South Korea: Amendments To Laws Relating To Employee Inventions (Invention Promotion Act, Income Tax Act)

Last Updated: 18 January 2017
Article by Jeong Yeol Choe, Cheol Hwan Kim, Samuel Lee and Hyeong Joo Lim

1. Introduction to Key Points of Recent Amendments to Laws Relating to Employee Invention (Invention Promotion Act; Income Tax Act)

On August 18, 2016, the government preliminarily announced its amendments to the Invention Promotion Act. The most important change is that rights to an employee's invention will be acquired by the employer without separate processes for reporting and assignment of the employee's invention, as long as there is a pre-designated assignment regulation for the employee's inventions. Also, the amendment to the Income Tax Act, dated September 2, 2016, which is pending in the National Assembly, aims to amend the current provision in which the compensation for employee invention is deemed entirely tax exempt, so that compensation received during employment is classified as labor income and compensation received after employment is classified as other income, while also limiting the scope of how much is exempt, therefore making some part of the compensation non-exempt.

2. Implications

A. If Pre-Designated Assignment Regulation Is in Place, Employer Acquires Employee's Invention Immediately upon Its Completion (Employer-Friendly)

According to the current law, in order for an employer to acquire the rights to its employee's invention, the employee needs to (1) report the invention to the employer and the employer needs to (2) provide a notice of intent to acquire the rights thereto. Therefore, in principle, it is legal for the employee inventor to refrain from reporting the invention to the employer, instead assigning it to a third party or to the employee's subsequent employer, which third party or subsequent employer may then file the patent for the invention under its name. In such a scenario, the original employer is, in principle, not permitted to assert rights to such employee invention. Upon review of scenarios such as the above, the Korean Supreme Court recently held that, in principle, the original employer cannot seek assignment of the patent rights to such employee inventions (Supreme Court Decision No. 2011Da77313, dated November 13, 2014) and that the employer cannot claim liability for disclosing a trade secret (the employer's invention itself) because the employee's invention does not constitute trade secret of the original employer (Supreme Court Decision No. 2012Do6676, dated November 15, 2012).

However, according to the amendment, an employer that has in place a pre-designated assignment regulation will be deemed to have acquired the rights to the invention when the invention is completed, without separate processes for reporting and assignment of the employee's invention. Therefore, in the scenario stated above, the original employer will be able to claim assignment of patent rights from the third party assignee or the subsequent employer of the employee, based on the grounds that the successor in interest to such invention is the original employer. The original employer will also likely be able to claim damages for disclosing trade secrets against both the employee and the employee's assignee, as the completed employee invention will itself be deemed a trade secret.

B. Taxes on Compensation for Employee's Invention Compensation That Exceeds a Certain Threshold

Also, the proposed partial amendment to the Income Tax Act will amend the current provision in which compensation for employee invention is entirely tax-exempt. Under the amendment, the compensation for employee invention received during employment will be classified as income tax and the compensation received after employment will be classified as other income, while also limiting the scope of how much is exempt, therefore making some part of the compensation non-exempt. Such change in law and regulation regarding employee invention compensation reflects the trend of treating employee invention as a work product of the employee's labor and the compensation therefor as wage and salary income.

Also, given the recent trends in designating tax brackets for income tax purposes, a very high tax rate will likely apply to large compensation amounts, significantly reducing the compensation actually received by the employee. However, exactly where the tax bracket will apply will be determined by the Enforcement Decree of the Income Tax Act. Therefore, it is necessary to pay close attention to the upcoming Enforcement Decree.

C. Employers Need to Amend Company Regulations on Employee Inventions (To Ensure Procedural Fairness)

Therefore, employers need to prepare pre-designated rules on assignment for employee inventions, in order to acquire rights to the employee inventions automatically. As the amendments also expand the scope of intellectual property applicable to employee inventions, new provisions for such intellectual property are also needed.

Further, in order to prepare such company regulations, employers need to negotiate with employees, as well as put in place consent procedures and opposition procedures for such negotiations. If employers comply with such procedural fairness requirements, courts will likely deem such compensation amounts stated in company regulations to be fair.

In conclusion, changes in laws and regulations require employers to amend company regulations so that the regulations meet procedural fairness requirements and to determine fair compensation that takes into account new laws, such as the amended Income Tax Act.

Originally published in IP Legal Update December 2016.

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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