Shanks v Unilever Plc & Ors

For the purposes of Patents Act 1977, s 41(2), the hypothetical transaction following a disposal to a connected person is not assessed by reference to that person retaining every commercial characteristic except the connection. The statutory phrase “that person” identifies the actual counterparty, but the statutory hypothesis requires a notional non-connected counterparty operating in the appropriate market at the relevant time. Characteristics which would artificially depress the price, or prevent a commercially sensible transaction, should not govern the assessment. Section 41(2) deliberately permits an assessment based on a different hypothetical transaction and benefits which may exceed those actually obtained from the connected transaction.

Professor Shanks appealed from a decision of the Intellectual Property Office hearing officer dated 19 May 2009. The hearing officer had refused to admit part of a supplementary statement of case, treating the proposed construction of s 41(2) of the Patents Act 1977 as unsustainable.

The claim concerned compensation for an employee invention. The invention had been transferred by the employing company to a connected group company for nominal consideration and was later exploited through licensing, producing substantial royalty income. The central issue was whether the deemed counterparty under s 41(2) was the actual connected person without the connecting relationship, or a notional ordinary non-connected purchaser in the market.

1. The appeal was allowed. The procedural irregularity was corrected by treating the matter as an application to strike out paragraph 9(b) of the amended statement of case. That application failed.

2. The literal meaning of “that person” in s 41(2) refers back to the real person to whom the disposal was made. It cannot, as a matter of language, mean a generic disponee. However, that conclusion did not determine the characteristics to be attributed to the person in the statutory hypothesis.

3. Parliament should not lightly be taken to intend an absurd or uncommercial result. Treating the actual connected person as retaining all its characteristics, apart from the connection, could preserve price-depressing features such as an inability or unwillingness to exploit patents. That could produce a hypothetical transaction which no sensible seller would enter into.

4. The correct approach is to construct a notional transaction with a non-connected counterparty operating in the appropriate market at the appropriate time. The counterparty is not burdened with commercial characteristics which would prevent a proper arm’s-length transaction, although the assessment remains a statutory hypothesis rather than an inquiry into what actually occurred.

5. This interpretation is consistent with s 40 and s 41(1). Although the actual benefit is the starting point for assessing outstanding benefit and compensation, s 41(1) also requires an assessment of what the employer may reasonably be expected to derive. Section 41(2) expressly requires a hypothetical transaction, so the resulting benefit may differ from the benefit actually obtained through the connected transaction.

6. The hearing officer’s final formulation was therefore wrong. The supplementary statement of case should not have been struck out, and the proceedings could continue on the proposed basis.

• High Court (Chancery Division): Appeal from the Intellectual Property Office hearing officer’s decision dated 19 May 2009. The appeal was allowed and the strike-out application failed.