Shanks v Unilever Plc & Ors [2019] UKSC 45

Professor Shanks invented a glucose biosensor while employed by a Unilever research subsidiary. Unilever earned around £24m from licensing the patents. The Supreme Court held the patents were of outstanding benefit and awarded him a fair share of £2m.

Facts

Professor Shanks was employed from 1982 to 1986 by Unilever UK Central Resources Ltd (CRL), a wholly owned research subsidiary of the Unilever group, at its Colworth laboratories. His brief was to develop biosensors for process control and engineering. In October 1982, using materials including slides from his daughter’s toy microscope, he built the first prototype of what became known as the Electrochemical Capillary Fill Device (ECFD), capable of measuring glucose concentration in blood, serum or urine.

The rights in the invention belonged to CRL from the outset under section 39(1) of the Patents Act 1977. CRL assigned them to Unilever plc for £100, which in turn assigned overseas rights to Unilever NV, also for £100. Patents (the ‘Shanks patents’) were granted in multiple jurisdictions. Unilever had no interest in competing in the glucose testing market and made only modest efforts to exploit the technology. However, as the glucose testing market expanded in the late 1990s and 2000s, the ECFD technology became widely adopted. Unilever granted seven licences (net value attributable to the Shanks patents approximately £19.55m) and, in 2001, sold Unipath (including the patents) to Inverness Medical Innovations, with approximately £5m of the sale price attributable to the Shanks patents. Total net benefit was approximately £24m after costs.

Professor Shanks applied for compensation under section 40 of the 1977 Act in 2006. The hearing officer, Arnold J and the Court of Appeal each rejected the claim, holding that the benefit was not ‘outstanding’ having regard to the size and nature of Unilever’s undertaking.

Issues

The Supreme Court identified the following issues:

• What principles govern the assessment of ‘outstanding benefit’ to an employer under section 40(1) of the 1977 Act, and did the hearing officer apply them correctly?
• How should a fair share of an outstanding benefit be assessed under section 41, and were the hearing officer and Arnold J wrong in their assessment?
• Whether, in assessing fair share, the court should take into account the time value of money and the employer’s tax liability.

Arguments

Appellant (Professor Shanks)

It was submitted that CRL was his actual employer and the relevant undertaking, and that £24.3m plainly dwarfed CRL’s own annual profits of about £2m. Counsel characterised Unilever’s contrary position as ‘too big to pay’, arguing it would make it virtually impossible for employees of large conglomerates ever to succeed. He further contended that the time value of money should be reflected in any award, that tax should not reduce the benefit, and that a fair share should be between 10% and 20%.

Respondents (Unilever)

Unilever submitted that CRL was merely a service company and that the commercial reality was that the relevant undertaking was the Unilever group as a whole. Measured against Unilever’s billions of pounds of turnover and hundreds of millions of profit from products like Viennetta ice cream, spreads and deodorants, the benefit from the Shanks patents was not outstanding. It was further argued that tax paid on the revenues should reduce the benefit figure, and that bringing the time value of money into account would introduce disproportionate complexity and reward delay.

Judgment

Identifying the employer’s undertaking

Lord Kitchin (with whom the rest of the Court agreed) held that the correct approach lay between the extremes advanced. Where a group company operates a research facility for the benefit of the whole group, the inquiry is to be approached from the perspective of the inventor’s actual employer, but applying commercial reality. The focus must be the extent of the benefit of the patent to the group compared with benefits the group derived from other patents arising from the research work of that company. The hearing officer’s starting point — treating CRL’s undertaking as the whole of Unilever and comparing the Shanks patents’ returns against group-wide turnover and profit on unrelated products — was wrong in principle.

Meaning of ‘outstanding’

‘Outstanding’ is an ordinary English word meaning exceptional or such as to stand out, referring to the benefit in money or money’s worth to the employer. It is relative and qualitative. Many factors may be relevant: whether the benefit exceeds what would normally be expected from the employee’s duties, whether it was achieved without risk, whether it represented an extraordinary rate of return, or whether it opened up new licensing opportunities. A tribunal should be ‘very cautious’ before accepting that a patent is not outstanding merely because it has no significant impact on overall profitability of a very large business.

Tax

The Court of Appeal was correct to reject Arnold J’s approach. The incidence of tax is a consequence of the benefit rather than part of it. The benefit is first quantified; the employee then accounts for tax on the share received and the employer on the balance.

Time value of money

Lord Kitchin disagreed with Arnold J and Patten LJ. The time value of money can properly be a benefit derived from the patent within section 41(1); Unilever had the use of the licence fees for many years before any compensation order. Reflecting inflation does not amount to awarding interest and does not cut across the statutory scheme. Undue delay by an employee could be taken into account, but there was no such finding here.

Application — outstanding benefit

The hearing officer’s own findings — extreme disparity between Professor Shanks’ salary/£100 assignment fee and the benefit received; no evidence of any other Unilever licensing deal matching the Shanks patents; very high rate of return; benefit generated at no significant risk; modest commercialisation effort by Unilever; and the patents ‘stood out’ compared with other Unilever patents — pointed strongly towards outstanding benefit. The hearing officer’s errors were (i) treating the whole Unilever group as the relevant undertaking; (ii) wrongly focusing on group turnover and profit from unrelated products like ice cream, spreads and deodorants; (iii) failing to recognise that Unilever’s size and infrastructure played no material part in generating the benefit, which came from licensing initiated largely by third parties; and (iv) effectively adopting a simple comparison approach he had said he was rejecting. These were errors of principle justifying interference in accordance with the standard discussed in Actavis Group PTC EHF v ICOS Corpn [2019] UKSC 15.

Fair share

Arnold J had no basis for reducing the fair share from 5% (as assessed by the hearing officer) to 3%; the hearing officer made no finding that Unilever’s litigation muscle secured higher royalty rates, and the negotiations were in substance between willing licensors and willing licensees. However, Professor Shanks’ arguments for a higher figure (10–20%) were rejected: he was employed to invent, Unilever’s input in licensing was not negligible, and the relevant factors had been properly weighed by the hearing officer. The fair share was 5% of £24m, i.e. £1.2m. Applying an uplift for inflation using 1999 as the median receipt year and the Bank of England calculator (average rate 2.8%) produced a fair share of approximately £2m.

Implications

The decision clarifies several important aspects of the employee compensation regime under sections 40–41 of the Patents Act 1977 (in its pre-2004 form, though the analysis remains relevant to the amended provisions):

• Where an inventor is employed by a research subsidiary whose work is exploited group-wide, the assessment of outstanding benefit is made from the perspective of the actual employer but applying commercial reality, comparing the patent’s benefit to the group with benefits the group derives from other patents arising from that subsidiary’s research.
• A ‘too big to pay’ defence is rejected: a tribunal should be very cautious before concluding that a patent is not of outstanding benefit merely because its returns are small relative to a very large employer’s overall turnover and profitability, particularly where those overall figures derive from unrelated products.
• Tax paid by the employer is not deducted in quantifying the benefit; it is a consequence of the benefit.
• The time value of money (reflecting inflation between receipt and award) may properly be taken into account in assessing a fair share, without amounting to an impermissible award of interest.
• The decision is significant for employee-inventors in large corporate groups, confirming that structural arrangements which channel revenue away from the employing entity will not insulate the group from section 40 claims. It remains, however, a fact-sensitive inquiry, and the statutory test of ‘outstanding’ remains a demanding one requiring something exceptional or ‘out of the ordinary’.

Verdict: Appeal allowed. The Shanks patents were held to be of outstanding benefit to CRL and Unilever within the meaning of section 40 of the Patents Act 1977, and Professor Shanks was awarded £2m as a fair share of that benefit (5% of the £24m net benefit, uplifted for inflation).

Source: Shanks v Unilever Plc & Ors [2019] UKSC 45