China: How to Interpret Service Invention in China

Last Updated: 10 August 2011
Article by Cecilia Lou and Vincent Yu

Service inventions created by employees ("Service Invention") are valuable intangible assets for employers, which makes it important to distinguish Service Invention from non-service invention. The Patent Law of the People's Republic of China ("PRC Patent Law")1 provides a rudimentary definition of Service Invention leaving many questions unanswered, such as what is the definition of "employee" for purposes of defining Service Invention, and what "tasks of the Entity" should include. Due to those uncertainties, many disputes arise as to the ownership of the right to patent inventions. This article summarizes the requirements and burden of proofs of Service Invention by analyzing actual cases, followed by a comprehensive strategy to avoid those disputes from the perspective of an employer.

According to the PRC Patent Law, in order to make a Service Invention, the inventor must establish an employment relationship for purposes of defining Service Invention ("Employment Relationship").2 If so, employees' inventions are divided into three categories: inventions created in the execution of the tasks of the entity to which the employees belong ("Entity"), inventions made via taking advantage of Entity's material and technical means, and inventions made via other means.

As for the inventions made by the employees during the execution of their tasks of the Entity, the right to apply for patenting such inventions shall remain with the Entity. In no way could the statutory ownership be agreed upon. However, both the employees and the Entity may agree on the ownership of inventions made via taking advantage of the material and technical means of the Entity. Such agreement shall prevail. If no such agreements exist, the default rule is that the right to patent inventions made via "mainly" taking advantage of the material and technical means of the Entity shall belong to the Entity.3 The third kind of invention accomplished by other means is deemed as non-Service Invention and belongs to the inventor.

When determining whether the invention should be deemed as Service Invention in ownership disputes, the courts analyze (1) whether an Employment Relationship there exists; (2) whether the invention is related to the "execution of the tasks of the Entity"; (3) whether the invention is achieved via "mainly taking advantage of the material of technical means of the Entity"; and (4) when the invention was finished considering the patentability of inventions in dispute. The analysis below will center on these four elements.

I. Is an employment contract the only form of Employment Relationship?

Employment Relationship should be interpreted broadly.4 Employment Relationship under the PRC Employment Contract Law is definitely within the purview of Employment Relationship. Except for Article 12, paragraph 2 of the Implementation Rules for the PRC Law which provides that the Entity should include "temporary employer",5 the PRC Patent Lawis silent on most scenarios. The following two cases demonstrate that a rehired retiree and a shareholder could also be an employee in an Employment Relationship.

Retirement in China signifies the termination of employment relationship under the PRC Employment Contract Law. Rehiring after retirement is more likely to make a former employee an independent contractor. Nevertheless, it still constitutes an Employment Relationship, which is illustrated in Sinopec Shanghai Inc. v. Gao Xi.6 In that case, the defendant retired from the plaintiff in April 2000 and was immediately rehired by the plaintiff. On February 16, 2004, the defendant was granted a patent for an invention he created during the rehiring period. After the rehiring agreement terminated in August 2007, the plaintiff sued the defendant on grounds that the invention in dispute was a Service Invention and the ownership thereof should be vested with the plaintiff. In determining whether the plaintiff and the defendant established an Employment Relationship, the court opined that "since the defendant was immediately rehired by the plaintiff and never departed the plain! tiff, the defendant was an 'employee' for purposes of determining whether he made a Service Invention".

A shareholder, who contributed his technology as capital contribution to the company, participates in the management of the company, and is on the payroll, may be deemed to have an Employment Relationship with the company. In Beijing Yingshan Mine Equipment Co., Ltd. v. Wang Xingqi,7 the defendant contributed the technology to the plaintiff as part of its registered capital and actively participated in the management and technology development in the plaintiff. The defendant also received payments and benefits from the plaintiff, which were distributed as wages rather than share dividends. The court held that the defendant established a de facto Employment Relationship in addition to his status as a shareholder, thus he was an "employee" for purposes of creating a Service Invention.

In conclusion, whether a relationship constitutes an Employment Relationship is a factual issue that the court will examine the relationship on a case-by-case basis.

II. Should an invention directly result from execution of Entity's tasks to be a Service Invention?

According to Article 12, paragraph 1 of the Implementing Rules for the PRC Patent Law, execution of Entity's tasks includes "performing employee's own duties" and "execution of tasks assigned by the Entity other than employee's own duties." To satisfy its burden of proof, the Entity must provide clear and convincing evidence to demonstrate that it has engaged the employee in the developing technology and creating the invention in dispute, or has assigned the employee tasks of technology development to the employee other than employee's own duties.8

Can the court refer to the business scope of the Entity to determine "employee's own duties"? Chinese courts split on this issue. Some courts admit circumstantial evidence of Entity's business scope in its business license to prove the scope of employee's own duties. The Hainan High People's Court is one of these as demonstrated in Wu Yifan v. Hainan Jinding Industry Development Co., Ltd.9 Other courts require direct evidence. In Wu Zhongqun, el. v. Kunmin Detianli Technology Co., Ltd.,10 the Yunnan High People's Court opined that "employee's own duties" should reflect only tasks or responsibilities directly assigned by the Entity. Other factors, such as employee's skills and Entity's business scope, should not be taken into consideration.

To prove "tasks assigned by the Entity other than his own duties", majority of the courts require the Entity produce direct, clear, and convincing evidence to demonstrate that the Entity provides the employee with a detailed plan on the arrangement of personnel, material, and capital for execution of the tasks.11

Therefore, no consensus has been reached as to how "execution of Entity's tasks" should be interpreted and proved. Nevertheless, if the Entity clearly states the tasks in a written document, it will be certain that any inventions resulting from execution of such tasks will be Service Inventions.

III. Do inventions created via taking advantage of the material and technical means of the Entity necessarily belong to the Entity?

Many enterprises could not maximize the potential of its material or technical resources, while many inventors could not locate the resources necessary for their endeavors for inventions. The PRC Patent Law provides a solution to ease the tension. It allows the Entity and the employee to agree on the ownership of invention resulting from using the material and technical means of the Entity.

In reality, however, there may not be any agreements between the Entity and the inventor, or the Entity does not know that the employee is using its material or technical means. Article 6 of the PRC Patent Law provides a default rule in which an invention created by "mainly taking advantage of the material and technical means by the Entity" shall belong to the Entity. This default rule is applicable only when the inventor creates the invention when not executing of the tasks of the Entity.12The Entity has the burden to prove the three elements of this rule if it seeks to acquire the ownership of Service Invention, namely "material and technical means of the Entity", "taking advantage of", and "mainly".

"Material and technical means of the Entity" includes Entity's money, equipment, spare parts, raw materials or technical materials that are not disclosed to the public.13These technical materials refer to the internal information and resource, such as technical database, designs, or new technical information.14

"Taking advantage of" denotes use with a specific intent. In the Service Invention scenario, the courts usually require the Entity to produce direct evidence to prove that the inventor uses the material in order to accomplish the invention. For example, the ability to access the material or technical resources does not necessarily lead to the conclusion that the employee has used such material or technical resources.15 Moreover, the material must be used before the invention is made. In the Chen Zhihao v. Foshan Sanshui Electronic Equipment Inc., the Entity furnished the application fee and registration fee to the inventor employee to obtain the patent. The Guangdong High People's Court held that despite the close relevance of the fees and the patent in dispute, these expenses were spent only after the invention was made. Therefore, the inventor did not take advantage of the materials owned by the Entity.

Finally, in determining whether the Service Invention results from "mainly" taking advantage of Entity's material and technical means, the courts test whether the materials or technical means used are necessary and indispensable for the invention.16

IV. Whether the invention created one year after the Employment Relationship terminates must be non-Service Invention?

The time at which the invention is finished and the inventiveness of the invention are critical in determining whether a Service Invention has been created. It is acknowledged that the inventions created before an Employment Relationship come into existence is not a Service Invention for the current Entity. As discussed above, during the Employment Relationship period and within one year after the termination thereof, an invention related to the execution of inventor's tasks shall constitute a Service Invention.

Nevertheless, the law is silent on the ownership of the inventions created after one year upon termination of the Employment Relationship. The courts do not definitively conclude that such inventions are non-Service Inventions.17

In Shi Baozhu v. Shanghai Xinlian Chemical Pharmaceutical Co., Ltd., the defendant applied for a patent and argued that the underlying invention was a non-Service Invention because it was allegedly made more than one year after his Employment Relationship terminated. The court compared the patented invention in dispute and the invention the defendant made during the Employment Relationship period, and found these two inventions were the same. The court held that the time at which the invention was finished fell into the Employment Relationship period, and concluded that the patented invention was a Service Invention.

Apparently, the court resolved the case by examining whether the invention in dispute has any inventive steps compared to the inventor's invention during the Employment Relationship period according to Article 22 of the PRC Patent Law.18

V. How can the Entity maximally protect its own interest in the Service invention?

In light of these cases, the Entity should enter an employment contract with the existing or prospective key technician or managerial personnel, in which the ownership of inventions should be agreed upon. The Entity is advised to enumerate "employee's own duties" in the employment contract. Moreover, the Entity should confirm with the employee when tasks other than the employee's own duties are assigned, and preserve the evidence of resources allocated to the employee for execution of such tasks.

In terms of "taking advantage of the material and technical means of the Entity," the Entity should qualify the "material and technical means" in a written agreement, and stipulate that all inventions by taking advantage of such material or technical means shall belong to the Entity. Alternatively, the Entity could provide in the agreement that it has the right to review the invention and may waive its right to patent the invention if the inventor employee furnishes a sufficient consideration, such as usage fees for the material.

The above agreement brings about four benefits. First, the ownership of the invention is agreed upon upfront. Thus, the agreement is a prima facie evidence of ownership over the inventions, making it unnecessary for the Entity to prove the three elements in Section III. Second, since the agreement is for the inventions created by taking advantage of the material and technical means, be it mainly or not mainly, the Entity has the right to patent all such inventions. Third, the Entity may have the option to give up some useless inventions depending on the Entity's business goal and derive benefits from the utilization of its technical resources. Fourth, this arrangement will motivate the employees to renovate and, thus, helps to achieve the goal of Article 7 of the PRC Patent Law to protect and promote the development of non-Service Invention.

As for prospective key employees, the Entity should conduct a comprehensive due diligence on their past research areas and inventions, whether patented or not. This is to ensure what the employees bring to the Entity are the skills and experiences he obtained from previous employments. To that end, the Entity is suggested not to apply for any patents with this employee as the inventor within one year after his previous employment terminated. Even if more than one year has passed since the previous employment terminated, the Entity should evaluate the invention created by the employee to make sure it has prominent substantive features and represents a notable progress before applying for patenting such invention.

In terms of corporate management, the Entity should preserve the payroll evidence, which may be helpful to prove a de facto Employment Relationship if necessary.

Furthermore, the Entity should include every research and development area in the business scope of its business license. Business license is one of the most important evidence in a patent ownership dispute. If the business license does not reflect the tasks assigned by the Entity, the Entity may find it more difficult to meet its burden to prove that the resulting invention has any relation with the tasks assigned.

In conclusion, Service Inventions are Entities' treasure trove. The Entity must take whatever measures to maximally protect its interest in the Service Inventions. Ideally, a comprehensive IP strategy should be designed and implemented considering the PRC Patent Law, Contract Law, Employment Contract Law, and Corporate Law.



The article was originally written in Chinese, the English version is a translation. This article was first published in the firm's periodical China Bulletin June Issue, 2011, Vol.49

Notes:

1、It was amended for the third time at the 6th Session of the Standing Committee of the 11th National People's Congress on December 27, 2008 and implemented on October 1, 2009.

2、Article 6 of the PRC Patent Law provides:

An invention made by a person in the execution of the tasks of the entity for which he works or made by him by taking advantage of the material and technical means of this entity shall be a service invention. The right to apply for patenting a service invention shall remain with the entity. After the application is approved, the entity shall be the patentee.

For any non-service invention, the right to apply for a patent shall remain with the inventor or designer. After the application is approved, the inventor or designer shall be the patentee.

For an invention made by a person by taking advantage of the material and technical means of the entity where he works, if there is a contract between the entity and the inventor or designer regarding the right to apply for patent and the ownership of the patent, the contractual stipulations shall prevail.

3、"Minor use of the material and technical means of the Entity should not be taken into consideration in determining whether a Service Invention is made." Intellectual Property Press, Interpretation of the New Patent Law, 33 (2002).

4、Id. at 32.

5、"Employees of the Entity include any temporary personnel, such as the employee transferred or invited from other Entities. Though the employment relationship of such employees remained with other Entities, the Entity hiring those temporary employees includes them on its payroll. Thus, they should form an Employment Relationship with the Entity when they execute the duties assigned by the Entity." Id at 32.

6、Sinopec Shanghai v. Gao Xi, Hu Gao Min San (Zhi) Zhong Zi Di 130 Hao (Shanghai High People's Court 2008).

7、Beijing Yingshan Mine Equipment Co., Ltd. v. Wang Xingqi,Gao Min Zhong Zi Di 61 Hao (Beijing High People's Court 2003).

8、Chen Hongqi v. Shantou Guanghua Machinery Industry Co., Ltd., Yue Gao Fa Min San Zhong Zi Di 58 Hao (Guangdong High People's Court 2005).

9、Wu Yifan v. Hainan Jinding Industry Development Co., Ltd., Qiong Min Er Zhong Zi Di 48 Hao (Hainan High People's Court 2002).

10、Wu Zhongqun, el. v. Kunmin Detianli Technology Co., Ltd.,Yun Min San Zhong Zi Di 58 Hao (Yunnan High People's Court 2005).

11、 Wu Yingduo v. Zhejiang Leji Chemical Inc., Zhe Jing San Zhong Zi Di 99 Hao (Zhejiang High People's Court 2001).

12、Intellectual, supra n. 2, at 33-34.

13、See Paragraph 2, Article 2 of the Implementing Rules for the PRC Patent Law.

14、Intellectual, supra n. 2 at 33.

15、Wu Yingduo v. Zhejiang Leji Chemical Inc.

16、Interpretation, supra n. 2, at 33; See Chen Zhihao v. Foshan Sanshui Co., Ltd.; See also Wu Yingduo v. Zhejiang Leji Chemical Inc.

17、 Shi Baozhu v. Shanghai Xinlian Chemical Pharmaceutical Co., Ltd., Hu Er Zhong Min Wu (Zhi) Chu Zi Di 117 Hao (Shanghai No. 2 Intermediate People's Court 2004).

18、Article 22 of the PRC Patent Law provides:

Any patentable inventions should have prominent substantive features and represent a notable progress.

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.

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Cecilia Lou
 
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