Multinational corporations management of service inventions in China

By Li Mi, Patent Agent Beijing Lusheng Law Firm,[Patent]

In modern society, the battle between innovation corporations has taken the high ground from the products and marketing to the new intellectual properties, the core competitive edge being the inventive creations of the corporate employees, namely, service inventions as provided under the Patent Law. According to the statistics issued by the State Intellectual Property Office (SIPO) in 2011, service inventions in other countries accounted for 97.6%, a figure much higher than China’s, which is 78%. Moreover, as China is becoming increasingly important in international trade, many multinational companies have set up subsidiaries or relevant R&D centers in China for completion of technical R&D and patent applications. These result in service inventions in patent law sense.
 
I.What are service inventions
Multinational corporations have enormous service inventions across the world. When they file for patent applications in China, the first problem to be solved is whether they have to comply with China’s Patent Law provisions on service inventions.
 
Service inventions made outside China are treated based on the law of the state where the invention was made according to the principle of territorial jurisdiction. Therefore, multinational corporations need only focus on those inventions made in China. China’s Patent Law and regulations control over determination of service inventions, ascertainment of the right to file for patent in or outside China, or the relevant remuneration.
 
China’s Patent Law mainly provides for two types of service inventions, of which one is the inventive creation by executing the tasks given by the organization for which he works, and the other is the inventive creation made principally by using materials and technical support of the organization for which he works. The organization is entitled to such service inventions in terms of filing for patent. The service inventions by executing the task of one’s organization are further defined in the Implementing Regulations of the Patent Law (Implementing Regulations) as:
(1) the inventive creation made in performing one’s own duty;
(2) the inventive creation made in accomplishing tasks beyond one’s own duty;
(3) the inventive creation made in connection with the duties or tasks given by a former organization for which one was employed, within one year after the retiring, or being transferred therefrom, or otherwise terminating work or personnel relationship therewith.
 
The definition of service invention is relatively broader in China compared with many other countries. For example, subsection (2) of the above article is not listed as service inventions in those countries. Also the United States does not have statutory provisions for service inventions at all, defining only in case law for limiting service inventions by contract, to be associated with the employer’s business, or to have made using the employer’s equipment or other resources. Other countries, such as France, adopt similar standards when defining service inventions.
 
As for inventions made principally by using materials and technical support of the organization for which an inventor works, the Implementing Regulations make an illustrative interpretation by indicating that “principally by using” means the degree of indispensable reliance in accomplishing the inventive creation. China’s Supreme People’s Court’s interpretation of the Contract Law for “mainly utilizing the material and technical support of a corporation or other entities” can be analogized for service inventions under China’s Patent Law. However, the degree of “principally by using” is practically difficult to ascertain, and difficult to prove in the judicial process, This difficulty does not even mention the uncertainty created by the different standards applied by different local courts.
 
It is the author’s advice, therefore, that multinational corporations retain evidence of their service inventions; that duties be clearly defined for employees, in practice, research employees when the Chinese counterpart of multinational corporations sign employment contracts or other documents; that if other research tasks are given, contents of the tasks be specifically recorded, preferably in writing records which track the borrowing of corporate technical resources by employees be well kept; that evidence of special employees which are not working under a contract be kept as evidence of de facto employment; and that relevant company rules be established in the administrative management, based on each company’s circumstances, so as to avoid the risks of being unable to establish “service inventions.”
II.The ownership of service inventions
The United States, Germany, Japan and other countries adopt the legal principle that the inventor is naturally the owner of service inventions and the enterprise has no original right of service inventions.
 
France takes the neutral attitude, under which the law provides that enterprises can have the right of the service inventions under strict restrictions, otherwise the inventions shall belong to the employees. China’s Patent Law specifies that service inventions belong to the enterprises instead of following the western style of natural ownership of the service invention s by the inventor, from which there is no need for the enterprises to negotiate with employees on the transfer of such inventions. The only exception under China’s Patent Law is when an invention is made by an inventor who is “taking advantage of the material and technical means of an entity” but inventor and entity have entered into a preexisting agreement which provides for which party shall have ownership of the service invention. In such a case ownership is based on the agreement between the parties. Therefore, such inventions are not pure service inventions under China’s Patent Law and shall belong to the enterprise where there is no such agreement. There is no provision that the contract shall take precedence for an invention made by a person in the execution of the tasks of the entity for which he works. It may be interpreted that such inventions are pure service inventions and shall belong to the enterprise.
 
China’s enterprises are eligible to apply for the right of patent. Since there is no obligatory provision to regulate the actions of the entities on this point, the inventors have little say in whether the enterprise should seek patent protection for the service invention and has no legal influence over any other disposition the enterprise chooses. Different from China in which the service inventions shall naturally belong to the enterprises, many countries have made provisions in law to limit the enterprise’s right of service inventions. In this regard, The German Employee Invention Act (GJA) requires that employer must make a declaration on such invention and has the duty to apply for protection, American enterprises have only the right of free exploitation of such inventions according to judicial precedents, and Japanese businesses have the ordinary right of the exploitation and shall pay the inventor through negotiation in order to transfer the ownership of such inventions.
 
The author noticed that when dealing with service inventions in China, it was common for some multinational companies, in particular the U. S. companies, to ask their employees to sign contracts with their subsidiaries and joint ventures to transfer the right to apply for service inventions to the parent companies before the application for a patent, or they will allow the employees to apply for the patent as an individual first and then transfer the right to application to the parent companies after the filing of the application. Such practices are in line with American domestic law and have something contradictory to China’s law in this regard.
 
There is no doubt that the employees of such subsidiaries and joint ventures shall be the inventors of such service inventions, which shall belong to the employees’ entities where there is no special agreement according to China’s Patent Law. In accordance with China’s law, such entities shall sign labor contracts with their employees, enjoy the rights to such service inventions, and has no right to transfer such right to their parent companies. In accordance with the provisions of China’s Contract Law, the employees at these subsidiaries or joint ventures in China shall have no right for such transfer and such contracts shall be held to be invalid, with the exception of ratification by these subsidiaries or joint ventures.
 
Currently, SIPO does not examine the qualifications of the applicant for a patent and grant a patent without consideration of the applicant being a parent company or an employee. There are significant legal risks for such practices. Although there have been no disputes related to such rights in China’s courts, there is uncertainty resulting from such rights and may lead to the instability of the service inventions acquired by the parent company and it is difficult to predict the potential legal risks from such uncertainty.
 
In order to avoid such risks and disputes, the author suggests that it would be better for subsidiaries or joint ventures and their employees to have a contract in transferring the right of service inventions and it is especially necessary for the parent company which has no controlling of shares in the joint ventures in China. China’s Patent Law has not expressly forbidden the transfer of non-service invention from the entity and employee who make the invention to a third party. Therefore, the parent company abroad may obtain the appropriate rights according to the principle of freedom of contract in civil law. And there is another way by which the subsidiary or joint venture in China signs a contract with its employee to transfer the service inventions at first and then transfer such right to its parent company. However, the said two methods may be governed by China’s law related to administrative examination and approval in terms of technology import and tax.
 
III.The right for the inventor to be rewarded from service inventions
It is a general practice to give reward and remuneration other than wages to the inventor across the world, including the U.S. which has no provisions of service inventions. It is generally held that there is an essential difference between service inventions and ordinary works for the employee because the latter fall within the governance of the labor contract while the former do not. However, each country has its own legal system to determine the compensation for service inventions in addition to the wage for the inventor.
 
GJA stipulates that the employees have the obligation to inform the employer of the invention, regardless of its being service inventions or not, and that the employer shall give a reasonable reward to the employee according to the detailed guiding rules promulgated by German Ministry of Labor if he claims the right to such invention. U.S. patent law has no provisions on such invention and reward. However, U.S. companies generally have their own reward rules, and their employees have more opportunities to negotiate with the employers on remuneration in American social environment.
 
China’s Patent Law stipulates that the inventor has the right to be given reward and remuneration from the entity because of his service inventions and its Regulations in 2010 has three articles to further set the way and amount in which the reward and remuneration be specified. The basic principle is that the contract precedes the legal provisions.
 
According to China’s Patent Law, the entity may, on the manner and amount of the reward and remuneration, enter into a contract with the inventor or creator, or provide it in its rules and regulations formulated in accordance with the laws. China’s Patent Law sets no time limit on such contract and it may be interpreted that it may be conducted in advance, after the invention being made or granted.
 
Where there is no such contract, the legal provisions of the Implementing Regulations shall determine the reward and remuneration as following:
a) reward: the entity shall, within three months from the date of the announcement of the grant of the patent right, award to the inventor or creator of a service invention creation a sum of money as prize, which shall not be less than 3,000 yuan for a patent for invention and 1,000 yuan for a patent for utility model or design.
 
b) remuneration: the entity shall, after exploiting the patent for invention-creation within the duration of the patent right, draw each year from the profits from exploitation of the invention or utility model a percentage of not less than 2%, or from the profits from exploitation of the design a percentage of not less than 0.2%, and award it to the inventor or creator as remuneration, or, as an alternative, by making reference to the said percentage, award a lump sum of money to the inventor or creator as remuneration once and for all. Where any entity to which a patent right is granted authorizes any other entity or individual to exploit its patent, it shall draw from the exploitation fee it receives a percentage of not less than 10% and award it to the inventor or creator as remuneration.
 
However, the statutory standards of Patent Law on the remuneration is lower than the standards of China’s Law on Promoting the Transformation of Scientific and Technological Achievements in 1996, which specifies that: When transferring a scientific or technological achievement made by employees while holding positions in a unit, the unit shall take not less than 20 percent of the net income, obtained from transfer of the achievement, to award persons who made important contributions to the scientific or technological achievement or to its transformation.
 
Therefore, a multinational corporation, in determination of the reward and remuneration to its employee in China, may take into many factors into account according to the current laws, including the inventor’s duties and remuneration from his work, his contribution to the invention, the contribution of other person and the company’s material and technical conditions in making the invention, the sales of the product, the role of the service inventions in the final sale of the products, etc. The company may adopt diversified incentive rewards for service inventions, including compensation, project incentive bonuses, stock options, additional training, special benefits, position promotion and others. Although China’s courts have not heard a case similar to the Syuji Nakamura v. Nichia Corporation case from Japan, which involved huge sums of compensation, that does not mean that it is safe to say Chinese employees have no right to request cancellation of the contract and make a claim for an additional reward and remuneration. Courts may support such a claim if there is a huge disparity between the commercial profit from a service invention and the reward and remuneration given to the employee.
 
In addition, the Impementing Regulations limits the enterprise to “the entity to which a patent right is granted.” That is to say, the enterprise is not required by the law to reward the inventor of service inventions before the grant of the patent, when there is no application at all, or after the application is rejected.
 
IV.Legal advice
There are many differences in detailed rules between China and other countries around the world. Therefore, multinational company should be familiar with China’s legal system, abide by China’s law, and take Chinese lawyers’ advice into consideration.
 
When managing service inventions in China, including judging and deciding whether inventions made in China should be deemed as service inventions or not, the multinational corporations may refer to the legal differences between China and the Western world as well as learn and borrow from their parent companies’ experience in managing local service inventions. They should take a prudent attitude, set down relatively broad criteria, sign contracts with their employees over the transfer of service inventions in line with China’s law, reward the inventors with reasonable awards, hammer out complete managing systems for service inventions and thereupon seek to minimize the legal risk in the future.
 
(Translated by Yuan Renhui)

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