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Compensation for Employee Inventions: A Novel Twist in the UK

Thomas C. Carey

Thomas C. Carey | Partner, Business Chair View more articles

Thomas is a member of our Business Practice Group

On February 11, 2009, the England and Wales High Court (Patents) broke new ground in Kelly v. GE Healthcare Limited. The High Court concluded that two employees of GE Healthcare were entitled to compensation for their invention of a heart imaging agent that had achieved sales of over £1.3 billion. The award was made under a provision of the Patents Act of 1977 that had never before been successfully enforced by an inventor.

The statute has a high threshold: The inventor must demonstrate that the patent has been of “outstanding benefit” to the employer and that he received inadequate consideration in exchange for the assignment of the patent. In such a case, a court may award the employee a “fair share of the benefit which the employer has derived, or may reasonably be expected to derive, from the invention.”

GE was surprised not only because the statute had never been enforced before, but also because the inventions in question were conceived at a company that it did not then own; GE had purchased the company more than 10 years after the patents issued. Little did GE expect that there were nascent inventors’ claims embedded in the intellectual property portfolio.

While GE may be unhappy with the precedent, it should not be too displeased with the result. The court awarded the inventors a mere £1.5 million on a £1.3 billion (sales) invention. One reason for this modest result is that the statute, which has since been revised, formerly spoke in terms of the value of the patent rather than the value of the invention. Thus, the Court felt inclined to consider what commercial success the employer would have had in selling the product had no patent issued.

In doing so, the Court embarked on an analysis that considered only sales in the United States (about 50% of sales), and assumed that generic competition, had the patent never issued, would have lowered sales in the US by only 10%. The Court described this estimate of lost sales as a “rock bottom” figure, but nonetheless adopted it to conclude that the patent had a value of £50 million, even though it covered an invention having a much greater value. No justification was offered for ignoring sales outside of the United States.

The court then considered a wide range of possible royalty rates, from 0% to 33%, and chose to apply a 3% rate. One reason for this was that the employer had engaged a university professor as a consultant, and the professor proposed royalties in the range of 1 – 3% for chemical developments that involved a “significant degree of innovation”.

The High Court then applied the 3% royalty rate against the value of the patent, rather than sales of the product, and came to a royalty of £1.5 million, which the Court acknowledged was only 0.1% of sales. Perhaps the court was all too aware of the novelty of its decision and wished to avoid opening the floodgates for inventor claims. Regardless of the reasons for the very conservative analysis, GE should be pleased that a much higher award was not granted.

The Patents Act of 1977 contains some limitations on the availability of an award that were not available to GE under the circumstances. For example, royalties agreed in advance under a collective bargaining agreement will not be set aside. Still, companies engaged in R&D in England or Wales may wish to evaluate their practices in light of this newly-invigorated statutory scheme so as to reduce the risk of an inventor’s claim.

The High Court placed the UK in the company of Japan, Germany, South Korea and potentially Finland as a jurisdiction that may second-guess the fairness of the compensation paid to an employee-inventor. Of those countries, Japan’s recent decisions have been the most favorable for inventors.

In the first major case there, Hitachi v. Yonezawa, the Japanese Supreme Court held in 2006 that a co-inventor who had already been compensated $1,140 for his patent applications was entitled to an additional $1.6 million under a statute providing that an employee inventor is entitled to “reasonable compensation”.

The real attention-grabber, however, was the case brought by Shuji Nakamura against his employer, Nichia Corp. Mr. Nakamura’s invention related to blue-light LEDs, for which he had been paid $180. Pursuing his claim in court, he was awarded $190 million at trial in 2004 after the court concluded that his invention was worth about three times that amount to Nichia. His payment was reduced in a court-supervised mediation to $8.1 million (including interest), effectively reducing the royalty from 33% to 1.4%, a rate that significantly exceeds the 0.1% that GE Healthcare must pay.

In sum, the rules of the road are different abroad. Prudence dictates being mindful of them.

The Hatch-Waxman Act rewards makers of generic drugs for the risk and expense of litigating challenges to a pioneer drug company’s patents: 180 days of exclusive marketing rights, if the patent challenge succeeds. Procedurally, the generic drug maker files an abbreviated new drug application (ANDA) for drugs that are the bioequivalent of previously approved drugs.
When the approved drug is covered by patents still in force, the ANDA filer submits a so-called Paragraph IV certification, declaring that those patents are invalid. This declaration is itself an act of infringement, entitling either party to commence an infringement lawsuit. Increasingly, pioneer drug companies have settled such litigations with reverse payments. See our May 2008 article.

The courts have taken conflicting views of such payments. The FTC and at least one appeals court regards them as per se antitrust violations. Other courts, applying a “rule of reason,” believe that, as long as the pioneer drug company does not seek to expand the scope of its patent through the settlement process, reverse payments do not offend the antitrust laws. See our December 2008 article.

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