The UK Department of Trade and Industry is seeking industry views on proposals to amend existing UK patent legislation [1]. One of the most controversial proposals relates to the circumstances in which employee-inventors can claim compensation from their employers for successful inventions.

The Current Law
Section 39 of the Patents Act 1977 (“the Act”) sets out the circumstances in which inventions made by employees belong to their employer. In such circumstances, section 40(1) entitles an employee to compensation by his or her employer if the patent resulting from the invention has been of “outstanding benefit” to the employer. Section 41 outlines how the level of compensation is to be determined, with an intention that the employee shall have “a fair share (having regard to all the circumstances ) of the benefit which the employer has derived or may be reasonably expected to derive from the patent…”

The Act has been in force for over 20 years and yet to date there have been no successful actions under section 40. This has lead the DTI to question whether the objective of the Sections in striking a fair balance between employer and employee is being achieved.

Problems with the existing legislation
The DTI has highlighted various problems with the Act.

The test of “Oustanding Benefit”
One of the main criticisms is that section 40 requires the patent to have been of “outstanding benefit” to the employer. This is a notoriously difficult test.

Judicial guidance on how the legislation should be interpreted has been primarily restricted to three cases: GEC Avionics Ltd [2], British Steel plc [3] and Memco-Med Ltd’s Patent [4].

In Memco, Mr Justice Aldous said that the word “outstanding” denoted something special and required the benefit to be more than simply substantial or good. He added that although a finding that sales of a patented product had been of vital importance to the employer was a relevant consideration, this was not necessarily a determinative factor on whether the benefit was “outstanding”.

The benefit must also be actual, rather than potential. In British Steel plc, the applicant submitted calculations of the benefits his employer could expect to receive over the life of the patent, however the Court focused on the actual benefit received to date, which amounted to no more than 0.01% of turnover.

Should the benefit be determined on the size and nature of the employer?
Section 40(1) requires the benefit to be linked to the size and nature of the employer. This is an extremely difficult test for an employee in a large multi-national organisation to overcome. Arguably the benefit should be assessed against the appropriate section/division of the employer’s business. Clearly, the likelihood of an invention effecting the turnover of a large plc by more than a fraction of a percent is extremely small.

Should the benefit derive from the patent or from the invention?
The Act requires the benefit to flow from the patent itself, rather than the invention as a whole. This excludes any benefits arising from unpatented inventions such as trade secrets. A bare patent licence, for example, may be relatively worthless to a potential licensee, without the transfer of appropriate know-how. In addition, focusing solely on the patent rather than the invention per se, results in further developments and modifications to the “invention” being excluded. Under the Act, the “outstanding benefit” must flow from the “patent” in the singular, irrespective of what other patents / unpatented inventions and trade secrets have been developed by the employee. A fairer test would be to assess “outstanding benefit” against the “invention” created by the employee, encompassing both registered and unregistered intellectual property rights.

Benefit must be accrued by the employer
For a compensation claim to succeed the outstanding benefit must have actually been received by the employer. Thus, as currently drafted, an employer assigning a patent application to a third party before any benefit has arisen will mean any employee claim will fail regardless of what revenues the assignee may ultimately derive.

There is no simple solution to this. The assignee, having already paid an assignment fee, will not wish to compensate an employee of the assignor. Equally, having transferred any potential benefit from the patent to a third party, the original employer will be unwilling to pay its employee.

Arguably, any new rules should allow greater flexibility and discretion for the judiciary in assessing an employee’s claim. For example, the securing of a lucrative royalty deal from the assignment of the patent should potentially be an outstanding benefit. Equally, agreed annual minimum and milestone payments should be considered when assessing the benefit accruing to the employer.

How should the level of compensation be calculated?
The compensation to the employee should represent a “fair share” of the benefit which the employer has derived. Detailed guidance on how a fair share is calculated is set out in sections 41(4) and (5) of the Act and should take into account factors such as the nature of the employee’s duties, the effort and skill involved in making the invention and any contribution made by the employer in terms of facilities and infrastructure.

Since no successful claims have been brought it is unclear how these sections will be interpreted by the Courts. Arguably sections (4) and (5) are overly specific and will present a further evidential obstacle to any employee claiming compensation.

What constitutes a “fair share” will also vary considerably in each case. If fairness is to be linked to the ultimate employer benefit (as suggested by section 41(1)), the financial gain to the employer should be the critical factor, rather than the issues outlined in the Act.

Contracting out
The Act contains a loophole whereby employees are not protected from a subsequent contract which diminishes their rights to seek compensation for an invention. This differs from the position where an employee makes an invention and a term in their existing employment contract attempts to restrict their right to compensation (any term which seeks to do this is unenforceable). It is quite possible that an employee will create an invention of considerable worth to his or her employer, only to subsequently sign a contract which restricts the right to compensation.

Difficulties with the proposed reforms
The proposals will clearly help however there are other issues which question whether any statutory compensation scheme is entirely workable.

Joint inventors
Inventions will often be created jointly by a number of employees. This is particularly the case with larger organisations, where teams may work on projects over a period of time.

As seen above, the Act poses a number of difficulties for the sole employee inventor. However, these difficulties are made more complex when assessing claims by multiple inventors. For example, the problems with assessing the concept of “fair share” are compounded in any multiple claim, where the contribution of each employee to the overall invention will prove difficult to assess. Even more problematic will be claims where an invention has been devised by a combination of employees and other third parties. In such cases, allocating a “fair share” to each interested party will be practically impossible.

An unfair burden on employers?
In practice, many employers reward employees who make inventions for their business. Employees may receive bonuses and incentives to encourage innovation and which aim to incentivise the best employees to stay within the business. Whilst safeguards may be appropriate for certain employee inventors whose efforts are not recognised, a benevolent employer who already rewards innovation within its business may be forced to pay “double” compensation under a simplified claims process.

Enhanced compensation rights will be particularly difficult for start-up and smaller companies with limited capital resources who often depend upon a strong patent portfolio to grow their business. Even where compensation is limited to a “fair share” of what the employer has received, claims could prove crippling for new companies with limited funding.

Reluctance by employees to litigate
Even if the claims procedure is changed radically in favour of the employee, employees will remain reluctant to bring claims against their employer. Whilst the limited number of cases to date is no doubt partly due to the wording of the Act, it may also reflect the financial and moral difficulties faced by employees considering taking action against their employer.

Anomaly with other IP rights
Compensating employees for patentable inventions creates an anomaly with other intellectual property rights. Why should the employee inventor of a successful patent be in a better position than another who devises a lucrative piece of computer software?

There is no obvious reason why patents should be treated any differently to other works. Rather than propose similar compensation mechanisms for ideas protected by copyright / trade marks and design right, it could be argued that it is section 40 which is at odds with other areas of intellectual property law.

Summary
The aim of Section 40 is to strike a fair balance between the employee and the employer, thereby ensuring innovation and research within business are encouraged. Arguably, it has failed in this goal. Certainly, the absence of any successful claim suggests either that the balance does not need addressing or that the balance is not achieved by the Act. The problems with Section 40 have been highlighted by the DTI and it is clear that there is no easy solution. This does beg the question, is a statutory compensation mechanism necessary?

There are strong and legitimate moral arguments for a compensation scheme. The reality, however, is that the majority of employers will wish to retain their best employees and will incentivise them accordingly. Equally, employees will be reticent to take legal action against their employers. Given this, and the apparent anomaly section 40 creates with other areas of intellectual property law, it is unclear whether section 40 is required. Certainly, until such time as a workable re-draft is proposed, section 40 would appear to be of little practical use.

Footnotes
[1] a summary of the proposals can be found at www.patent.gov.uk/about/consultations/patact/index.htm
[2] [1992] RPC 107
[3] [1992] RPC 117
[4] [1992] RPC 403

This article first appeared in IPeye, the intellectual property newsletter published by Eversheds Solicitors. For more information about, or to receive copies of IPeye, please contact Janet Knowles on +44 161 837 6107 or +44 113 200 4186 or at janetknowles@eversheds.com

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