China: Dodging Service Invention Disputes - Rewarding and renumerating inventor employees

Last Updated: 2 December 2011
Article by Cecilia Lou and Steven Yao Tang Lei

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:

  1. the employer consults with employees to determine the remuneration standards but not unilaterally;
  2. the compensation has been disclosed to the employees, not only on the employer's own master; and
  3. 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.

Conclusion

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.

Footnotes

1 Article 16 of the Patent Law:

The entity that is granted the patent right shall reward the inventor or designer for his/her service invention. After such invention patent is exploited, the inventor or designer shall be given a reasonable reward according to the scope of application and the economic benefit the entity obtains from patent exploitation.


2 Article 76 of the Implementing Regulations:

An entity that is granted the patent right may enter into an agreement with the inventor or designer or provide the method and amount of reward and/or remuneration prescribed by Article 16 of the Patent Law in the code of conduct set forth by the entity in accordance with the law.The amount and method of the reward and/or remuneration given to inventors and designers by enterprises and/or public welfare institutions shall be determined in accordance with relevant state financial and accounting systems.
Article 77 of the Implementing Regulations:
Where an entity that is granted the patent right fails to enter into an agreement with inventors and/or designers or fails to provide the method and amount of reward and/or remuneration prescribed by Article 16 of the Patent Law in the code of conduct set forth by the entity in accordance with the law, the said entity shall give monetary awards to the inventors or designers within three (3) months upon the date of announcement of the patent right. The monetary award for one (1) invention patent shall be a minimum of RMB 3,000; and that for one (1) utility model patent or one (1) design patent shall be a minimum of RMB 1,000.
Where an invention accomplished by an entity incorporates the inventor's or designer's suggestions, the entity that is granted the patent right shall favorably give the inventor or designer monetary awards.
Article 78 of the Implementing Regulations:
Where an entity that is granted the patent right fails to enter into agreement with inventors and/or designers upon or fails to provide the method and amount of reward and/or remuneration prescribed by Article 16 of the Patent Law in the code of conduct set forth by the entity in accordance with the law, the said entity shall, within the validity term of the patent right, withdraw not less than 2% of the operating profit from the exploitation of the invention or utility model patent or not less than 0.2% of the operating profit from the exploitation of the design patents as remuneration for the inventor or designer since its exploitation of the invention patent on a yearly basis, or shall, in light of the above percentage, give the inventor or designer a lump sum of compensation; where an entity that is granted the patent right license to other entities or individuals to exploit its patent, the said entity shall give not less than 10% of the royalties collected as remuneration for the inventor or designer.


3 Article 35 (Inventions by Employees) of Japan Patent Law:

Where an agreement, employment regulation or any other stipulation provides for the value provided in the preceding paragraph, the payment of value in accordance with the said provision(s) shall not be considered unreasonable in light of circumstances where a negotiation between the employer, etc. and the employee, etc. had taken place in order to set standards for the determination of the said value, the set standards had been disclosed, the opinions of the employee, etc. on the calculation of the amount of the value received and any other relevant circumstances.


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:

Either party has the right to request a People's Court or an arbitration institution to alter or rescind any of the following contracts: (1) any contract which is made under substantial misunderstanding; or (2) any contract the making of which lacks fairness.


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.

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