“(1) Notwithstanding anything in any rule of law, an invention made by an employee shall, as between him and his employer, be taken to belong to his employer for the purposes of this Act and all other purposes if— (a) it was made in the course of the normal duties of the employee or in the course of duties falling outside his normal duties, but specifically assigned to him, and the circumstances in either case were such that an invention might reasonably be expected to result from the carrying out of his duties; or (b)...”
“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.”
“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.” [paragraph 35] 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. As Kitchin J observed [paragraph 41]: “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 contracts are split into pairs with the clearing house becoming a party to every trade. They then operate a system of “margining” whereby the original counterparties are required to deposit sums of money on a day to day basis to reflect adverse price movements of the future or option as the case may be. Margining ensures that the counterparties to a future or option are always guaranteed performance of the contract at the agreed price.”
“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.”
“He explained that the continued commercial success of LIFFE depends upon two factors, the maintenance of industry-leading trading technology and the development of new products. He also explained, and I accept, 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. As Mr Foyle explained, the derivatives business (both on and off exchange) has one of the fastest growth rates of any business in the world.”
“In my judgment these submissions go too far. I accept that LIFFE has hitherto only traded futures and options, as I have described them. However, I conclude on the evidence that LIFFE has endeavoured to develop and launch new products and to develop its business systems to ensure that it remains competitive.”
“Your job title is Manager-Interest Rate and Product Management, reporting to Head of Interest Rate Products. However, the nature of LIFFE’s business demands that you are flexible in your approach to work and you will be expected to undertake such other duties appropriate to your status as may be allocated to you.”
“All trade secrets, inventions, written 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 LIFFE’s property and such rights or interest in any such property or information that you may have are prescribed by the law.”
“As part of the Interest Rate Product Management Team [Dr Pinkava] will be jointly responsible for the development of Euronext.liffe’s interest rate product derivative range. They will support the Director - Interest Rate Products and Marketing Executives – Interest Rate Products, in promoting and recommending enhancements as well as new products/services where appropriate to maximise trading volumes and revenue.”
“Driving the maintenance and development technically robust products. Generating ideas for new yet commercial viable interest rate products”
“Innovation Generating new and valuable ideas.”
“...it is more likely than not that the expression BAU was used in the course of the discussion but I do not accept that it was used proscriptively [semble prescriptively] to limit the scope of the project. Rather I think it likely that it was used to indicate one of the possible ways that the project might be progressed.”
“Please be aware that we can be quite flexible in that we could in principle list products in a number of modes ranging from something akin to OTC right through to a central transparent market. In the latter case wholesale trading facilities such as basis and block trading can co-exist with the central market or we can activate preferencing privileges for market makers (with FSA approval). The more OTC modes are not ones we have used in interest rate products before so I will principally be looking at the “business as usual” central market approach. I will need to understand Trac-x better and also where exactly J P Morgan and Dow Jones are coming from on this. My aim is to quickly discover what listed-contract specifications and market model would a) best fit with your traders’/customers’ existing patterns of behaviour; and yet b) give the brightest prospects for growth of an on-exchange product. I would therefore like to come and see you early on in the week of Jan 5th. Please let me know when would be a suitable time.”
“JP Morgan explained to Dr Pinkava the basic principles of CDSs and CISs. Dr Pinkava was also told that TRAC-X was an index designed by JP Morgan and Morgan Stanley and in 2003 rights had been given to Dow Jones. He was also told it comprised a series of different generations of CISs with different launch and maturity dates. JP Morgan explained 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. There then followed a general discussion. JP 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.”
“whether there would be any fundamental IT changes = depends on design but could easily be BAU or close to BAU.”
“The purpose of the presentation was to persuade the Executive Committee to authorise the purchase of a licence for the TRAC-X index and to meet the pressure from JP Morgan to investigate such a product. A number of aspects of the presentation indicate that what Dr Pinkava and Ms Sudworth had in mind at this point in time was a conventional future based upon the TRAC-X index value or a total return index. The most important are the following. First, in the “Introduction” there is a description of the two rivals, TRAC-X and iBoxx and then a statement that “Both want Credit Default Swap (CDS) futures on CDS baskets introduced asap. Both groups believe that a futures market can become much bigger than the cash”
“OTC • Take a leading role in assessing the need for an interest rate product OTC market – by end Q3. • Put forward significant input to a strategy to get into the IR OTC market by end Q2 2005 – as soon as possible after assessment. Credit Derivatives • Lead research and development efforts with a view to launch a broadly supported and robust futures contract – by Q3/Q4 • Help secure a European Trac-X licence – as necessary.”
“Dr Pinkava was interested in attending a seminar run by Eurex (the Frankfurt based futures exchange) to see whether or not Eurex had made any progress in creating a credit futures contract. Dr Pinkava was struck by one slide that the speaker from Eurex presented. After the seminar was over, and on the way home, Dr Pinkava 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.”
“This document...sets out how we might expect to bring the existing market for OTC CDS indices on to the LIFFE Exchange in the near term. The document also sets out details how having created an active market in CDS indices we can from that starting point bring the majority of credit derivatives to our Euronext markets thereafter. Also it explains how we may list further novel yet significant products that do not yet exist in OTC format.”
“Pricing analysis, Development of Credit Derivatives Products, Development of Parimutual technology, Development of OTC markets on Exchange, Strategic development of Margining. Some educational projects. ”
“4. Strategy • OTC Take a leading role in assessing the need for an interest rate product OTC market – by end Q4 Put forward significant input to a strategy to get into the IR OTC market by end Q2 2005 – as soon as possible after assessment. 6. New Products • Credit Derivatives Secure a European Trac-X license – ideally Q1 Develop and launch a futures product – ideally Q3/Q4 • Continue to pursue/develop the Parimutuel technology”
“Pavel’s work on Credit Derivatives is still work in progress, however, I believe the concept he has developed will be an effective solution to the problem of bringing credit derivatives on exchange and promises much for 2005.”
“A very good year, marked by real enthusiasm and drive on the development side and excellent customer interaction. Pav’s commitment has been 100%. He needs to really focus on Credit Derivatives over the coming months to ensure we are a major player in this emerging market.”
“Thereafter the relationship began to break down. LIFFE decided to seek patent protection in respect of the inventions and asked Dr Pinkava to assist in this regard. In particular he was asked to permit a U.S. patent application to be filed in his name and thereafter assign it to LIFFE. Dr Pinkava told Mr Foyle that he felt he was owed compensation in return. In January 2005 Dr Pinkava told LIFFE that he had received advice to the effect that the invention was his. LIFFE disagreed. In due course that led to the commencement of these proceedings.”
“Dr Pinkava’s key and over-arching insight was to devise a way of making swaps “mimic” the simpler structure of futures. He had the idea of converting swaps and other derivative products into a series of notional futures, so allowing them to be traded on the existing IT systems of the LIFFE exchange. The mimicking effect occurs internally in the LIFFE system. In broad terms this is achieved in the following way: i) Splitting long-dated swaps such as IRSs, CDSs and CISs into a series of individual one-coupon contracts. The benefit of this is that a one-coupon contract is much closer to a futures contract in terms of its structure; ii) Including day counts to address margining problems. In short, the quoted prices are converted into cash values so that the clearing house can calculate the cash value of the daily variation margin; iii) In the case of IRSs and ORSs, creating a series of pairs of one-coupon contracts, one in respect of the fixed interest rate “leg” and one in respect of the floating interest rate “leg”; iv) In the case of CDSs and CISs, making the exchange responsible for determining when a credit event occurs (called a notional credit event) by reference to its own rules and definitions; v) In the case of a CIS, when a notional credit event occurs, “detaching” the defaulted CDS from the CIS basket and creating two new contracts. The first is an auction product which involves auctioning the defaulted loan over a certain number of days after default. The second contract is a future based on the value of that auction product. This mechanism permits the CIS to carry on trading without the defaulted CDS; vi) In the case of inter-bank loan transactions, pooling risk by novating all loans between a “club” of participating banks to a clearing house, operating a system of daily margining in respect of each bank’s overall position and securing the agreement of all banks in the club to pool the risk of default by any one of them.”
“In many cases the terms of the contract of service may in themselves be sufficient to determine whether or not the Patent belongs to the servant or to his employer. For example, the mere fact that this gentleman was engaged as an assistant engineer or as a draughtsman in the office of the Plaintiff Company would not have entitled the Plaintiff Company to claim for its benefit the advantages of any invention which the Defendant might have made, although the invention had been the result of knowledge and experience gained in their Office, and might even have been suggested by difficulties which had arisen in the Office, the existence of which had come to his knowledge by reason only of his having been employed there. But in dealing with the question whether or not a particular invention is to be retained by the servant or has been made by him for the benefit of the employer, it is necessary to regard not only the contract of service and the relative positions which the servant and the employer occupy hereunder, but the circumstances in which the particular invention was made. I do not think it is right here to limit the consideration to the fact that the ordinary duty of the Defendant would be the ascertaining of the matters to which I have referred, that is to say, to the ordinary scope of the work of an assistant engineer or draughtsman. Still less do I think it material to consider the wage at which he was engaged. I must regard also the particular circumstances and the particular piece of work entrusted to him, out of which this invention grew. Now, the net result is that after his visit of the 9th of November to the colliery he was employed by the Plaintiff Company to design, if he could, a form of lining which could comply with and meet the four specific and essential requirements enumerated in his report. In my opinion, from that moment the terms of his employment imposed upon him an obligation to place at the disposal of, and treat as the property of, the Company the best design which he could, by the exercise of his industry, skill, ingenuity, and inventive ability, produce for the purpose of complying with the essential conditions of the work on which he was employed.”
“I find myself in general agreement with the conclusion arrived at in the Court below. The circumstances in which the invention was made cannot fairly be said to derive directly from the employers’ business, and I can see no ground for holding that the relationship between Mr. Warren-Smith and his employers was such as to make it incumbent upon him to do more than to keep them informed of this particular activity in connection with his invention, and of his action in applying for patent protection in connection with it.”
“It is elementary that, where the employee in the course of his employment (ie in his employer’s time and with his materials) makes an invention which falls within his duty to make (as was the case here) 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 rule appears to us to be a fair one and we recommend that it should apply to all inventions made by employees. This would involve a provision that any contractual term in the employer’s favour which goes beyond the common law position would be unenforceable. There should, however, be nothing to make unenforceable a contracting-out in favour of the employee....To safeguard employees from attempts to contract out by making the employee’s stated duties (or “course of employment”) wider than they are in fact, the Court or the Comptroller in any dispute between employer and employee should have regard to the actual duties of the employee rather than to the express words of his conditions of service, the title of his post, or the scope of the employer’s business.”
“34. Common law on the ownership of inventions made by employees is clear and straightforward: if an invention is made by an employee in the course of his employment, the right to patent the invention belongs to the employer; otherwise, the right to the invention belongs to the inventor. 35. 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.”
“As to the second requirement in the paragraph, that is to say, whether the circumstances were such that an invention might reasonably be expected to result from his carrying out those duties, Miss Vitoria submitted that the circumstances referred to in paragraph (a) must be the circumstances in which the invention was made; and it seems to me that submission must be right. Mr. Pumfrey, in the course of his argument, pointed out that the wording of the paragraph was “an invention might reasonably be expected to result” and not “the invention might” and so on. But plainly, the wording “an invention” cannot mean any invention whatsoever; it is governed by the qualification that it has to be an invention that “might reasonably be expected to result from the carrying out of his duties” by the employee. That wording applies equally to the second alternative in paragraph (a), that of “specifically assigned” duties falling outside the employee’s normal duties; and, therefore, in my judgment the wording “an invention might reasonably be expected to result from the carrying out of his duties” must be referring to an invention which achieves, or contributes to achieving, whatever was the aim or object to which the employee’s efforts in carrying out his duties were directed, in the case of alternative (i) of paragraph (a) his normal duties being performed at the time; in the case of alternative (ii) of paragraph (a) the specifically assigned duties, that is to say, such an invention as that made, though not necessarily the precise invention actually made and in question. The circumstances to be taken into account for the purposes of paragraph (a) of section 39(1) will, of course, depend on the particular case, but clearly a circumstance which must always loom large will be the nature of the employee’s duties, either his normal duties or the specifically assigned duties, as the case may be. The nature of Mr. Harris’s normal duties have to be examined, therefore, from this aspect also.”
“In the light of all the evidence before me I am quite satisfied that Dr Pinkava’s normal duties did extend to the development of new products that might be added to the range of futures and options concerned with bonds, swapnotes and STIRs that the Interest Rate team of the Marketing and Product Management department was responsible for. But his normal duties did not extend to other derivatives and, in particular, swaps that were traded OTC. These formed no part of the business of LIFFE, let alone the particular department or team in which Dr Pinkava worked.”
“In all these circumstances I have reached the conclusion that the CDS and CIS inventions were made in the course of the duties which were assigned to Dr Pinkava. The CDS system is merely a simplified version of the CIS system. In my judgment Dr Pinkava was assigned the task of devising an exchange tradable credit derivative and he made the inventions in the course of performing that task.”
“131. I have carefully considered the other categories of Dr Pinkava’s inventions, namely those that relate to IRSs and OISs and inter-bank loan transactions. I have found this more difficult. However, I have come to the conclusion that these were also made in the course of Dr Pinkava’s assigned duties for the following reasons. 132. First, I am satisfied on the evidence that all the inventions flowed from the ideas which Dr Pinkava had on the way back from the Eurex seminar in July 2004. 133. Secondly, it formed part of the case advanced by Dr Pinkava that all of the inventions are related. It was submitted on Dr Pinkava’s behalf that he had an over-arching series of inventive insights which have application in different areas. Similarly it was submitted he has devised a system which has a number of components, some of which are redundant when the system is used in particular applications. 134. Thirdly, this inter-relationship is apparent from the general description of the inventions that I have provided at [110] above. It is also apparent from the agreed confidential descriptions of each of the categories of invention. All the systems embody the idea of making the derivatives to which they relate mimic the structure of futures so that they can be traded on the existing LIFFE systems. In the case of the interest rate swaps the system is simpler in that it does not need to deal with credit events. So also in the case of inter-bank loan transactions there is no need for a system to deal with credit events but again the system involves novation of all agreements and a system of daily margining. 135. Finally, and as in the case of the CIS and CDS systems, I believe that the events through the autumn of 2004 to which I have referred support the conclusion that all the inventions were treated as part of the same assignment.”
“137. I have carefully considered these submissions but I have reached the conclusion that they must be rejected. In my judgment the circumstances were such that an invention might reasonably be expected to result from the carrying out by Dr Pinkava of his duties for the following reasons. 138. First, it is true to say that LIFFE had no history of filing for patent protection either in this country or abroad. However, I do not accept that it had no interest in new developments. On the contrary, over the years it has sought to maintain its competitive position by introducing new products and business systems. 139. Secondly, it is correct that Dr Pinkava was not employed at a high strategic level or to design “blue sky” products. Nevertheless his normal duties, as I have found them, 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 importance of all these matters is that they reveal that Dr Pinkava was known to be a person who had the ability to devise solutions which were not obvious. Accordingly, when he was assigned the task of developing an exchange tradable credit derivative contract Ms Sudworth knew that he had the ability to come up with a solution, even though she did not know what it would be. In her words, she had “the main brain which was capable of solving this problem, we had a resource”. 140. Thirdly, I do not believe the task that Dr Pinkava was set was 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, I consider it likely that any solution that Dr Pinkava devised was likely to be innovative. 141. Fourthly, I accept that no one anticipated that Dr Pinkava 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 Dr Pinkava’s inventions are ground breaking and very clever. However, in my judgment the application of s.39(1) is not determined by the size of the invention.”
“I have found that Ms Sudworth probably did use the expression BAU during the course of her initial discussions with Dr Pinkava on23 December 2003 . However, I have also found that it was used to indicate one of the ways the project might proceed. In my judgment it was not used to limit the scope of the project. Nor was it so understood by Dr Pinkava. I reach this conclusion for the following reasons. First, at the outset neither Dr Pinkava nor Ms Sudworth had any real understanding of CDSs or CISs or the indices which were based upon them. Accordingly, they were simply not in a position to decide how to progress the project or that a BAU solution could be achieved. Secondly, it is apparent from the e mail that Dr Pinkava sent to JP Morgan on the same day that he was far from clear as to how the project would proceed and that he needed to discuss the matter with JP Morgan in order to develop an appropriate model. Thirdly, the note of the meeting that took place between Dr Pinkava and JP Morgan on 5 January reveals that the bank was also not sure as to the best way to proceed and a number of different possible approaches were canvassed. Fourthly, the e mail which Dr Pinkava sent to Ms Sudworth on the28 January 2004 shows that at that stage he recognised that, whilst BAU might be the favoured option, it was not the only one. Fifthly, it is true to say that the presentation made to the Executive Committee focussed on a BAU solution, but Mr Foyle was quite sure that any successful product would have to deal with credit events and I do not accept that the preference for BAU that this presentation exhibits amounted to a limitation on the general task which Dr Pinkava was set. Finally, the uncertainty as to how to trade a contract based upon CISs or CDSs on exchange is reflected in the debate which was taking place in the industry in 2004 as revealed by the Creditflux publication.”
“124. In the light of this evidence I have reached the conclusion that the term future is used in a number of ways. It is unquestionably used to describe the kind of transaction which LIFFE has hitherto conducted on its exchange. This is what I have referred to as a conventional future. However, it is also used in a broader sense to describe other products which can be traded on electronic exchanges and which have the characteristics identified by Mr Foyle. It is not a misuse of the term to apply it to the products which can be traded on exchange using the systems devised by Dr Pinkava. 125. For all these reasons I do not believe that the scope of the task set to Dr Pinkava was limited by the use the expression BAU or the use of the term future to the production of a conventional future of the kind historically traded by LIFFE.”
“The final limb can be dealt with quite shortly. The task which Dr Pinkava was set had not been shelved at the time he made his inventions. Such is apparent from all the matters to which I have referred in considering the history of the matter at [92] to [97] above. It was live at the time of his April appraisal, it remained live thereafter as Ms Sudworth and Dr Pinkava accepted in evidence and it was clearly live immediately before the seminar which prompted the making of the inventions.”
“As a practical matter swaps were considered too complicated and too varied to be traded on exchange.”
“On the contrary, it permits the trading on exchange of OTC swaps, something which had previously been thought impossible.”