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Too big to pay? Compensating employee inventors: Shanks v. Unilever

Wednesday 23 October 2019

The Supreme Court has delivered their judgement on the dispute between Professor Shanks (the employee) and Unilever Plc (the employer) about compensating employee inventors.

This update follows from our previous article.

Brief Background

Professor Shanks invented a device which uses capillary action to sample and measure glucose concentration in blood, serum or urine. Professor Shanks’ inventions belong to his employer at the time (“CRL” – Unilever group’s UK-based research staff), who assigned the rights to Unilever plc.

Unilever licensed the resulting Shanks patents for about £19.55m, and eventually sold the patents for about £5m. Taking into account the costs paid by Unilever in prosecuting, maintaining and licensing the patent, it was decided that Unilever’s net benefit from the patents was about £24m (BL O/259/13).

Professor Shanks originally requested employee compensation, and in the first instance it was decided that the requirements to issue compensation were not met. Professor Shanks appealed the decision, first to the High Court, then to the Appeals Court, and finally to the Supreme Court who have now issued their judgement.

Two important points of review from the Supreme Court judgment are:

  • Whether the patent was of outstanding benefit to the employer?
  • What amount is a “fair share” to compensate the employee?

Outstanding Benefit

For compensation to be awarded to the employee where the invention belongs to the employer, the patent must prove to be of an “outstanding benefit” to the employer taking into account, among other things, the size and nature of the employer’s undertakings.

The requirement to establish that a benefit is “outstanding” has been a high hurdle to overcome. Due to the size of Unilever Plc, it was submitted that employers such as Unilever could be “too big to pay” because even though a patent is of a large benefit (£24m in this case), when compared to the total turn over of a multinational company, it could never be considered an “outstanding benefit”.

The Supreme Court warned that it should be very cautious to accept 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. Such a consideration is a very poor guide to whether the benefit the employer has derived from the patent is out of the ordinary and therefore “outstanding”. Accordingly, when taking into account the size and nature of a company, the benefit to the company of a patent cannot be simply disregarded because of its size.

Despite the fact that Unilever expended significant effort and skill in licensing the patents, the rewards it enjoyed were substantial and were generated without significant risk and with a very high rate of return. Additionally, the benefit of the Shanks patents could not be attributed to the deployment or application of Unilever’s wider business assets or infrastructure or as a consequence of any leverage Unilever could exert because of its size.

Therefore, the Supreme Court concluded that the Shanks patents was of “outstanding benefit”. Importantly, large corporations cannot be immune to awarding employee compensation purely due to their size.

Fair Share

After deciding that the Shanks patents was of “outstanding benefit” to Unilever, next the Supreme Court tackled what constitutes a “fair share” of the benefit for compensation.

At first instance, the hearing officer concluded that a “fair share” of the benefit would have been 5%, amounting to £1.2m and did not take into account the time value of money.

When Professor Shanks appealed to the High Court, Mr Justice Arnold found that, if a fair share was awarded, it would have been 3%. Mr Justice Arnold also did not take into account the time value of money and asserted that the amount should be discounted to reflect payment of corporation tax by Unilever on the benefit of the patents.

The Supreme Court decided that Mr Justice Arnold was wrong to find that 3% represented a fair share of the benefit. The justification made by Mr Justice Arnold in coming to the figure of 3% was that an important factor in Unilever’s ability to extract licence fees was the fact that it could afford to bring proceedings for patent infringement against potential infringers and pursue such proceedings to conclusion. However, Unilever had no manufacturing business it needed to protect and, with one exception, the discussions were initiated by prospective licensees. Accordingly, the Supreme Court decided that 5% represented a fair share.

Professor Shanks requested a value greater than 5%, however the Supreme Court was not persuaded. It was considered that although the patent did generate a new stream of income for Unilever and at no real risk to itself, it did so without the input of Professor Shanks. For example, the licensing agreements from which Unilever attained benefit were negotiated without the input of Professor Shanks.

Tax and the assessment of benefit

The Supreme Court decided against the previous decision that the benefit should be reduced due to corporation tax. This is because the employee must account for any tax due on that share and the employer must account for any tax due on that balance. Both parties are accountable for taxation and to reduce the benefit for the employee because the employer is required to pay tax would be unfair.

This means that future awards to employees should not be reduced due to the employer’s tax position.

The time value of money

Previously, when considering compensation for the employee, the time value of money was not taken into account. Unilever submitted that taking into account the time value of money would introduce disproportionate complexity and would actively reward an inventor who delays bringing a claim.

However, the Supreme Court decided that it is reasonable and fair to uplift the fair share of the benefit to reflect the impact of time on the value of money. The Supreme Court decided that although it is true that the Comptroller has no power to award interest, there is nothing to prevent the Comptroller from having regard to the impact of inflation in assessing the benefit or what amounts to a fair share of it.

To take into consideration the time value of money, the method used was to take the median year in which Unilever received the benefit (1999), and then take into account the effect of inflation using the Bank of England calculator.

The entitled benefit awarded to Professor Shanks is 5% of £24m, which is adjusted by an average 2.8% inflation, resulting in £2m.

Conclusion

The Supreme Court has set a new precedent for future disputes relating to employee compensation. The hurdle of “outstanding benefit” is still difficult to overcome, but no longer should companies be considered “too big to pay”, and they cannot expect to avoid compensating their employee inventors due to their size.

Additionally, any compensation will not be reduced due to the employer’s tax position and will be adjusted to take into account the time value of money, which can make a significant impact on the awarded amount. In the case of Professor Shanks, due to the significant time it took to be awarded compensation, the amount of compensation was increased by ~60%.

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