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Unilever not “too big to pay” - Context is key when considering outstanding benefit

Unilever not “too big to pay” - Context is key when considering outstanding benefit

30/10/19

Large employers, previously considered too big to be outstandingly benefitted by a single patent or invention may be at risk of challenges from disgruntled employees instrumental in the development of valuable IP in a shake up of UK patent law relating to employee compensation for IP developed as part of their employment.

Background

Section 39 of the UK Patent Act 1977 confirms that inventions made in the course of normal duties of an employee, in the course of special duties assigned to an employee where an invention may reasonably be expected to occur, or in the course of duties by an employee under a special obligation to further the interests of the undertaking, shall belong to the employer and not the employee. Meanwhile, Section 40 of the UK Patents Act 1977 provides means for employees to be awarded additional remuneration for a patent or invention which provides an “outstanding benefit” to the employer. However, when determining the extent of the benefit afforded, the Patents Act requires that the benefit is determined taking account of the “size and nature” of the employer’s undertaking. In addition, a lack of a formal definition of “outstanding benefit” has led to many employees floundering in their attempts to bring a successful case for compensation under Section 40.

One of the few successful cases was Kelly v GE Healthcare ([2009] EWHC 181 (Pat)) where it was found that due to difficulties within the company at the time, Kelly’s patented invention was instrumental in preventing the collapse of the overall company. However, in the absence of such a clear benefit to the overall viability or financial health of the undertaking it has historically been difficult for employees to successfully claim that an individual patent or invention has provided an outstanding benefit to a large undertaking, leading to many such large and/or multinational companies being considered “too big to pay”.

Shanks v Unilever

One such large undertaking previously found to be “too big to pay” was Unilever plc. In 1982 Professor Shanks was employed by CRL, a wholly owned subsidiary of Unilever plc, in a research role. While employed, Professor Shanks conceived an invention which would later become the subject of several patents relating to a device configured to measure glucose concentrations in blood, serum or urine. Although the prototype was built at the Professor’s home using household items and equipment from his daughter’s toy microscope kit, it was accepted by both parties that the rights to the invention belonged to CRL from the outset, before being assigned to Unilever plc, who ultimately licenced the related patents to third parties for financial benefit.

Following the expiry of the patent rights, Professor Shanks began proceedings at the UKIPO seeking compensation under Section 40. In these proceedings it was found that the patents had generated earnings of around £24 million for Unilever plc over their lifetime, after costs. However, given that Unilever plc had an annual turnover of billions of pounds and annual profits of hundreds of millions, the Hearing Officer failed to find that the patents in questions had provided Unilever plc with an “outstanding benefit”. Subsequent appeals to the High Court and the Court of Appeal upheld the Hearing Officer’s original Decision.

Supreme Court Ruling

In the culmination of a 13-year legal battle, the Supreme Court last week issued a Decision ([2019] UKSC 45) overturning the Decisions of the Hearing Officer and each of the lower courts, awarding Professor Shanks £2 million compensation for the work he did which led to the “Shanks” patents. This Decision was reached on the basis of key flaws in the original Hearing Officer’s analysis which had not been rectified in the lower courts.

The Undertaking

Like many large companies, Unilever plc operated a policy of managing several sub-divisions and wholly owned subsidiaries. While the Hearing Officer and lower courts took Shanks’ employer to be Unilever plc as a whole, Lord Kitchen for the Supreme Court found that the word “undertaking” should be understood to mean “simply a unit or entity which carries on a business activity…(It) will be the whole or, if it is divided into economic units, the relevant unit of the employer’s business”. On this basis, the relevant undertaking for considering whether a benefit was outstanding was the wholly owned subsidiary, CRL, not Unilever plc.

The “size and nature” of the employer’s undertaking

In addition, Lord Kitchen also rejected the simplistic approach taken by the Hearing Officer and lower courts, insisting that additional aspects of the size and nature of the employer’s business must be considered. This included whether the benefit was more than might normally be expected for the duties for which the employee was paid, opportunities to develop new lines of business or to engage in unforeseen licencing opportunities, the risk to the business, and the rate of return of the investment compared to other patents held by the undertaking.

In this case, the Shanks patents were found to have produced a very high rate of return despite “a very small effort to commercialise” the patent. Moreover, with one exception, the licensees approached Unilever plc reducing the risk of litigation. In addition, in general, Unilever plc had not considered patent licencing a key part of its business, instead focusing on using patents to protect its own commercial activities. Lord Kitchen also found that the size and success of Unilever plc’s business did not play any material part in securing the success of the Shanks patents.

An outstanding benefit?

In addition to taking the CRL as the undertaking for the purposes of Section 40, and considering contextual as well as financial aspects of its size and nature, Lord Kitchen stated that the Hearing Officer should not have focused on the “overall turnover and profits generated by Unilever plc”. Instead, it was necessary to compare the returns generated by the Shanks patents to the benefits Unilever plc derived from other patents. In so doing, Lord Kitchen found that the success of Unilever plc’s other products was not wholly attributable to their patents but was also due to factors such as quality, branding and price. When a true comparison of the Shanks patents was made compared to the other patents held by Unilever plc, the Shanks patents stood out and could be considered “outstanding”.

Impact

This latest ruling makes clear that contextual aspects must be considered when determining whether a patent or invention has given rise to an outstanding benefit, and not merely a comparison between the total profits of an undertaking and the income arising from a particular patent or invention. In light of this approach, it may be anticipated that large companies, previously viewed by some as untouchable and “too big to pay” may now be open to further employee compensation suits. This may be especially true for many large, multifaceted undertakings in view of the decision to decouple the wholly owned research subsidiary CRL from Unilever plc as a whole.

This Decision increases the need for large undertakings especially to keep detailed records of contributions made by individual employees to key patents and inventions, along with the context to which the patent and/or invention has been monetised. Such evidence will also need to be retained, not only throughout the lifetime of the patents in question, but for some years thereafter. In addition, some companies may wish to re-visit their policies regarding compensation under Section 40.