendering Unilever ‘too big to pay.’[15]


The Court also felt that undertaking should not be restricted to Unilever’s subsidiary research company (Central Resources Limited) which did not directly derive benefit from the exploitation of his patents.[16] In light of this, the lack of clarity in PA 1977 once again made defining the benefit an arduous task.


The Supreme Court factored in that outstanding benefit should include any benefit which has derived or can reasonably be expected to derive from the assignation of the patent, or any rights in the patent, to a body connected to the employer.[17] Assessing the commercial reality of the situation, Lord Kitchin compared like with like and determined that Unilever generally did not achieve such a high level of commercial success from other similar patents/inventions that derived from CRL’s research.[18] In an unusual twist of fate, the benefit was considered outstanding.


2. Section 41: Amount of compensation


If an outstanding benefit can be proven, section 41 allows the employee-inventor to claim a fair share of the benefit derived, or reasonably expected to be derived by the employer from the patent and/or invention.[19] The provisions offer factors for assessing the amount of monetary compensation. These include but are not limited to, the duties and salary of the employee, the effort and skill involved in making the invention, the contribution of any other inventor and the employer’s contribution.[20]


Of course, when determining the correct award, Unilever argued for less, and Shanks argued for more. Factoring in all of the considerations above, taking into account inflation and corporation tax, several amounts were suggested landing at both ends of the scale.[21] Agreeing with the IPO, the Supreme Court finally decided that 5% was sufficient compensation.[22]


A quick glimpse at the discussion above would hint that the courts kept themselves very busy in determining whether or not compensation was owed to Shanks. Had the legislature strapped on its lederhosen and headed across the water, the judiciary could have saved time, focusing on calculating the appropriate award instead.


The German Approach


How does the German approach work? Some of the most notable differences between PA 1977’s approach to compensation and the German Act on Employee Inventions (AEI) are outlined below.[23] In summary:

  1. A German inventor will own the rights to his invention and patent/utility model.[24]

  2. The German approach categorises ‘service inventions’ as those made during the term of employment and resulting from the employee’s work conducted during his employment or otherwise based on the employer’s experience and/or activities.[25]

  3. All others will be ‘free inventions,’ subject to some limitations.[26]

  4. If the inventor is an employee, he must report the invention to his employer.[27]

  5. If the employer claims the invention, compensation will be due to the employee, usually as decided between the parties without proceedings.[28]


If an employee is unhappy with the figure, a claim may be raised with the German Patent and Trademark Organisation.[29] Instead of receiving a ‘fair share’ of the benefit, a subtle difference can be taken from the AEI. Employee compensation will be assessed as a ‘contribution factor’ of the ‘invention’s value.’[30] Whilst the German ‘contribution factor’ and the UK’s ‘fair share’ approach might seem mutually confusing, the German court will assess the invention’s value as compared with the license fee typically paid by third parties.[31]

Where a license fee cannot be calculated, factors similar to s41 of PA 1977 are considered.[32] However, where the UK courts are left to their own devices in applying these factors, in Germany, the Federal Ministry of Labour and Social Affairs[33] produces non-binding Compensation Directive Guidelines,[34] which are widely used in practice.[35]

The Compensation Guidelines offer practical scenarios and a clear sum can be calculated, whereby the ‘contribution factor’ will be valued in monetary terms.[36] Rather than requiring the payment of a lump sum which seems to be the only option in the UK, the German approach often gives rise to an annual payment.[37] Alternatively, a one-off payment will generally be recommended for practical purposes for inventions of lesser value.[38]


A German Approach to Shanks?


Ultimately Shanks was successful, his compensatory payment was substantial, and it would be inaccurate to suggest that UK courts remain completely unwilling to award compensation. However, it is still interesting to consider how things would have played out had Shanks been a German employee inventor.


Looking at the Compensation guidelines for clarity, it is fair to presume that if Unilever had appropriately claimed Shanks’ invention, the German approach would have saved a lot of time spent questioning whether the Shanks patents were compensation worthy.[39] Whilst the German approach would not have decisively helped Shanks predict the compensation that he could expect to receive, it would have at least provided comfort that some compensation was coming.[40]


Battling his way through three appeals, Shanks’ stamina has to be commended. It isn’t hard to imagine that the looming threat of a ‘loser-pays’ legal fees approach would have deterred the risk-averse inventor from even attempting to invoke the UK’s statutory scheme.


If the UK took inspiration from the AEI, employee inventors may feel more empowered to seek compensation, albeit potentially a smaller amount.[41] Even better, employers might be encouraged to strategise how to best account for such inventions, leaving them less exposed to the threat of an unexpectedly successful application of the legal framework.


Thoughts


So, would the German approach fix everything? Well, not quite but it might offer marginally more certainty. Since Germany allows for annual compensatory payments for larger inventions,[42] it is possible to see how the German approach might be more precise where commercialisation only arises towards the end of protection and would allow remuneration to be adjusted. Naturally, the innovative character of patent law makes it particularly difficult to account for future inventions and their success. In the same vein, accurate awards require accurate administration and high monitoring costs.[43]


But for now, the UK judiciary is working with what they’ve got, and it will be interesting to see if Shanks evokes a newfound confidence in UK employee inventors!






Endnotes


[1] See for example: Hannan A, ‘Outstanding Clarity at Last for Employee Compensation’ (2020) 79 Cambridge Law Journal 1, 31.

[2] Shanks v Unilever [2019] UKSC 45.

[3]World Intellectual Property Organisation, ‘The Relationship Between Employed Inventors and Employers: Legal, Contractual and Financial Questions’ WIPO/INN/MCT/04/8 (20 April 2004), 14; Ullrich H, ‘Harmonisation of Employee Invention Laws: The Black Hole of the EU’s Innovation Policy’ (2022) Max Planck Institute for Innovation and Competition Research Paper no. 22-3, 7.

[4] HL Deb 24 February 1977 vol 379, col 262 [Lord Brown].

[5] See, for example, decision in : GEC Avionics Ltd’s Patent [1992] RPC 107, British Steel PLC’s Patent [1992] RPC 117, Memco-Med Ltd’s Patent [1992] RPC 403.

[6] See: Kelly and Chui v GE Healthcare Ltd. [2009] EWHC 181 (Pat); Dunlop H, ‘Shanks v Unilever: The Sweet Smell of Success’ (2020) 15 Journal of Intellectual Property Law & Practice 2, 76.

[7] Shanks, at para [1].

[8] Ibid, at para [17].

[9] Ibid, at para [92].

[10] PA 1977, s40(1). Originally limited to “patents” under PA 1977, extended by the 2004 amendments to include an outstanding benefit arising in respect of an invention for which a patent has been granted.

[11] PA 1977, s40(1)(a) and s40 (1)(b).

[12] Shanks, per Lord Kitchin at [36] referring to GEC Avionics Ltd’s Patent [1992] RPC 107 per Comptroller at [115] British Steel Plc.

[13] Dunlop (n20), 77.

[14] Shanks, at para [26].

[15] Ibid, at para [50].

[16] Ibid, at para [13].

[17] PA 1977, s41(1).

[18] Shanks, at para [48].

[19] PA 1977, s41 (1).

[20] Ibid, s41(4)(a) - (d).

[21] Shanks, at para [86]-[92].

[22] Ibid, [92].

[23] Employee Inventions Act (AEI) [Gesetz über Arbeitnehmererfindungen] (of 25 July 1957) as last amended by Art. 7 of the Act of 31 July 2009, (Federal Law Gazette1. I p. 2521)), available in English at: https://www.dpma.de/docs/dpma/schiedsstelle/employee_inventions_act.pdf Last accessed: 20/12/22.

[24] Ibid, S2.

[25] Ibid, s 4(2).

[26] Ibid, S4(3).

[27] Ibid, S5(1).

[28] Ibid, s9(1); See also Shah T, Clark B, Wallis E and Ritter A, ‘”Too Big to Pay” or Just Not that Outstanding? English Court of Appeal Decides on Employee Inventor Compensation – a Comparative Case Review under English and German Law’ (2017) 39 European Intellectual Property Review 6, 384.

[29] S12(1), (4) AEI.

[30] AEI, s2.

[31] S3a Compensation Guidelines [Richtlinien für die Vergütun von Arbeitnehmererfindungen im privaten Dienst] (of 20 July, 1959), as last amended 1 September 1983. Author’s translation – "Reference points for determining the license rate in individual branches of industry can be taken from the fact that: In general, the license rate in:

● The electrical industry will be 1/2-5%

● The machinery and tool industry will be 1/3-20%

● The chemical industry will be 2-5%

● The pharmaceutical field will be 2-10%

Of sales revenue.”

[32] Ibid, S2. Author’s translation – 'the economic usability of the service invention, the tasks and position of the employee in the company, and the company's share in the creation of the service invention'.

[33] AEI, s11.

[34] Compensation Guidelines (n31).

[35] Stallberg CG, ‘The Legal Status of Academic Employees’ Inventions in Britain and Germany and its Consequences for R&D Agreements’ (2007) IPQ 4, 493.

[36] Wolk S, ‘Remuneration of Employee Inventors – Is There a Common European Ground? A Comparison of National Laws of Compensation of Inventors in Germany, France, Spain, Sweden and the United Kingdom’ (2011) 42 ICC 3, 279 “Remuneration = Value of the invention x Rate of share.”

[37]Deck M & Matthes J, ‘Employee Inventions in Germany’ (2005) Linklaters, Intellectual Asset Management, 65.

[38] ibid.

[39] Shah et al (n32), 385.

[40] Wolk (n45), 281.

[41] Harhoff D & Hoisl K, ‘Institutionalised Incentives for Ingenuity – Patent Value and the German Employees’ Inventions Act’ (2006) Munich School of Management, University of Munich. Discussion Paper 2006-12, 2.

[42] Ibid, 11.

[43] Shah et al (n32), 385 and Wolk (n45), 281.






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