The law deals not only with ownership of patents, the property rights that protect inventions, but also the ownership of inventions themselves. Given that the whole idea of granting patents is to turn abstract intellectual creations into property, it might seem unnecessary to recognise a property right in the invention too: but that is how the law works. There is some logic to it, and it works on the basis that the invention and the patent – the protected thing, and the right that protects it – are distinct entities, which is similar to distinguishing between a piece of music, say, and the copyright in it.
Inventions belong to their inventors, and as we saw earlier1 the inventor or joint inventor is the person entitled to apply for a patent, unless the rights have been given to someone else. This can happen either by a specific assignment or by a contract of employment. Even after a patent application has been filed it can be assigned to someone else. Where the inventor is an employee special rules apply (see below, 9.3).
Where someone other than the inventor is entitled to apply, they must indicate how they derive title to the invention from the inventor2. The inventor must be identified in the application.
If two or more people collaborated in making the invention, the joint inventors are entitled to apply for a patent unless the right to do so have been passed to someone else: and each of them may be entitled to a share in the ownership of the patent.
All joint applicants should be named in the application. There are provisions to enable someone who should be entitled to an invention to insist on being registered as the owner or a co-owner.
The joint owners of a patent generally each have an equal and undivided share in the patent. Each may make and sell the product or use the process which is protected by the patent, but they cannot assign or licence their rights without the agreement of the other owners. This situation can easily lead to unequal results in research and development agreements, where one party may be a large industrial concern and the other may be a research organisation or university.
The joint proprietors of a patent may agree something different from this arrangement. If one party takes an interest in the patent after grant, the terms of their relationship will be determined by the document of transfer. This will usually indicate whether the proprietors are joint tenants or tenants in common. The latter will be implied if the parties are in a business relationship or where co- owners contribute unequally to the costs of the patent.
The Patents Act 1977 contains specific rules concerning ownership of inventions devised by employees. Note that this applies to inventions, not just patents, though of course ownership of an invention is a precursor to owning a patent. The Patents Act provides a statutory test of ownership, rules about compensation of employee inventors3, and prohibitions on certain terms in contracts of employment.
Before the 1977 Act, there was no statutory law on the subject, just a hundred or more years’-worth of case-law. Ownership of inventions was governed by contract or trust, the latter arising from the fiduciary relationship between the employee and employer. In Worthington Pumping Engine Co v Moore4 the company’s managing director held his invention on trust for the company, and in British Syphon Co v Homewood5 the same applied to a senior researcher. An alternative approach considered whether the contract of employment said that the employee was employed to invent: if he or she was, they would hold an invention made in the course of their duties as trustee for the employer, as in Triplex Safety Glass v Scorah.6
Freedom of contract was generally paramount, and for years there was no concern about inequalities in bargaining power – which you would have thought were pretty obvious. Pre-assignment clauses in contracts of employment were common, and readily enforced until Electrolux v Hudson7 in 1977 held that they were in unlawful restraint of trade.
The 1977 Act was preceded by the report of the Banks Committee and a White Paper8 which addressed the matter of employee inventions. The then Labour government was also receptive to the views of the trade union movement on the subject. The resulting provision, section 39, consists of a self-contained code for determining the ownership of an invention made by an employee who works wholly or mainly in the United Kingdom. The basic rule is that such an invention belongs to the employee unless one of two situations set out in the legislation applies. The Act makes no provision for joint ownership in such a case and the rules are based on the consideration of the employee’s duties. This means more than just their duties under their contracts of employment: consideration must be given to the actual duties performed by the employee if necessary.
The Act also contains a code governing compensation for employee-inventors where they invent something of outstanding benefit to their employer. It also deals with the situation where the employee initially retains the rights to an invention but the employer takes an assignment or exclusive licence. Finally, it contains provisions that make unenforceable certain contract terms that might otherwise modify the statutory régime.
Section 39(1) recognises two categories of employee: sub-sub-section (a) deals with ‘normal’ employees and (b) with employees who have special obligations towards their employers. For ‘normal’ employees – those not of a particularly high status within the organisation – the two stages in considering ownership of an invention are:-
To the extent that the employee’s contract of employment says anything different from this it is void.
In other words: is the employer, as a result of their duties, expected to invent? The test is objective: the Court will consider whether the employee has made other inventions; and if so, whether he or she has done so recently and whether they are in a similar technical field. The Court will also consider whether equivalent employees are also in the habit of making inventions. In Reiss Engineering v Harris9 a salesman was not expected to invent anything, and in Greater Glasgow Health Board’s Application10 a junior doctor was not expected to do so either, notwithstanding that he also did some teaching and research. Whether one is employed to invent requires consideration of all the circumstances at the time the invention was made – promotion to a new position, or a change in the terms of employment, may have a bearing on the conclusion.11
For higher status employees – those of relatively high status in the organisation – the two-stage test is:
This second stage raises the question of whether the employee has a special obligation to further interests of the employer’s business. Staeng – a Patent Office decision12 – suggests that it applies only to employees who are directors or of equivalent status, and makes clear that all the circumstances including the employee’s remuneration must be taken into account. Some of the cases turn on the tribunal’s assessment that the employer simply was not paid enough to invent.
Notwithstanding that the inventor be a company director, if they are not employed under a service contract section 39 will not be engaged – an employment relationship is essential. The law on directors’ duties may be engaged, but that is outside the scope of this work (I have to draw the line somewhere).
Disputes over the ownership of an invention may be dealt with by the High Court or IPEC which may issue a declaration. Alternatively the Patent Office has a mechanism for resolving such disputes.
Where the invention in question has been patented, claims of ownership are statute-barred after two years from the grant of the patent. Section 42, which deals with unenforceable contract terms (see paragraph 9.3.4), applies to the matters dealt with in section 39.
There are two basic rules about compensation for employee inventors, one for the situation where the invention belongs to the employer automatically (section 40(1)) and the other where the employee owned the patent but it is assigned to the employer (section 40(2)). In each case the employee may be entitled to compensation: the rules differ for those two situations, but they have in common the feature that they very rarely deliver.
The rules apply not only to patents granted in the United Kingdom but also to foreign patents and to lesser protection afforded to the foreign laws, e.g. the German utility model system. An application may be made to the Patent Office or the Court within one year of the patent ceasing to have effect.
The law was considered in detail by Floyd J in Kelly and Chiu v GE Healthcare13 and it is worth reading that judgment for the summary of the law. The Kelly case is the first one in which an award has been made to employees under these provisions.
9.3.3.1Employer owns the invention
If the invention belongs to the employer and a patent has been granted, and if the patent or the invention, or both, turns out to be of ‘outstanding benefit’ to the employer, and it is just to do so, the court or the Comptroller may award compensation to the employee-inventor. The amount of compensation is dealt with by section 42. There are loopholes: the employer might decide not to file application, or the application might fail, or it might be allowed to lapse before the benefit becomes apparent. The benefit might not actually be due to the invention or the patent14 but to some other factor15. Worst of all, ‘outstanding benefit’ is extremely difficult to demonstrate.
9.3.3.1.1The benefit to the employer
The first problem is how to calculate the benefit to the employer. In Shanks v Unilever plc16 the Court of Appeal decided that the assessment of the size of the employer’s benefit for the purposes of s.40(1) should take account of neither the ‘time value of money’ (that is, the fact that employer has had the benefit years before the hearing into an award of compensation) nor the fact that any financial benefit applicable to the patent or invention is taxed in the hands of the employer.
Benefit may be in money or money’s worth, so can include anything that can be measured in financial terms. The question of whether a benefit accrues to the employer may be difficult to determine. Clearly, where the invention protects a product it restricts competition and there is a readily identifiable benefit to the employer. Where the invention has been licensed and the employer has enjoyed a flow of royalties as a result, the answer is also reasonably clear cut. The same is true of a situation where the patent has a blocking effect, excluding others from the market. However, the courts have adopted a restrictive approach to assessing whether there is an outstanding benefit.
9.3.3.1.2‘Outstanding benefit’
The test of outstanding benefit is relative, not absolute. The courts have indicated that an outstanding benefit is one that is more than just substantial or good: it is something special, or out of the ordinary. In British Steel plc’s Patent17 savings in production costs amounting to hundreds of thousands of pounds did not satisfy the ‘outstanding’ requirement because they were only 0.01 per cent of turnover. The bigger the business, the harder it will be to show a benefit which is truly ‘outstanding’ to it: some employers (perhaps many) are simply too big to pay. The courts are required to adopt a multifactorial approach, of which the size of the employer’s undertaking is only one factor – though it is often the decisive one. In Shanks, the Court of Appeal held that the Hearing Officer at first instance had taken the correct approach when he decided that the £24.5 million benefit enjoyed by Unilever from Professor Shanks’s invention was not ‘outstanding’ in this instance. Briggs LJ acknowledged the problems faced by employees of big companies in his judgment:
[T]his 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.
At least it is not necessary to show that the benefit lasted for a long time.18 In any case, the Supreme Court took a different view – but before we consider that decision, we should look at the first case in which compensation was awarded to an employee (actually two employees).
In Kelly and Chiu19 the judge concluded that the value of the invention to the employer was at least £50 million, and (by contrast to the other cases) he had no difficulty finding that this amount satisfied the ‘outstanding’ requirement. The fact that the patent had expired made it easier to quantify the benefit. Patent protection for the product assisted greatly in securing lucrative deals, and this had transformed the image of the company.
Under the 1977 Act as originally enacted (the form in which it applied in Kelly), the benefits had to flow from the patent, not merely from the invention. The intrinsic merits of the invention may produce a benefit, whether there is a patent or not. Royalties paid by third parties for the use of the invention flow from the patent, and so does the increased monopoly profit earned by the patent holder who exploits it itself. This last type of benefit is demonstrated by showing that, but for the patent, others would enter the market and monopoly profits would be eroded.
In the SC Lord Kitchin (with whom the other Supremes, unsurprisingly given his background in IP law, agreed) warned that tribunals “should be very cautious before accepting a submission 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”.
A benefit, to be outstanding, has to stand out (the sort of statement of the obvious that judicial decisions are required from time to time to make). The consequence of this is perhaps rather less obvious: to stand out, the thing being considered has to be compared against something else. And what is the something else against which it has to be compared—the multinational ice-cream-to-deodorants behemoth, or Unilever UK Central Resources Ltd which actually employed him? The answer turns out to be a pragmatic one—although Professor Shanks OBE FRS FREng (as the judgment calls him) worked for a small cog in the Unilever machine, it was right to consider the benefit to Unilever as a whole, but to assess its significance to his employer. The Act contains what are designed to work as anti-avoidance provisions, so the employer cannot licence the patent at a peppercorn royalty so as to avoid liability for compensation, and this approach seems consistent with this.
As for the outstandingness of the benefit to Unilever, His Lordship said:
... the rewards it enjoyed were substantial and significant, were generated at no significant risk, reflected a very high rate of return, and stood out in comparison with the benefit Unilever derived from other patents. What was more, they could not be attributed to the deployment or application of Unilever’s wider business assets or infrastructure; nor were they found to be the consequence of any leverage Unilever could exert because of its size. In short, the benefit Unilever enjoyed from the Shanks patents was outstanding within the meaning of section 40 of the 1977 Act. [85]
So Prof Shanks’s invention was of outstanding benefit to his small-cog employer, and he was entitled to a fair share of that benefit. The Hearing Officer had set a ‘fair share’ at 5 per cent and the Supreme Court held that this was an appropriate percentage. On this basis, Professor Shanks was awarded a sum of £2 million.
Arnold J had been wrong to reduce the Hearing Officer’s 5 per cent to 3 on the interesting basis that Unilever were able to drive a harder bargain than others in licensing transactions on account of their very deep pockets which meant that they would be able to protect their patents vigorously.
The Patents Act 2004 changed the rules, giving employees a better chance of success (although it did not assist Prof Shanks – the amendment was too late, anyway). It provides that the employee will also be able to claim for the benefit from the invention itself. This simplifies the situation and should open the door to more claims for compensation, but it still does not enable employees to claim compensation for the use of unpatented inventions, and the scope of the patent may still be narrower than the employee’s invention. So, under the 2004n Act, compensation will be payable where a particularly attractive solution is a commercial success even though the market is already foreclosed (perhaps there are significant barriers to entry, such as high investments to enter the market, or the employer already has a huge share of the market) so the success cannot be attributed to the patent.
9.3.3.2Employee owned the invention
The second situation dealt with in section 40 is where the invention belonged in the first place to the employee. Perhaps the employee was not employed in an inventing capacity, or the contract of employment (exceptionally) gave him or her the rights to the invention. If a patent has been granted for the invention, since when it has been assigned or exclusively licensed to the employer, and the benefit derived from it by the employee is ‘inadequate’ (contrast this with the requirement for ‘outstanding benefit’ in section 40(1) – not just a different side of the same coin, rather a completely different approach, and no less fraught with difficulties for the employee), the court or the Comptroller may award compensation if it is just to do so. Here, the employee’s entitlement to reward depends on the relative benefits of the patent. It may be that the employee is already receiving royalties or has been paid some consideration for the assignment of the patent, but whether or not this is the case the law is intended to ensure that the employee gets a ‘fair share of the benefit’.
9.3.3.3Calculating compensation
Section 41 sets out the factors that have to be taken into account in calculating what compensation is due. It is lengthy, and for our purposes it is sufficient to note that it says that the principle governing the calculation should be that the inventor receives a ‘fair share of the benefit’ to the employer. In Kelly and Chiu, the amount of compensation the court awarded the two doctors was calculated by taking into account (inter alia) the high level of effort and skill exercised by the inventors while working for the employer, and also the employer’s own efforts such as accepting the risk for the development of the patents. The court finally took 3% of the £50 million as fair and just – 2% to Dr Kelly, and 1% to Dr Chiu.
By Section 42(2) any terms in the contract which conflict with these provisions are void. Terms which pre-date the invention and which diminish the employee’s rights in that invention are unenforceable.
This does not apply if the invention had already been made and belonged from the beginning to the employer. But where it belonged initially to the employee and was sold or licensed exclusively to the employer the rights to compensation may not be ousted by the contract of employment.
Disputes about entitlement to a patent may be referred to the Comptroller before or after grant.
A patent is a right of personal property, and so is an application for a patent. They can be dealt with by assignment, mortgage and licence. The 1977 Act lays down a framework for dealings, but there is noting startling in these provisions. An assignment or mortgage (or assent, if the dealing is by personal representatives) must be in writing and signed by or on behalf of the assignor or mortgagor (or personal representative). There is no such requirement for a licence.
An assignment or exclusive licence may confer on the assignee or licensee the right to take action for earlier acts or infringements. This right does have to be expressly given.
Information about transactions is recorded on the register of patents, although there is no statutory obligation to register interests – registration provides only prima facie evidence of what is on the register. However, if a transaction is not registered:
Patent licensing is a substantial subject in its own right, dealt with elsewhere
1Para 8.2.
2Section 15.
3For no good reason except that it is a great piece of trivia, the German law the deals with this subject is the Artbeitnehmererfindungsgesetz, sometimes held out as a great example of a compound noun.
4(1903) 20 RPC 41.
5[1956] 1 WLR 119.
6[1938] Ch 211.
7[1977] FSR 312.
8Cmnd 6000 (1975).
9[1985] RPC 19.
10[1996] RPC 207.
11LIFFE Administration and Management v Pinkava [2007] RPC 667, [2007] EWCA Civ 217, [2007] 4 All ER 981, [2007] Bus LR 1369, [2007] ICR 1489, [2007] BusLR 1369 (15 March 2007) (CA).
12Staeng Ltd’s Application [1996] RPC 183, confirmed in Henry Brothers (Magherafelt) Ltd v Ministry of Defence [1999] RPC 442.
13[2009] EWHC 181 (Pat).
14In GEC Avionics Ltd’s Patent [1992] RPC 107 the employer secured a lucrative contract, but the patent played only a small part.
15In Memco Med Ltd’s Patent [1992] RPC 403 success was attributed to the relationship with a long-standing customer.
16[2017] EWCA Civ 2.
17[[1992] RPC 117.
18Entertainment UK Ltd’s Patent [2002] RPC 291.
19Supra, note 13.