The Patent Law of the People's Republic of China1("Patent Law") and Regulations for the Implementation of the Patent Law of the People's Republic of China2 ("Implementing Regulations") has drawn our attention to rewards and remuneration for inventors. The Patent Law stipulates that employers must pay reasonable rewards and remuneration to inventors of a service invention and the Implementing Regulations explicitly address the amount payable. For purposes of encouraging technological innovation and industrialization, the change is sure to play a positive role in motivating employee initiatives and promoting social productivity. However, it will also bring certain challenges to many employers in terms of compliance with reward and remuneration issues in China, especially when the Blue LED case in Japan resulted in a 70 million RMB settlement.
The key issue of concern to employers is: Whether the huge commercial benefits acquired by the employer based on a service invention made by its employee do not correspond to the remuneration received from the employer due to the creation of the service invention agreed in the remuneration clause in China, whether the employee shall be entitled to request the court to modify or even revoke the remuneration clause and request some additional remuneration?
I. Comparative Study of the Japanese Legal System
In Japan, the employee is entitled to request courts to modify or even revoke the remuneration clause and request additional remuneration. According to Article 35 (Inventions by Employees) of Japan's Patent Law,3 only in the following conditions may payment of remuneration not be considered unreasonable:
- the employer consults with employees to determine the remuneration standards but not unilaterally;
- the compensation has been disclosed to the employees, not only on the employer's own master; and
- the employer, taking an employee's opinion into consideration, determines the standard calculation of the specific amount of remuneration.
Also, the Olympus Case4(Olympus Optical Co., Ltd vs. Tanaka) of the Supreme Court of Japan ruled that "the court has the right to judge whether the remuneration is reasonable or not". Furthermore, the world-famous Blue LED Case (Nichia Corporation vs. Shuji Nakaumura) of the Tokyo District Court sided with the employee with 20 billion yen as a reasonable remuneration for the employee and then the Parties reached a 844 million yen (about 70 million RMB) settlement before the Tokyo High Court.
As the remuneration part of PRC patent laws have been heavily influence by that of Japan and companies set more and more R&D centers in China, there is no doubt that employers in China will face the same tough issues as seen in Japan sooner or later.
II. PRC Practice
There are no specific PRC provisions or cases on this issue. However, we can not fully exclude the possibility that the court will support claims of employees to request additional remuneration if the remuneration which employees initially receive are not reasonable.
A related PRC case regarding an employer's non-competition clause may assist us in concluding that an unreasonable contract between employer and employee could be adjudicated to be invalid by a PRC court. According to Aixin Case((2006)Hui Zhong Fa Min Yi Zhong Zi No. 2596 Guangzhou Aixin Co., Ltd Vs. Li Wei case regarding labor compensation), the non-competition provision limits the employment rights of Li Wei, and sets broad restrictions on Li Wei from receiving financial compensation, which violates the principle of fairness and reasonableness. Therefore, this non-competition clause is adjudicated to be invalid according to Article 9 of Rules on Labour Contract Management in Guangzhou. Article 54 of the PRC Contract law also has similar rules, which stipulates that a party shall have the right to request the People's Court or an arbitration institution to modify or revoke contracts that are obviously unfair when execution of the contract. From this case, we can see that China's courts may support claims of seeking financial compensation raised by employees when the employee enters into an unreasonable contract with the employer.
In the scenario for remuneration of a service invention, the employee may be entitled to request the court to modify or revoke the remuneration clause by arguing that the clause is unfair according to Article 54 of the Contract law of the People's Republic of China ("Contract Law")5. As during the negotiation of a contract, the employer is always in a stronger position and the relationship between the employer and the employee is not necessarily equal. Also, during the stage of signing the employment handbook or other relevant documents, the employee has no idea how substantial the profit will be generated by his invention. As a result, this contract actually causes unfairness and may be revoked, requiring the employer to compensate the employee with an amount based on the principle of reasonableness.
Furthermore, another question is raised by whether an employee is entitled to request additional remuneration if the employer transfers or licenses the service invention patent to a third party at an unreasonably low price or even free of charge to avoid paying remuneration fee to the employee-inventor and the third party enjoys huge profits from exploiting such rights.
To answer the question, Professor Tao Xinliang proposes an interesting solution, which is designing a subrogation right for employees. In his paper "Discussion on Remuneration for Inventor's Rights and Incentives to Innovate"6, he states that if the employer transfers its patent voluntarily to its affiliates, or if the employer licenses others to use its patent but fails to collect a royalty fee, or intentionally defaults in collecting outstanding royalty fees, employees' legitimate right of receiving reasonable remuneration will be prejudiced. Therefore, the employee can plead in court in his/her employer's name to request remuneration directly from the licensee or assignee. However, we think this question remains open for further discussion.
The possibility cannot be excluded that the employee may be entitled to request the court to modify or even revoke the remuneration clause in an employment contract and request additional remuneration if the commercial benefits acquired by the employer based on a service invention made by its employee do not correspond to the remuneration paid to the employee-inventor.
Therefore, the employer should develop a fair and reasonable system for rewarding and remunerating employees. For example, during the development of such a corporate policy, the employer could fully consult with the employees regarding the calculation of remuneration standards, and fully disclose the development process of the rules. This can reduce the risk of a huge remuneration claim from a service invention dispute. Also, after a dispute arises, employers can also use the fact that they took the above steps as a defense, and request the court to make more lenient decisions.
(This article was originally written in Chinese, the English version is a translation. The English version was first published in China Law and Practice September 2011 Issue.
1 Article 16 of the Patent Law:
2 Article 76 of the Implementing Regulations:
3 Article 35 (Inventions by Employees) of Japan Patent Law:
4 Olympus Optical Co., Ltd. vs. Tanaka, Supreme Court of Japan, Hei 13(uke)1256, ruled on April 22, 2003., last visit: November 12, 2010.
5 Article 54 of the Contract Law:
6 Tao Xinliang, Discussion on Remuneration for Inventor's Rights and Incentives to Innovation, Annals of Interllectual Property (2006), published by Peking University Publishing House in the first edition of February 2007, P133.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.