Where Plaintiff operator of London Futures Exchange employed Defendant in position involving innovation, English Court of Appeal, Civil Division, holds that, under English patent statute, Plaintiff owned Defendant’s inventions dealing with electronic trading of various forms of futures contracts so that Defendant was unable to obtain U.S. patents on his system
The Plaintiff below was LIFFE Administration and Management, the operator of the London Futures Exchange. In July 2001, it had hired Dr. Pavel Pinkava (Defendant) as a manager in its Interest Rate Product (IRP) Management Team. By July 2004, Defendant had come up with a system which enabled the trading on an electronic exchange of various financial instruments not previously traded. Plaintiff promoted Defendant to senior manager in September 2004.
In January 2005, Defendant notified Plaintiff that he, not Plaintiff, was entitled to own the system and related inventions. The usual rule under English common and statutory law was that the development of inventions in the course of an employment normally lodged the patent rights in the employer, see Section 1(2)(c) Patents Act 1977. On April 23, 2005, Defendant filed four applications for United States Patents. The employment of Defendant by Plaintiff ended on July 13, 2005.
On July 20, 2005, Plaintiff filed proceedings in Chancery Division (Patents Court) claiming to be entitled to the confidential information relating to the system devised by Defendant and the patent applications based on it. On August 18, 2005, Defendant applied to the U.K. Patent Office pursuant to Section 12(1)(a) Patents Act 1997 claiming to own the four inventions referred to in
his U.S. patent applications and seeking a declaration that he was entitled to apply for the U.S. patents. The first instance court heard both sets of proceedings in January and February 2006.
In essence, the court ruled that (a) the inventions did not arise in the course of Defendant’s normal duties with Plaintiff, but that (b) Defendant had developed them in the course of duties specifically assigned by Plaintiff in December 2003. In his order of April 7, 2006, the court thus
declared that Plaintiff owned the inventions claimed in Defendant’s four U.S. Patent Applications. Defendant appealed, contending that the Judge was right as to conclusion (a) but wrong on conclusion (b). The English Court of Appeal (Civil Division), however, dismisses the appeal.
In the lead opinion, the Chancellor outlines the context of this controversy. “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 the lower court explained: ‘Derivatives are bilateral contracts, the financial value of which is directly dependent upon the magnitude or value of one or more underlying assets such as stocks, bonds, commodities or currencies. The design of derivatives makes them particularly attractive for speculators and those who wish to hedge against risk. Amongst the most common types of derivatives are swaps, futures and options.’”
“... [A] ‘swap’ is a contract whereunder two counter-parties agree to exchange one asset or instrument for another. They have only ever (sic) 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).”
“[A] future, in its simplest form, is an agreement whereby on a particular date (‘the trade date’) one party agrees to buy from, or sell to, another party a particular asset or instrument at a predetermined price at some point in the future (‘the settlement date’). Such a contract is settled by reference to one ‘fixing’, requires no payment of periodic premiums from one party to the other and cannot be brought to a premature end via a credit event.”
“Other relevant features are that a future may be settled by reference to an index, such as the FTSE 100. Futures are only traded on an exchange. Options are similar to futures but give a right to buy or sell rather than imposing an obligation to do so and may be traded on or off exchange.”
“The essential structure of a futures contract remains the same whatever the particular fixing chosen. The principal challenge in designing a new futures contract is deciding what the market is interested in as a contract standard and making sure that the fixing is sufficiently robust, that is to say that it will be present at the settlement date and reasonably invulnerable to market manipulation. That is not to say that fixings are always straightforward.’”
“[The lower court] 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 Plaintiff have standardised contracts and have addressed the problems of credit risk
by the system of ‘margining’ whereby the contracts are split into pairs with the clearing house becoming a party to every trade.”
“Swaps, however, pose additional problems. Notably, they involve the making of periodic coupon payments and, in the case of CDSs and CISs, must cater for the possibility of credit events. As a practical matter, swaps were considered too complicated and too varied to be traded on exchange.”
“Plaintiff commenced business in 1982 as the London International Financial Futures Exchange [LIFFE]. 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, Plaintiff developed futures contracts based on the Euro. In 2000, Plaintiff closed its trading floor having moved its markets on to the electronic trading system known as LIFE CONNECT in 1998.”
“Plaintiff’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 Plaintiff’s customers and other employees.”
“In the period material to this appeal, Plaintiff 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.” [One of Plaintiff’s directors also testified]. “He explained that the continued commercial success of Plaintiff depends upon two factors, the maintenance of industry-leading trading technology and the development of new products. He also explained, ... that the importance of these two factors has increased dramatically during the last six or seven years as a result of a number of events which have transformed the exchange-traded derivatives industry.”
“It has become progressively accepted that computer-based markets are viable and offer advantages over floor-based markets.... Exchanges are now able to compete more effectively with each other and without the protection previously provided by physical location. Market participants demand that exchanges offer them services on a competitive basis, especially in terms of cost, and product and market quality.”
“As a result of the shifts in the industry, the profitability of established products has been squeezed and it has become increasingly important to develop new products and achieve patent protection where possible. ... [T]he derivatives business (both on and off exchange) has one of the fastest growth rates of any business in the world.”
Defendant Pinkava has an interesting background. “He has a Ph.D. in Physics from Imperial College, London. In addition, he is highly competent in mathematics and computer technology. Plaintiff engaged Defendant on July 21, 2001 as a product manager in the Interest Rate Team of the Plaintiff’s Marketing and Product Management department. The head of that team and his supervisor was Ms. Amanda Sudworth.”
“The document relating to Employee Confidentiality, Intellectual Property and Inventions provided [in part] that: ‘documents, and other confidential information developed or created by or with your assistance during your employment in the course of carrying out your duties are [Plaintiff’s] property and such rights or interest in any such property or information that you may have are prescribed by the law.’”
About a year after Defendant began working for Plaintiff, he wrote a Job Description in consultation with Ms. Sudworth. ... The job title was stated to be Manager – Interest Rate Products, Product Management. The Job Purpose was [partially] described: “As part of the Interest Rate Product Management Team [IRPM], [Defendant] will be jointly responsible for the development of Euronext.liffe, Plaintiff’s interest rate product derivative range.”
“Under the heading “Key Accountabilities” it is stated, inter alia, that the Manager “will assist the IRPM team with all aspects of the IRP business at Euronext.liffe, from initial product development and maintenance through to marketing strategy and implementation.” [¶¶ 5-16]
Between 2001 and 2003, the OTC market in credit derivatives was burgeoning because of the standardization of contracts effected through ISDA and the introduction of two indices. First, J. P. Morgan and Morgan Stanley with Dow Jones created TRAC-X. Secondly, Deutsche Börse and a group of investment banks devised iBoxx. Each index was to facilitate trade in credit derivatives as a tool to limit or increase credit risk exposure. As a result, Plaintiff, its members and competitors looked forward to an exchange tradeable contract.
The Defendant had a three-hour meeting with a J. P. Morgan representative on January 5, 2004 ... “J. P. Morgan explained to Defendant the basic principles of CDSs and CISs. [Defendant] was also told that TRAC-X was an index designed by J. P. Morgan and Morgan Stanley. In 2003, rights had been given to Dow Jones. J. P. Morgan explained that they wanted a futures contract which could expand the market to new customers that could not trade CDSs and they also wanted to create a hedging tool. ...”
“J. P. Morgan identified a number of problems in designing a future. These included the following. First, the spread (that is to say the price) of the TRAC-X would be hard to use as a basis of any index product as it was discontinuous from one CIS generation to the next. Secondly, a future based on a total return index would be easier to construct but less intuitive to use.” [¶ 21].
Defendant then left for the U.S. to help launch Plaintiff’s Eurodollar interest rate future. In his absence, Ms. Sudworth made a presentation to Plaintiff’s Executive Committee on the subject of a TRAC-X future based on a document largely prepared by Defendant.” [¶ 23].
On July 1, 2004, Defendant attended a conference called the Futures and Options World Conference (FOWC). “Defendant was struck by one slide that the speaker from Eurex presented. After the seminar was over, and on the way home, Defendant came up with his first inventive insights. He appreciated that something the conference speaker had said in connection with the problem of bringing credit derivatives on exchange was plainly wrong, and he realised how the problem could be overcome.” [¶ 25].
On September 13, 2004, Plaintiff promoted Defendant to Senior Manager. While Plaintiff did give Defendant a raise, all other terms and conditions of his employment remained unchanged. His responsibilities were described as: “Pricing analysis, Development of Credit Derivatives Products, Development of Pari-mutuel technology, Development of OTC markets on Exchange, Strategic development of Margining. Some educational projects.” [¶ 27].
Defendant’s four U.S. Patent office applications state that “The inventions have the effect of making available new classes of derivatives over the pre-existing legal and distributional channels of a futures exchange that can currently only accommodate futures and options.” [¶ 32].
In Patchett v Stirling Engineering Co. Ltd ., (1955) 72 R. P. C. 50, 56. Viscount Simonds succinctly expressed the common law principle in these words: “It is elementary that, where the employee in the course of his employment (i.e. in his employer’s time and with his materials) makes an invention which falls within his duty to make ... he holds his interest in the invention, and in any resulting patent, as trustee for the employer unless he can show that he has a beneficial interest which the law recognises.”
“The common law position may, however, be varied by contract. Banks recommended that it should no longer be possible for employers so to impair the legal position of employee inventors. This means that an employer may not require his employees to assign to him any inventions which they may make in the future outside the course of their employment.” Patents Act 1977 Section 42(2) invalidates any contractual provision which diminishes the employee’s rights in inventions of any description. But the Act preserved the employee’s duty of confidentiality. Section 43(4) confirms that any right of Defendant to statutory compensation exists notwithstanding that patent protection for his inventions is obtainable in the United States but not in the U.K. [¶ 37].
The Chancellor rejects the notion that Defendant’s invention fell within his normal duties. “Defendant’s normal responsibilities included the design of new futures and options based upon financial products of these kinds. As his job description stated, he was responsible for the development of the interest rate product derivative range. That range did not extend to new futures and options in other categories; nor did it extend to the development of products of altogether different kinds, such as swaps, which had never been traded on exchange before.”
“Secondly, it is correct that Defendant was not employed at a high strategic level or to design ‘blue sky’ products. Nevertheless his normal duties, ... did include an obligation to develop new products and be creative in the area of the business in which he worked. He was recognised as a person who could come up with innovative ideas. He was known to have considerable academic and technical abilities. He was also known to be an ‘ideas’ man.” The task that Defendant was set was [not] at all straightforward. There was no obvious solution to it. There was a need to deal with credit events but no understanding as to how this was to be achieved. It was a matter of considerable debate in the industry as to the best way to proceed. Accordingly, it [was] likely that any solution that Defendant devised was likely to be innovative.”
“... [N]o one anticipated that Defendant would come up with the radical inventions which he did. I rather think that the expression ‘quantum leap’ is something of an exaggeration. Nevertheless, I accept that Defendant’s inventions are ground breaking and very clever. However, in my judgment, the application of Section 39(1) is not determined by the size of the invention.” [¶ 48].
“Defendant 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, Defendant attended the FOWC, following which he had the creative insight which led to the inventions. For all these reasons, I respectfully disagree with the conclusion of [the court below] that the normal duties of Defendant did not extend to the design of an exchange tradeable credit derivative.” [¶ 68].
“Thus, the Chancellor agrees with the lower court’s conclusion. First, ... the collection of sections in the Patents Act 1977 dealing with Employees’ Inventions is more favorable to the employee than the previous common law rules. It introduced in Section 40 a statutory right to compensation for inventions made by an employee but which in accordance with Section 39 belong to the employer. It invalidated by Section 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 ... 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.”
“In these circumstances, there is no reason to interpret Section 39(1)(a) by reference to any assumption of an intention (a) to enact either a test substantially more favorable to the employee than the old common law test or (b) to reproduce exactly the old common law test. ... The [statutory] 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. ... ”
“The [Defendant’s] second submission ... 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. ... [T]he expectation must arise from the carrying out of his duties by Defendant not just from the fact that it was Defendant, an intelligent and inventive man, who was to carry them out.”
“Thus the fact, if it be one, that someone of Defendant’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 ... would be that there was no reasonable expectation that an invention might result from the performance of his duties, not that the abilities of Defendant were irrelevant.” [¶¶ 76-78].
“ ... Plaintiff has established that, in accordance with the terms of Section 39(1)(a) Patents Act 1977, it is the owner of the inventions [which are] the subject matter of the four U.S. Patent Applications. ... [T]he inventions were made in the course of the normal duties of Defendant as an employee of Plaintiff rather than the specifically assigned duties on which [the judge below] founded his conclusion. ... [I]n either case it was reasonably to be expected that an invention might result from the carrying out of those duties by Defendant. In those circumstances, I would dismiss this appeal.” [¶ 84].
The two other judges agreed but on somewhat different reasoning.
Citation: Liffe Administration & Management v. Pinkava,  E.W.C.A. Civ. 217, 2007 WL 711497 (Ct. App. Civ. Div., March 15, 2007).
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