Liffe Administration and Management v Pinkava & Anor

S.39 Patents Act 1977 is headed “Right to employees’ inventions”. So far as material ss.(1) provides:

The appellant Pavel Pinkava (“Dr Pinkava”) was engaged by the respondent (“LIFFE”), the operator of the London Futures Exchange, as a manager in its Interest Rate Product Management Team on 21st July 2001. In July 2004 he devised a system and related inventions which permit the trading on an electronic exchange of various financial instruments not previously so traded. He was promoted to senior manager in the same team on 13th September 2004. In January 2005 Dr Pinkava was advised that he, not LIFFE, was entitled to such system and related inventions. On 23rd April 2005 Dr Pinkava filed four applications for US Patents, such protection being unavailable in England by virtue of the provisions of s.1(2)(c) Patents Act 1977, for the inventions related to the system. The employment of Dr Pinkava by LIFFE terminated on 13th July 2005.

On 20th July 2005 LIFFE commenced proceedings claiming to be entitled to the confidential information relating to the system devised by Dr Pinkava and the patent applications based on it. On 18th August 2005 Dr Pinkava issued an application in the Patent Office pursuant to s.12(1)(a) Patents Act 1997 claiming to be the owner of the four inventions the subject of the US patent applications and seeking a declaration that he was entitled to apply for the US patents in respect of them. Both sets of proceedings, to which Dr Pinkava’s company De Novo Markets Ltd had been joined, were heard by Kitchin J over 10 days in January and February 2006. For the reasons given in his judgment handed down on 24th March 2006 ([2006] EWHC 595 (Pat)) Kitchin J concluded that

Thus the issues arising on this appeal are the same as those determined by the judge which I have summarised in paragraph 3. I shall, in due course, deal with them in that order but first it is necessary to explain in some detail (1) the nature of the financial instruments, markets and exchanges with which these proceedings are concerned, (2) the business of LIFFE, (3) the employment of Dr Pinkava and (4) the nature of the system and the related inventions.

The judge dealt with these topics in paragraphs 15 to 47 of his judgment in terms with which the parties agreed. As his judgment is readily available I need not repeat his explanation in detail or at length. It is sufficient to highlight certain matters. First this appeal concerns the financial markets, as opposed to the commodity markets, comprising the foreign exchange, money, bond and equity markets. Each of them has an associated derivative market. As Kitchin J explained (paragraph 19):

As Kitchin J explained, a ‘swap’ is a contract whereunder two counter-parties agree to exchange one asset or instrument for another. They have only ever been traded on the Over the Counter Market (“OTC”) overseen by the International Swaps Derivatives Association (“ISDA”). Relevant to this appeal are interest rate swaps (“IRS”), overnight index swaps (“OIS”), credit default swaps (“CDS”) and credit index swaps (“CIS”). As Kitchin J explained:

As Kitchin J explained a future, in its simplest form, is:

In paragraphs 42 to 47 Kitchin J described the features of an exchange as a means of buying or selling a commodity or financial product. He pointed out the need for liquidity and, in the case of derivatives, for standardised contracts and credit risk protection. He described how exchanges such as LIFFE have standardised contracts and have addressed the problems of credit risk by the system of ‘margining’ whereby [paragraph 46]:

The business of LIFFE was described by Kitchin J in paragraphs 48 to 54 of his judgment. For present purposes it is sufficient to focus on certain aspects of that summary. LIFFE commenced business in 1982 as the London International Financial Futures Exchange. Initially it traded in seven financial futures. In 1984 it added futures based on the FTSE 100 Index. In 1992 it acquired the traded options business formerly carried on in the London Stock Exchange. In 1996 it acquired the business of the London Commodity Exchange which included trading in futures contracts based on sugar, coffee, cocoa and other commodities. In January 1999 LIFFE developed futures contracts based on the Euro. In 2000 LIFFE closed its trading floor having moved its markets on to the electronic trading system known as LIFFE CONNECT in 1998.

LIFFE’s products are divided into three categories, namely Commodities, Equity Derivatives and Interest Rates. For each category it has a Marketing and Product Management team. The function of each team is to develop new products or enhancements to existing products, launch the products and provide educational and support services to LIFFE’s customers and other employees. In the period material to this appeal LIFFE listed six types of future contract, with a parallel series of options, namely short term interest rate (“STIR”) futures, bond futures, individual equity futures, equity index futures, commodity futures, and swapnote futures. All of them are electronically traded on variations of a standard template.

Kitchin J heard evidence from Mr Foyle, a director of LIFFE who had been involved in the development of the LIFFE trading exchange since its inception. In paragraph 50 Kitchin J recorded that:

In paragraph 54 Kitchin J recorded his view in respect of a submission made on behalf of Dr Pinkava that LIFFE had never launched an original product of its own in the following terms:

Dr Pinkava has a PhD in physics from Imperial College, London. In addition he is skilled in mathematics and computer technology. He was engaged by LIFFE on 21st July 2001 as a product manager in the Interest Rate Team of the Marketing and Product Management department of LIFFE. The head of that team and his supervisor was Ms Amanda Sudworth with whom he had worked at Nomura International on the listed derivatives brokerage desk. His contract of employment dated 23rd July 2001 incorporated the LIFFE Employee Guide and other documents, including one headed Employee Confidentiality, Intellectual Property and Inventions. Clause 3 of the contract of employment provided:

The document relating to Employee Confidentiality, Intellectual Property and Inventions provided that:

About a year after his employment by LIFFE had commenced a Job Description was written by Dr Pinkava in consultation with Ms Sudworth. This was after the merger of the pre-existing Product Development Department and the Marketing Department. The job title was stated to be “Manager – Interest Rate Products, Product Management”. The Job Purpose was described as:

Under the heading “Key Accountabilities” it is stated, inter alia, that the Manager

Under the heading “Key Deliverables” there are included:

In the period 2001 to 2003 Dr Pinkava was involved in the development of three new products, namely the Dollar Swapnote, EONIA and a system called Parimutuel. Each of Dollar Swapnote and EONIA was a variant on a conventional future. In the same period the OTC market in credit derivatives grew rapidly. This was achieved through the standardisation of contracts effected through ISDA and the introduction of two indices. The first index was TRAC-X which was created by JP Morgan and Morgan Stanley in conjunction with Dow Jones. The second was iBoxx devised by Deutsche Börse and a group of investment banks. Each was designed to facilitate trade in credit derivatives as a tool to limit or increase credit risk exposure. In consequence LIFFE, its members and competitors contemplated an exchange tradable contract.

JP Morgan was keen to launch an exchange tradable derivatives contract based on TRAC-X and approached LIFFE. In consequence Ms Sudworth, with her superior Mr Cowie, met Mr Lee McGinty of JP Morgan on 23rd December 2003. Shortly thereafter Ms Sudworth met Dr Pinkava. She asked him to undertake some research into movements by LIFFE’s competitors to create and launch an exchange tradable credit derivative contract and to undertake a watching brief on such activities. At the trial there was conflicting evidence as to what more Ms Sudworth said. Dr Pinkava contended that she said that it was to be a BAU futures contract. This was denied by Ms Sudworth. BAU is an acronym commonly used in LIFFE. It stands for ‘business as usual’. The documentary evidence indicates a number of variants such as NEW BAU, NON-BAU and BAU+ were in current usage. Kitchin J concluded (paragraph 76):

The same day (23rd December) Dr Pinkava sent an e-mail to Mr Lee McGinty on the subject of “Dow Jones Trac-X Index Futures on Euronext.liffe” stating:

The meeting of Dr Pinkava with Mr McGinty took place on 5th January 2004 and lasted over three hours. The detailed discussion is recorded in a six page note made by Dr Pinkava. The substance of the meeting was summarised by Kitchin J (paragraph 79) as follows:

On 28th January 2004 Dr Pinkava sent Ms Sudworth an e-mail outlining what he described as a Catch 22. The dilemma was how to design a product without a licence to use TRAC-X when it was not worth paying for the licence without a product with which to recoup the considerable cost. He concluded:

Dr Pinkava then left for the US to help launch LIFFE’s Eurodollar interest rate future. In his absence Ms Sudworth made a presentation to the Executive Committee of LIFFE on the subject of a TRAC-X future on the basis of a document largely prepared by Dr Pinkava. The presentation was described by Kitchin J (paragraph 89) in the following terms:

Dr Pinkava returned from the US in mid-March. On 23rd April 2004 Dr Pinkava gave a revised presentation to the Executive Committee of LIFFE. He explained that a number of important developments had occurred. These included what were described as design “issues/problems” and, importantly, that iBoxx and TRAC-X were contemplating a merger. In the April 2004 performance objectives of Dr Pinkava in a long list of objectives appear the following:

Take a leading role in assessing the need for an interest rate product OTC market – by end Q3.

Put forward significant input to a strategy to get into the IR OTC market by end Q2 2005 – as soon as possible after assessment.

Lead research and development efforts with a view to launch a broadly supported and robust futures contract – by Q3/Q4

Help secure a European Trac-X licence – as necessary.”

On 29th June 2004 Mr Cowie wrote to Dow Jones indicating the interest of LIFFE to research the feasibility and potential demand for a futures or option contract based on iTraxx. On 1st July 2004 Dr Pinkava attended a conference called “Futures and Options Worlds”. As Kitchin J explained (paragraph 98):

Between July and September 2004 Dr Pinkava wrote a draft brief entitled “Bringing Credit Derivatives to LIFFE – A Strategic Action Plan”. He explained in the Preface that:

On 13th September 2004 Dr Pinkava was promoted to the position of Senior Manager with effect from 1st September 2004. His salary was increased but all other terms and conditions of his employment remained unchanged. His responsibilities were described as:

Delayed by other pressures on his time Dr Pinkava did not complete his presentation until the first week in December 2004. It was called “Design Concept Overview”. At the same time his performance appraisal was completed. In the business key result areas the following are included:

OTC

Credit Derivatives

Continue to pursue/develop the Parimutuel technology”

In the section dealing with competencies “Pushing Boundaries” Dr Pinkava wrote:

My conviction to push boundaries comes from my innovative and adaptive intelligence and my clear understanding of customers’ current and future needs i.e. customer focus

I believe I embrace change and new challenges with great openness whenever they arise

In the reviewing manager’s summary Ms Sudworth wrote:

As Kitchin J recorded (paragraph 108):

I have referred to the inventions in the plural, not by way of predetermining a point on which there is some dispute but because this is the way the discovery made by Dr Pinkava on his return from the Futures and Options World Conference in July 2004 was treated in the US Patent Applications. At the trial the parties put before the judge three agreed descriptions entitled “Interest Rate Swaps and the Invention”, “Credit Index Swaps and the Invention” and “Interbank Deposits and the Invention”. Dr Pinkava’s counsel also adduced a document headed “Summary Overview Table”. The text states that

The agreed description, with some slight modification, were accepted by the judge and provided the foundation for his description. Neither party criticised the description. It is as follows (paragraph 110):

Fundamental to the parties’ submissions on the three issues to which I have referred in paragraph 3 above are certain points of interpretation of the relevant legislation. It is convenient to refer at this stage to the material relevant to those points but leaving consideration of the arguments of counsel until after I have set out the relevant passages in the judgment of Kitchin J. Before the enactment of the Patents Act 1977 the ownership of an invention made by an employee depended on the common law. This was reflected in a number of decisions to which we were referred.

In British Reinforced Concrete Engineering Company Ltd v Lind(1917) 34 RPC 101 Eve J was concerned with the invention made by an assistant engineer in consequence of a visit to a colliery made in the course of his employment. He applied for and was granted a patent in respect of the invention. The employer claimed to be entitled to the benefit of it. The employee resisted this claim on the ground that he was employed to discharge the duties of a draughtsman or assistant engineer not to apply any inventive skill he might possess for the benefit of his employers. Eve J upheld the employer’s claim. At pp. 108-109 he said:

In Re Charles Selz’s Application(1953) 71 RPC 158 Lloyd-Jacob J upheld the claim of the employee. He had been engaged as the general manager of one of the factories of a lamp-shade maker. On a visit to a packaging exhibition for the purpose of selecting packaging material for his employer’s lampshades he was shown some ‘spray plastic’ packaging. It occurred to him that spray plastic was capable of uses other than packaging, including making lampshades. The employee applied for the grant of a patent for his invention. The employer applied to the Comptroller for a declaration to the effect that he was entitled to the invention. The employer’s claim was dismissed by the Comptroller and, on appeal, by Lloyd-Jacob J. At p.166 he said:

In Patchett v Stirling Engineering Co. Ltd (1955) 72 RPC 50, 56 the common law principle was succinctly expressed by Viscount Simonds in these words:

These principles were clearly recognised in the standard textbooks before the enactment of the Patents Act 1977 to which we were referred, see Blanco-White Patents for Inventions 4th Ed. Paragraphs 9-302 and 9-303 and Terrell on the Law of Patents 12th Ed. Paragraphs 95-98.

The Banks Committee Report on the British Patent System 1970 Cmnd.4407 considered Employees’ Inventions in Chapter 16. They doubted whether a statutory scheme for compensating employees for inventions made by them for the benefit of their employers was the best way of providing such compensation (paragraph 465). In paragraph 469 they wrote:

The Patents Act 1977 was also preceded by the white paper “Patent Law Reform” 1975 Cmnd 6000. Chapter VI is entitled “Inventions made by Employees”. Paragraphs 34 and 35 state:

Counsel for Dr Pinkava also invited us to consider a passage in Hansard for 24th January 1977 recording the words of the Lord Chancellor in introducing what became s.39. We looked at the passage in question because counsel for LIFFE did not object to us doing so de bene esse. For my part I do not consider that we were entitled to do so in accordance with the principles laid down by the House of Lords in Pepper v Hart[1993] AC 593 or the wider principle suggested in Halsbury’s Laws of England 4th Ed Reissue Vol.44(1) paragraph 1422. In any event, as the citation shows, the Lord Chancellor summarised the proposed enactment. He did not purport to explain it or any policy behind it.

Patents Act 1977 was not a consolidating measure. As its long title proclaims it provided for a new law relating to patents. Employees’ inventions are dealt with in ss.39 to 43. I have quoted s.39(1)(a) in paragraph 1 above. S.39(1)(b) provides for the case of an employee under a special obligation to further the interests of the employer’s undertaking. S.39(2) confirms that in all other cases the invention belongs to the employee. Ss 40 and 41 provide for compensation to be paid to an employee who makes an invention which belongs to his employer in accordance with the provisions of s.39. S.42(2) invalidates any contractual provision “which diminishes the employee’s rights in inventions of any description”. But ss.(3) preserves the employee’s duty of confidentiality. S.43(4) confirms that any right of Dr Pinkava to statutory compensation exists notwithstanding that patent protection for his inventions is obtainable in the US but not in the UK.

There have been two reported cases on the ambit of s.39(1)(a), namely Harris’ Patent[1985] RPC 19 and Greater Glasgow Health Board’s Application[1996] RPC 207. Harris was the manager of the Wey valve department of his employer. In August 1978 he was told that he was to be made redundant. He left his employer’s service in December. In the months in between he devised an improvement to the Wey valve and applied for a patent in January 1979. The employer claimed to be entitled to the invention and instituted the requisite proceedings. The Hearing Officer decided that the invention belonged to Harris and his decision was upheld on appeal by Falconer J.

Falconer J left undecided the question of whether s.39 is declaratory of the pre-existing common law. He concluded that the provisions of ss.39(1) and (2) and 42(1) and (2) showed clearly that Parliament intended that rights to an employee’s invention “are to be governed by, and only by, the provisions of s.39”. He did not rule out considering the pre-existing case law for guidance but “it is the provisions of section 39 to which regard must be had for the law governing any employee’s invention made after the appointed day”.

Falconer J then turned to the two issues before him, namely (1) what were Harris’ normal duties at the material time, and (2) whether the invention in suit was made by him in carrying out those duties. In relation to the first issue he considered (p.30) that the employee’s duty of fidelity to his employer did not assist in the formulation of the actual duties which the employee is employed to carry out. In relation to the second he said:

In Greater Glasgow Health Board’s Application[1996] RPC 207 Jacob J was concerned with an invention made by a Registrar in the Department of Ophthalmology who invented an optical spacing device for use with an indirect ophthalmoscope. The Hearing Officer decided that the invention belonged to the employer. Jacob J, as he then was, disagreed. He considered that he was only concerned to ascertain the normal duties of the Registrar. In doing so he relied on the contractual job description and the evidence of the Head of Department.

As I have indicated, Kitchin J concluded that the relevant invention or inventions was or were not made in the course of the normal duties of Dr Pinkava’s employment by LIFFE. His decision in that regard is contained in paragraphs 70 and 112 to 114 of his judgment. Paragraph 70 is the concluding paragraph of a section of the judgment headed Dr Pinkava’s employment and his normal duties. It runs from paragraphs 55 to 70 and covers the matters I have set out in paragraphs 13 to the first two sentences of paragraph 18 above. In paragraph 70 Kitchin J wrote:

The judge then set out in paragraphs 71 to 97 under the heading “The 23 December project and Dr Pinkava’s specifically assigned duties” the events I have covered in paragraphs 18 to 31 above. After a section (paragraphs 98 to 111) describing the inventions, the judge expressed his conclusions on the first issue, namely whether the inventions were made in the course of Dr Pinkava’s normal duties, as follows:

The judge’s conclusions in relation to Dr Pinkava’s specially assigned duties are set out in a section comprising paragraphs 115 to 135. He started (paragraphs 115 and 116) by recording the parties’ respective cases. He then described and dealt (paragraphs 117 to 124) with the three limbs to that for Dr Pinkava. In the light of all those considerations he concluded in paragraph 127:

Kitchin J found reinforcement for those conclusions in evidence indicating that Dr Pinkava made the inventions in the course of seeking to solve the problem assigned to him by Ms Sudworth and that he did so in office hours and with guidance and encouragement. The judge then considered the other inventions. He wrote (paragraphs 131 to 135):

Finally the judge turned to the third issue of reasonable expectation in paragraphs 136 to 141. He considered the submissions made on behalf of Dr Pinkava and rejected them. He concluded (paragraphs 137 to 141):

In the light of those conclusions he upheld the claim advanced by LIFFE and dismissed the proceedings brought by Dr Pinkava under s.12 Patents Act 1977.

Though the three limbs of s.39(1)(a) overlap to some extent it is convenient to consider the submissions of counsel under each of the three headings (1) normal duties, (2) specially assigned duties and (3) reasonable expectation.

Counsel for LIFFE submits that normal duties for the purposes of s.39 necessarily exclude duties specifically assigned. Subject to such an exclusion they include the duties imposed by the contract of employment and those which may evolve over time. He submits that it would be wrong to confine normal duties to everyday duties because the infrequent may still be normal. Counsel for LIFFE criticises the judge’s conclusion on the ground that he did not consider the evolving nature of the duties of Dr Pinkava since he was engaged in July 2001. He submits that by July 2004 it was, and should have been recognised by the judge to be, part of Dr Pinkava’s normal duties to consider how to devise an exchange tradable credit derivative.

Counsel for Dr Pinkava submits that the judge was right on this issue and disputes the contentions of counsel for LIFFE. He relied on the common law principles and the cases and other materials to which I have referred. He contends that the duties of an employee for the purposes of s.39 fall into three categories, normal, abnormal and specifically assigned. He suggested that the first category was not just the equivalent to contractual but should be equated to ‘day to day’ or ‘primary’ duties. He points out that, in any event, Dr Pinkava’s contract of employment and job description is confined to interest rate futures traded on an exchange not wholly different types of derivative, such as swaps and interbank pooled deposits, which were not considered to be so tradeable. He points out that at the trial LIFFE had suggested that the contract of employment was the only source for normal duties so that any subsequent evolution is immaterial.

The only contrast drawn by s.39 between one sort of duty and another is to be found in the alternatives ‘normal’ and ‘specifically assigned’. Unless the invention was made in the course of a duty falling within one or other description, which are in terms mutually exclusive, s.39(1) cannot apply and the invention will belong to the employee. It may be that there is a third category of duty, such as that adverted to by the Banks Committee in paragraph 469 of their report (see paragraph 39 above), but it is unnecessary to decide the point because it is irrelevant. Further the emphasis is on a duty of the relevant description. The source of an employee’s duty is primarily contractual, though some of the terms are implied by law, cf Patchett v Stirling (1955) 72 RPC 50, 56 and 58. But the contract evolves in the course of time such that, in my view, it is unsafe to have regard only to the terms contained in an initial written contract of employment. The actions of employee and employer in performance of the contract may give rise to an expansion or contraction of the duties initially undertaken by a continuous process of subtle variation. I do not think that any extra or different duties so undertaken should be regarded only as duties ‘specifically assigned’. It is quite possible for them, in the course of time, to have become ‘normal’.

The suggestion that what is ‘normal’ is to be ascertained by reference to some other standard such as ‘ordinary’, ‘day to day’ or ‘primary’ must also, in my view, be rejected. Parliament has chosen the word ‘normal’. It is not for the courts to substitute for that ordinary English word some other test which may or may not be quite the same. It is for the courts to apply the test selected by Parliament in accordance with its normal meaning. Thus I agree with Falconer J in Harris’ Patent[1985] RPC 19, 28 that the cases decided before the enactment of s.39 can only be guidance in relation to the assessment of an employee’s duties in the circumstances of that case. For my part I doubt if they are helpful in even that limited context.

It is not in doubt that the duties of an employee may evolve in the course of time, see Armstrong Whitworth Rolls Ltd v Mustard [1971] 1 AER 598 and Carmichael v National Power plc[2000] IRLR 43 paragraph 33. Accordingly, I agree with counsel for LIFFE at least to the extent of examining the judgment of Kitchin J on this part of the case to see if he did pay sufficient regard to the possibility of the evolution of duties as normal over and above those set out in the initial contract of employment. Such an approach is consistent with that of Jacob J in Greater Glasgow Health Board’s Application[1996] RPC 207, 222 in having regard to what the employee did as well as to what his contract said he ought to do. For this purpose it is necessary to return to the section (paragraphs 48 to 54 of Kitchin J’s judgment) dealing with the business of LIFFE (paragraphs 9 to 12 above).

In paragraph 50 (paragraph 11 above) Kitchin J accepted the evidence of Mr Foyle to the effect that it was increasingly important for LIFFE to develop new products and to achieve patent protection if possible. He also accepted his evidence that derivatives business, both on and off exchange, has one of the fastest growth rates of any in the world and that LIFFE had endeavoured to develop and launch new products and to develop its business systems to ensure that it remained competitive. Thus although a more diverse derivative trade might have formed no part of the existing business of LIFFE in 2001 it was, as the judge stated in paragraph 70, a business into which, if it could, LIFFE wished to expand.

The judge accepted that Dr Pinkava’s normal duties did extend to devising new products that might be added to the range of futures and options. He also accepted that in December 2003 Dr Pinkava was instructed to consider how to develop an exchange tradable credit derivative and that his inventions were the outcome of his implementation of that instruction. This was in the context that Dr Pinkava was recognised by LIFFE to be an ideas man with considerable academic and technical ability. The judge took his stand, chronogically, at 23rd December 2003. But the relevant date was the second week of July 2004. I find difficulty in accepting that by that date it had not become one of the normal duties of Dr Pinkava to consider and, if he could, devise an exchange tradable credit derivative or its equivalent.

As counsel for LIFFE pointed out in his written argument Dr Pinkava had been commended in his 2003 Performance Appraisal for his work in relation to OTC products and equities. He spoke in his oral evidence of “his standing duty to be available for assignment” in relation to the provision of electronic services to the OTC market. He regarded it as part of his normal duties to assist the strategy department whenever they requested his assistance and to contribute technically whenever asked by departments unrelated to his day to day activities.

Ms Sudworth considered that the design of an exchange tradable product was particularly suited to the Interest Rate Team in general and to Dr Pinkava in particular. At the time of his promotion in September 2004 it was not suggested that Dr Pinkava was undertaking any additional duties yet his responsibilities were then described as including “Development of Credit Derivatives Products”. To my mind a conclusion that that had been part of Dr Pinkava’s normal duties since the beginning of the year is hard to resist. Even if in December 2003 it had been a duty specifically assigned by July 2004 it had become a part of his normal duties.

Before reaching a final conclusion on this issue I should deal with some objections raised by counsel for Dr Pinkava on the second issue, namely specifically assigned duties. If his objections are well made in that context then they may also go to show that the development of exchange tradable credit derivatives could not have been any part of Dr Pinkava’s normal duties either. These are the three limbs to which I referred in paragraph 49 above. They were relied on in support of the proposition that the task of devising an exchange tradable credit derivative had never been specifically assigned to Dr Pinkava.

The first was the use of the expression BAU (business as usual). The judge concluded in paragraph 76 of his judgment that Ms Sudworth did use this expression at her meeting with Dr Pinkava on 23rd December 2003 (see paragraph 19 above). Counsel for Dr Pinkava objected to the addition of the comment that “I do not accept that it was used proscriptively”. He submitted that there was no evidence to justify that comment. The judge returned to this point in paragraph 118 of his judgment where he wrote:

The second limb was to the effect that the instructions to Dr Pinkava were limited to devising a future based on the TRAC-X index. This would be a conventional product wholly unlike that which Dr Pinkava designed. As to this point the judge considered evidence as to how the parties had understood the word ‘future’. He considered oral evidence of Ms Sudworth, a number of instances in which Dr Pinkava himself had used the word to describe his own invention and the evidence of Mr Foyle. The judge’s conclusion is contained in paragraphs 124 and 125 of his judgment where he wrote:

Counsel for Dr Pinkava invited us to reject this conclusion. He referred us to a number of passages in the evidence of Ms Sudworth to show that she used the word ‘future’ in the conventional sense to which the judge refers. He referred to a similar passage in the evidence of Mr Foyle to the like effect. He submitted that loose and inaccurate uses of the word by Dr Pinkava should be given little, if any, weight. I do not consider that these considerations or any of them should lead us to depart from the judge’s conclusion. It was not in doubt but that the word ‘future’ does have the conventional sense for which counsel for Dr Pinkava contends. The question is whether that is the only sense in which the word was used by those primarily concerned in this case. The judge held that it was not and the evidence of Dr Pinkava alone would justify that conclusion.

The third limb was to the effect that whatever may have been the position in December 2003 the project had been abandoned by the time Dr Pinkava made his inventions in July. This submission was rejected by Kitchin J in paragraph 126 of his judgment in the following terms:

Not only do I think that these three conclusions are consistent with my prima facie view expressed in paragraph 62 above they appear to me actually to support it. Thus the project might or might not be BAU, Dr Pinkava was throughout engaged in seeking to devise a product comparable to a future in respect of credit derivatives such as swaps and the project was ongoing in July 2004 when, as part of it, Dr Pinkava attended the “Futures and Options World” Conference following which he had the creative insight which led to the inventions. For all these reasons I respectfully disagree with the conclusion of Kitchin J that the normal duties of Dr Pinkava did not extend to the design of an exchange tradable credit derivative.

In the light of my conclusions on the extent of Dr Pinkava’s normal duties this issue does not arise. But in case the other members of the court do not agree or in case this case goes further I will deal with it shortly. I approach this issue on the footing that I am wrong to conclude that by July 2004 the normal duties of Dr Pinkava had evolved so as to include the design of an exchange tradable credit derivative. I have referred, in paragraphs 49 and 50 above, to the reasons why Kitchin J concluded that the design of an exchange tradable credit derivative was a duty specifically assigned to Dr Pinkava.

Counsel for Dr Pinkava submits that the judge was wrong to do so. Much of his argument was in fact directed to the third issue and I will deal with it in that context. Insofar as it was not it was directed to the three limbs of the argument before Kitchin J to which I have referred in paragraphs 63 to 67 above. For the reasons I have explained in those paragraphs I do not consider that the judge’s conclusions on the specifically assigned duties can be faulted if, contrary to my view, his judgment in respect of normal duties is right. It follows that, on the hypothesis on which I am considering this issue, I would affirm the judge’s conclusion on the second issue.

For s.39(1)(a) to apply not only must the invention be made in the course of the employee’s normal or specifically assigned duties but also that

Counsel for Dr Pinkava submits that the judge was wrong. His submissions, some of which overlap with his submissions in respect of an employee’s duties, normal or specifically assigned, fall into the following categories: (1) the invention must solve a problem for which the employee was employed to find a solution; (2) the intelligence or other personal qualities of the employee are not part of the relevant circumstances to be taken account of in determining reasonable expectation; (3) at the relevant time it was considered impossible to devise an exchange tradable credit derivative; (4) at the relevant time Dr Pinkava had not been asked to do so; (5) even if some exchange tradable credit derivative might have been reasonably expected the statutory test cannot be satisfied by all of them.

The answer to the first submission colours the approach to the third, fourth and fifth. The submission of counsel for Dr Pinkava in opening was to the effect that the words “an invention” in the part of s.39(1)(a) I have set out in paragraph 71 above should be read as “the invention”. In other words the invention under consideration will belong to the employee unless he was employed to devise that invention. I would reject that submission on the grounds that it would involve rewriting the subsection to alter the word “an” into the word “the” in a context in which to do so would deprive the subsection of any meaningful content. If the invention were to be reasonably expected to result from the carrying out by an employee of his duties it is unlikely that the so-called invention would be either new or involve an inventive step, cf Patents Act 1977 s.1(1).

In the course of argument the submission was modified. In reply counsel for Dr Pinkava accepted that the exact nature of the invention will be unknown before it is discovered. He suggested, in reliance on the judgment of Falconer J in Harris’ Patent which I have quoted in paragraph 45 above, the invention under consideration must be “similar” to that which might be reasonably expected. This submission was made in the context that s.39 was intended to provide a test of ownership substantially more favourable to the employee than the previous common law test.

The same or a similar submission was made to Kitchin J. He rejected it in paragraphs 12 and 13 of his judgment where he wrote:

I agree with the conclusion of Kitchin J. First, it is the case that the collection of sections in the Patents Act 1977 dealing with Employees’ Inventions is more favourable to the employee than the previous common law rules. It introduced in s.40 a statutory right to compensation for inventions made by an employee but which in accordance with s.39 belong to the employer. It invalidated by s.42(2) any contractual term by which the rights of an employee in inventions of any description are diminished. It is also true that the Act as a whole, as proclaimed by its long title, was an Act “to establish a new law of patents”. But the Banks Committee considered that the common law test as to ownership was fair (see paragraph 469 quoted in paragraph 39 above) and the White Paper did not suggest any substantial change (see paragraph 40).

In these circumstances there is no reason to interpret s.39(1)(a) by reference to any assumption of an intention (a) to enact either a test substantially more favourable to the employee than the old common law test or (b) to reproduce exactly the old common law test. I agree with the comments of Kitchin J in relation to the judgment of Falconer J in Harris’ Patent. The test is an objective test. It is to be applied in the light of and in consequence of the prior conclusion that the invention was made in the course of the normal or specifically assigned duties of the employee. I see no reason to imply any further condition or qualification to the effect that (1) the invention is similar to what might have been expected, (2) it provides a solution to a pre-identified problem, or (3) it achieves or contributes to the achievement of the aim or object of the employee’s duties. The combination of the two statutory conditions is sufficient without the implication of any more.

The second submission of counsel for Dr Pinkava was that in ascertaining whether an invention might reasonably be expected to result from the carrying out by an employee of his duties the qualities of the particular employee, whether positive or negative, are not relevant. I would reject this submission. The statutory test is an objective one but it is to be applied to the circumstances of the particular case. Those circumstances include the facts that Dr Pinkava was employed by LIFFE with the normal or specifically assigned duties in point. The question is whether “an invention might reasonably be expected to result from the carrying out of his [sc. Dr Pinkava’s] duties”. It would be inconsistent with that test to assume that Dr Pinkava’s duties were carried out, not by him, but by some notional employee of reasonable or average ability. And how would such an employee be ascertained? That said, I agree with counsel for Dr Pinkava that the expectation must arise from the carrying out of his duties by Dr Pinkava not just from the fact that it was Dr Pinkava, an intelligent and inventive man, who was to carry them out. Thus the fact, if it be one, that someone of Dr Pinkava’s ability was likely to recognise that a departure from merely carrying out his duties, whether normal or specifically assigned, might reasonably be expected to lead to the invention in question would not satisfy the statutory test. But the reason it did not satisfy the statutory test would be that there was no reasonable expectation that an invention might result from the performance of his duties, not that the abilities of Dr Pinkava were irrelevant.

The reliance placed by Kitchin J on the abilities of Dr Pinkava is shown by paragraph 139 of his judgment which I have set out in paragraph 51 above. It is quite clear that the judge was well aware that the reasonable expectation must arise from the performance by Dr Pinkava of his duties. In that context he considered the abilities of Dr Pinkava as a relevant circumstance. In my view he was both entitled and bound to do so.

I turn then to the third and fourth submissions of counsel for Dr Pinkava which I have recorded in paragraph 72 above. Kitchin J accepted in paragraph 47 of his judgment, in the context of his description of exchanges, that:

His conclusions on reasonable expectation, in particular paragraphs 140 and 141 (see paragraph 51 above), recognise that some thought that the task was impossible to achieve. Dr Pinkava achieved it by devising a system which was both ground-breaking and very clever. The judge concluded that the application of s.39(1) does not depend on the size of the invention. I agree. Similarly the fact that Dr Pinkava had not been asked to do what he achieved, is in the light of my interpretation of s.39(1)(a), as explained in paragraphs 76 and 77 above, irrelevant. An invention from the carrying out of his duties, normal or specifically assigned, by Dr Pinkava was reasonably to be expected as a result even if the particular invention was not.

The fifth submission also carries overtones of the first. Counsel for Dr Pinkava submitted that the application or invention involving the pooled bank deposit was so different from either a swap or a future as not to be reasonably expected. This provoked a dispute as to whether it was open to counsel for Dr Pinkava to differentiate between the inventions or their application. Kitchin J referred to them as “a system and related inventions”. I understood it to be common ground that that was the case advanced before the judge and the basis for the examination and cross-examination of the witnesses.

The fact is that the judge did consider the question of expectation in relation to each invention or application. In paragraph 127 he dealt with the CDS and CIS systems. In paragraphs 131 to 135 he dealt with the IRS and OIS and bank loan systems and arrived at the same conclusion. Accordingly the submission made in paragraph 188 of the written argument of counsel for Dr Pinkava that the judge

For all these reasons I agree with Kitchin J that LIFFE has established that, in accordance with the terms of s.39(1)(a) Patents Act 1977, it is the owner of the inventions the subject matter of the four US Patent Applications. I do so on the basis that the inventions were made in the course of the normal duties of Dr Pinkava as an employee of LIFFE rather than the specifically assigned duties on which Kitchin J founded his conclusion. I agree with Kitchin J that in either case it was reasonably to be expected that an invention might result from the carrying out of those duties by Dr Pinkava. In those circumstances I would dismiss this appeal.

I agree with the Chancellor’s conclusion that Dr Pinkava’s inventions were made in the course of his normal duties as an employee of LIFFE but I would, if necessary, also agree that, if that is wrong, they were made in the course of duties specifically assigned to him. I also agree that it was reasonably to be expected that an invention might result from Dr Pinkava carrying out those duties. I would, therefore, also dismiss this appeal.

On the matter on which the Chancellor and Jacob LJ disagree, as set out in their respective paragraphs 78 and 103, I agree with the Chancellor.

I agree with the Chancellor’s reasoning and conclusion that Dr Pinkava’s “inventions” were made in the course of his normal duties. I also agree that the circumstances were such that an invention might be expected to result from the carrying out of those duties. However in deference to the arguments and because the ownership of inventions is an important topic I provide my own analysis of the statutory provisions and a few comments of my own.

First there is the fact that none of Dr Pinkava’s innovations are patentable within Europe. Art. 52 of the European Patent Convention (implemented by s.1(2) of the 1977 Act) says:

So Dr Pinkava’s innovations are, for the purposes of patentability, “not to be regarded as inventions”. This potentially raised the question of whether s.39 applied at all to this case since, even though there is no definition of “invention” in the Act, methods of doing business as such are not to be regarded as inventions. However no point was taken about this, both sides agreeing that for the purposes of ss.39-43 (headed “Employees’ Inventions”) the innovations were indeed “inventions.” They were probably right to do so, since the exclusion is only the context of what is to be patentable.

As a consequence Mr Miller, for LIFFE, openly acknowledged that if his clients were successful, Dr Pinkava may be entitled to compensation pursuant to the provisions of s.40 – there was no discussion as to whether it was those provisions before or after their amendment by the Patents Act 2004 s.10.

Next there is question of whether or not s.39 is meant to be merely declaratory of the common law or to replace it. The Act is to “establish a new law of patents” and s.39 opens with the words “notwithstanding anything in any rule of law”. Moreover s. 43.(1) provides that “sections 39 to 42 above shall not apply to an invention made before the appointed day” which suggests that, so far as s.39 is concerned, there may be a difference between the old and new law.

Given these words I think it must be the language and meaning of this provision which governs the position, whether or not it merely codifies the common law. I note however that the Banks Committee had taken the view that “the common law rule appears to be a fair one.” Its recommendation was that contracting out by overstating an employee’s actual duties should be prevented by making such a provision unenforceable (see para. 469, quoted by the Chancellor). So although s. 39 provides the governing rule, that rule is unlikely to differ much from the previous common law. Actually the Committee seems to have overlooked the fact that the common law itself had a weapon to strike down the overbroad contractual duty, see e.g. Electrolux v Hudson [1977] FSR 312 where a clause in a storekeeper’s contract giving inventions to employer was held invalid because it was in unreasonable restraint of trade.

But the language of s.39 is not easy. Before turning to it, I must mention two other provisions, for they form part of the context in which it falls to be construed. Section 42 provides:

Standing alone s.42(2) is at first sight startling – it says that any term in a contract which diminishes an employee’s rights in an invention is unenforceable. That would apply even to a case where everyone agrees that an invention should belong to the employer, for instance a term in a research engineer’s contract that inventions made by him pursuant to his contract belong to the employer. That makes no sense on its own. But it is not on its own. s.39 covers the situation – so it is not the term of the contract which gives ownership to the employer but s.39 itself.

I think that must be the true explanation for s.42(2). Ownership of inventions between employer and employee is not governed by direct contractual provisions as to ownership, but by s.39(1) and (2) alone. S.42(2) is the mechanism by which the anti-contracting out recommendation has been implemented.

Note however that s.42(3) preserves the employee’s duty of confidentiality. So if an employee makes an invention which it is his duty to keep confidential as being an idea which belongs to his employer, that duty continues notwithstanding s.42(2).

It is against that background that one comes to s.39(1). Both (a) and (b) focus on the employee’s duties (“normal” or “specifically assigned” for (a) and a “special obligation to further the interests of the employer” for (b)). How then does one ascertain the nature of the employee’s duties? “Duty” is the language of obligation. As between the employer and employee the primary source of a duty are the terms of the contract. What is it that he is employed to do must be the key question. That is not the same thing as was suggested by Mr Tritton – what is his day-to-day work? Take for instance a research chemist working on a cancer cure for the last 10 years. Suppose he came up with a cure for arthritis. He could not seriously contend that he owned the invention because he was day-to-day working on a cancer cure. His duty as a research chemist is clearly wider than his day-to-day work.

On the other hand the contract cannot be sole arbiter of the duty. Otherwise employers would be able to include overbroad duties in contract terms and s.42(2) would not operate to make the contract unenforceable. As I have noted, that was specifically a matter of concern to the Banks Committee. S.42(2) will have effect to deal with overstated duties. The “duties” of s.39(1) are determined realistically.

Since one cannot go by the contract alone I do not think one can be too precise about how the duty is to be ascertained. The contract and the general nature of the job both call for examination. It is not possible to be too analytical about this. In the end one is asking whether the employee is employed to try to innovate and, if he is, what general sort of areas his innovation duties cover. It is here that I think Kitchin J got too far into the detail of Dr Pinkava’s day to day work, accepting that he was under a duty to innovate new types of future of a conventional kind but not other types of product which would be of commercial interest to LIFFE.

Clearly another factor relevant to the determination of duties is the extent to which the common law imposes a duty of confidence on the employee. S.42(3) makes it clear that Parliament was not intending to abrogate this duty in relation to employee inventions. So if in the course of his work an employee comes up with an idea which the common law would require him to hold as confidential to his employer, that will be covered by s.39. Any other conclusion leads to the absurd result that an invention would belong to the employee and yet he would owe a duty of confidence to his employer. Parliament cannot have intended such a stalemate. It follows that to some extent at least, although s.39(1) is a complete code, it lets the common law back in via the concept of “duty.”

The section provides that the invention must be made “in the course” of the employee’s duties. This clearly draws on the well-known common law concept of “in the course of employment”. The classic contrast is “a frolic of his own”. In practice once the duties are ascertained this requirement should cause little difficulty.

What then of the last part of s.39(1)(a) – “and the circumstances … were such that an invention might reasonably be expected to result from the carrying out of his duties?” This is particularly incompetent wording, even by the standards of the Patents Act 1977. For inventions to be patentable they must be novel and non-obvious – you cannot “reasonably expect” an invention to result from research. Even in research departments, most researchers do not make inventions, however hard they try. What you can do is conduct research in the hope of making an invention. And that, I think, is what this requirement of s.39(1)(a) must be about. It uses “an invention” not “the invention” because it is saying that the employer will own any invention made from the carrying out of the employee’s duties if the circumstances are such that an invention might result. If the employee is employed to innovate then it will normally follow that the provision is satisfied.

Where I differ from the Chancellor is in thinking that the particular attributes of the individual employee are a relevant circumstance. I cannot accept that, given all other factors being equal (contract terms, nature of job and so on), there can be a difference as to ownership depending on whether the individual employee is thick or brilliant. Why should an unimaginative employee get the invention because no-one expected him to come up with anything whereas an Edison in exactly the same situation has to hand it to his employer? I do not think Parliament intended an inquiry into the inventiveness of the individual employee or what, if anything, the employer knew about that. I think the last part of the section in its reference to “the circumstances of the case” is referring just to the objective circumstances in which the invention was made – was the employee in a situation where one could objectively expect him to try to innovate?

So far as this case is concerned, I do not think this makes any difference. Dr Pinkava was under a general duty to innovate new products for LIFFE, he had time to do so and did so in his employer’s time. The circumstances were such that an invention might reasonably be expected to result from carrying out his duties.

I have nothing to add to the Chancellor’s treatment of the three “different” inventions with which I agree. I therefore agree that this appeal must be dismissed.