Neutral Citation Number: [2006] EWHC 595 (Pat)
Case No: HC 05 1939
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
PATENTS COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 24 March 2006

Before:

MR JUSTICE KITCHIN
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Between:

	LIFFE ADMINISTRATION AND MANAGEMENT	
Claimant	
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	(1)	PAVEL PINKAVA
(2)	DE NOVO MARKETS LIMITED	
Defendants	

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Dr Justin Turner and Mr Miles Copeland (instructed by Clifford Chance) for the Claimant
Mr Guy Tritton (instructed by Wragge & Co) for the Defendants

Hearing dates: 26-27, 30-31January, 1-3, 7-9 February 2006
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(redacted for publication)
Judgment 

Mr Justice Kitchin:
Introduction 
1.	This is the trial of an action concerning the ownership of a number of connected inventions relating to trading on a financial exchange.  The claimant (“LIFFE”) operates the well known London futures exchange.  LIFFE was acquired by Euronext N.V. in the first quarter of 2002.  After the takeover, Euronext N.V. rebranded its derivatives business in London, Amsterdam, Brussels, Paris and Lisbon as “Euronext.liffe”.  The first defendant (“Dr Pinkava”) was employed in the Marketing Division of LIFFE from 21 July 2001 to 13 July 2005.  The second defendant is a company incorporated under the laws of England and Wales and is controlled by Dr Pinkava.  
2.	In July 2004, Dr Pinkava devised a system and related inventions which permit the trading on an electronic exchange of various types of financial instruments known as credit default swaps, credit index swaps, interest rate swaps and overnight index swaps.  Dr Pinkava initially believed that the system and inventions he had devised belonged to LIFFE.  However, in early January 2005, he received professional advice which led him to believe that they belonged to him.  He communicated this view to LIFFE.  It is this assertion of ownership that has given rise to the current dispute.  
3.	From the beginning of February 2005, Dr Pinkava remained at home on full pay and took the opportunity to instruct patent agents.  He was evidently advised that his ideas were, in essence, business methods and consequently not patentable in Europe.  There is, however, no such exclusion from patentability in the U.S.  Accordingly, he wrote up four U.S. patent applications which were filed on 23 April 2005.  The applications were assigned to the second defendant at some time between 24 June 2005 and 22 July 2005.  
4.	In early July 2005, Dr Pinkava informed LIFFE that he had filed patent applications in respect of his systems.  On 20 July 2005, LIFFE commenced these proceedings alleging misuse of confidential information, breach of contract and seeking, inter alia, declarations that LIFFE is the owner of the U.S. patent applications.  Shortly thereafter Dr Pinkava commenced proceedings in the Patent Office under s.12 of the Patents Act 1977 (“the Act”) seeking, inter alia, an order that he is the owner of the inventions embodied in the U.S. patent applications.  At the same time Dr Pinkava requested the Comptroller to transfer the proceedings to the High Court in the light of the existing High Court proceedings.  LIFFE consented to this request and, accordingly, in addition to the proceedings commenced by LIFFE, I have before me the reference by Dr Pinkava of the question whether he is the owner of the inventions and is entitled to apply for patent protection.
Legal background
5.	Despite the breadth of LIFFE’s claim, it became apparent during the course of LIFFE’s opening that my judgment in this case must depend upon the application of the relevant provisions of the Act. 
6.	Section 39 of the Act reads, so far as relevant:
“Right to employees' inventions

39.- (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) the invention was made in the course of the duties of the employee and, at the time of making the invention, because of the nature of his duties and the particular responsibilities arising from the nature of his duties he had a special obligation to further the interests of the employer's undertaking.
(2) Any other invention made by an employee shall, as between him and his employer, be taken for those purposes to belong to the employee.”

7.	Section 42 of the Act reads, so far as relevant:
“Enforceability of contracts relating to employees' inventions.

42.- (1) This section applies to any contract (whenever made) relating to inventions made by an employee, being a contract entered into by him--
(a) with the employer (alone or with another); or
(b) with some other person at the request of the employer or in pursuance of the employee's contract of employment.
(2) Any term in a contract to which this section applies which diminishes the employee's rights in inventions of any description made by him after the appointed day and the date of the contract, or in or under patents for those inventions or applications for such patents, shall be unenforceable against him to the extent that it diminishes his rights in an invention of that description so made, or in or under a patent for such an invention or an application for any such patent.”

8.	I must also refer to s.43 which says, so far as relevant:
“43.- (1) …..
(2) Sections 39 to 42 above shall not apply to an invention made by an employee unless at the time he made the invention one of the following conditions was satisfied in his case, that is to say-
(a) he was mainly employed in the United Kingdom”
(3) ….
(4) Any references in sections 39 to 42 above to a patent and to a patent being granted are respectively references to patent or other protection and to its being granted whether under the law of the United Kingdom or the law in force in any other country or under any treaty or international convention.”
9.	In the light of these provisions the following matters were agreed between the parties. First, s.39 applies to the inventions in issue because Dr Pinkava was mainly employed in the United Kingdom when he made them (s.43(2)).  Secondly, this is so notwithstanding the fact that Dr Pinkava has applied for patents in the U.S. (by necessary implication from s.43(4)). Thirdly, if LIFFE does not succeed in establishing entitlement under the Act then its claim must fail because it is not possible to contract out of the operation of s.39 (s.42(2)). I should add that the parties were also agreed that s.39 applies even though the inventions may not qualify for the grant of patent protection under the Act. 
10.	LIFFE bases its case upon s.39(1)(a). This has two limbs, each of which is relied upon. An invention belongs to the employer if:
i)	It was made in the course of the normal duties of the employee, or
ii)	It was made in the course of duties falling outside his normal duties, but specifically assigned to him.
In either case there is a second requirement: it must be shown that the circumstances were such that an invention might reasonably be expected to result from the carrying out of his duties.
11.	The scope of s.39(1) was considered by Falconer J in Harris’ Patent [1985] RPC 19. Mr Harris was employed by Reiss Engineering (“Reiss”). Reiss sold Wey valves used for controlling the supply of coal dust through a duct. They were made by a Swiss supplier. If a problem developed with a valve then Reiss would report it to the supplier. Mr Harris was primarily concerned with obtaining sales and providing an after-sales service in the course of which he would deal with problems that customers experienced with their installations. In the summer of 1978 Mr Harris was told that he was being made redundant and his employment came to an end in December. In the meantime he devised an improved valve.  Reiss contended that the invention belonged to them by virtue of s.39(1)(a) on the basis it was made in the course of Mr Harris’s normal duties and the circumstances were such that an invention might reasonably be expected to result.  They also relied upon s.39(1)(b), but that is not material to the present case. Falconer J. rejected the claim on the basis that it was never a part of Mr Harris’s duties to apply his mind to problems arising in the design of the Wey valves. In the course of his judgment he said this at p.29:
“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.”
12.	Dr Pinkava relied upon this passage and, in particular, the finding that the words “an invention might reasonably be expected to result from carrying out 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 were directed. I respectfully agree with Falconer J that the requirements of  paragraph (a) cannot be satisfied merely by showing that the circumstances were such that any invention at all might reasonably be expected to result from the activities of the employee. However I think that his particular finding must be seen in the context of the case before him and there is a danger in substituting one test for another. The statute already imposes the limitation that the invention in issue must have been made in the course of the normal or specifically assigned duties of the employee. 
13.	The point may be of some importance in the present case. As I explain later in this judgment, the system which Dr Pinkava devised was found to have a number of different applications, some of which fall outside anything he was specifically asked to consider but all of which are of great interest to LIFFE. He has filed different patent applications which, in essence, claim those applications as different inventions. If the inventions were made in the course of his specifically assigned duties and the circumstances were such that an invention might reasonably be expected to result then the requirements of s.39(1)(a) are, in my judgment, satisfied. It is no answer to say that the inventions the subject of the further applications do not achieve the particular aim or object to which his efforts were directed.  
14.	I believe that it is convenient to consider the application of s.39(1)(a) by addressing the following questions:
i)	What were the normal duties of the employee?
ii)	What duties outside the normal duties was specifically assigned to the employee?
iii)	Were the inventions in issue made in the course of those duties?
iv)	If so, were the circumstances in either case such that an invention might reasonably be expected to have resulted from the employee carrying out those duties?
Financial products, markets and exchanges
15.	In order to understand the subject matter of the inventions and the rival claims of the parties it is necessary to set out a little background concerning financial products and how they are traded.  Much of this was not in dispute.  The parties did, however, disagree as to the meaning of one term in particular, namely what is meant by a “future”.  This is an issue to which I  return later in this judgment.
16.	Five principal markets were referred to in the evidence, namely:
i)	Commodity (such as grain and petrochemical) markets; 
ii)	Foreign exchange (otherwise known FX or forex) markets;
iii)	Money (otherwise known as short term interest rate) markets, that is to say debt of less than one year;
iv)	Bond (otherwise known as long term interest rate) markets, that is to say debt greater than one year;
v)	Equity (otherwise known as share or stock) markets.
17.	Only the last four together are called the financial markets.  The bond and equity markets form the capital markets and are mostly based on so called negotiable securities which are designed to be easily resold.
18.	Prices in the market for any financial product quickly respond to changes in supply and demand.  The markets can therefore be used for gain if a trader can predict market direction and use this information to buy at a low price and sell at a high price at a later point in time.  Traders who buy the market in question are said to hold a “long” position or to be “long in the market”.  Conversely traders who sell the market are said to hold a “short” position or be “short in the market”.  At any one point in time each market should have a best bid price and a best ask price.  The bid/ask spread represents the cost of doing business in that particular market. A market that shows a tight bid/ask spread with a good quoted size (that is to say there are many potential counterparties) is said to be “liquid”.  Conversely, a market with a wide bid/ask spread and limited quoted size is said to be “illiquid”. 
19.	All of the five markets to which I have referred have derivative markets associated with them.  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.
Swaps
20.	Swaps are contracts whereby two counterparties agree to exchange one asset or instrument for another.  For the purposes of this case, the particularly relevant swaps are interest rate swaps, overnight index swaps, credit default swaps and credit index swaps.  
21.	Swaps have only ever been traded on the over the counter (“OTC”) market.  This is overseen by the International Swaps Derivatives Association (“ISDA”) The OTC market is a market where contracts are negotiated between the counterparties, usually the big banks.  There is no doubt that the market is very large indeed.  
22.	One of the most common types of swap is the interest rate swap (“IRS”).  This involves one party agreeing to pay to the other a floating interest rate on the principal of a notional loan in exchange for the other party agreeing to pay a fixed interest rate on the same principal.  The long trader makes periodic interest payments which are fixed while the short trader makes interest payments based upon an agreed, but fluctuating, bench mark interest rate such as LIBOR. The interest payments are called “coupons”.  The period of an IRS can be very long, such as 30 years.
23.	Another important swap is the overnight index swap (“OIS”).  This is like an IRS but for a short period.  It involves the payment of one fixed and one floating coupon interest payment by, respectively, the long and the short trader at the end of the lifetime of the swap.  The floating payment is determined by the compounding of the relevant overnight bank interest rate on the notional principal for the period of the swap.
Credit Default Swap
24.	The credit default swap (“CDS”) is a more recent innovation.  Often a lender may wish to obtain protection against default on a loan whilst still retaining entitlement to receipt of interest payments.  For example, a bank may wish to obtain insurance against a loan being defaulted on in much the same way that a mortgage company may wish to secure protection for damage to a property against which a loan is secured.  
25.	The lender accordingly goes into the market as a “protection buyer” and asks a “protection seller” to take on the risk of default in return for the payment of periodic premiums.  It “swaps” the risk of default for the payment of those premiums.  The protection buyer is known as the long trader and the protection seller as the short trader.  A default is known as a “credit event”.  What amounts to a credit event is a matter for negotiation but normally reference is made to standard ISDA definitions.
26.	Like other assignable contracts, CDSs can be traded for a price.  This will depend upon the market’s appreciation as to whether the risk of default of the borrowing company has increased or decreased since the issuing of the CDS.  CDSs are quoted and priced in terms of the annualised percentage of the notional principal that the protection buyer must pay.  The price is calculated in units called basis points (“bps”) where one basis point is 0.01%.  Thus a CDS which is priced at 30 bps means that the protection buyer must pay 0.3 % of the insured principal per annum.  If a credit event occurs then the protection buyer ceases paying the premiums and the protection seller must pay an agreed sum (such as the unrecoverable element of the loan) to the protection buyer. 
Credit Index Swap 
27.	A credit index swap (“CIS”) is a “basket” of CDSs.  It may comprise a large number (perhaps 125) of CDSs, usually of blue chip companies.
28.	A CIS is priced in much the same way as a CDS.  So, for example, a CIS which is quoted at 30 bps means that the average price (spread) of the single named CDSs that make up the basket is 30 bps.  
29.	When a credit event occurs in a CDS in the basket, that CDS leaves the basket and the basket continues to be traded without it.  By convention, the quoted price of the CIS is the average price of the remaining single named CDSs that remain in the basket. 
30.	Accordingly, if all the CDSs are perceived to have the same risk of credit default, then the removal of any one CDS from the CIS should not affect the quoted price of the CIS.  If, however, the price of the removed CDS does not correspond to the average price for the remaining CDSs, then the price of the CIS will move up or down following that removal.  It is apparent therefore that the price of a CIS is not affected specifically by a credit event but only by whether the perceived credit worthiness of the removed single named CDS differed from the average of the CDSs in the basket prior to the credit event.  
31.	However, it is also to be noted that when a credit event occurs for a CDS in the basket, the protection seller becomes liable to pay for the credit default of that CDS and the obligation of the protection buyer to pay premiums for that company comes to an end.  This will reduce the aggregate premium that the buyer has to pay per annum. 
32.	I should mention two other matters at this stage.  First, from time to time, a new CIS is put on the market where certain changes have been made to the constituent CDSs.  So, over a period of time, a series of CISs are issued.
33.	Secondly, a CIS will command a particular price depending on market appreciation of the credit worthiness of the underlying corporations in the basket.  Its price will go up and down as the perception of that credit worthiness changes.  The advantage of a CIS as opposed to a single name CDS is that it permits a trader to hedge against a general worsening of that credit worthiness.  So, for example, if a bank with a large variety of outstanding loans with FTSE 100 companies is concerned about an increase in the risk of default on those loans, it can buy a CIS (the basket of which broadly reflects such companies) at a particular quoted price and know that that will protect him against a general worsening of credit worthiness of those companies.  
Futures and Options 
34.	Futures and options are also derivatives but, unlike swaps, have been traded on exchanges for some time.
35.	In its simplest form a “future” or “futures contract” 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.
36.	Futures are not, however, limited to contracts relating to such “deliverables”.  The parties may agree to settle by reference to the value of any fixing on the settlement date, such as the value of the FTSE 100.  So, for example, a buyer of a FTSE 100 future at “7,000” will make money if the FTSE 100 is greater than 7,000 on the settlement date but will lose money if it is less than 7,000.   
37.	Options are like futures but instead of imposing an obligation to buy or sell at a pre-determined price in the future they give one party the right to carry out such a transaction.  On the trade date that party must agree to pay a premium because it is, in effect, a one way bet.
38.	Futures contracts are only traded on exchange.  Options contracts are traded both on and off exchange.  In relation to options, and particularly equity options, there is therefore some degree of competition between exchanges and the OTC market.
39.	An important part of the business of LIFFE lies in the trading of interest rate futures.  These provide a convenient framework to consider the essential elements of a futures contract as traded on exchange.  A typical example of an interest rate future is the EONIA (Euro Over Night Index Average) future.  The essential elements of this future are:
i)	The fixing is the compounded rate of the effective overnight reference rate for the Euro calculated by the European Central Bank;
ii)	The contract value is EUR 3 million;
iii)	The tick price (minimum price movement) is 0.005%;
iv)	The contract is for one month.
40.	The counterparties to an EONIA future will therefore effectively bet on the value of the EONIA fixing on the settlement date, one month from the trade date.  One party will pay to the other the difference between the agreed rate and the actual EONIA rate on the settlement date as applied to the contract value.  
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.  Fixing may be complicated, as in the case of the swapnote future which I refer to later in this judgment. 
Exchanges
42.	Exchanges facilitate the buying and selling of commodities, bonds and other financial products. In the case of assets such as equities, matters are not unduly complicated.  Market makers generally offer to buy at one price and sell at another and make their money on the difference.  Once any sale is concluded money is delivered to one party and the asset to the other.  All positions are then “closed”.  An essential requirement to trade any asset on an exchange is, however, liquidity.  Unless there is a considerable supply and demand for a particular asset, it will not be suitable for trading on exchange.  
43.	The trading of derivatives on an exchange poses particular problems, namely the need for standardised contracts and for credit risk protection.
44.	The need for standardised contracts follows from the liquidity requirement.  A multitude of contracts with different terms are not suitable for trading on an exchange.
45.	The need for credit risk protection comes from the fact that derivatives generally give rise to “open” positions.  That is to say at least one party will have a continuing financial exposure to the other during the life of the contract. 
46.	Futures exchanges such as LIFFE and it competitors, such as the Chicago Mercantile Exchange, have managed to address these problems for futures and options.  They have addressed the first by standardising their agreements. They have addressed the second by mandatory novation of all new contracts. 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.
47.	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.  
LIFFE
48.	The London International Financial Futures Exchange began trading in 1982.  The acronym LIFFE was quickly established as a brand name.  The business of LIFFE has steadily expanded. Initially seven financial futures contracts were traded.  In May 1984, a futures contract based on the FTSE 100 index was introduced. In 1992, LIFFE acquired the business of the London Traded Options Market, formerly part of the London Stock Exchange, which traded equity options.  The full name of the exchange was thereupon changed to the London International Financial Futures and Options Exchange but it retained the brand name LIFFE.   In 1996, LIFFE absorbed the business of the London Commodity Exchange, comprising commodity futures contracts based on sugar, coffee, cocoa and the like and options on these contracts.
49.	More recently and with the introduction of the Euro in January 1999, LIFFE developed contracts based on the Euro, namely the “Euro LIBOR” and “Euribor” contracts.  Trade in the last of these is presently LIFFE’s biggest single source of revenue.
50.	Mr Foyle, a company director of LIFFE and who gave evidence on its behalf, has been closely involved in the development of the trading exchange operated by LIFFE since its inception.  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.  For this reason LIFFE moved its markets on to the LIFFE CONNECT electronic trading system from 1998, closing its trading floor in 2000.  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.
51.	LIFFE now lists six kinds of futures contracts, namely short term interest rate (“STIR”) futures, bond futures, individual equity futures, equity index futures, commodity futures and swapnote futures. It also lists a parallel series of options. These are all conventional products in that they use variations of a standard template.  The swapnote future is the most unusual in that the fixing broadly represents the value of a notional bond on the settlement date.  The methodology was patented in the U.S. and LIFFE has taken an exclusive licence in respect of it.
52.	LIFFE’s business is not limited to exchange trading.  Various other aspects of the business were described during the course of evidence.  In particular, it has developed a business supplying IT systems to the OTC market.  Particular systems referred to in the evidence, albeit designed by third parties, were Cinnober, Creditex and Swapstream.  
53.	For approximately the last eight years products have been divided into three categories, namely Commodities (including non financial products such as weather contracts based upon, for example, temperature or rainfall), Equity Derivatives (contracts based upon indices of equity share prices and on the shares of individual listed companies) and Interest Rates (contracts based on interest rates and foreign exchange).  For each of these categories a Marketing and Product Management team has been appointed.  The role of the Marketing and Product Management team is to develop new products or enhancements to existing products, launch the products, and provide educational and support services to LIFFE’s customers and other employees.  In addition to and separate from the Marketing and Product Management teams LIFFE has established sales teams. These focus on suggesting the use of established products to their contacts, or testing whether their contacts are interested in new products. They also provide feedback from customers about market developments which may indicate opportunities for new products which it would be worthwhile for the relevant Marketing and Product Management team to research further.
54.	There was a substantial dispute between the parties as to whether or not LIFFE has any history of innovation or invention.  It was submitted on behalf of Dr Pinkava that LIFFE has never launched any product that contains an original feature designed “in house”, that LIFFE has repeatedly launched exact or near exact copies of products first listed on other exchanges and that LIFFE has repeatedly shown a pattern of reacting to product initiatives first put forward by other exchanges or other competitors rather than showing any leadership.  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.
Dr Pinkava’s employment and his normal duties
55.	Dr Pinkava was employed on 21 July 2001 as a Product Manager in the Interest Rate team of the Marketing and Product Management department.  Ms Amanda Sudworth was the head of the team and Dr Pinkava’s supervisor. She reported to Mr Fraser Cowie, the head of the Marketing Department. Dr Pinkava has a PhD in physics from Imperial College, London and particular skills in mathematics, including designing and programming computer simulations.  He was hired because of his experience in the industry coupled with his technical abilities.  In particular, Ms Sudworth was aware of Dr Pinkava’s technical skills as a result of working with him at Nomura International on the listed derivatives brokerage desk.  
56.	The starting point for a consideration of Dr Pinkava’s duties and responsibilities is his contract of employment and job description.  Clause 3 of his contract of employment provides:
“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.”
57.	The job description was written by Dr Pinkava in consultation with Ms Sudworth.  It contains the following executive summary:
“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 … in promoting and recommending enhancements as well as new products/services where appropriate to maximise trading volumes and revenues.”
58.	A section “Key Accountabilities” includes the following:
“Development of new products and wholesale trading facilities after recognising new product opportunities or receiving customer feedback.  Assess demand and evaluate commercial viability whilst balancing detailed research with internal considerations and external drivers.”
59.	A section “Key Deliverables” contains the following points:
“Driving the maintenance and development technically robust products.
Generating ideas for new yet commercial viable interest rate products”
60.	Finally, a section headed “Knowledge, Skills and Experience Required” includes the following:
“Creativity – demonstrates the vision to come up with new and alternative ideas that are workable.  Shows an innovative approach; an ideas person.”
61.	Having heard the evidence of Dr Pinkava and Ms Sudworth I have no doubt that a major part of Dr Pinkava’s day to day activities were concerned with marketing.  In particular he was skilled and effective at producing and delivering presentations to customers and potential customers, explaining LIFFE’s products and answering technical questions, writing technical literature for inclusion in LIFFE’s product brochures and in designing and demonstrating fee plans which were used to satisfy customers that LIFFE’s fees were competitive and reasonable. Dr Pinkava regularly visited LIFFE’s customers in the U.K. and abroad to deliver presentations on technical aspects of LIFFE’s business and products.
62.	In addition I am also satisfied that Dr Pinkava was valued for his technical and academic abilities and was seen by his employers, and saw himself, as an “ideas” man.  After only five months his first appraisal included the observation that:
“Pavel has only been with the team for 5 months but has already produced some excellent and valuable work. He has the ability to think on many levels, producing practical solutions or equally generating challenging or innovative ideas”
63.	Dr Pinkava was, in particular, involved with the development of two new products launched by the Interest Rate team of the Marketing and Product Management department.  The first of these was the “Dollar Swapnote” contract which was launched in June 2002.  As Ms Sudworth explained, this contract was a modified version of the existing “Euro Swapnote” contract and, although launched just prior to Dr Pinkava starting his employment with LIFFE, required considerable input by Dr Pinkava to perfect it.  One of his tasks was to devise an appropriate mathematical algorithm to calculate the  settlement prices.  In his 2002 appraisal Dr Pinkava wrote about the work he performed in the following terms:
“I feel I have achieved a lot this year but hope to do even better going forward.  I am particularly proud of my work on $ Swapnote and will be disappointed if we have not become the dominant/only swap future by next year.  My analytical support on the benchmark portfolio future we are considering launching with EuroMTS and work on TIFFE Swapnote are examples of the quality added value work I have delivered. I believe there are many others.”
64.	Similarly, Ms Sudworth commented on Dr Pinkava’s performance for 2002:
“Pavel has had a great year, continuing the excellent and valuable work he started last year.  As said last year, he has the ability to think on many levels, producing practical solutions or generating challenging and innovative ideas.”
65.	The second product that Dr Pinkava helped to develop was EONIA.  The contract was launched by LIFFE in about February 2003.  Although a fairly straightforward product, Dr Pinkava was responsible for designing the contract specifications and developing the marketing and educational materials for it.
66.	In addition, and in the course of 2003, Dr Pinkava did a good deal of work on a new system called Parimutuel, which was effectively a more sophisticated way of trading options. Although not devised by Dr Pinkava it was a radical development and something which he championed, as recorded in his 2003 appraisal.  
67.	Overall Dr Pinkava described himself as “a guru”. In the course of cross examination he explained that he challenged the status quo, that is to say that he actively looked for new approaches and inspiration to improve the business, and considered himself to be a person that “pushed the boundaries”. In respect of his performance in 2004 he said (Day 6, at p.891):
“…So "pushing boundaries", what I was trying [to] do is say that I do challenge the status quo, that I actively look for new approaches and inspiration to improve the business, innovative and adaptive, embraces change and new challenges with openness ; so where I use those words, I am actually just paraphrasing HR jargon, just because I am on task.  So I would not want the court to think that I am in any way, you know, creating those words.  This was, nonetheless, after my invention.”

68.	And similarly (Day 6, at p.895):
“Q.  It is true, is it not, that before and after the invention, you saw yourself as an employee who challenged the status quo and pushed the boundaries.

A.  I saw myself as a good employee.  A good employee would be aware of the core competencies.  The core competencies include challenging the status quo.  I considered myself to be fully pushing the boundaries.  I therefore scored myself as no. 1.”

69.	He saw himself and was seen by his employers as a problem solver (Day 5, at p.795):
“A.  I considered myself to be exceptional.  The trouble with being more intelligent than people around you -- unfortunately I often find myself in that position -- is that those people, no offence to those people, they cannot see that, can they?  They would have to have the intelligence that I have got to see that I have got it.  If they had it, of course .... Anyway, the upshot is that I have not been treated in a nice way by my colleagues at all; I have just been treated like one of the team.  Nobody has gone, "Pavel, you are smarter than Mr. Foyle."  No one would dream of saying such a thing.  It just does not happen.  It is just, "Pavel, solve this problem, go and see that customer, do this, do that" and there was an element of self-starting.  I am waffling, but this is something I share with John.”
70.	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.
The 23 December project and Dr Pinkava’s specifically assigned duties
71.	In the few years prior to 2004 the OTC market in credit derivatives grew rapidly. Mr Foyle explained that work was done by ISDA to standardise contract documentation. In addition, two indices called TRAC-X, created by JP Morgan and Morgan Stanley (in conjunction with Dow Jones), and iBoxx, created by a group of investment banks and Deutsche Borse, had been created to facilitate trade in these instruments and as a tool to limit or increase credit risk exposure. For example, the TRAC-X Europe series 1 consisted of a basket of 100 single name CDSs at launch. These developments in the market caused LIFFE, its members and its competitors to contemplate an exchange tradable contract.  
72.	Ms Sudworth was also aware of these developments. She was conscious that LIFFE had been interested in capturing a part of the credit derivatives market since about 2002 and the Marketing and Product Management department therefore kept an eye on developments in the market via the press and published statistics. They made a number of presentations to LIFFE’s management body, but it was not until late 2003 that they decided it was time to get involved.
73.	In December 2003, LIFFE was approached by JP Morgan about the development by LIFFE of a derivatives contract. JP Morgan was very keen to launch an exchange tradable derivatives contract based upon the TRAC-X index. As a result Ms Sudworth and Mr Cowie met Mr Lee McGinty of JP Morgan on 23 December.
74.	After the meeting Ms Sudworth had a meeting with Dr Pinkava and asked him to undertake some research into movements by LIFFE's competitors to create and launch an exchange tradable credit derivative contract, and to undertake a watching brief on such activities.  At or about the same time she also asked Dr Pinkava to commence work investigating and developing a credit derivatives future for LIFFE, and arranged for him to meet with Mr McGinty. Dr Pinkava attaches considerable importance to the use of the expression “future” in this context, and this is a matter to which I will return later in this judgment.
75.	So far as Ms Sudworth was concerned she knew little about the credit derivatives market and had no preconceptions about the type of product which should be developed. What was important was an on-exchange solution which would generate liquidity.
76.	The meeting was a short one but it raises one acute conflict of fact. Dr Pinkava said that the task he was set was absolutely clear, it was to be a “BAU” (“business as usual”) futures contract and is convinced that he wrote down BAU in one of his notebooks. The significance being that a BAU contract could only be a contract based upon the standard LIFFE future template. He suggested that Ms Sudworth or someone else at LIFFE had destroyed the relevant pages in his notebook. For her part, Ms Sudworth was clear that she would never have used the expression BAU because at the time neither she nor Dr Pinkava knew much about CDSs or CISs and because no particular product was envisaged. I am satisfied that Dr Pinkava’s suggestion that LIFFE destroyed pages of his notebook is speculative and groundless. He accepted that from time to time he tore out pages from his notebooks himself.  However, as I will shortly explain, the expression BAU was certainly used in later documents to indicate one of the possible ways that the project might progress. I have reached the conclusion that 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 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.
77.	On the same day Dr Pinkava sent an e mail to JP Morgan on the subject of “Dow Jones Trac-X Index Futures on Euronext.liffe”. He said this 
“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.”
78.	This indicates Dr Pinkava could see a number of possible ways forward and he needed to discuss the matter with Mr McGinty to develop an appropriate model. He anticipated looking principally at a “business as usual” approach, but clearly had not limited himself to this.
79.	The meeting with JP Morgan took place on 5 January 2004 and Dr Pinkava produced a detailed note. 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.
80.	This highlights one of the difficulties inherent in the project. For an exchange tradable CIS product to have real value there was a perception that it would have to be able to deal with and reflect the occurrence of credit events. One of the problems with a future based simply upon the TRAC-X index value was that it could not. For the reasons I have explained earlier in this judgment, the occurrence of a credit event might not affect the price of a CIS (and hence the index value) at all because it simply drops out of the basket. Alternatively, it might lead to an increase or decrease in value depending upon the perceived creditworthiness of the remaining CDSs in the basket.
81.	A total return index, on the other hand, did have the potential to reflect the occurrence of a credit event. Its value would be determined by calculating the sum of the coupon payments received by a protection seller and the notional interest earned from the insured principal, taking account of any capital appreciation or depreciation of the CIS and deducting the cost resulting from a credit event. But, at least in early 2004, the notion of a total return index was no more than embryonic. 
82.	This difficulty led to a considerable debate in the industry as to the appropriate way to bring the OTC market in CISs on exchange. It is illustrated by a publication of September 2004 entitled “The Creditflux Inside Guide to credit index trading” published by Creditflux Limited in conjunction with Morgan Stanley. It contains a wide variety of views of those trading in these instruments. So for example it says on p.10:
“But it is hardly surprising that some areas of the market are more liquid than others, especially given the youth of the product.  And there is every possibility that many of the gaps in credit index liquidity will soon be filled.
It is also possible that the indices can overcome the shortcomings of their basic design.  Most indices exist initially as an exercise in price calculation designed to demonstrate the general trends in a market.  If they meet a need, they are then taken up by the investment community and used as a benchmark.  Finally, bankers will look to fashion some instrument or other that allows firms to trade the index directly.
By contrast, credit derivative indices have put the cart before the horse.  They have been designed to be traded from day one, and it is only now that they trade in large volumes that people are thinking about their other potential uses.
Despite their initial success, transforming indices such as iTraxx and CDX into the credit market’s equivalent of the S&P500 or Eurostoxx 50 is a big challenge.  It will need many more asset managers, insurers, corporates and commercial banks to be persuaded of their benefits.  And it may require credit derivative dealers to give up some trading benefits in favour of greater transparency and objectivity in portfolio selection.”
83.	And on pp.42 to 44:
“Some traders worry about the decline in margins that an exchange-traded credit index product might bring for dealers.  Many express the view that since the indices are already highly liquid there is little to gain by putting contracts on an exchange.
But some heads of trading at major dealers welcome the development.  “Most credit derivative dealers would like to have the index traded on an exchange or as a futures contract,” says Jared Epstein, head of credit derivatives trading at Morgan Stanley in New York.  “This would allow everyone to tap into the same pool of liquidity.  In addition, listing the index on an exchange would help further grow the market since it would attract participants who generally shy away from buying over-the-counter products.”
……..
To date, several exchanges have expressed an interest in developing a listed index credit derivative, but none of the parties involved has yet gone public with details of its project.  As long ago as late 2003, ABN Amro, Deutsche Bank and Citigroup announced that they were developing a contract based on the iBoxx index, though the merger between IBoxx and Dow Jones Trac-x is thought to have derailed the timing of this project. 
Nonetheless, collaborative work is continuing between banks and exchanges, with Eurex and Euronext in Europe, Chicago Board of Trade in North America, and Tokyo International Financial Futures Exchange and the Singapore Stock Exchange all having confirmed that they are in the running.
So how might an index credit future work, and what problems are created by basing a contract on an underlying basket of default swaps?
The contract would work quite differently from a conventional over-the-counter credit default swap:
•	The contract would be electronically traded with an exchange acting as the central counterparty, rather than bilaterally between two counterparties.
•	The credit future would be based on the performance of an underlying index, for example, the DJ iTraxx Europe or DJ CDX North America, with traders agreeing to buy or sell at a designated future date the value of the index fixed today.  For example, the contract might be bought and sold based on a quarterly delivery date, with the last trading day occurring two business days prior to the delivery day.  As with other futures markets, contracts would typically be fulfilled by offsetting: that is, the obligation to deliver would be fulfilled by taking a long position in a contract with the same expiry month.
•	Margining requirements would apply, with positions marked-to-market daily and investors required to maintain a minimum level of margin, calculated as a proportion of the current value of the position.  The initial margin would be a small percentage of the futures contract, giving leverage.
There are two big stumbling blocks in creating a watertight structure for credit index futures: documentation and settlement.  Exchanges that have looked at credit futures are known to be sceptical about the suitability of current credit derivative documentation for an exchange-traded futures contract.
“Credit default swap confirms are bilateral contracts,” says one exchange official who declines to be identified.  “There are far too many elements that are subject to different interpretation to work as an exchange-traded contract.  A futures contract needs to be short, simple and unambiguous.”
But as anyone who has been involved in drawing up credit derivative documentation knows, default is, by its nature, a complex and ambiguous risk.  And that is hard to capture in legal language.  Yet for a futures contract, the default of a name in the index would have to be triggered simultaneously on all contracts.  “With virtually every credit event we have had disagreement over the exact timing of the event,” says one credit derivatives trading head.  “But if it is an exchange traded contract you cannot trigger just some contracts.  That is a weakness of the credit future.””
84.	And on p.46:
“For now, the likelihood is that today’s credit derivative indices will morph into something more like an S&P 500 or EuroStoxx 50 – robust, transparent constructs that can  support exchange trading, long-dated options, futures ETF’s [exhange traded futures] and the like.”
85.	All these passages were explored in evidence at some length and there is a degree of ambiguity about them. But a consistent theme is that those in the industry appreciated there was no obvious way to implement the trading of CISs on exchange. They also support the proposition that those in the industry were contemplating bringing CISs on exchange. Mr Foyle and Ms Sudworth accepted that it would have been relatively straightforward to implement a futures contract based upon the value of the index itself, assuming that it was available and sufficiently robust. However, Mr Foyle was adamant that such a contract  would have been of no value as it had to deal with credit events (Day 5, at p.770): 
“Well, what do you do when one of the companies in this list of 125 suffers a credit event, a likely bad debt?   How do you deal with that?"
It is a problem for the index, the calculator of the index number.  He has also got a problem with his index of 125 because he has now really only got 124, but never mind, because when you get to 20th March or 20th September, they create a new list and they can add another company in.  But, for the index number, you have a problem because if you stop including number 125 that has suffered this credit event, then if you just stop including it, does the index number just drop by 0.8 of a per cent, in effect, because you just treat it as being worth zero, or does it continue as an index number, ignoring the fact that one of the original 125 is now in a serious credit risk situation and that their debt may be worth a lot less than 100? 
How the index deals with that would be, as I commented yesterday, of fundamental significance to the design of a futures contract based on the index number.  It is what happens when there is a default.  If the contract does not work satisfactorily in that situation, you can put it in the wastepaper bin.” 
86.	On 28 January Dr Pinkava sent to Ms Sudworth an e mail concerning TRAC-X in which he described the situation as potentially a Catch 22:
“We could have a dealer meeting like Eurex did but it won’t get us far and PLEASE don’t let EC [Executive Committee] put us in a Catch 22-
1.	We can’t get a licence without consulting > but 2.
2.	We can’t meaningfully consult without design details and indeed without tipping our hand > but 3.
3.	We can’t design without considerable support from JPM (or Deutsche) > but 4.
4.	JPM (or Deutsche) won’t help us further without a license > but 1.
…cost, whether there would be any fundamental IT changes = depends on design but could easily be BAU or close to BAU”
87.	The importance of this is that it recognises that there was no certainty about the form of the project and BAU, that is to say a future based upon the index value was not the only way forward although, as Dr Pinkava said in cross examination, it was the preferred option.  
88.	At about this time Dr Pinkava was sent to the U.S. to help launch LIFFE’s Eurodollar (interest rate) future. This was a typical interest rate future with the fixing being the benchmark interest rate LIBOR as applied to a three month $1,000,000 deposit. It was one of the major priorities for 2004.
89.	In his absence Ms Sudworth made a presentation to the Executive Committee on the 2 February. The subject was the TRAC-X index future. The presentation was based upon a document that was largely prepared by Dr Pinkava although agreed with Ms Sudworth. 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”. This implies that futures could become much bigger in turnover terms than the swaps themselves, so drawing a distinction between them. Secondly, there is a statement that “We believe futures on broad based CDS baskets are technically possible whereas future [sic] on single name CDS are not”. This is indeed the position with a conventional future, but is not the case with the systems devised by Dr Pinkava. These permit the trading on exchange of CDSs and CISs. I should also note at this point that the presentation also mentions total return indices as one possible approach. Thirdly, the project was described as “a BAU” launch and IT costs were budgeted at £15,000, that is to say the level of costs associated with the launch of a new but conventional future. 
90.	Dr Pinkava and Ms Sudworth were cross examined on this presentation. In the light of their evidence I am satisfied that Dr Pinkava had in mind a conventional future at this point. Ms Sudworth did not dissent from this as a proposition. Her position was rather that she had never asked or required Dr Pinkava to produce a BAU solution.
91.	Dr Pinkava returned from the U.S in late March and thereafter an update on the presentation was prepared dated 23 April. This explained that a number of important developments had occurred. These included what were described as design “issues / problems” and, importantly, that iBoxx and TRAC-X were contemplating a merger. There was thus considerable uncertainty over the indices and what would emerge. The position was clarified when the merger of iBoxx and TRAC-X to produce iTraxx was announced on 21 June. 
92.	It was submitted on behalf of Dr Pinkava that, from April, the project was, for practical purposes, dead. Indeed, no research had ever actually started into a future based on iTraxx. I am unable to accept this submission. It is clear that there were other priorities but the project was never abandoned. As Ms Sudworth explained (Day 3, at pp.543 to 544): 
“Q: So there was not much point bidding?
A: Until you had something concrete to bid for.
Q. Exactly. In other words, by about April, everybody was holding back from doing anything because they wanted to see what was going to happen in the marketplace with the indices?
A: I think that is probably the way things were, yes.
Q: Therefore, everybody in LIFFE’s Marketing Division Department was presumably concentrating on other things and waiting to see what happened?
A: We had lots of other projects on the go. We had the Euro dollar project which was the big project of the year, and Dr Pinkava had been involved by going to the US. I was very, very involved in it, and it was probably a case of treading water, but yes. As to objectives and things we wanted to do, I talked earlier about keeping balls in the air. They might seem pretty low to the ground at times but you have to bring them back at times.
Q:  I understand there may come a point in the future when-
A: It is about priorities.
Q: - a product is to be resuscitated.
A: It was never killed in any shape or form.
Q: I am not suggesting that for a moment. What I am suggesting is that in mid April it was shelved, to be pulled out of the shelf once one knew that the iTraxx index had been launched?
A: We knew we had to wait until we had the defined index, but I would not even say shelved. It was just bubbling along underneath.
Q: Nobody was actually doing anything on it?
A: But it was not dead or shelved in any way, shape or form. Credit Derivatives had got the attention of our Executive Committee. It had the attention of my boss and it was still something that we needed to continue with. ”
93.	Dr Pinkava also gave evidence which confirmed the position (Day 6, at p.881):
“Q: Is your evidence to this court that you did no work on credit derivatives between April and July?

A: That would not be the Pavel Pinkava that Amanda described would it, the loyal person who does things?  I would have almost certainly, well, I think I remember – no, I mean, that is certainly not the case.  Vincent Ramey became the lead in the credit index task, if you like.  He was going to do an exchange traded fund with AXA, if you remember?  I mean, that is effectively, the same task in a different form because an exchange traded fund is very similar to – if I had an exchanged traded fund on the FTSE 100, it would be used very similarly to the FTSE 100 future.  I think I am answering your question.

Q: It is a simple question.

A.  It is a simple question.  The simple answer is I did continue some work, but I was not the lead…”

94.	Further, the April performance objectives of Dr Pinkava recorded:
“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”
95.	After the announcement of the merger Mr Cowie wrote to Mr Lars Hamich of Dow Jones Indexes a letter dated 29 June, stating:
“Now the DJ iTraxx Europe family is with us we can commence research into the right design of a futures (and potentially an options) product to best exploit your and our capabilities. We have allocated a team led by Dr Pavel Pinkava to come up with the derivatives designs”
96.	This letter was accepted by Ms Sudworth to be “spin”. A more accurate account was set out in a draft prepared by Dr Pinkava:
“Now that the DJ iTraxx Europe family is with us we anticipate the research into feasibility and potential demand for a futures or even option product to begin in earnest. We have allocated this task to a committed individual who expects to be able to report within 2 to 3 months.”
97.	So far as Ms Sudworth was concerned the committed individual was Dr Pinkava. As she put it: “at the time he was generally the person who was going to solve these problems”  (Day 3, at p.545) and “in terms of Dr Pinkava as being the main brain which was capable of solving this problem, we had a resource.” (Day 3, at p.546).
Dr Pinkava’s inventions
98.	On 1 July Dr Pinkava attended a conference called “Futures and Options Worlds”. 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.
99.	Thereafter Dr Pinkava worked on his ideas at various points during office hours from July to December 2004.  In the period between July and September Dr Pinkava wrote up a draft brief entitled “Bringing Credit Derivatives to LIFFE – A Strategic Action Plan”.  The version of this document produced in disclosure did not contain details of the new system, but it nevertheless retains the results of the background research that Dr Pinkava did into the credit derivatives products traded OTC.  In a number of places in this document Dr Pinkava refers to his new system as involving “futures contracts”.  By way of illustration, Dr Pinkava stated in para. 1.6.3:
“The market is still very young with many areas in need of clarification.  For example on 19 July 2004 the US Treasury Department and the Inland Revenue Service issued a notice requesting information regarding CDSs in order to address tax payers requests for guidance.  Indeed since the beginning of the market many grey areas are open to various interpretations have existed.  Though the situation is much improved since the earliest days the creation of successful futures contracts of the type described in this document would help tackle most of these definitional and hence legal or taxation problems.”
100.	Dr Pinkava’s progress on the document was slow due to his other work obligations.  In the course of July Dr Pinkava told Ms Sudworth that he was frustrated by the fact he did not have time to concentrate on the project.  She agreed that writing up his credit derivative ideas was important, but at the time there were more pressing short term tasks that Dr Pinkava had to attend to.  In the event Dr Pinkava was given time to write up the project in the course of three to four weeks in about August 2004.  He spent approximately 1/2 to 2/3 of his time at work during this period on the task.  
101.	On 13 September Dr Pinkava was promoted to the position of Senior Manager, Interest Rate Product Management. Dr Pinkava’s responsibilities were described as follows:
“Pricing analysis, Development of Credit Derivatives Products, Development of Parimutual technology, Development of OTC markets on Exchange, Strategic development of Margining.  Some educational projects. ”
102.	There is no doubt that this covered and was intended to cover the working up of the inventions in issue. During the course of September and October Dr Pinkava continued to work on his ideas, together with other projects.  At various times Ms Sudworth reminded Dr Pinkava to give the work on his new system a higher priority.  In order to assist him, Ms Sudworth suggested that it might be easier if he divided the project into more manageable pieces and began by concentrating on the credit derivative (that is to say CDS and CIS) applications.  She suggested that Dr Pinkava write his ideas in the form of a presentation, rather than a long technical paper.  This presentation could then be made to members of the Executive Committee for them to decide how it should be progressed.  
103.	Dr Pinkava finalised his presentation in the first week of December.  It was called “Design Concept Overview” and expressly recorded that the document contained information which was confidential to LIFFE.  It also recorded that the content would remain commercially highly sensitive until a patent application had been filed.  
104.	On 1 December 2004 Dr Pinkava’s Performance Appraisal was completed.  Dr Pinkava wrote on p.5:
“I am certainly good at ‘Pushing Boundaries’ –
•	My conviction to push boundaries comes from my innovative and adaptive intelligence and my clear understanding of customers’ current and future needs i.e. customer focus
•	I believe I embrace change and new challenges with great openness whenever they arise
Good examples of my challenging the status quo are my work on parimutuel options and choice arb removal … An example of my actively looking for new approaches and inspiration to improve the business is my credit index future design.”
105.	Ms Sudworth recorded on p.6:
“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.”
106.	Finally, Mr Cowie wrote on p.7:
“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.”
107.	Ms Sudworth signed the appraisal on 30 November and Dr Pinkava read the comments, agreed with them, and signed the appraisal on 1 December.  On the basis of this performance appraisal for the 2004 calendar year Dr Pinkava was paid a bonus £30,000.
108.	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.
109.	The parties were agreed that the system and inventions devised by Dr Pinkava have applications which can be divided into three categories. The first relates to CISs and CDSs, the second to IRSs and OISs and the third to inter-bank loan transactions which are conducted on what is known as the “Deposit Market”. The system allows each of these products to be traded on exchange. During the course of the trial the parties helpfully agreed descriptions of each category. I have not incorporated them into this judgment because they are confidential but I have considered them carefully in arriving at my conclusions. 
110.	In the written opening submissions made on behalf of Dr Pinkava the inventions were described in summary form which, in the light of the evidence, and with slight modification, I accept. [Description of the inventions redacted]. 
111.	The evidence establishes that LIFFE believes the system and inventions devised by Dr Pinkava to be very clever.  This description was actually used by Ms Sudworth on a number of occasions during her cross examination.  I am also satisfied that the system is conceptually different to anything which LIFFE has traded before. It permits the trading on exchange of CIS, CDS, OIS and IRS products.  Indeed, Mr Foyle accepted that the CIS and CDS traded products would not be like any product that LIFFE has on the market at present.
Were the inventions made in the course of Dr Pinkava’s normal duties?
112.	LIFFE submitted that Dr Pinkava had a duty to develop ideas for various aspects of LIFFE’s business, including the development of new products, so that, irrespective of the specific tasks that were assigned to him on or after 23 December 2003, the inventions necessarily belong to LIFFE. It was also submitted that Dr Pinkava’s contract of employment and job descriptions made clear that he was to be flexible in his approach to work and was responsible for developing new interest rate products, and this must include IRS and OIS swaps. Further CDSs and CISs are swaps with certain similarities to IRSs and, by 2003, they were something which was actively being considered by Dr Pinkava and his department. 
113.	I am unable to accept these submissions. As I have explained, Dr Pinkava was employed in the Interest Rate team of the Marketing and Product Management department. This team was responsible for particular futures and options, namely those based upon bonds, swap notes and STIRs. Dr Pinkava’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.
114.	The inventions in issue were not made in the course of the normal duties of Dr Pinkava, as I have found them to be.  The system Dr Pinkava devised cannot be described as permitting the trade of new products in the interest rate product derivative range. On the contrary, it permits the trading on exchange of OTC swaps, something which had previously been thought impossible.
Were the inventions made in the course of Dr Pinkava’s specifically assigned duties?
115.	LIFFE’s case here was straightforward: Dr Pinkava was, on 23 December 2003, instructed by Ms Sudworth to develop an exchange tradable credit derivative and this remained a part of his objectives in April. It was in solving this problem that Dr Pinkava made his inventions. They were therefore made in the course of his specifically assigned duties.
116.	On behalf of Dr Pinkava it was submitted that the 23 December project was, from the outset, a task to create a BAU futures contract based upon the TRAC-X index. From LIFFE’s viewpoint this was to be very similar to a FTSE 100 future. The task was effectively shelved after the April 2004 presentation to the Executive Committee and not meaningfully resuscitated thereafter.
117.	There are three principal limbs to Dr Pinkava’s submissions: first, that the task was a BAU task, and by no sense of the imagination could the inventions be described as BAU; second, that it was to produce a conventional futures contract of the kind which LIFFE has hitherto traded, and the inventions are certainly not concerned with such conventional futures; third, that the task had been shelved by the time that Dr Pinkava made his inventions. I will address them in turn.
118.	I have found that Ms Sudworth probably did use the expression BAU during the course of her initial discussions with Dr Pinkava on 23 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 the 28 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.
119.	The second point is closely allied to the first. It was submitted that the assigned duty to design a future did not extend to the creation of systems which would permit the trading of swaps on exchange. In this regard, I have no doubt that the structure of swaps is quite different to that of a conventional future of the kind which LIFFE has traded hitherto. I have described the essential elements of each earlier in this judgment. It is apparent from that description that not only is the structure of such products different but also that the difference was considered to present a real difficulty in trading swaps on exchange.
120.	In addressing this second point I must, however, consider the following. First, and for the reasons I have given, the task assigned on 23 December was not limited to  finding a BAU solution – that is to say finding a solution which could be implemented using a conventional futures contract by, for example, designing a future based upon the value of the TRAC-X index number. Moreover, it is clear that the term “future” is not used in the industry only in the limited sense for which Dr Pinkava contends. Ms Sudworth explained that “future” is a generic term used to describe products listed on exchange and that such use is common in the industry. When she used the term future in her initial request to Dr Pinkava it was not intended to put a straightjacket on his work. In cross examination she explained (Day 3 at pp.504 -506):
“A. I went to the JP Morgan meeting.  They wanted to get a product on-exchange.  I came back and asked Dr. Pinkava because he was, by far, the best placed person to get involved with this with his skills and abilities, and I probably said "future". I am sure I did.  I would have done because it is just jargon. It is just what I would have said.  I had got no preconceptions as to what it would look like.

Q:  Miss Sudworth, it says a future because what JP Morgan wanted was a future, was it not, based upon the credit index?

A. I have no idea.  I mean, I really cannot remember whether Lee -- and it was not Lee McGinty -- what Tim Frost said was a future.  They probably did, but again it is just jargon.

Q. I think we are going to have to look at that.

Q. OK.  They probably did, but I do not think -- I think what they were looking for is a solution, not it had to be a future and if it was not a future it was not any good.
Q.  Do you remember we had a discussion ----
A.  Yes.
Q.  ---- over Friday and Thursday about if you are going to have a future upon a credit index, you may remember the article we looked at, the future of credit indices ----
A.  Yes
Q.  The idea is to sort of make it a little bit like a Standard & Poore's index?
A.  It is one way you could go.  I think Dr. Pinkava in the notes he wrote up after the Lee McGinty actually went in a slightly different direction.
Q.  Just going back to ----
A.  Yes.
Q.  What we were discussing is that if you, for instance, had a credit index, in other words, an OTC credit index swap containing a basket of single CDs, that credit index is a reasonable benchmark of the general well-being of companies because it is a sort of time slice of the market's perception of the overall credit worthiness of those companies? 
A.  Yes.  At the time after my meeting with JP Morgan, and when I spoke to Dr. Pinkava, I had absolutely no preconception of what anything would look like.  It is not my job -- well, I suppose it is my job, but I handed it to Dr. Pinkava because I wanted him to think about it.  I had no conception whatsoever as to what a product would look like.
Q.  You called it a "future" there, Miss Sudworth, because that is precisely what you asked Dr. Pinkava to do ---
A.  And I ---
Q.  Just a minute
A.  Sorry, yes.
Q.  Because you asked him to investigate into researching a credit derivatives future?
A.  Yes, but I had no idea what that would look like.
Q.  If you ask somebody to research into designing a credit derivatives future, the solution to that project would be to come up with a credit derivatives future, would it not?
A.  It would be, but what we were looking for is whether it is future or anything is something that we could trade on our exchange. ”
121.	Further, Dr Pinkava himself referred to his inventions as a way of trading  a credit index “future” on a number of occasions in e mails, in his 2004 appraisal to which I have referred at [104] above and in his strategic action plan “Bringing Credit derivatives to LIFFE” to which I have referred at [99] above.
122.	Likewise Mr Foyle described his understanding of the distinguishing features of a futures contract as:
i)	The contract is defined in standard terms so as to enable a concentration of trading activity thereby enabling a liquid market to be created;
ii)	The contract is not settled immediately;
iii)	A clearing house is involved as the counterparty to each and every contract, so the other parties need not be concerned about exposure to the other counterparty’s credit risk over a long period;
iv)	The role of the clearing house as counterparty to each trade enables purchase and sales contracts to be “netted out”; and
v)	It depends on a liquid market to determine settlement.
123.	Mr Foyle was cross examined at some length about this evidence, but I did not understand him to change his position.
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.
126.	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.
127.	 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.
128.	I am reinforced in this conclusion by the following further matters. Dr Pinkava himself explained in evidence that the inventions replaced the need for a credit index future of the conventional kind. As he put it in his second witness statement:
“Now, because part of my invention concerned credit swaps, there seemed no commercial need to consider the problems posed by credit index futures further.” (at [69])

“Ironically later this same week I came up with my inventions just as I have already described (from paragraph 61 onwards above) and this invention eclipsed the need for any research into a credit future (as explained in paragraph 69 above).” (at [97.28])

129.	This reveals that Dr Pinkava’s inventions solve the problem which was assigned to him, even on the narrow basis for which he contends. They solve it by removing the problem altogether. In Dr Pinkava’s words the inventions “eclipse” or remove “the commercial need” for a credit index future because now it is possible to trade the swaps themselves. In my judgment this does not mean that Dr Pinkava has stepped outside the duties which were specifically assigned to him. To the contrary, his inventions are so fundamental that that he has, in a sense, provided the best solution possible.
130.	Secondly, I consider that the events that followed the initial conception also reveal that LIFFE and Dr Pinkava considered that he was working through the autumn on the same project that he had been assigned at the outset. The work he did took place largely in office hours and, in so far as he worked at weekends, he was given time off in lieu. He was guided by Ms Sudworth and when he had difficulty completing the assignment she suggested he divide it up into more manageable sections and focus initially on the credit derivative applications.
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. [Description of the inventions redacted]. 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 [description of the inventions redacted].
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.            
Were the circumstances such that an invention might reasonably be expected to result from the carrying out of the duties?
136.	It was submitted on behalf of Dr Pinkava that the circumstances were not such that an invention might reasonably be expected to result from the carrying out of his duties for a number of reasons. It was said that LIFFE and the Interest Rate Product department had no history of invention, that Dr Pinkava was not employed at a high strategic level or to design “blue sky” products and that creating new products was a small part of his duties to which LIFFE devoted little by way of resources. It was also said that Dr Pinkava’s inventions represent a “quantum leap” and that no one, including Ms Sudworth, expected an invention to result from his efforts.
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. 
Conclusion
142.	For all the reasons I have given I have reached the conclusion that the claim by LIFFE that it is the owner of the inventions succeeds. The proceedings commenced by Dr Pinkava must be dismissed.