Understanding the Remuneration for Employee Inventors in China
Here we look at recently issued draft rules for employee inventor remuneration to be applied under the Chinese Patent Law. It also contrasts China's position with those in the US and Australia.
China’s State Council Legislative Affairs Office recently released the Draft Regulations on Service Invention (the “Draft”) for public comments. The Draft includes several significant provisions that may increase companies’ compensation costs in relation to employee-inventions. This is due to China’s attempt to promote innovation by remedying several shortfalls and clarifying certain provisions concerning employee remuneration in the current scheme so as to protect the financial and compensation of employee inventors.
The Current Scheme
A basic principle relating to service inventions is that an employee-inventor should be reasonably awarded and remunerated. Therefore, the PRC Patent Law requires an employer granted an invention patent, design patent or utility model to reward the employee-inventor with reasonable compensation based on the scope of the economic benefits obtained from it.
The Patent Law Implementing Regulations provides for statutory default levels of compensation in the absence of an employment agreement or regulation including:
1. A reward payment depending on the type of patent;
2. Remuneration to be no less than 2% of the profits generated from exploiting the patent per annum, or an equivalent lump sum; and
3. Remuneration to be no less than 10% of the royalties generated from licensing the patent per annum.
The attempts to regulate over compensation schemes have produced a procedural framework for defining and reporting inventions, but they are general and may be difficult to enforce as they are hampered by a lack of clarity.
Therefore, the recent Draft published consists of a few significant proposals, which are explored further below.
The Draft, which was the product of several ministries and agencies including SIPO, Ministry of Education, Ministry of Science and Technology, MIIT, Ministry of Labour and Social Security, Ministry of Agriculture, NCAC, Forestry Bureau, China Patent Protection Association and the Chinese Inventors Association, was first published on November 12, 2012 for awards and remuneration of employee inventions, and the updated version of the Draft finalized on March 31, 2014 was formally published for public comments on 2 April 2015. It has important implications for employers of inventors who develop inventions in China, especially the increase in remuneration for compensation levels.
The Draft proposes a few changes including:
1. Service inventions that are granted with patent rights or new plant varietal rights requires the employer to pay the inventor(s) an award in the total amount of no less than 200% of the average monthly salary of the employer’s on-post staff; and for service inventions that are granted with other intellectual property rights, the total amount of the reward for the inventor(s) shall be no less than the average monthly salary of the employer’s on-post staff (Article 20);
2. The four standards provided by the Draft of when the entity must provide remuneration to the related investor(s) upon exploitation of the intellectual property rights including either a sum of money no less than 5% from the operating profit or no less than 3% from the operating profit of exploiting the other intellectual property right; no less than 0.5% from the revenue of exploiting the patent right or the right of new varieties of plants, or no less than 0.3% from the revenue of exploiting the other intellectual property right; or determine a lump sum amount of remuneration to be paid to the inventor (Paragraph 1 of Article 21); and
3. If the employer assigns or licenses the patent rights of service inventions, the employer shall pay remuneration to the inventor(s) a total amount of no less than 20% of the net income from such assignment of licensing (Paragraph 3 of Article 21);
Therefore, not only has the Draft increased the compensation payable to employee-inventors, it has also expanded the types of intellectual property that entitles the employee to a reward to include plant breeder’s rights, layout design of integrated circuits, computer software and trade secrets.
Position in the United States
In the US, there are no particular federal or state laws regulating employee invention issues. While any intellectual property is owned by the inventor, most employment agreements stipulate rights of invention to be owned by the employer, and waives any legal right to additional compensation beyond the normal salary.
In the absence of an express or limited employment agreement, the common law of patent ownership applies. While this varies from one state to another, in general there are 3 principles:
1. If an inventor has been specifically hired to invent, or has been assigned tasks to resolve a particular issue in the course of employment, the employer has ownership;
2. If the inventor was not employed to invent and creates due to the contribution of resources by the employer, the employee is the owner but the employer may receive a shop right which is a non-exclusive, non-assignable, royalty-free licence for the employee to use the invention for the duration of the patent; and
3. If the inventor was not employed to invent, or if the invention was conceived independently of the job, or if the invention has nothing to do with the company’s business, the employee will be the owner only if it can be proved the invention was not made in pursuance of the guidance and instruction of the employer.
The court may also consider additional issues in determining the ownership of an invention, such as whether the employee received additional compensation for developing the invention, or whether the employee filed and paid for a patent application, etc.
In the United States, it is the general view that an individual’s employment and the salary is sufficient consideration, but some companies choose to compensate the employee-inventors in many different ways as a means of rewarding and fostering innovation, including the grant of stock, cash bonuses, promotions, and awards of recognition.
Therefore, while there are no particular laws regulating compensation schemes for employee-inventors, the US is still at the forefront in this field because of its alternatives in nurturing and developing innovation.
Position in Australia
In Australia, there are no express provisions or statutes dealing with the ownership of employee invention or compensation schemes for employee inventors, therefore this area is still regulated by the contract law, common law, and equitable principles.
In the absence of any express contractual obligations, there is no rule that an invention made by an employee is the property of the employer. Instead, it is necessary to determine whether the employment relationship suggests that the invention concerned was made in the course of the employment. Several case law in Australia have illustrated the following principles:
1. An assignment of invention rights from the employee to the employer can be implied by the conduct of the parties, entitling the employer to call for specific performance of the inventor’s contractual promise (Preston Erection Pty Ltd v Speedy Gantry Hire Pty Ltd  FCA 1615);
2. Where the employee’s normal duty was not to make inventive improvements to the product, the employer has no rights regarding the invention (Spencer Industries Pty Ltd v Collins  FCA 542);
3. The rights belong to the employer where the invention was undertaken in the course of the employment, but the employee inventors are entitled to compensation for their efforts, including interest (Victoria University of Technology v Kenneth Gregory Wilson & Ors (2004) 60 IPR 392);
4. Where there is no specific duty to invent, a university employment contract does not give rise to an implied duty to invent, therefore all invention rights belong to the inventor (University of WA v Gray  FCAFC 116).
Therefore, the law in Australia regarding employee-inventor compensation schemes is still being developed.
Implications of the Draft Regulations
The implications of the Draft proposals are significant, mainly because they will increase the amount of administrative work and costs for employers.
Employers will have less autonomy and control over their employee’s inventions, and will have to respond quickly to employee’s claims and decide quickly on issues regarding the ownership and use of an invention. For instance, if an employee fails to respond within two months to an employee regarding a non-service invention, the intellectual property rights to such an invention will belong to the employee (Article 12). Furthermore, an employer must decide within 6 months from the service invention reporting date to apply for intellectual property rights, to which if the employer fails and consequently also fails to respond to an inquiry within 1 month, will deem the invention to be protected as a know-how, which gives the inventor the right to receive compensation (Article 13). This is in contrast to the previous position where compensation was only required for patented inventions, therefore illustrating the interest in further securing employee-inventors’ rights and interests to encourage innovation.
The Draft seeks to expand its scope in regulating intellectual property, illustrated by the appearance of provisions attempting to regulate over trade secrets and software. While this may be necessary, it may be difficult for employers to effectively divide profits related to these intellectual property areas and compensate every involved employee based on their individual contribution. Therefore, the Draft may add further uncertainty and complications to the employee-inventor remuneration system.
Under Article 18, the employer may enter into an agreement with the inventor, or provide in its policy on the procedure, manner and amount of the award and remuneration, as well as informing the inventor of his or her rights and the different ways to seek relief.
This agreement shall be made in accordance with Article 19, which stipulates the inventor’s opinions must be considered in relation to the procedure, manner and amount of the award and remuneration as well as informing the inventor of the information on the economic benefit earned by the employee by exploiting the service invention; and Article 22, which requires factors such as economic contribution to the entire product or process made by each service invention, and the contribution into each service invention made by every inventor, etc. to be considered when deciding the amount of remuneration. Any agreement or policy eliminating or limiting the rights which the inventor are entitled to in accordance with the Draft will be invalid.
It is recommended for companies to have well-drafted employee-inventor compensation schemes or policies in light of the increased compensation requirements to avoid payment of compensation at the statutory default levels. A guidance on setting appropriate levels of compensation is the Certain Opinions on Further Strengthening the Protection of the Legitimate Rights and Interests of Service Inventions and Promoting the Utilisation and Enforcement of Intellectual Property Rights 2012 which states as a principle that the amount of compensation should be determined by reference to the economic benefits created by the invention and the extent of the employee’s contribution to the invention, and requires the compensation to be paid within three months of a relevant event – for instance, a patent grant – and minimum thresholds for compensation levels when there is no agreement or applicable rules.
A further recommendation is an internal system which should be implemented to handle employee ownership or compensation claims. This should include recording the invention details such as the inventor, owner, level of commercial exploitation and the profits generated by each employee invention, therefore resolving any future disputes.
In an attempt to generate more inventions, encourage innovation, and attract and foster more talent, China has revamped the legal framework to protect the rights and interests of employees and their inventions. This move by the State Council Legislative Affairs Office to enforce the Draft Regulations on Service Invention will be a valuable asset as it will provide competitive advantage and contribute to the long-term success of China’s economy.
ABOUT THE AUTHOR: Matthew Murphy
Matthew Murphy would like to thank Joyce Chng for her assistance in writing this article.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.