Where Plaintiff operator of London Futures Exchange
employed Defendant in a 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 in this matter is LIFFE Administration and
Management, the operator of the London Futures Exchange. In July 2001, it had
hired Dr. Pavel Pinkava (Defendant) as a manager of its Interest Rate Product
(IRP) Management Team. By July 2004, Dr. Pinkava had developed a system, which
enabled the trading on an electronic exchange of various financial instruments
not previously traded. LIFFE promoted Dr. Pinkava to senior manager in
September 2004.
In January 2005, Dr. Pinkava notified LIFFE that he – and not
LIFFE – 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 and scope of one’s employment normally lodged the patent rights
in the employer, see Section 1(2)(c) Patents Act 1977. On April 23, 2005, Dr.
Pinkava filed four applications for United States Patents. The employment of Dr.
Pinkava by LIFFE ended on July 13, 2005.
On July 20, 2005, LIFFE filed proceedings in Chancery
Division (Patents Court) claiming to be entitled to the confidential
information relating to the system devised by Dr. Pinkava and the patent
applications based on it. On August 18, 2005, Dr. Pinkava 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 those same patents. The first
instance court heard both sets of proceedings in January and February 2006.
In essence, the first instance court ruled that (a) the
inventions did not arise in the course of Dr. Pinkava’s normal duties with LIFFE,
but that (b) Dr. Pinkava 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 LIFFE owned the inventions claimed in Dr.
Pinkava’s four U.S. Patent Applications. Dr. Pinkava appealed, contending that
the Judge was right as to conclusion (a) but wrong on conclusion (b). The
English Court of Appeal (Civil Division), however, dismissed the appeal.
In the lead opinion of the appellate court, the Chancellor
outlined 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 standardized
contracts and credit risk protection. He described how exchanges such as
Plaintiff have standardized 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 rejected the notion that Dr. Pinkava’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].
The court further determined that LIFFE 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 with the result but based upon somewhat
different reasoning.
Citation: Liffe Administration & Management v.
Pinkava, [2007] E.W.C.A. Civ. 217, 2007 WL 711497 (Ct. App. Civ. Div., March
15, 2007).
*** Mr. Kenneth Todd Wallace is an attorney and founding partner of the law firm. He has nearly 20 years of experience in the legal and business professions with established excellence in trial advocacy, negotiation, strategic and initiative planning, government relations, mergers and acquisitions, and team building. See http://www.walmey.com/
