(December 9, 2009) Employed inventors are happier with jobs in which they are rewarded for their inventions and are unsatisfied with jobs in which they feel they receive only token recognition. Yet industry has a number of arguments against tying compensation to the commercial worth of a patent. Consider, for example, the employer's dilemma. If the only ones who are rewarded are the ones whose names are on the patent application, there may be claims that the work was a group effort.

If it later comes out that the invention was not a group effort, the patent may be found invalid. On the other hand, many people are still unrecognized or unrewarded by the patent system for their own important work—in software development and pure research, to name two areas.

Of course, other incentives could be worked out in such areas. As previously mentioned, another oft-used argument is that the employer hired the employee to produce new ideas and that the employer supported the employee in doing so. To get the rights to his or her work in those circumstances, say some employers, is tantamount to the employee doing his or her own work on employer time or on employer pay. Besides, inventions often are the result of orderly procedure rather than of blinding insight. Following routine procedures under employer direction may result in an invention, but the engineer's actual contribution may be limited, as when the basis for the patent is a particular mixture ratio or range of operating temperatures.

Perhaps the best argument that employers have is a practical one. Marketing and developing new inventions is a high-risk enterprise. Because only about one patent in 50 covers an invention that earns a profit, companies lose most money they spend on invention development. As a result, most engineers do defer to the relative security of a steady job and a corporate benefit package, even though they have to give up all direct rights to the benefits resulting from their genius.

That does not mean, however, that they deserve to be victimized. Simply as a matter of the engineer's own personal worth and self-esteem, to say nothing of personal pride in his or her own ability and competence, there ought to be some recognition. Apart from financial considerations, there is often a "pride of inventorship" involved with receiving even a small continuing royalty. On top of that, successful inventions enhance one's professional prestige and subsequent career development. These are not matters to be taken lightly.

One possible response that considers both the employer and the individual engineer is to offer a choice of compensation and benefits packages. For example, the employee might agree to assign inventions to the employer in exchange for compensation plus a percentage of profits or savings above a certain level. The employer could adjust the base compensation according to this threshold in addition to the level of profit sharing, or instead of it.

The base compensation may vary from a high of no profit/savings sharing to a minimum level at which the employer bases compensation directly on the worker's identifiable contribution. This scheme need not even be tied to the patent system, though it may be. Thus, achievements in areas outside those that the patent system covers can also be recognized as the employer sees fit.

One part of the Santa Clara Valley PAC survey dealt specifically with incentives. Most of the companies that replied demonstrated an active interest in either invention incentives or some form of profit sharing for employees. More than 90% had one program or the other, and 25% had both.

One out of four respondents expressed negative or neutral feelings about the success of the incentivetype programs. The remaining 75% reported results that ranged from moderate to "unusually successful." One company said that the incentives promoted lower turnover, but another said that "professionals" had no need for formalized incentives. Another survey respondent claimed that incentive programs produced an effect that was the opposite of what they were designed for, because they were too hard to administer fairly.

Types of incentive

The range of incentive programs is instructive. One small company, for example, offered a package of stock options and an interest in a special profit-sharing fund that rewards investors in cash. This scheme was in addition to the profit-sharing plan that the employer offers to all employees. A senior executive familiar with employee performance administered the incentive program on an informal basis. Many other companies offered cash bonuses for exceptional ideas—sometimes formally, sometimes not.

Incentive programs can be well-thought-out and extend far beyond the patent system to recognize both technical and nontechnical achievements beyond expected levels of performance. Companies may also provide support in the form of assistance to obtain publication or other professional recognition. Such recognition not only makes the engineer happy but also provides the by-product of added publicity for the employer. Other incentives sometimes focus on the role of education in the productivity of technical employees.

As a result, benefit packages frequently include tuition reimbursement and scholarships for continuing education. Some companies may even offer sabbaticals and time off with pay for selected employees. Occasionally a company, recognizing the value of an invention that one or more workers of its workers made, has been persuaded to provide additional financial and technical support outside the ordinary business operation. Certainly, anyone who starts a spin-off business with both the blessing and the technical and financial assistance of his former employer is in one of the best possible positions for success.

Royalty agreements

Several research-and-development organizations, both large and small, provide some form of established royalty-sharing arrangement with regular employees or contract researchers. In addition, exceptional employees have negotiated royalty-sharing provisions on an individual basis as part of employment agreements. Typically, the people who have been able to do this have special expertise are senior employees or company founders and major stockholders. Here is an example of such a royalty agreement:

If the Company decides to sell any of the employee's conceptions, inventions, improvements, or copyrightable or copyrighted material, whether in the form of confidential information, patent, patent application, or copyright for actual money consideration, the Company agrees to give the employee a percentage of any actual money that the Company may collect from the aggregate of all such sales or licenses, after deduction of expenses to which the Company may be put in connection with such licenses or sales and taxes that the Company may have to pay on such collections, according to the following scale:

Of the first___________dollars actually collected, zero.

Of the next____________dollars actually collected,______percent.

Of any further sums actually collected,________percent.

One problem with royalty-sharing incentives lies in the complexity of determining how much an invention is worth and how much of a contribution the individual employee made. Other problems are the complexities of cross-licensing arrangements, which often make it difficult to assign a value to an invention and result even more often in the production of little or no royalty income.

This client alert is for general information purposes only, is current only as of the indicated date, and should not be regarded as legal advice. Providing this information is not intended to create an attorney-client relationship. You should not act upon this information without seeking professional legal advice.

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