Employee inventions: When are employers liable to pay compensation to employee innovators?

This article addresses inventions created by employees. Parts Two and Three will consider confidential information and data subject access requests. This series is a collaboration between A&L Goodbody's Employment & Incentives and Commercial & Technology teams in Belfast.

Speedread

Inventions created during the usual course of employment typically vest in the employer, pursuant to section 39 of the Patents Act 1977 (Patents Act). Additionally, contracts of employment for senior executives in a business usually contain specific intellectual property and invention clauses. These clauses may stipulate that all inventions and intellectual property rights created during the course of employment will vest in the employer and that the employee will be required to disclose to the employer full details of any works of any nature they make during their employment. In addition, the contract may provide that, where an invention does not automatically vest in the employer, the employee agrees to assign all intellectual property rights created during his/her employment to the company and to sign any documents necessary to ensure full ownership vests in the employer.

Businesses should be alert to the fact that employees can be awarded compensation for patented inventions that provide "outstanding benefit" to their employer, pursuant to section 40 of the Patents Act. The level of compensation will be a "fair share" of the "outstanding benefit", having regard to all the circumstances.

On 23 October 2019, the UK Supreme Court ruled that an employee was entitled to significant compensation of £2 million for his invention created during the course of his employment, to be paid by his employer. The full judgment is accessible here.

What was the case about?

Professor Shanks was employed by Central Resources Ltd (CRL) (part of the Unilever group) from 1982 to 1986.  During his employment, Professor Shanks developed an electrochemical capillary fill device, used for glucose testing, which Unilever subsequently incorporated into successful patent applications across the world (Shanks Patents). The rights to the invention, and the patents, belonged to Unilever. Unilever went on to licence the Shanks Patents before their eventual sale, generating total earnings of £24m.

Professor Shanks accepted that his employer owned the rights to his invention but claimed compensation under section 40 of the Patents Act. The Supreme Court judgment, which concluded a legal dispute spanning 13 years, provided clarification on what constitutes "outstanding benefit" and how a "fair share" of the same should be assessed.

What did the Supreme Court decide?

1. Outstanding benefit

Unilever argued that, due to its enormous profits and revenues, the Shanks Patents were not of outstanding benefit. Whilst the Supreme Court accepted that the size and the profitability of the group should be taken into consideration, it rejected that it should be directly compared with the benefit derived from the Shanks Patents. Instead, it declared that the focus should be on "the benefits derived by the group from other patents for inventions arising from the research carried out by that company [CRL]", not other revenue streams.

The Supreme Court noted that Professor Shanks went beyond the scope of his brief and created his invention using his own initiative. Further, the Shanks Patents had a very high rate of return yet carried no significant risk, standing out against the benefit derived from other patents. It followed that the Shanks Patents provided outstanding benefit.

2. Fair share

The Supreme Court noted that Professor Shanks was employed to invent and that the Shanks Patents did not generate the outstanding benefit, without Unilever's input, notably in negotiating the various licenses. In all the circumstances, a fair share of the outstanding benefit in this case was 5% of £24m (£1.2m). That figure was not reduced to reflect the payment of corporation tax but was uplifted to £2m to reflect an average inflation rate of 2.8%.

What does this means for employers in the UK?

The key takeaway is a reminder that employee inventors can be entitled to significant compensation, albeit in exceptional circumstances. Whilst the threshold for such a claim remains high, an employer will not simply be too big to pay.

The judgment is less likely to impact pure-research led businesses that routinely derive significant income from patented research. However, where research and development is part of a broader business structure, other revenue streams may not be relevant in an assessment of whether a patented invention has provided outstanding benefit.

It would be prudent for employers across the UK to review their existing recognition and incentive schemes for key innovative employees as a result of this judgment. Maintaining a fair and balanced reward scheme could assist in discouraging employee inventors from seeking compensation payments via the Courts in the wake of breakthrough innovation.

For more information on this series, please contact Gareth Walls and Laura Feely (Employment & Incentives) or Ciaran O'Shiel (Commercial & Technology) in our Belfast office.

Date published: 21 February 2020