England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
PATENTS COURT
Arnold J.
[2014] EWHC 1647 (Pat)

		Royal Courts of Justice Strand, London, WC2A 2LL
		18 January 2017

Lord Justice Patten :

Introduction

1. This is an appeal by Professor Ian Shanks against the dismissal by Arnold J. ([2014] EWHC 1647 (Pat)) of his appeal against a decision of the Comptroller-General of Patents (acting by Mr Julyan Elbro, Divisional Director) who dismissed his claim for employee compensation pursuant to s.40(1) of the Patents Act 1977 ("the 1977 Act"). The claim was made against Unilever plc, Unilever NV and one of their subsidiaries, Unilever UK Central Resources Limited ("CRL") which I shall refer to collectively as "Unilever" except where otherwise indicated. It relates to European Patent (UK) 0 170 375 ("EP 375") and related patents which resulted from an invention made by Professor Shanks during his employment at CRL.
2. To succeed in his claim Professor Shanks needed to establish that the patents had been of "outstanding benefit" to his employer and that it was just to award him compensation. At the end of a 9-day hearing, the Hearing Officer concluded that the financial benefit to Unilever from the patents was £24.5m but that this was not, in the circumstances, outstanding. Had he been of a different view, he said that he would have awarded Professor Shanks 5% as his fair share of the benefit to the employer.
3. On the first appeal, Arnold J. (like the Hearing Officer) rejected an argument on behalf of Professor Shanks that the benefit from the patents to Unilever should be calculated in an amount which included not only the income received from the exploitation of the patents but also a sum which reflected the time value of money. But he accepted Unilever's argument (which the Hearing Officer had also rejected) that the £24.5m in receipts should be discounted by 30 per cent to reflect the amount of corporation tax which Unilever paid during the relevant period. This reduced the benefit to Unilever to £17m. The judge also indicated that had it been necessary for him to calculate what would have been a fair share of the benefit to award Professor Shanks, he would not have given him more than 3 per cent which was the level of the award in Kelly v GE Healthcare Ltd [2009] EWHC 181 (Pat), [2009] RPC which is the most recent reported case in which the issues of outstanding benefit and fair share have been considered.
4. Permission was granted by Floyd LJ for this second appeal on the basis that it raises important issues of principle in relation to what constitutes outstanding benefit and how it should be calculated. Professor Shanks challenges the decision of the Hearing Officer as affirmed by Arnold J. that the patents did not confer an outstanding benefit on Unilever and repeats the submission that the calculation of benefit should include an allowance for the time value of money. He also contends that a fair share of the benefit to Unilever would be at least 33 per cent rather than the 5 per cent which the Hearing Officer would have awarded. He also invites us to overturn the judge's conclusion that the financial benefit should be calculated net of tax.
5. Unilever has served a respondent's notice setting out further grounds relied upon for upholding the decision of Arnold J. One of these is that the Hearing Officer should have deducted development costs when assessing the benefit of the patents to Unilever which would have reduced the £17m figure by a further £1.75m. It is also said that the Hearing Officer was too generous to Professor Shanks in treating him as the principal inventor and in failing to give adequate weight to the provision of advice, facilities and other resources by Unilever. A proper consideration of these matters would, it is said, have reduced the calculation of a fair share still further.

The legislation

6. We are concerned on this appeal with the relevant legislation prior to its amendment by the Patents Act 2004. Part I of the 1977 Act begins with s.39 which specifies the circumstances in which an invention made by an employee will belong to his employer:

"39. (1) Notwithstanding anything in any rule of law, an invention made by an employee shall, as between him and his employer, be taken to belong to his employer for the purposes of this Act and all other purposes if—

(a) it was made in the course of the normal duties of the employee or in the course of duties falling outside his normal duties, but specifically assigned to him, and the circumstances in either case were such that an invention might reasonably be expected to result from the carrying out of his duties; or

(b) the invention was made in the course of the duties of the employee and, at the time of making the invention, because of the nature of his duties and the particular responsibilities arising from the nature of his duties he had a special obligation to further the interests of the employer's undertaking.

(2) Any other invention made by an employee shall, as between him and his employer, be taken for those purposes to belong to the employee."

7. Section 39(2) is re-inforced by s.42(2) which renders unenforceable a term in a contract with the employer which has the effect of diminishing the employee's rights to the invention or any resulting patents. As Jacob LJ explained in LIFFE Administration and Management -v- Pavel Pinkava [2007] 4 All ER 981; [2007] RPC 30 at [95], s.42(2) seems to have been intended to limit the ability of an employer to by-pass the conditions for ownership prescribed by s.39(1) by introducing some kind of catch-all provision in the contract of employment in respect of all employee inventions made during the period of employment. This can obviously lead to disputes as to which provisions of any particular contract diminish the employee's right in the invention as opposed to defining the scope of his duties but those issues do not arise on this appeal. It is, however, clear that s.42(2) would also apply to any contractual limitation on the employee's right to compensation but again that is not a difficulty in this case.
8. Section 40 in its unamended form provides:

"40. (1) Where it appears to the court or the comptroller on an application made by an employee within the prescribed period that the employee has made an invention belonging to the employer for which a patent has been granted, that the patent is (having regard among other things to the size and nature of the employer's undertaking) of outstanding benefit to the employer and that by reason of those facts it is just that the employee should be awarded compensation to be paid by the employer, the court or the comptroller may award him such compensation of an amount determined under section 41 below.

(2) Where it appears to the court or the comptroller on an application made by an employee within the prescribed period that—

(a) a patent has been granted for an invention made by and belonging to the employee;

(b) his rights in the invention, or in any patent or application for a patent for the invention, have since the appointed day been assigned to the employer or an exclusive licence under the patent or application has since the appointed day been granted to the employer;

(c) the benefit derived by the employee from the contract of assignment, assignation or grant or any ancillary contract ("the relevant contract") is inadequate in relation to the benefit derived by the employer from the patent; and

(d) by reason of those facts it is just that the employee should be awarded compensation to be paid by the employer in addition to the benefit derived from the relevant contract;

the court or the comptroller may award him such compensation of an amount determined under section 41 below."

9. "Benefit" is defined by s.43(7) as "benefit in money or money's worth".
10. The amount of compensation is to be determined in accordance with s.41:

"(1) An award of compensation to an employee under section 40(1) or (2) above in relation to a patent for the invention shall be such as will secure for the employee a fair share (having regard to all the circumstances) of the benefit which the employer has derived, or may reasonably be expected to derive, from the patent for the invention or from the assignment, assignation or grant to a person connected with the employer of the property or any right in the invention or the property in, or any right in or under, an application for that patent.

(2) For the purposes of subsection (1) above the amount of any benefit derived or expected to be derived by an employer from the assignment, assignation or grant of—

(a) the property in, or any right in or under, a patent for the invention or an application for such a patent; or

(b) the property or any right in the invention

to a person connected with him shall be taken to be the amount which could reasonably be expected to be so derived by the employer if that person had not been connected with him.

…

(4) In determining the fair share of the benefit to be secured for an employee in respect of a patent for an invention which has always belonged to an employer, the court or the comptroller shall, among other things, take the following matters into account, that is to say –

(a) the nature of the employee's duties, his remuneration and the other advantages he derives or has derived from his employment or has derived in relation to the invention under this Act;

(b) the effort and skill which the employee has devoted to making the invention;

(c) the effort and skill which any other person has devoted to making the invention jointly with the employee concerned, and the advice and other assistance contributed by any other employee who is not a joint inventor of the invention; and

(d) the contribution made by the employer to the making, developing and working of the invention by the provision of advice, facilities and other assistance, by the provision of opportunities and by his managerial and commercial skill and activities."

11. At common law inventions made by an employee in the course of his employment and any resulting patents were held on trust for the employer. What constituted the course of employment depended not only on the terms of the contract of service but also on a wider assessment of the relationship between the employer and employee and the circumstances in which the invention came to be made: see e.g. British Reinforced Concrete Engineering Company Ltd v Lind (1917) 34 RPC 101. The provisions of ss.39-43 of the 1977 Act were intended to provide a comprehensive code for determining the ownership of employees' inventions and for providing compensation to employees in certain cases where the inventions had been of substantial benefit to their employers. Looked at overall, the legislation is therefore more favourable to an employee than the old common law position which deprived the employee of any interest in the invention unless he could show that it was made wholly outside the course of his employment and not under any duty or expectation that it would enure for the benefit of his employer. Prior to the 1977 Act there was no right to compensation in respect of inventions which belonged to the employer beyond the salary or any bonus attributable to the inventor's work and nothing to prevent the employer from insisting upon an express contractual right to the benefit of all inventions regardless of the circumstances in which they were made.
12. But it does not follow from this that s.40 was intended to provide some universal measure of compensation and it is clear from the statutory language that it was not. Awards of compensation are limited to cases where the invention confers on the employer what is described as an outstanding benefit in money or money's worth measured against all relevant factors including the size and nature of the employer's undertaking. On any view these will be exceptional cases but the difficulty, as ever, is to specify with a sufficient degree of certainty where the line is to be drawn which is, of course, a threshold question prior to any consideration of fair share.
13. Before I come to the earlier authorities on s.40(1) compensation I want to set out some of the background facts which are relevant to provide the context in which the test comes to be applied in this case. They are set out in [9]-[26] of Arnold J's judgment which is itself a distillation of the more detailed findings made by the Hearing Officer. For convenience, I have set them out in an appendix to this judgment. I shall therefore assume that the reader of this judgment is familiar with the outline facts but it will be necessary to refer to some of the Hearing Officer's findings in more detail when I come to the issue of whether the benefit was outstanding.
14. Although Professor Shanks built the first prototype of the ECFD at home using slides from his daughter's microscope kit, it has never been suggested that this work fell outside the scope of his duties as an employee of CRL. The Hearing Officer found that although Professor Shanks was made to understand that he should not stray too far from his core brief of biosensors, he did have freedom to develop ideas in other areas and the use of biosensors as part of a disposable or re-usable device for diagnostic testing was therefore within his remit.
15. As part of his submissions Mr Green QC, on behalf of Professor Shanks, suggested that ownership of the invention passed to CRL under s.39(1)(b) rather than s.39(1)(a). Mr Alexander QC disputed this but it is not necessary to decide the point for the purposes of this appeal and I prefer not to do so. The position of CRL as a research company within the Unilever Group meant, however, that the rights in the invention were assigned (in accordance with company policy) for a nominal consideration totalling $2.00 to Unilever plc which divided up the territorial rights between it and Unilever NV. The direct financial benefit of the invention to CRL was therefore very limited but Professor Shanks was able to rely on s.41(1) and (2) and to ask that the benefit to CRL be calculated by reference to the amount which would have been derived from the invention had the assignment not been made to a connected company.
16. At an earlier stage of these proceedings this provoked a dispute between the parties as to the extent to which the calculation of the benefit derived from the notional assignment to an unconnected party required a departure from the actual transaction which occurred and the actual financial benefit derived by Unilever from its subsequent licensing of the patent rights: i.e. the £24.5m. It was contended by Professor Shanks that the benefit to CRL from the assignment of its rights should be measured not simply by reference to what Unilever actually obtained but also by what it would have obtained had the invention been fully exploited. The potential for the use of the invention in diagnostic testing was, it was said, huge and Unilever could, had it wished, have extracted royalties amounting to as much as US$1bn.
17. Unilever, for its part, contended that s.41(2) postulated an arm's length sale of the rights between the actual parties to the assignment rather than one to a hypothetical purchaser and that, in view of the uncertainties surrounding the commercial worth of the invention at the time of the assignment, Unilever would not have been prepared to pay more than a few thousand pounds. Eventually this submission was modified to one that the consideration should not exceed the actual royalties obtained.
18. On the hearing of a preliminary issue as to the meaning of "that person" in s.41(2), the Court of Appeal ([2010] EWCA Civ 1283) held that the amount which could reasonably be expected to be derived from the notional assignment was the £23m. (The Hearing Officer refined this to £24.5m). Section 41(2) required the Court to consider an assignment between the actual parties (CRL and Unilever plc) at a price which reflected the actual amount derived (or to be derived) from the exploitation of the invention. Jacob LJ said:

"26. What the statute then calls for is an assessment of what the assignor "could reasonably be expected to be so derived" if the assignee had not been connected with him. "So derived" takes one back to the opening words of the subsection: "any benefit derived or expected to be derived." That is the same phrase as is used in s.41(1) . In that context, the paradigm case, the assessment involves working out what benefit the employer has actually got in the past and any future benefit (if any) which that particular employer would get.

27. It seems to me that that is the same where there has been an assignment to a connected company. A temporal element comes in. The "benefit derived or expected to be derived" from the assignment is deemed to be the amount the employer could reasonably be expected to have derived if the assignee had not been connected, knowing what benefit was in fact obtained by the assignee. This is the benefit that must be considered for the purposes of s.40(1) and s.41(1) . In this sense s.41 reaches through to s.40."

19. Hindsight is therefore admissible to calculate what at the date of assignment would have been paid.
20. This decision of the Court of Appeal therefore determines the benefit in money or money's worth which the employer derived from the invention for the purposes of s.41(1) and therefore also of s.40(1). The remaining question is whether it was outstanding. That was not an issue at the earlier hearing but some reliance has been placed on a passage in Jacob LJ's judgment where, when discussing Mr Green's submissions that "benefit" required some consideration of the putative benefit to Unilever from the invention had it been fully exploited, Jacob LJ said:

"17. In oral argument Mr Green somewhat modified his submission: he suggested that the "putative benefit" applied essentially only at the threshold stage. Unilever were (and according to Mr Alexander still are) contending that although £23m royalties might be a lot for some companies, by Unilever standards it is not a lot and so the patent was not of outstanding benefit to Unilever. He pointed to the words in s.40(1) "having regard to the size and nature of the employer's undertaking", suggesting they meant that inventor/employees of big companies had to show a larger benefit to their employer than inventor/employees of smaller companies. I am far from convinced that Parliament meant that inventor/employees of large companies should get less or no compensation for a particular invention compared with what they would get if they had been employed by a small company. It may indeed be the other way round in that a large payment may be too much for a small company to able to afford and that was what Parliament had in mind. The point does not immediately arise—the Comptroller will have to consider it in due course if it is persisted in."

21. It is clear that Jacob LJ was not purporting to decide whether £23m was an outstanding benefit to Unilever and I confess to finding what he said about it a little Delphic. In particular, I would have thought that questions of affordability were relevant to what it would be just to award the employee rather than to whether the invention was of outstanding benefit to the employer. A more useful starting point on this issue is the earlier case law.

"Outstanding benefit"

22. Although "benefit" is a defined term under s.43(7), there is no statutory definition of "outstanding". In Memco-Med Ltd's Patent [1992] RPC 403 at page 413 Aldous J. said:

"(2) Is the benefit outstanding? The superintending examiner in this case quoted from the decision in GEC Avionics Ltd.'s Patent, [1992] RPC. 107 to the effect that the rationale being the requirement for outstanding benefit was that the employee had already received compensation for the invention through remuneration for his employment.

As was said in GEC Avionics:

"It is for this reason that the section (section 40 that is) uses the word 'out-standing' to qualify the benefit which would make it just that the employee should receive compensation. Moreover, it is noted that the word 'outstanding' is used rather than 'significant' or 'substantial' or other such term. It must be something out of the ordinary and not such as one would normally expect to arise from the results of the duties that the employee is paid for. It is, I think, for this reason that reference is made to the size and nature of the employer's undertaking, and that the benefit (to the employer) must be looked at in the total context of the activities of the employer concerned to see whether it is outstanding".

Dr. Ferdinando in British Steel PLC's Patent, [1992] RPC 117 said, at page 5 of the transcript:

"Thirdly, subsection (1) makes clear that the patent must be of 'outstanding' benefit if the application is to succeed. Mr. Tritton submitted that, taken at face value, this indicated that the patent must stand out from the rest. In Ellis, the hearing officer noted that the statute did not use the words such as 'significant' or 'substantial', and opined that 'something of the ordinary was required'. While Mr. Tritton was plainly correct in describing 'outstanding' as a comparative term, I would regard it as going further than that, implying a superlative. The test I must apply in reaching my decision as to whether an award is warranted must be correspondingly stiff."

I do not disagree with the approaches of those superintending examiners. The word "outstanding" denotes something special and requires the benefit to be more than substantial or good. I believe that it is unwise to try to redefine the word "outstanding". Courts will recognise an outstanding benefit when it occurs."

23. Although attempts to re-define the statutory test by the use of a variety of synonyms are to some extent inevitable as part of the process of statutory construction, I agree that they are largely unhelpful. Outstanding is an ordinary English word with a readily understood meaning and was doubtless chosen by Parliament to identify the exceptional nature of the benefit that must exist. It may be useful for this purpose to consider whether the benefit to the employer exceeded what would normally be expected to result from the work for which the employee was paid so long as one bears in mind that the focus of s.40(1) is on the benefit to the employer and not on the degree of inventiveness of the employee. For that reason, I would not adopt the suggestion made in British Steel PLC's Patent (quoted above) that the patent must stand out from the rest except in the sense of its return or value to the employer.
24. A number of these points were taken up by Floyd J. in Kelly. The case concerned two research scientists employed by Amersham International Plc who worked on the first synthesis of a compound called P53 which later formed the basis of a patented radioactive imaging agent. The two scientists were paid only their ordinary salaries and, in the case of the senior of the two (Dr Kelly), an additional ex gratia payment of £74,500 which he received on retirement. The imaging agent, sold under the mark Myoview, cost about £2.414m to develop and earned £4.473m in its first year of sales. But in the third year sales exceeded £20m and total sales to 2007 exceeded £1.3bn. Floyd J. held that the patents which resulted from the invention were of outstanding benefit to Amersham not only in terms of the profits they generated but also because, without them, Amersham would have been facing what he described as a crisis. In particular, they provided Amersham with protection against generic competition and enabled the company to enter into a number of major corporate deals on the back of what the judge described as a blockbuster radiopharmaceutical. In short, the fortunes of the company were transformed. The judge awarded Dr Kelly and his research assistant, Dr Chiu, 2% and 1% respectively of the £50m which was taken as the value of the patents to Amersham.
25. On any view that was a case in which the patents, whether by comparison with the income generated by other research products or in terms of their effect on the fortunes of the employer company, conferred on Amersham an outstanding financial benefit. In relation to the s.40(1) threshold question, Floyd J was not faced with the need to measure the financial return from the patents against a much larger undertaking generating profits far in excess of the revenues and other financial benefits which the patents brought. If anything, it was the other way round.
26. In this case, however, Unilever's central argument on the issue of outstanding benefit is that the £24.5m, although not an inconsiderable sum in itself, was simply dwarfed by the turnover and profits of the Group as a whole. Unilever manufactures a wide range of highly successful products from Viennetta ice-cream to deodorants which on the evidence generated billions of pounds in sales over the life of the patents and hundreds of millions of pounds in profits. Although it is accepted that the rate of return on many (if not most) of these products is much lower than on the Shanks patents, that is said not to be enough to make the benefit from the Shanks patents outstanding when regard is had to the size and nature of the employer's undertaking which it must be in accordance with s.40(1).
27. This argument was described by Mr Green as "Too big to pay". If s.40(1) calls for no more than a simple comparison between the value of a patent and the turnover and profitability of the employer's undertaking, it must follow, he says, that in relation to companies like Unilever it would be all but impossible for any employee to establish that the benefit generated by the relevant patents had been outstanding and the compensation regime contained in s.40 would have no possible application to a whole raft of major research industries. It was in relation to this contention that reliance was placed on the passage in Jacob LJ's judgment that I quoted earlier.
28. I accept Mr Green's submission that "outstanding benefit" cannot be determined simply by comparing the income generated by the patent with the overall turnover and profitability of the employer's undertaking. In particular, it cannot be necessary to show that the financial benefit from the patent exceeds a particular percentage of the total profits of the undertaking. In the case of a group like Unilever, that would exclude most patents even if the profits they generated were by any other standards exceptional. But a straightforward comparison of profitability may be sufficient, in the case of a much smaller company, to satisfy the test of outstanding benefit without recourse to a much wider consideration of the scope of the employee's duties and the expectations which the employer may be taken to have had about the level of return it would normally expect to see generated from its average research programme. The figures may in some cases be sufficient to speak for themselves.
29. What I think this demonstrates is that "outstanding" is a relative concept which requires to be measured against the relevant factors in each case. In relation to a large conglomerate like the Unilever Group, turnover and profitability will be relevant factors to consider as in every other case but they will not be the only relevant factors as s.40(1) makes clear.
30. Before turning to consider the Hearing Officer's reasons for concluding that the benefit from the Shanks patents was not outstanding in this case, it is convenient and perhaps logical to deal with three specific issues that have a direct bearing on the calculation of the financial benefit to Unilever. They are: (i) what constitutes the employer's undertaking for the purpose of s.40(1); (ii) whether the £24.5m should be increased to reflect the time value of the money to Unilever; and (iii) whether the £24.5m should be reduced to take account of corporation tax. The first point and arguably the third are relevant to a consideration of whether the benefit was outstanding for the purposes of s.40(1). The second issue was argued before Arnold J. on the basis that it was only relevant to the amount of compensation or the fair share of the benefit to be awarded to the employee under s.41(1) but it is convenient to address all three issues at this stage.

"Undertaking"

31. There is no definition of "undertaking" in the 1977 Act nor, in my view, is one really necessary. As a matter of language, the word can describe the company or other entity which employs the inventor either in terms of its organisational structure or simply as an economic unit. In Memco-Med Ltd's Patent Aldous J. said that the undertaking may be the whole or a division of the employer's business but Mr Green contends that it cannot be more than that and extend to the business activities of the whole Unilever Group. They cannot sensibly be described as the undertaking of CRL.
32. The Hearing Officer rejected the argument that the employer's undertaking should be limited to CRL or perhaps some other division within the Unilever Group. He said at [196]:

"In the event, on the facts of this case I find that the reality of the situation is that described by the defendants: regardless of how the various companies in the Unilever group have been structured, researchers at Colworth (employed by CRL) were doing work which was going to be exploited by the group as a whole. Indeed, it is notable that the whole benefit from the Shanks patents was generated by licensing activity operated out of the central Unilever companies. Having regard to the size and nature of the employer's undertaking therefore requires me to have regard to whether the benefit from the patents is outstanding in the context of the Unilever group as a whole."

33. It seems to me that an assessment of what constitutes the undertaking based on the economic and business realities of the employer's organisation is the correct approach. If one takes a strictly legal approach to the construction of the statute it can be said that the employer is CRL and that CRL's undertaking in financial terms is limited to the nominal payments it receives on the assignment of the patent rights. But if that approach is to govern s.40(1) it must also apply to s.41(1) with the consequence that the benefit derived from the patent is limited to those sums and does not include the £24.5m subsequently received by other companies in the Group from licence fees.
34. The earlier decision of this Court that I have referred to is only consistent with treating CRL's undertaking as including that of the other Group companies who received the licence fees from the Shanks patents. The work carried out by CRL employees at the Colworth laboratory was intended to enure for the benefit of the whole Group. I can therefore see no answer to the reasoning of the Hearing Officer and Arnold J. in concluding that the relevant undertaking in this case was or included Unilever plc and Unilever NV.

The time value of money

35. Mr Green contends that Arnold J. and the Hearing Officer were wrong to exclude an allowance for the time value of money from their calculation of the benefit to the employer from the Shanks patents. Unilever was in receipt of licence fees from 1996 until 2004 and Unipath (with the benefit of the patents) was sold to IMI in December 2001. Between these dates and the hearing in 2012 Unilever had the use of the money which was in itself a financial benefit to the Group. It was therefore something which should have been taken into account in calculating the benefit derived from the patents.
36. As I mentioned earlier, this point was raised before the Hearing Officer and Arnold J. as part of the argument on fair share. It was accepted (see Arnold J. at [33]) that a benefit which was not outstanding at the date of receipt did not become outstanding due to the passage of time and the employer's ability to make use of the money in the meantime. On the other hand, it might, I suppose, be said that where the financial benefit to Unilever from the patents was the licence income received over a number of years it was relevant also to take into account the fact that the employer not only received the licence fees but had the use of the money during that period.
37. There is no doubt that the time value of money is a quantifiable financial benefit so that its loss can be the subject of an award of compound interest as part of a claim in restitution: see e.g. Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34, [2008] 1 AC 561. But this is not a claim for damages or unjust enrichment and Professor Shanks' right to statutory compensation depends upon the terms of s.41(1) which limit any award to a fair share of the benefit derived by the employer from the patent. I agree with Arnold J. that this is limited to direct receipts from the exploitation of the patent rights and does not include an allowance for the fact that the employer has had the benefit of those receipts for a period of time prior to any award under s.41(1). As he pointed out, the monies received would have been employed in other activities which were either profitable or loss-making but the results of bringing that into account could be random and unpredictable and bear no relation to what the patent produced for the Group. It is the opening balance which counts. I think that the Hearing Officer was also right to point out that if the calculation of benefit is to include an allowance for the time value of money then a similar adjustment would need to be made to the calculation of Group income in order to compare like with like.

Tax

38. Mr Green challenges Arnold J.'s reduction of the amount of the benefit by reference to the amount of corporation tax which Unilever paid on the licence fees. The judge's decision was, he says, wrong in principle and results in tax being deducted twice; first by the allowance for corporation tax and secondly because the award would be taxable in Professor Shanks' hands.
39. The Hearing Officer rejected this part of Unilever's argument on the ground that a flat rate allowance of 30% was too arbitrary. He criticised the evidence of Dr Osborn for not discounting the losses that were made in some years. The inclusion of an allowance for tax was, he said, also inconsistent with the approach of Floyd J. in Kelly who had used gross income in the calculation of benefit.
40. On appeal Arnold J. placed some reliance on the decision of Laddie J. in Celanese International Corp. v BP Chemicals Ltd [1999] RPC 203 who had held that in taking an account of the profits made from a patent infringement the Court should use the amount of net profits after tax. This case was not cited to the Hearing Officer.
41. Part of the argument before the judge centred on the principles to be applied in determining whether an award of damages should be reduced to take account of the fact that the recoverable loss represented income or profits which would, if paid, have been subject to tax. The rule in British Transport Commission v Gourley [1956] AC 185 allows the award of damages to be reduced in such cases if the damages will not themselves be subject to tax.
42. The judge accepted Mr Alexander's argument that none of this was really relevant because the point in issue is not whether the award of compensation should be reduced to take account of tax but whether the benefit derived by Unilever from the patents should do so. The judge was prepared to accept that any award under s.41(1) would be taxable in Professor Shanks' hands but he held that this was irrelevant to what constituted the amount of the financial benefit to Unilever.
43. I think that the judge was right to reject an analogy with the calculation of damages as unhelpful because the first stage in any s.41(1) calculation is to determine the benefit derived from the patent. But I think that he fell into error in treating that amount as the licence income net of tax. An adjustment of the gross sum to take account of corporation tax would require an investigation into the employer's tax position taking into account years of loss as well as profit; the possibility of carrying losses forward and an assessment of whether and to what extent any payment to the employee would be deductible. I do not consider that this was what Parliament can have intended when it referred to the benefit derived from the patent. The incidence of tax is unconnected to the financial benefit which the patent produced for the employer. Its deduction is no more part of the calculation of what constitutes the benefit than the time value of the money received. Both are consequences of the benefit rather than part of it. The £24.5m should not therefore be reduced to take account of corporation tax.

The Hearing Officer's decision

44. I return then to a consideration of the Hearing Officer's reasons for deciding that the Shanks patents did not confer an outstanding benefit on Unilever. It is important to emphasise at the outset that we approach the question of outstanding benefit in a purely appellate capacity and not de novo. Our sole function is to review the decision already made to ensure that it was reached on a correct legal basis. It is only if it can be shown to be based on a misdirection as to the relevant statutory test or, for example, on some misapprehension as to the material facts that it would be open to this Court to set the Hearing Officer's decision aside and to re-make it.
45. We also have to bear in mind that we are dealing with the decision of what amounts to a specialist tribunal whose expertise needs to be acknowledged in any consideration of the merits of the decision under appeal. In practice, this means that the Court will show a real reluctance but perhaps not the very highest degree of reluctance to disturb the conclusions of the Hearing Officer on matters that are particularly within his expertise absent a clear and material error of principle: see South Cone Inc v Bessant [2002] EWCA Civ 763; [2003] RPC 5 at [28].
46. There was some discussion during the hearing as to whether, were we to set the decision aside, the proper course would be for us to remit the case back to another hearing officer to be re-heard. Both sides were agreed that in view of the costs and further delay which that would involve, they would prefer this Court to decide the issue of outstanding benefit in that event.
47. Although this is technically an appeal from the decision of Arnold J., he dismissed the challenge to the Hearing Officer's decision on outstanding benefit and the focus of this part of the appeal is therefore on the Hearing Officer's reasons for reaching the conclusion he did. Three grounds are relied on:

(1) the adoption by the Hearing Officer of the "Too big to pay" approach referred to earlier;

(2) his failure to attach sufficient weight to the scope of Professor Shanks' contractual duties and his insight, initiative and inventiveness; and

(3) his failure to give any or sufficient weight to the use of the licence fee income to boost the profit and loss accounts of Unipath Limited so as to enable it to be sold.

Too big to pay

48. I have already explained why I accept that the adoption of a simple comparison between the income from the patents and the profits of the Unilever Group to the exclusion of all other relevant factors would amount to an error of law. But Arnold J. rejected Mr Green's argument that the Hearing Officer decided that the £24.5m was not an outstanding benefit by reference to only one factor, namely that it was dwarfed by Group profits in the relevant years. And so do I.
49. Professor Shanks' case is that his invention and the patents it led to produced a rate of return that was a hundred times the actual and expected return of any equivalent and carried with it no material risks for Unilever. It was produced at virtually no cost to Unilever and partly in Professor Shanks' own time. In addition, he fully performed his other (more mainstream) contractual duties. No other single patent achieved an equivalent rate of return and the profits were pure income, produced simply through licence fees. In all but one case the licencees approached Unilever for a licence. The Hearing Officer found that in the expanding market for glucose testing the major players were prepared to pay millions of pounds to have the certainty of being able to use the ECFD technology. The existence of the patents was described as a mousetrap which enabled Unilever to recoup a windfall of £24.5m from a invention which the Group did not even want to put into production. Licensing was not a normal part of Unilever's business. Most of its successful patents led to a product range protected from competition by the patent rights.
50. There was also a large disparity between the benefit to Unilever from the patents and the rewards which Professor Shanks himself received. The evidence from Unilever was that the Group's bonus scheme did not cater for what one witness described as windfall things. Whereas Unilever received tens of millions of pounds, Professor Shanks got no more than his contracted remuneration and the $2.00 assignment fee.
51. In summary, it is said that the invention was down to Professor Shanks alone; that it resulted not from his mainstream activities but from his own researches and innate inventive capabilities at least in part in his own time; that it produced an extraordinary rate of return notwithstanding Unilever's antipathy to any active exploitation of the patent; that despite Unilever's failure to incorporate the technology into any of its product ranges the existence of the patent was an obstacle which most of the operators in the field of glucose testing obviously felt they needed to overcome and which therefore produced for Unilever an unexpected low-cost source of income amounting cumulatively to £24.5m.
52. Professor Shanks' case is that in relation to all of the issues about inventiveness, rate of return and disparity of outcome he was largely, if not wholly, successful. In these circumstances, he says that the Hearing Officer can have and did only find against him on the issue of outstanding benefit by reference to a single factor: the relative size of the return from the patents compared with Group profits. In other words, by the application of the too big to pay principle which was used to trump all other considerations.
53. After setting out his findings of fact the Hearing Officer dealt with outstanding benefit in [198]-[225] of his decision. He began by quoting the passage from the judgment of Aldous J. in Memco-Med Ltd's Patent that I have referred to at [22] and then also refers to the disparity in benefit from the patent between the employer and the employee in this case. That, he accepted, was a relevant consideration in relation to whether the benefit conferred by the patent on the employer was outstanding but did not operate as an alternative to the statutory test.
54. None of this is controversial nor is it suggested that [198]-[200] of the decision include a misdirection. The focus of the appeal on this point, as I have explained, is on how the Hearing Officer then treats his findings about benefit in assessing whether it was outstanding.
55. The Hearing Officer's findings on this issue can be summarised as follows:

(i) Looked at properly in terms of cash, the revenue from the Shanks patents was small when compared with Unilever's overall profits in the same period. The patents did not produce income in every year and the sum of £23m did not require a re-statement of the Group accounts. "But that does not mean that Mr Alexander's argument immediately carries the day": see [202]. The Hearing Officer therefore rejected in terms at the outset that an income/group profit comparison was conclusive of the issue.

(ii) In [203]-[206] the Hearing Officer recited Mr Green's argument that if one applies Unilever's approach it would be impossible for any employee of a company of the size of Unilever to produce a patented invention which conferred an "outstanding" benefit. He then referred to what Jacob LJ said in his judgment at the earlier hearing (see [18] above). At [207]-[208] the Hearing Officer said:

"207. I agree with Mr Green to the extent that I think it is too simplistic to simply look at overall turnover, or profits, of an employer's undertaking and then simply state that a given benefit is a small percentage of that. At the same time, it is necessary, as the statute says, to take account of the size and nature of the employer's undertaking. Different undertakings will have different leverage to be able to make more or less benefit out of their activities. I see this as being illustrated by Mr Emanuel's comment in evidence that £50,000 would be an excellent return for a small company to get from licensing its patents. Clearly, that would not be an excellent return for Unilever, which by its nature, for example by being able to contemplate greater expenditure on litigation, is able to get higher returns in negotiations than a smaller entity would, as Mr Emanuel conceded. So it seems totally logical to me that a given monetary benefit might be outstanding for a small entity, but not for a larger one.

208. Ultimately, I do not think this reduces to a simpler test than that laid down in the statute – it is a matter of looking at the benefit in the overall context and determining whether in view of all the facts the benefit to the employer was outstanding. Sometimes that might be because of the benefit being in fact a large portion of the employer's profits or turnover. Other times it may be possible to see the outstanding nature from the effect it had – for example in Kelly, where Floyd J is able to determine the benefit is outstanding before determining its precise value in money terms."

(iii) At [210]-[212] he considered the evidence which compared the valuation of the Shanks patents with average patent values more generally. He concluded that these comparisons were not of much assistance:

"The question of outstanding benefit must be considered in the context of an employer's undertaking. A patent might very well provide outstanding benefit in that context even if it did not stand out among patents generally. Conversely, I find it hard to see how a benefit of £50,000 could be considered an outstanding benefit in the context of Unilever's overall budget, even if generally patents are licensed for much less".

(iv) The next issue to be considered at [213]-[215] was the benefit in the context of Unilever's licensing activities which, as I have mentioned, were not a usual part of its business. There was little or no evidence about any other licensing deals which could be used by way of comparison with the Shanks patents and one of the witnesses called by Unilever not surprisingly accepted that any significant level of licence fees was therefore likely to stand out by comparison to this part of the Group's activities. On this, the Hearing Officer said:

"215. It does not however follow that the benefit, in money or money's worth, is outstanding. On this I agree with the point Mr Alexander put forward, which was that how the benefit was made is not relevant to whether it is outstanding – what matters is whether the benefit in money or money's worth is outstanding in the context of the undertaking as a whole. Just because a company does not usually make money in a certain way does not mean that any sum, no matter how small relative to the size of the company's usual business, is of outstanding benefit for it".

(v) At [216]-[218] the Hearing Officer considered the evidence which sought to compare the benefit from the Shanks patents with that from other patents owned by Unilever. Much of this evidence was of very little assistance because it was not exclusively related to the value of the patents in money terms. There was also the difficulty that because as a general rule the patents which the Group research led to were used to protect the products derived from them, any calculation of benefit was dependent on disaggregating the value derived from the patents from the overall value of the product in terms of sales. The Hearing Officer was not able to get much assistance from this evidence one way or another.

(vi) He then turned to consider the benefit by comparison with Unilever's activities in general. This brought in the very wide product range I referred to earlier which generates many billions of pounds each year for the Group. But the Hearing Officer noted that to achieve the profits from its products Unilever needed to incur expenditure running into many hundreds of millions of pounds whereas in relation to the Shanks patents the expenditure did not exceed about £2m. At [220] he said:

"220. There is one noticeable difference between the benefit in cases such as Vienetta and the present case: the amount spent by Unilever to get the benefit. Profits of 'hundreds of millions' on revenues of 'billions' necessarily implies expenditure in the hundreds of millions. In this case, even on the defendants' case, the expenditure was no more than around £2 million. Under my own approach, which is to look at the benefit of the patent, even most of those costs can be ignored, giving a very high rate of return."

(vii) Having considered the various factors urged on him by Mr Green as relevant to the issue of outstanding benefit, the Hearing Officer set out his conclusions in [222]-[225]:

"222. Considering the totality of the evidence, I was left with a clear impression. The benefit provided by the Shanks patents was a substantial and significant one in money terms – the sort of sum Unilever would, on the evidence, worry about (cf. Project Hyacinth). Furthermore, in comparison to the benefit from other patents to Unilever, from the evidence before me it does, in Mr Emanuel's words 'stand out'. But Unilever makes profits at an order of magnitude greater on other inventions – albeit primarily by manufacture and at a much lower rate of return than was provided by the Shanks patents. Further, this is not such a case as Kelly, where Floyd J held that without the patents in that case, Amersham would have faced a crisis. There was no suggestion from either party that the Shanks patents were crucial to Unilever's success.

223. In my view, taking account of the size and nature of Unilever's business, the benefit provided by the Shanks patents falls short of being outstanding.

224. I note that this conclusion is not driven by the specific figure I arrived at for the benefit above. Putting aside the time value of money argument (which as I explained does not assist in making the necessary comparisons), the claimant's arguments for the total benefit, ignoring all costs and allowing approximately £8 million for the Unipath sale, gave a total of about £32 million, which would in my view not make a significant difference to the outcome of the comparisons.

225. This is sufficient to decide the case. However, in view of the extensive evidence I heard relating to fair share, I think it worthwhile to express my views on what a fair share of the benefit would have been had I held the benefit to have been outstanding to the employer, particularly in terms of the relevance of the evidence in anticipation of the possibility of appeal."

56. Mr Green says that it is apparent from this analysis that the Hearing Officer, although disavowing it in [202], did ultimately rely upon the fact that £24.5m is a small sum of money in comparison to Group profits overall as the reason for finding that the benefit from the patents was not outstanding. He emphasises that there were few, if any, negatives. The work needed to produce the patent was low cost and generated a high rate of return compared with other Unilever patents. Unilever was unable to identify any other patent with a comparable rate of return. In terms of licence fee income, the return was exceptional. The Hearing Officer expressed reservations (in [212] and [215]) about the weight to be given to comparisons with patents in general and with Unilever's licensing activities. He also considered that the evidence comparing financial benefit from the Shanks patents with that derived by Unilever from other patented products was inconclusive: see [218]. But he accepted in [222] that the benefit from the Shanks patents was, to use his words, substantial and significant and in the context of other Unilever patents that it stood out.
57. Against this, he says, the Hearing Officer set the profits derived from other Unilever patents recognising (as explained in [218]) that the profits are derived from manufactured products with a much lower rate of return. Mr Green says that this is not comparing like with like, particularly given that the Hearing Officer had previously rejected the suggestion that he could rely on this evidence as proving that the other Unilever patents were more beneficial to the Group than the Shanks patents. The fair and correct reading of [222] and [223] is that because Unilever makes very large profits from its product range as a whole, the Shanks patents did not confer an outstanding benefit. The order of profits was treated as dispositive.
58. This, says Mr Green, is a misdirection because it compares the return from the Shanks patents only with the Group's total profitability and not with the returns from other patents. The Hearing Officer was not provided with the evidence to enable him to make that comparison. Mr Green accepts that Group profitability and turnover is a relevant factor to consider but it is not a conclusive factor and that is how the Hearing Officer treated it in this case. The reason, he says, we are left with little more than an arithmetic calculation of the ratio of £24.5m to total profits is that the Hearing Officer attached almost no weight to the positive factors which he himself identified.
59. It is not suggested that there was any error in the Hearing Officer's initial statement of the law which one finds in [198]-[208]. The Hearing Officer recognises there that the question of outstanding benefit cannot be decided simply by comparing the profits generated by the Shanks patents with total Group profits. That is made clear in the passage from [202] which I quoted earlier. It is also apparent from [200] that he recognised the disparity between the returns which Unilever received and the benefits which accrued to Professor Shanks, although he was clearly right to reject this as a substitute for the statutory test. What the Hearing Officer set for himself in [207]-[208] was, as Arnold J. observed, a multi-factorial test which involved looking at the profits from the patents in the context of Group profits as a whole but taking into account other relevant factors. His acceptance that the scale of the financial returns may be sufficient in itself in some cases to answer the outstanding benefit question simply reflects what I have tried to explain in [28] above. But in most cases the figures by themselves will not provide a ready answer and it will be necessary to take a more nuanced approach balancing considerations of financial return against the effort and cost involved. This, as I have said, is a comparative exercise but there is no getting away from the fact that s.40(1) expressly recognises the size and nature of the employer's undertaking as something which must form part of the equation and mandates a determination of outstanding benefit by reference to that comparison. The size and nature of the undertaking is not limited in terms to Group profits generated by other patents and must be capable of including the whole of the employer's business. Therefore, although it will be relevant to take into account the fact (if it be) that in a company like Unilever much of the profit will come from manufactured products derived from patents and not from licence fees, I reject any suggestion that total Group profits are not to be included in what is meant by the employer's undertaking. As I have already said, s.40(1) was designed, as I read it, to deal with exceptional cases. There must be an outstanding benefit to the employer company and not just generally. Cases like Kelly illustrate the sort of circumstances where those conditions will be satisfied.
60. For these reasons, I accept Mr Alexander's submission that although the receipts in licence fees from the Shanks patents was considerable and far in excess of any other income of the same type, that is no more than a factor to be considered and does not obviate the need to make a broader comparison with the financial position of the Group as a whole. This is what the Hearing Officer is saying in [215].
61. The argument that [222] of the decision embodies a misdirection can only succeed if what the Hearing Officer decided was that the only relevant and determinative factor was the size of the profits generated by the Shanks patents in comparison to the overall profits of the Group. As I mentioned earlier, Mr Green put it in argument in terms of this being simply a comparison with total profitability. If the correct reading of the decision is that the Hearing Officer did carry out an analysis of the other factors which were pressed on him as relevant but concluded that on balance they did not make the benefits outstanding then it would not be right in my view for this Court to interfere. The weight to be given to those factors was a matter of judgment for the Hearing Officer.
62. It seems to me that this was the course which the Hearing Officer did follow. He went through the evidence in relation to each of the issues explaining what he was able to derive from the evidence and what weight he gave to the various factors. He was alive to the fact that the Shanks patents produced a high rate of return, unique in terms of licence fee income, and at little risk or cost to Unilever. But he was also aware that the benefits in terms of income which the patents produced came in over an extended period of time and produced no obvious benefit to the business as a whole other than in terms of cash. It was certainly not the transformative discovery that occurred in Kelly. At some point in his argument Mr Green came close to suggesting that Unilever was at fault for not exploiting the invention and its patents in terms of production. It was, he said, the equivalent of a block-busting invention. That is however in dispute. Mr Alexander points out that the claims do not relate to a glucose test as such but to a means of providing a sample for testing more generally which, with subsequent advances in electrochemistry, made the technology suitable for glucose testing. The viability, and therefore value, of the patents was always, he says, an issue as is evident from the terms on which the patents were eventually disposed and the relative scarcity of buyers.
63. In the end, these are not matters for us. These issues were addressed to the Hearing Officer and he made such findings of fact as were appropriate. It is not part of Professor Shanks' case that the Hearing Officer reached any conclusions unsupported by any evidence or that he failed to deal with some obviously material factual issue. He did not find that the Shanks patents embodied the kind of invention which Mr Green contends for.
64. What I think does matter is that he properly took all these matters into account but was not persuaded that the benefits which the patents did bring could be described as outstanding when looked at in the context of the overall performance of the Group. That seems to me to be what he was required to do under s.40(1). There is, I think, something to be said for Mr Alexander's argument that if all that the patents produced was money then it is not irrelevant to look at the benefit they brought largely in money terms. In any event, it is a misreading of the decision to suggest that the Hearing Officer reached his conclusion solely on the basis that the income from the patents was a small part of Group income in the relevant years. Ground 1 therefore fails.

The other grounds of appeal

65. I can deal with the other two grounds of appeal quite shortly. The Hearing Officer dealt at length in his decision with how the invention came to be developed and what was Professor Shanks' contribution to it. In terms of his contractual duties, the Hearing Officer found that the work lay within Professor Shanks' brief although it was not the main focus of his work. So far as these are relevant to the issue of outstanding benefit, the Hearing Officer was obviously aware of these matters and I think took them into account. But, as stated earlier, they have only a limited relevance to the s.40(1) question and are of more obvious importance to a consideration of what a fair share of the benefit would be. I am not satisfied that there is anything in this ground of appeal.
66. The issue about Unipath was not really pressed although addressed in Mr Green's skeleton argument. It is obviously not a requirement of s.40 that the patent should save the business but, if it does, it is obviously likely to be regarded as of outstanding benefit as it was in Kelly. Mr Green's other point is that the revenues from the Shanks patents had been used to prop up Unipath's accounts and return it to profitability in readiness for a sale. But the Hearing Officer took account of this and the decision of Unilever to use the revenue for the benefit of a particular entity within the Group does not obviate the need to consider those figures in relation to the Group as a whole.

Conclusions

67. For these reasons, I would dismiss the appeal in relation to outstanding benefit. In those circumstances, I prefer to express no view about what should have constituted a fair share.

Lord Justice Briggs :

68. I agree that this appeal should be dismissed, for the reasons given by Patten LJ. I do so with some reluctance because this does appear to be a case in which the sheer size of the employer's undertaking was, at the end of a careful and balanced analysis by the Hearing Officer, the key factor in his conclusion that the benefit which Unilever derived from Professor Shanks' invention was not 'outstanding' within the meaning of that word in s.40(1) of the 1977 Act. It may be going too far to say that Unilever was simply 'too big to pay', but there is no escaping the fact that Professor Shanks might well have succeeded had his employer had a much smaller undertaking than did Unilever.
69. But that seems to me to have been a legitimate consequence of the express statutory requirement that the Hearing Officer should have regard (amongst other things) to the size and nature of the employer's undertaking in deciding whether the benefit to the employer was outstanding. While s.40 does not, and the Hearing Officer did not, disregard any other relevant matter, the fact that it is the only matter to which Parliament makes express reference in this respect means that it plainly cannot be disregarded and that, in some circumstances, such as this case, it will prove to be decisive.
70. The fact that this factor did, I consider, prove decisive in the Hearing Officer's analysis by no means leads to the conclusion that he made an error of law. As my Lord has demonstrated, the Hearing Officer carefully took into account a range of competing factors for and against a conclusion that Professor Shanks' invention was of outstanding benefit to Unilever, recognising that no relevant factor could be treated on its own as compelling a particular outcome, without a balancing of all relevant factors. It is frequently the case that the outcome of a multi-factorial balancing exercise of this kind is ultimately determined by a particular factor. Providing that the decision maker remains within the bounds of rationality, the weight to be given to each factor is a matter for him.
71. I wish to add a few words about the relevance in a case of this kind of the time value of money. I agree with my Lord that where (as it usually will) the analysis and quantification of the benefit of the invention to the employer depends either totally or partly upon the money received from its exploitation, the enquiry ought usually to be directed to the amounts actually received, at the time when they were received, and that the use to which the employer subsequently put those receipts should not be taken into account.
72. There may however be cases where the time value of money, or the change in the real (rather than nominal) value of money over time, will need to be recognised in the process of determining whether the relevant benefit was outstanding. Where for example the income stream from the invention accrues over a long period of time, but needs to be compared with the size and nature (including turnover and profitability) of the employer's undertaking, it may be necessary to adjust one or the other by reference to the change in the value of money over time if the two are not, or cannot be, compared at the same points in time. This is simply to ensure that like is compared with like, rather than to attribute to the benefit of the invention the employer's use of the income from it after receipt.
73. More generally I would expect the time value of money (or its change in real value over time due to inflation) to be relevant in the quantification of the inventor's fair share of the outstanding benefit under s.41. This is, again, not because of any entitlement of the inventor to share in the benefits derived by the employer by using the relevant receipts in the course of its business, but rather because of the deleterious effect upon the real value of money of the likely substantial lapse of time between the employer's receipt of the benefit and the making of the fair share payment to be assessed at the end of proceedings. In times of high inflation this may be very large indeed. In times of high interest rates (which usually but not always accompany high inflation) the employee will suffer unjustly by being kept out of his share for the potentially long period between the employer's receipt of the benefit and the making of the order for payment if some interest element or inflation adjustment is not included within the award.
74. These considerations have no bearing upon the outcome of this appeal, but they have been addressed both by the judge and by the Hearing Officer in a manner with which, to the extent outlined above, I respectfully disagree.

Lord Justice Sales :

75. I agree that this appeal should be dismissed for the reasons given by Patten LJ. The one issue on which I would part company with his analysis is that regarding the relevance of the time value of money. On that, I agree with the observations of Briggs LJ at paras. [71]-[74] above. As Briggs LJ notes, this does not affect the outcome of the appeal.


 



 


APPENDIX TO JUDGMENT
76. Prof Shanks was employed by Unilever UK Central Resources Ltd ("CRL") from 5 May 1982 to 3 October 1986. Prior to that, he had been employed by the Royal Signals and Radar Establishment, where his expertise lay in the field of liquid crystals and liquid crystal displays. Prof Shanks was recruited by Unilever to work on process engineering and process control sensors with a focus on biosensors. He was based at Colworth Research Laboratories. It is common ground that Prof Shanks was employed to invent. For this, he initially received £18,000 per annum and a Volvo car, rising to £29,000 and a BMW.
77. In July 1982 Prof Shanks visited Professor Anthony Turner and Professor John Higgins at Cranfield University and learnt about the research they were carrying out in the field of biosensors for monitoring diabetes. Although Prof Shanks' brief was to develop biosensors for use in process control and process engineering, rather than in medical diagnostics, he became interested in the possibilities of developing re-usable or disposable devices incorporating biosensors for diagnostic applications. In a report dated 1 August 1982 entitled "Report on new opportunities offered by product sensors" Prof Shanks identified a number of "New product opportunities" one of which was "Sensors for monitoring glucose, insulin or immunoglobulin levels in diabetics. (Control unit + insulin pump + limited re-usability or disposable sensor.)"
78. Prof Shanks gave evidence that he had many times filled the 10 microns thick gap between the glass plates of an LCD with liquid crystal simply by placing a droplet on the edge of the cell and relying on capillary attraction to draw the liquid into the gap. He realised that this could be used with other liquids such as blood or urine. He then saw how this technique could be used with etched or printed planar electrodes and the enzyme electrochemical methods of Cranfield to measure glucose concentrations in blood, serum or urine in what was dubbed an Electrochemical Capillary Fill Device ("ECFD"). He said that he built the first prototype ECFD at home in October 1982 using some slides from his daughter's toy microscope kit with some Mylar film as spacers, held together with bulldog clips. Alongside the ECFD, Prof Shanks also developed a Fluorescent Capillary Fill Device ("FCFD").
79. CRL employed all of Unilever's UK-based research staff. CRL was not a trading company. CRL was a wholly-owned subsidiary of Unilever plc. Unilever plc and Unilever NV were parallel parent companies of the Unilever Group which were listed on the London and Amsterdam Stock Exchanges respectively, but which were run as a single business.
80. It is common ground that, as between Prof Shanks and CRL, the rights to the ECFD invention belonged to CRL pursuant to section 39(1) of the 1977 Act. In accordance with standard Unilever policy, CRL assigned the rights in the invention to Unilever plc for £100. Unilever plc retained the rights for the UK and other territories including Australia and Canada. Unilever plc assigned the rights for the rest of Europe and other territories such as Japan to Unilever NV for £100. Unilever NV assigned the rights for the USA to a company which subsequently changed its name to Unilever Patent Holdings BV. Prof Shanks was asked to sign, and did sign, two confirmatory assignments, for which he received $1 each.
81. On 13 June 1984 Unilever plc filed UK Patent Applications 8414018 and 8415019 ("the Priority Documents"). The 018 Priority Document covered the ECFD and FCFD devices, while the 019 Priority Document covered the optical principle of the FCFD. The application for EP375 was filed by Unilever plc (for the UK) and by Unilever NV (for nine other contracting states) on 12 June 1985 claiming priority from the Priority Documents. EP375 was granted on 16 May 1990. Other Shanks Patents were also obtained in Australia, Canada, Japan and the USA. All the Shanks Patents expired on 11 June 2005 except for the US Patent, which expired on 25 August 2009.
82. Prof Shanks was the sole named inventor in respect of the Priority Documents, whereas EP375 also named Martin Smith and Claes Nylander as inventors. The hearing officer found that the invention as claimed in the independent claims of EP375, together with some of the subsidiary features, was devised by Prof Shanks alone. Claim 1 was in the following terms:

"A specifically-reactive electrochemical test device, comprising electrodes, and a cavity (1-3, 51-2) having a dimension small enough to enable sample liquid to be drawn into the cavity by capillary action, the electrodes being arranged to contact the liquid, characterised in that the electrode structure (10-11, 61-2) for making one or more measurements of one or more electrically measurable characteristics of the sample is included within said cavity (1-3, 51-2), and in that optionally a surface or wall (51) of the cavity carries a coating (63,83) of a material appropriate to the test to be carried out in the device. "

83. Unilever also obtained European Patent No. 0 171 148 and related patents in respect of the FCFD invention ("the FCFD Patents").
84. Unilever were not interested in moving into the field of blood glucose testing, which would have involved them in competing with companies which were established in the therapeutic sector, and relatively little was done to develop the ECFD technology after the end of 1984. Both Prof Shanks and Unilever were more interested in the FCFD technology, which had application in other areas, and from 1985 to 1987 work was concentrated on developing this.
85. On 13 October 1987 Unilever sold the FCFD technology, including the FCFD Patents, to Ares-Serono Inc. Ares-Serono also took a three-year option on the ECFD technology, but never exercised this option.
86. After this, Unilever concentrated on the field of pregnancy and fertility testing. Nevertheless, some further research into glucose testing was carried out between 1987 and 1994, and further patent applications were filed by Unilever, in particular some based on the work of Professor Brian Birch ("the Birch Patents"). Furthermore, the Shanks Patents were maintained.
87. The glucose testing market expanded considerably in the late 1990s and 2000s. Biosensors played a key role in this. The ECFD technology eventually appeared in most personal glucose testing products, but it was not the key driver which caused the market to take off. The hearing officer concluded that it was a useful technology that most significant players in the field were willing to pay millions of pounds for the ability to use, but not one that was vital.
88. Unilever's main purpose in having patents was to use them to protect an actual business. Cross-licensing of unexploited patents was of secondary importance and out-licensing was third.
89. Nevertheless, most of the companies operating in the blood glucose testing field took fully paid-up non-exclusive licences for the remaining life of the Shanks Patents under which the licence fees were payable in instalments. Most of the licensees also took licences under the Birch Patents. These licences were negotiated between 1992 and 2001. Save in one case, the licensees approached Unilever. Even in the exceptional case, Unilever originally approached the licensee for a different reason. A total of seven licences (or sets of licences) were granted by Unilever plc and Unilever NV for a total consideration of £20.3 million. The hearing officer concluded that this figure should be discounted by 5% to reflect the inclusion of the Birch Patents, producing a figure of £19.5 million.
90. After leaving Unilever, Prof Shanks was employed by Thorn EMI plc. In 1994 he returned to Unilever, where he remained until 2003, but had little involvement in the licensing of the Shanks Patents. Nor did he develop the technology, or push forward its commercial exploitation, in any other way.
91. Along with other patents, management responsibility for the Shanks Patents and the Birch Patents was transferred to Unipath, a subsidiary of Unilever, in 1994. Unipath took on the bulk of Unilever's medical diagnostics business, including successful products in the field of pregnancy and fertility testing, in particular the ClearBlue pregnancy test.
92. In December 2001 Unipath, including the Shanks Patents and the Birch Patents, was sold to Inverness Medical Innovations (IMI) for £103 million. The sale agreement provided for IMI to receive expected licence payments from one of the licensees of £2.9 million. It was agreed that this sum should be treated as part of the benefit obtained by Unilever from the Shanks Patents, subject to a discount for the value of the Birch Patents, which the hearing officer again assessed at 5%. In addition, the hearing officer applied a further 5% discount for the credit risk that the licensee might not pay, producing a figure of £2.6 million. The hearing officer also concluded that part of the purchase price paid by IMI for Unipath was attributable to the Shanks Patents. He assessed this at £2.4 million.
93. Thus the total gross benefit which the hearing officer found Unilever to have obtained from the Shanks Patents was £24.5 million. He assessed the costs incurred by Unilever in prosecuting, maintaining and licensing the Shanks Patents at £250,000, giving a total net benefit of £24.3 million. He went on to conclude that this was not an outstanding benefit for reasons I will consider below. He also concluded that, if the benefit was outstanding, a fair share for Prof Shanks would be 5%. Again, I shall consider his reasons below.