In Germany, as in other industrialized countries, the vast majority of inventions and other creative developments are made by employees. In comparison to the laws regarding employee inventions in many other countries, German laws are unusual: as a matter of principle, an invention made by an employee belongs to the employee. The invention and the proprietary rights relating to it remain the property of the employee until they are transferred to the employer, which will only happen if the employer claims the invention in return for monetary compensation. This basic rule is binding by law and cannot be contracted out of until an invention report (see below) has been submitted by an employee inventor to his or her employer. This can have far-reaching consequences, and needs to be taken into account when drafting outsourcing contracts which may involve the creation of patentable inventions by employees in Germany.
A German Speciality
The legal concept that an invention made by an employee belongs to the employee has its roots in the German Patent Act of 1936, but the current specific provisions of German law relating to employee inventions are set out in the German Employee’s Inventions Act (EIA). Under § 1 of the Act, the proprietary right to an invention made by employees in private employment or in public service, by civil servants or by members of the German Armed Forces is subject to the EIA. According to §§ 1, 2, the EIA applies to all inventions which may be eligible for utility model and/or patent protection. The EIA does not apply to copyrights, design rights or topographies. Unfortunately, the area of employee inventions was not harmonized by the European Patent Convention (EPC). Where European patents are concerned, Art. 60 I 1 of the EPC states that if the inventor is an employee, the rights to the European patent shall be determined in accordance with the law of the State in which the employee is mainly employed. Thus, for a European patent the German rules apply if the employment relationship is governed by German law.
Possible Applicability to Software
Although the patentability of software under German law is not as wide in scope as in the U.S., the number of applications for patents claiming software inventions has been increasing every year, in contrast to the overall trend of a slight decrease in patent applications. In 2002 6.5% of all applications filed with the European Patent Office related to data processing. Where a software-related invention is patentable, the provision of the EIA will apply, with potential consequences for outsourcing of software development services.
Procedures Required by the EIA
The provisions of the EIA set out in detail the procedures that apply to employee inventions. The EIA distinguishes between inventions which are subject to the full provisions of the Act (defined as "service inventions") and "free inventions". Service inventions are those made during the term of employment which either result from the employee’s activities in the business or public service, or are significantly based upon the experience or activities of the business or public service. In practice, most inventions made in the course of the employment relationship are service inventions. All other inventions are free inventions which are owned by the employee but subject to the limitations of §§ 18 and 19, namely that the employee inventor has an obligation to notify the employer of the invention and offer the employer at least a non-exclusive license, if it wishes to exploit the invention.
For example, a special book cover invented by a rocket scientist would probably be a free invention because it did not result from his activities or experience as a rocket scientist. If, however, that book cover could be used to enable a reader to read more easily in space, then it would probably be a service invention.
An employee inventor is under a duty to report a service invention to his or her employer by written notice without undue delay by making an invention report. The written notice must fulfill the requirements set out in § 5 II in order to be recognized as an invention report, and the employer must confirm receipt of the invention report in writing without undue delay. Within two months of receipt of the invention report, the employer may ask the employee to supplement the invention report with additional information regarding the invention. In the absence of a request to supplement, the report is deemed to fulfill the requirements of § 5 II. After the two-month period, the employer is free to request any additional information relating to the invention, if needed, for the filing and prosecution of a patent application. This very bureaucratic approach to the reporting of inventions is intended to provide certainty to the employee and the employer regarding the status of an invention and the rights in it. Needless to say, in many instances the opposite is achieved and law reports contain many cases adjudicating on whether the provisions of the EIA have been complied with or not.
Employer’s Right to the Invention
The employer has the right to claim a service invention by means of either an unlimited claim or a limited claim pursuant to § 6. The employer may exercise his rights within four months of receiving the invention report from the employee. Upon receipt by the employee of a written notice of an unlimited claim, all rights to the service invention pass to the employer pursuant to § 7 I, but the employer must pay the employee reasonable compensation for those rights (as described below).
If the employee inventor does not submit an invention report, this will constitute a breach of his or her employment contract, and the employer may rely on any sanctions that would otherwise be applicable for that breach. The employee’s failure to submit the initial invention report does not, however, affect his or her rights to the invention.
If the employer makes a limited claim to the invention, the employer acquires a non-exclusive right to use the service invention in return for a claim for remuneration. In this event, the service invention becomes a free invention owned by the employee, subject to the right of use on the part of the employer.
The invention will become a free invention if:
- The employer releases it by a written notice, which usually does not pose a problem, as such notice is the result of a conscious decision, or
- The employer does not make a claim to the invention within four (4) months of receiving a duly filed invention report.
In both these cases the invention will be at the free disposal of the employee inventor and not subject to the limitations of §§ 18 and 19.
Employee Invention Reporting System Recommended
Clearly, in order to cope with the legal requirements of the EIA, a business should implement a system to process invention reports and react to them. Preferably this system should be monitored by a patent department that includes specialists who can evaluate the economic and technical value of the invention and are familiar with the business’s intellectual property policies.
A sample case
To illustrate the resulting complexities, imagine the following: Your business (A) asks another business (B) to develop a certain product. The contract specifies that you own the intellectual property rights in any invention made under the development contract, perhaps granting B a non-exclusive right to use it. B informs its employee (E) of the project. E comes up with a brilliant way to solve your problem and duly files an invention report with B. B does not consult with anybody who is familiar with the EIA and four months pass by without reaction. Your contract is with B. Now E, with whom you have no contract, owns the invention and the rights relating to it. You will have claims against B for damages, but E might have the right to prevent you from making and selling under the patent that will be granted to him. Imagine further that B in the meantime went bankrupt. So much for your claims for damages. E’s rights are limited by principles of good faith which form the basis of E’s employee relationship, but your business will not want to rely on these alone, and you may be left without ownership of important IPR.
It is therefore apparent that it is advisable to implement procedures in all companies to deal with employee inventions—and to follow them. In the context of two parties cooperating in relation to a project, it may be advisable to implement a reporting scheme to help ensure that no deadlines are missed.
Employer’s Obligation to File Intellectual Property Rights
The administration of employee inventions does not end, however, at this point. In the event that the employer has acquired a service invention by means of an unlimited claim, the right to the patent application or the registration of a utility model, the right to the patent and the rights deriving from the patent are transferred to the employer. In this case the employer is then the only person entitled to obtain intellectual property rights for the service invention. However, the employer is also obliged to file the respective patent applications or utility model registrations in Germany without undue delay. This obligation extends only to applications and registrations with effect in Germany. The employer can comply with this obligation by filing a European patent application if Germany is designated in this application. If the employer does not wish to file a foreign patent application, he must provide the inventor with the possibility of doing so within relevant priority time limits.
Employee’s Right to Compensation
In exchange for the right of the employer to claim the invention, the employee inventor is entitled to reasonable compensation in accordance with the provisions of the EIA and the guidelines for the compensation of employee inventors. The entitlement of the employee inventor to reasonable compensation applies to rights claimed in respect of both free inventions and service inventions. The compensation is calculated according to tables developed by the German courts and royalty schemes which have been developed enabling the users to arrive at a fair result.
Specific Provisions for University Employees
§ 42 of the EIA provides for specific rules that apply if the inventor is the employee of a university. Thus, cooperation agreements with universities subject to German law need specific scrutiny—before being signed. A body of sample contracts known as the "Berlin Contract" has been developed by co-operation between German industry and universities, which may be used as precedent contracts for cooperation agreements with universities. However, whilst the Berlin Contract may be used as a guideline, it should not be used as a definitive blueprint for every scenario. In fact, the Berlin Contract has also been the subject of a well-argued critique, which should be borne in mind if it is used as a framework. The specific interests of parties and projects in each case often require tailor-made solutions.
Non-patentable Intellectual Property Rights
As indicated above, the legal position regarding ownership of copyrights, designs and topographies is different from that which applies to inventions, and is mentioned here for completeness. § 69b of the German Copyright Act provides that where a computer program is created by an employee in the execution of his duties or based on the instructions of the employer, the employer is exclusively entitled to exercise all economic rights in the program. For designs and models made by illustrators, painters, sculptors or similar artists employed by a German commercial organisation, § 2 of the German Design Patent Act provides that if the creation was undertaken by order of, or for the account of, the commercial organisation, the latter shall be deemed to be the originator of the designs and models. If a topography was created during employment or by order of a commissioning party, the intellectual property rights in the topography belong to the employer or to the commissioning party. These basic rules may be contracted out of.
In most cases, patentable inventions can in practice only be economically exploited in conjunction with the necessary know-how. Know-how in itself is not subject to the EIA unless it constitutes a suggestion for technical improvement pursuant to § 3 at the same time. As a matter of principle, know-how remains the property of the firm where it was developed, provided that it fulfils the requirements of being secret, identifiable and essential. Under the German Act Against Unfair Competition, know-how is protected by civil and criminal sanctions. Nevertheless, German courts regularly hand down decisions permitting employees to use the knowledge that they obtained during their former employment in their new occupations, subject to the provisions of the employment contract and any secrecy obligations which continue after the termination of the employment contract.
The position under German law in respect of inventions on the one hand and creations subject to non-technical intellectual property rights on the other, needs to be taken into account when drafting outsourcing agreements. One solution for the outsourcing party may be a closely monitored reporting system that ensures that the four months’ deadline for claiming a service invention is observed by the party developing the intellectual property rights. Another solution depending on the facts may be to impose an obligation on the developing company to make a limited or unlimited claim to all inventions from the employees working on the project. This may be costly for the developing company and thus may affect the costs of the outsourcing agreement. If the outsourcing party has its own employees working on the project, it is essential to define their contribution to the project, since this contribution may result in a joint invention. A joint invention may give the outsourcing party a right to claim part of the invention from its employee. Joint inventions—in itself a complex topic, particularly when considered in the context of different legal systems—will be considered in a future article.
Under U.S. Law
Under English Law
The U.S. Patent Act is similar to the German Patent Act in that inventions made by an employee belong to the employee. This differs from the rule under the U.S. Copyright Act, which is that the employer is the owner of copyrights in works prepared by employees within the scope of their employment.
U.S. employers are generally permitted to require their employees to sign prospective assignments of the employees’ intellectual property rights in inventions as a condition of employment. The enforceability of these assignments is a matter of state law. However, employee assignments generally are enforceable if they cover inventions made by employees in the course and scope of their employment or with the use of the employer’s time, materials or facilities. Note that, unlike under German law, the U.S. employee does not have a right to compensation for assignment of the employee’s inventions.
In the absence of a written assignment agreement, an employer may still have rights in the employee’s inventions and related intellectual property. Some courts have found implied in-fact assignment when an employee is hired for the purpose of inventing or assigned to work on a specific invention.
Alternatively, an employer may have a "shop right" in an employee’s invention— a non-exclusive, non-transferable, royalty-free license for the employer to use the employee’s invention. However, both of these possibilities are roads to litigation and uncertainties. Employers should ensure that all of their U.S. employees sign written intellectual property assignments.
The position under English law regarding employee inventions is regulated by the Patents Act 1977, and is generally more favourable to employers than the position under German Law. Under English law, inventions made by employees belong to the employer if the invention was:
All other employee inventions are owned, as between the employee and the employer, by the employee. In practice, however, the vast majority of employee inventions will be owned by the employer.
The Patents Act does include provision for the courts to order employers to pay compensation to employees for patented employee inventions which have been of outstanding benefit to the employer. However, the courts have never made such an order. The scope of the provisions regarding employee compensation may be broadened in a new Patents Act which is being introduced to make various amendments to UK patent law. At present the employee needs to show that the employer’s patent for the invention has been of outstanding benefit to the employer. Under the proposed changes, any benefits deriving from the invention— not just from the patent— may now be relevant.
Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
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