Contents

1. 1 Introduction
2. 2 Joint inventors
3. 3 Employees’ Inventions
   1. 3.1 Categories of employee
   2. 3.2 Right to Compensation
      1. 3.2.1 Employer owns the invention
   3. 3.3 Employee owned the invention
   4. 3.4 Calculating compensation
4. 4 Unenforceable contract terms
5. 5 Disputes
6. 6 Transfers AND OTHER DEALINGS

Introduction

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).

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.

Joint inventors

If two or more people collaborated in making the invention, each of them may be entitled to a share in the ownership of the patent and will be able to work the invention (though not to assign their rights, or grant licences) without reference to the other co-owners.

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 projected by the patent but they cannot assign or licence their rights without the agreement of the other owners. This situation leads 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 otherwise. 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.

Employees’ Inventions

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.

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 Moore³ the company’s managing director held his invention on trust for the company, and in British Syphon Co v Homewood⁴ 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.⁵

Freedom of contract was generally paramount, and for years there was no concern about inequalities in bargaining power. Pre-assignment clauses in contracts of employment were common, and readily enforced until Electrolux v Hudson⁶ 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 Paper⁷ 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 of actual duties performed by the employee if necessary.

The Act also contains a code governing compensation for employees where they invent something of outstanding benefit to their employer, and provisions that make unenforceable certain contract terms that might otherwise modify the statutory régime.

Categories of employee

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:-

• What are the employee’s normal duties, including duties to which they have been specially assigned?

• Would the invention reasonably be expected to result from the discharge of those duties?

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 Harris⁸ a salesman was not expected to invent anything, and in Greater Glasgow Health Board’s Application⁹ 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.¹⁰

For higher status employees – those of relatively high status in the organisation – the two-stage test is:

• whether the invention was made in the performance of the employee’s duties:

• would the responsibilities of the employee render it inconsistent for the employee to hold t he invention for themselves?

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 decision – 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.

Disputes over the ownership of an invention may be dealt with by the High Court or the Patent County Court which may issue a declaration. Alternatively the Patent Office has a mechanism for resolving such disputes.

Where the invention 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 ), applies to the matters dealt with in section 39.

Right to Compensation

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 Healthcare¹¹ 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.

Employer owns the invention

If the invention belongs to the employer and a patent has been granted, 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 in 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 patent¹² but to some other factor¹³. Worst of all, ‘outstanding benefit’ is extremely difficult to demonstrate.

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.

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 Patent¹⁴ 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. At least it is not necessary to show that the benefit lasted for a long time.¹⁵

In Kelly the judge concluded that the value of the invention to the employer was at least £50 million, and 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 himself. 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.

The Patents Act 2004 changed this. It provides that the employee will also be able to claim for the benefit from the invention itself. This will simplify the situation and should open the door to more claims for compensation, but it does not enable employees to claim compensation for the use of unpatented inventions, and the scope of the patent may be narrower than the employee’s invention. So, under the new 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.

Employee 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) – a different side of the same coin, perhaps, 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’.

Calculating 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, 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.

Unenforceable contract terms

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

Disputes about entitlement to a patent may be referred to the Comptroller before or after grant.

Transfers AND OTHER DEALINGS

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:

• The person whose right is not registered might lose priority to the owner of a later, inconsistent, right. If A grants an exclusive licence to B then assigns the patent to C, unless the licence is recorded (or, in the case of an unpublished application, has been notified to the Comptroller) or C knows about the licence, C takes the patent without the burden of the licence.

• A proprietor or exclusive licensee who fails to register within six months cannot claim damages or an account of profits for infringements taking place between when he became entitled and the date of registration.

Patent licensing is a substantial subject in its own right, dealt with elsewhere.