Shanks v Unilever Plc & Ors

This is an appeal from a decision of the hearing officer in the Intellectual Property Office (Dr J Elbro) dated 19^th May 2009 in which he refused to admit a supplementary statement of case from the claimant in proceedings before that office (Professor Shanks) which he considered to raise an unsustainable construction of s.41(2) of the Patents Act 1977. He did so by treating it either as an amendment which ought not to be allowed because it was unsustainable, or a striking out of a claim which could not be maintained in law. Unfortunately, he was pointed at the wrong target. As will appear, the real target ought to have been a paragraph in Professor Shanks’ amended original statement of case. He is not to be blamed for that. It was to some extent the parties’ representatives who managed to point him in the wrong direction. However, that problem was cured at the hearing before me, and it was accepted that I could and should proceed on the footing that there was before the hearing officer and/or before me an application to strike out the relevant paragraph in the statement of case. This is an unsatisfactory way of going about important matters such as removing a substantial element of a party’s case, but it was a cost-effective way of dealing with the somewhat misshapen matter as it arrived before me.

The point in issue in this appeal can be shortly stated. Sections 40 and 41 of the Patents Act 1977 deal with compensation to be paid to employees when they are the inventors of an invention underlying a patent when the benefit of the patent accrues to the employer by virtue of the employment. The basic measure involved in this exercise is the benefit to the employer. Section 41(2) provides in outline that where there has been an assignment or similar transaction effected by the employer in favour of a “connected person”, the benefit is to be assessed as if that person were not connected. The question which arises on this appeal (or in the striking out) is whether the deemed counterparty to the now hypothetical transaction is the actual counterparty with the connection element removed, but with all the other attributes of that person in place, or whether it should simply be treated as being a normal unconnected arms-length purchaser with no special attributes.

Section 40 of the statute, in the form relevant to these proceedings (it has since been amended) is, so far as relevant, as follows:

Section 41 deals with the amount of the compensation to be paid. Subsection (1) contains the basic measure:

This is the form of the statute that applies to the present case. The significant feature for present purposes is that the starting point is the benefit that the employer derives from the patent or (importantly for the present case) the assignment or other grant. The inquiry will be as to the actual benefit obtained, rather than any benefit that might have been obtained had something different been done.

It is subsection (2) that raises the question that arises in this appeal:

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

the property or any right in the invention;

The question of statutory construction that arises in this appeal is as to the meaning of the words “that person” at the end of subsection (2). It is the case of the Unilever respondents that the notional counterparty to the hypothetical transaction which is referred to in the subsection is the same person, with the same characteristics, as the actual connected person, but without the connection. The case of the appellant, Professor Shanks, is that it means, in substance, a generic assignee, so one posits a person who is not connected with the assignor. One does not imbue that person with any of the particular characteristics of the actual assignee.

The outline of the claim made by Professor Shanks can be taken to be agreed for the purposes of this appeal. In 1984 he was employed by Unilever UK Central Resources Ltd (“CRL”), and in that capacity he was responsible for the invention in a patent which related to measuring activities, and which in due course (after some years) was deployed as an element in blood testing kits used, inter alia, by diabetics. The details of the invention do not matter. It is common ground that as an inventor in the employment of CRL, the patent vested in CRL. On 13^th June 1984 CRL transferred the invention (or the benefit of the application – the difference is immaterial for these purposes) to Unilever plc (“PLC”) for a nominal consideration (£200). PLC did nothing with the patent for some years. After about ten years, however, it licensed its use to various persons, and for at least five years after that had a significant income from royalties – something in the region of £23m.

Against that background Professor Shanks started these proceedings which claim compensation under Sections 40 and 41. Much of his statement of case is given over to the question of who actually was his employer at the time. That point has probably been resolved, and certainly for present purposes it can be treated as being CRL. His original pleaded claim was a claim for a share of benefits derived by various of the companies who might have been his employer. However, as a result of correspondence with Unilever, and before Unilever served any defence document, he amended his claim to put it on two bases. In paragraph 9 of his amended statement of case he said:

Paragraph 9(a) corresponds to a claim in respect of actual benefits – it corresponds to s.41(a). Paragraph 9(b) is an alternative claim based on the assignment to PLC as a connected person. It should be noted that the paragraph avers that the benefit should be measured by reference to a transaction that would have been entered into with “a person or persons not connected with” the employer; that person is not described as the actual assignee (PLC) minus the connection feature.

The Unilever defendants pleaded to that. Their pleading in relation to paragraph 9 in s.41(2) is contained in paragraph 15 of their Counter-statement. It refers frequently to “arms length benefit”, and does not clearly seem to take any point in relation to the claim that the counterparty to the deemed assignment under s.41(2) is claimed to be “a person” in a general sense rather than PLC in a specific sense. The closest it comes is in paragraph 15.8 which says:

Paragraph 2 of that document made clear its purpose, which is the purpose I have just described. It uses the expression “The Putative Benefit” to describe one part of the benefit which Professor Shanks said was relevant for the purposes of sections 40 and 41. Paragraph 5 reads:

Paragraph 6 suggests two alternative dates at which the benefit should be measured; nothing turns on that. Paragraph 7 avers:

Paragraph 13 contains an averment that the claimant would rely on the actual benefits received by the Unilever Group as evidence in support of its contentions as to what the putative benefit was.

When measured against the original statement of case, it does not appear that this new document (other than part of it which plainly introduced a proposed amendment to the original statement of case and as to which there was no opposition) made any change in the fundamental nature of the case other than to choose one particular case as a primary case over another. In particular, it does not raise any issue as to the identity, nature and characteristics of the deemed counterparty to the hypothetical transaction envisaged by s.41(2). However, Unilever seems to have thought that it did. It objected to the introduction of this document on the basis that it included a new case to the effect just stated. Unilever’s case was (and is) that that case is wrong in law because it is inconsistent with the requirements of s.41(2). Unilever’s case below, and before me, is that the expression “that person” is a reference back to the connected person, and for the purposes of constructing the hypothetical transaction required by the subsection one took that precise person with his, her or its characteristics minus the connecting feature. In other words, Unilever was maintaining that the statute required (and plainly required) that approach and the different approach propounded by Professor Shanks was wrong, and sufficiently clearly wrong to require that the supplemental statement of case be not admitted.

The debate before the hearing officer seems to have taken place on that footing. His decision, to which I shall come, was to the effect that the statute had the meaning and effect contended for by Unilever and that the supplemental statement of case was wrong in alleging otherwise. In those circumstances he did not allow in the relevant parts of the supplemental statement of case. It followed from that that certain evidence which Professor Shanks proposed to adduce was irrelevant and inadmissible.

This procedural approach ignored two related things. First, the supplemental case did not actually propound a new and different statutory interpretation, or a new and different statutory effect when applied to the facts. It did not purport to do so. Professor Shanks’ case in relation to the statutory effect had already been set out in paragraph 9(b) of his amended statement of case. Second, it was not apparent from the Unilever response that they took issue with that. In July 2009 the Unilever defendants made the position clearer by amending paragraph 15 of their defence document to take the point clearly. That, however, merely compounded the oddity. It implicitly acknowledged that the real issue between the parties on the statutory construction point was still in play when the hearing officer had ruled that it could not be “introduced” by the supplemental statement of case.

In order to get round this procedural muddle, and because it seemed that the issue between the parties was sufficiently clearly articulated, I proposed, and the parties accepted, that I should treat the hearing officer’s decision as if it were an application to strike out paragraph 9(b) of the amended statement of case as being erroneous in law or proceeding on a plain legal mistake as to the meaning and effect of s.41(2); or that alternatively I could be treated as having such an application before me. The parties agreed to that. That enabled the debate to continue in a more properly directed fashion, and enabled me to reach a result which would be capable of having a useful effect in the proceedings. If I had, for example, dismissed the appeal, the supplemental statement of case would not have been allowed in, yet the very issue which it was (erroneously) thought to have raised would still be in play.

After an introductory passage, the hearing officer set out the statutory provisions involved. He also set out the provisions relating to striking out an amendment in the Office and recorded the submission of the defendants (Unilever) that the supplemental statement of case should not be admitted because it did not make out a good case “even if all the facts alleged are accepted as true”. It is not particularly clear which facts that is a reference to, but I do not think that that matters. The important part of his reasoning comes from the section headed “Interpretation of Section 41”. In paragraph 21 he records as follows:

His preliminary conclusion is in the next paragraph:

The following paragraphs set out the arguments advanced by Professor Shanks to the effect that that construction produced a ridiculous result which would undermine the purpose of the clause. His example involved a sale to an associated company which could never (because of its constitution) pay more than a nominal sum for a patent. He recorded that that argument was not convincing:

It is that last paragraph which contains the ultimate finding of the hearing officer and on which Professor Shanks takes issue.

Mr Green, for Prof Shanks, says that the interpretation of section 41(2) adopted by the hearing officer is wrong. The essence of his argument was that the words “that person” were capable of referring back to the expression “a person” (and not “a person connected with him”). That being the case, there were two possible constructions of those words, and the choice between them should be made on the basis of a purposive construction. The purpose of the subsection was to prevent avoidance of the principle that an employee-inventor should be paid a fair share of the benefit. That required that in lieu of the sale to a connected person there should be deemed to be a sale in the open market to an arms length purchaser, and not to the actual person who actually purchased but without the connection. The latter construction would be capable of creating unnecessary constraints on the deemed transaction - for example, if there were a sale to a group company which was unfunded and which never paid for patents anyway and would not do so. If he was wrong about the two possible alternative meanings of the word, and if “that person” was a reference back to the actual person who was connected, then nonetheless to adopt such a literal construction would lead to a commercial absurdity (again having regard to the purpose of the statute) because again it would be capable of imposing artificial constraints which would enable an employer to evade the consequences of, and the intention underlying, the provisions by selling at a nominal price to a connected person.

Mr Gardner supported the hearing officer’s decision. He said that the only realistic meaning of the words “that person” was that it was a reference back the person who was connected, and that one deemed a transaction with that person but without the connection. There was no absurdity in doing so, and Parliament should be taken to mean what it said.

In what follows I shall, for the sake of convenience, assume that the section 41(2) transaction is a disposal as it was in the present case. It might, of course, be something different - a licence, for example. All the same reasoning applies to those alternatives, but it will be easier to consider the point by reference to just one sort of transaction.

I start the resolution of this dispute by getting a couple of points out of the way. First, I consider Mr Green’s first alternative construction of “that person” (ie that it refers back to “person”) to be unsustainable as a matter of language. On the words of the section as it stands, I do not think that it is capable of more than one literal meaning in this respect. It refers to a form of disposal, and identifies it in terms of the person to whom it is made - the actual person who is a connected person. It refers to a real disposal to a real person. It then requires an alternative assessment of benefit in those circumstances. It requires (in ungrammatical English) that the benefit “so derived” (ie derived from the disposal) should be that reasonably expected to be the benefit derived by the employer if that person had not been connected. It seems to me to be plain that as a matter of literal English “that person” is the real person previously referred to. It cannot, as a matter of English, be a generic disponee. The word “that” is a demonstrative adjective that refers back to something. If one asks “which person is it a reference back to”, the answer, as a matter of English, must be to the person previously described, which is the connected person - a real person - and the subsection then requires one to imagine that person without the quality of being connected. I therefore think that the hearing officer was right to treat that as the literal meaning of the expression.

That, however, is not the end of the debate. Mr Green is entitled to rely on the principle, not disputed by Mr Gardner, that Parliament should not lightly be taken to intend an absurdity, and if it can be demonstrated that the literal construction leads to an absurdity then one is entitled to consider whether there is an alternative, less than literal, meaning which can be placed on, or effect given to, those words.

It seems to me that the literal meaning, rigorously pursued, is capable of giving rise to a very uncommercial result, and one which is capable of leaving in place the price-depressing factor which the subsection seems to be intended to remove. The subsection recognises that a disposal to a connected person may be different from that which would have taken place if there had been a sale to a non-connected person. Parliament recognises that the benefit that accrues to the employer/disponor may not lie entirely in the financial benefits flowing from the disposition. Thus if the disposition is to a company in the same group, the disponor may get an indirect benefit of any extra value in the transfer because that benefit is capable of accruing to the benefit of the group. Alternatively, Parliament seems to have intended that whether or not the disponor reserved a different form of benefit to himself from a sale to the connected person, nevertheless to give away part of the benefit would be unfair to the employee-inventor. Accordingly, if the price (benefit) is depressed, that should not work to the detriment of the employee.

The mechanism adopted in the wording of the subsection is to remove the element of connection. If removing it leaves one with an arm’s length purchaser with no special qualities, then there is no problem. But if one has a connected person with limited abilities, or limited willingness, or a limited capacity, to deal with a patent, or to bargain for one, then a very odd situation could arise. Take the following situations:

A disposition for a nominal consideration to a group company which is simply a depository for unexploited patents. It never exploits them, and has no staff who can do so. It does not need to have such staff - if someone in the group thinks the patent has become worth exploiting then another company in the group does the exploiting, perhaps taking over the patent as well. On the literal interpretation as propounded by the hearing officer and Mr Gardner, one takes away the connection, but is still left with a company which still has the characteristic of being one which, as a matter of policy, does not exploit patents and as a matter of practicality does not do so. That company would just not pay anything other than a nominal price for the patent. That seems to me to be a commercially absurd result, not least because a sensible seller would never enter into such a transaction.

A disposition by an individual employer to a spouse or other partner, where that partner has no interest in exploiting the patent at all. It is merely parked there because, for his/her own reasons (perhaps even to evade the consequences of sections 40 and 41) the employer chooses to do so, knowing that if necessary he/she can take steps to make sure it is exploited in the future. If the hearing officer’s reasoning is pursued, then one deems there to be no connection but still a disposition to someone with no interest in exploitation, and perhaps with no funds to buy the patent either. It seems to me to be absurd to imagine a transaction with such a person, and to use it as the basis for compensating the employee.

Mr Gardner himself submitted that there would be absurd, or uncommercial, consequences if one departed from the literal wording. He pointed out, correctly, that the remainder of sections 40 and 41 operate in such a way as to turn on the benefits that the employer actually received, not what he might have received in a better transaction. This is so both in relation to whether the benefit is outstanding, and the share of the benefit that the employee ought to take. If one starts positing market transactions in place of that, then one might come up with benefits vastly in excess of what actually accrued, and huge claims which would be very unfair on the employer. That is said to be exemplified by how it might work in the present case. It is accepted by Unilever that if one were looking at a market transaction with a willing counterparty in relation to the disposal event of the patent in 1984, one would in fact quite possibly be looking at a licensing arrangement. (It is to be noted that licensing was what ultimately happened in this case, so that increases the likelihood of that occurring in the national transaction.) The likely percentages payable for royalties were not the subject of much dispute between the parties. If one followed that through, and was informed by what happened in this sort of market in the years that followed, one would be looking at sales in the billions, and royalties in the billions as well. That was nothing like what actually happened in the present case, when the ultimate exploitation by the Unilever group yielded a benefit of no more than £23m.

The other provisions of section 40 and 41 provide the background to section 41(2). If a patent has been exploited by an employer, the starting point is to ascertain whether it has been of “outstanding benefit” to the employer. That suggests an assessment of what has actually happened - the exercise starts with working out what the employer actually got out of it rather than what he might have got out of it if he had exploited it otherwise. Mr Gardner relied on that, and pointed to British Steel plc’s Patent [1992] RPC 117. Thus the employee cannot complain that the employer could have done better if had he tried. The same theme is said to run into the assessment of the employee’s reward under section 41(1), which is based on what the employer:

It seems to me that Mr Gardner is only partially right about the effects of sections 40 and 41(1). It is true that the starting point seems to be the actual benefits derived by the employer, and not what the employer might have gained had he done something different. This applies both to the “outstanding benefit” threshold and to the first part of the assessment of the employee’s entitlement (“a fair share … of the benefit which the employer has derived”). However, there still has to be an element of assessment of probabilities for the future which departs from ascertainable realities insofar as section 41(1) requires an assessment of what the employer “may reasonably be expected to derive” from the patent. This contains some element of what the employer ought to achieve. It seems to me that once an employer has acquired an outstanding benefit, he could not avoid paying in respect of anticipated future benefits by saying that he simply does not intend to get any, if that would be an unreasonable stance. An assessment as to the future would involve an assessment of reasonable conduct in that future. There will be an element of hypothesis in that assessment.

Accordingly the inconsistency between Professor Shanks’ interpretation of section 41(2) and the rest of the two sections is not so stark so far as it exists at all. It is plain that section 41(2) requires a hypothetical transaction, so the question, against the background just described, is: what should the terms of that hypothetical transaction be?

On its face, the decision of the hearing officer on this point seems to require an inquiry as to what deal would be done with the actual connected purchaser, assuming no connection but leaving all other characteristics intact. As already pointed out, this seems to be a strange hypothetical transaction if that person has some odd characteristic which would still hamper that person's willingness or ability to exploit the patent, so that that person would simply not pay what might be regarded as a "full" price. On the hearing officer's final formulation one would imagine a transaction with someone who does not really want to purchase it at the same price as any other purchaser might. Absent the connection, the employer would not want to contract on those terms. I can see no policy reason which justifies that price-depressing factor to continue to govern the situation.

Furthermore, there is also an indication that the hearing officer did not think there was one either. Although I have set out the final formulation above, at one stage Dr Elbro posed a different formulation - I refer to paragraph 33 of his decision, set out above. This involves leaving in place characteristics which have nothing to do with the connection, and disregarding characteristics which "only make sense in the context of a connection".

This seems to me to be a more appealing way of dealing with the point, though it immediately moves away from defining "that person" as he ends up defining him. Under this formulation, not only does one deem there to be no connection (eg no common shareholder), one also takes out other characteristics if they are somehow attributable to the connection. The trouble is likely to be in identifying them. They will not be articulated in the disposition itself, and there is theoretically scope for unresolvable argument about it, save perhaps for one solution. It may well be that any features which make the connected person an unlikely arm's-length purchaser (absent the connection) can all be said to be attributable to the connection. If that is right, and if one then removes those unusual features, then one certainly no longer has "that person" as the hearing officer described him, and has a typical arm's length purchaser. If that is right then one might just as well imagine such a person in the first place.

Mr Gardner's own submissions seemed to accept that the narrow view suggested by the hearing officer's decision was not sustainable. He accepted that in considering what the notional counterparty ("that person") would do, one could not ignore the effect of the market. The deal that such a person would do would be affected by the market. Thus a particularly incompetent person should be treated as having to bid (notionally) in a market with other competent bidders, and would have to get advice if he did not know what transaction ought to be entered into. Mr Gardner accepted that one did not operate on the basis that the hypothetical purchaser was too obtuse, or too poor, to be able to do a deal which was good enough for the seller. That person would end up paying a "proper" price (ie a market price).

In my view, Mr Gardner's concession, rightly made, gives the game away. One cannot sensibly take "that person" as being the actual purchaser, with all attributes except the connection. So to conclude would risk introducing absurdity into the hypothesis, leading to absurdity in the result. What Parliament intended was a hypothetical transaction which is constructed because the actual transaction is affected by a commercial factor which depresses (or which might depress) the price below that which would normally be expected. It would be an odd result to fix that by constructing an alternative transaction which is almost as unreal because it contains factors which would never be allowed to affect the transaction in the real world (except to lead the seller not to enter into it). One has to bear in mind that the hypothetical deal has two sides - a seller as well as a buyer. It would be a very odd hypothetical transaction in which the notional seller is having to sell to an inappropriate buyer vested with qualities which mean that the former would never be able to do a commercially sensible deal with the latter in the real world.

It is perhaps useful to understand why this is said by Unilever to cause problems or unfairness in the present case. Mr Gardner's position in submissions was (as I have said) that the market must affect the notional deal done with the purchasing counterparty in this case. This means that the deal could end up being precisely the same as the deal which would be done with an arm's-length unconnected party. However, he said, it is the consequences of the deal that might be different. Mr Green wished to posit a medical equipment purchaser who would see the value of the patent and exploit it with huge commercial success (judging by what actually happened afterwards). As it happens, Plc (the purchaser) did not exploit it with that success, because it was not a vigorous exploiter of inventions used in medical devices. On the facts the group benefited only to the tune of some £23m, much less than would have been obtained had a licence been entered into with medical companies. Mr Gardner says that Parliament did not intend the amount payable to the employee to be based on sums in excess of benefits actually obtained. The way to avoid this was to assume that the notional purchaser was, like Plc, not a vigorous exploiter of medical patents, so the relevant benefit to the employer should be taken to be no more than £23m.

The problem with that analysis is that it ignores the fact that Parliament has certainly demonstrated an intention that the employee's claims should be based on sums in excess of benefits actually obtained. That is the whole purpose of section 41(2). First, it assumes a different transaction to that which was actually entered into. That immediately brings in a departure from reality. Second, it refers to benefits "reasonably [to] be expected to be … derived" from the disposal transaction - in other words, an expectation looking to the future which is likely to be different to what has already actually happened or is likely to happen under the connected transaction. Mr Gardner’s submission is that a notional arm’s length transaction could give rise to an effect which is very different from reality. He is right about that, but it is what comes from positing a hypothetical transaction. This different effect is inevitably built into section 41(1), insofar as the test in that section requires an assessment of the future by virtue of the reasonable expectation set out there.

Having said that, it does not follow that the application of the right construction to the section will inevitably have the effect feared by Mr Gardner. That all depends on the actual facts, and the proper nature of the deemed transaction. Since they have yet to be investigated in the present matter I will say no more about them.

I therefore conclude that the hearing officer's final formulation of the meaning of "that person" in section 41(2) is wrong. One does not treat that person as being the precise real person with all the same characteristics (commercial warts and all) as that person has but simply without the connection. I consider that in using the formulation that it did, Parliament was, perhaps a little clumsily, intending to refer to a notional non-connected counterparty operating in the appropriate market at the appropriate time. This is not inconsistent with its assumption (in the case of other actual transactions leading to benefits) that an employer is likely to want to exploit the patent properly and not give away its benefits, albeit (as I have observed) that it did not impose a positive obligation on the employer to do that.

Mr Gardner rightly pointed out that when Parliament wanted to refer to an arm's length purchaser paying a market price, it knew how to do so, because there is a large number of statutes in which it used that sort of formulation, in terms; he showed me several statutes where that was done. He submitted that Parliament used different words here, so it should be taken to have intended a different effect. He is plainly right in saying that Parliament has used clearer words to refer to arm's-length transactions in a market, and that is a factor to take into account in considering the effect of the words in section 41(2). However, looking at the competing contentions as to the effects of that section, I do not think that Mr Gardner's factor is particularly weighty. As already pointed out, this is perhaps not a spectacularly well-drafted set of provisions as they stand, so it becomes more likely that Parliament might not have meant quite what the statute seems literally to say.

Accordingly, the hearing officer was wrong to strike out the supplementary statement of case. An application to strike out paragraph 9(b) of the Amended Statement of Case fails, or would fail, for the same reason. This appeal will therefore be allowed.