• Another Potential Trap for the Unwary: Inventor Remuneration and Reward Under the Draft Rules on Inventor-Employee Inventions
  • May 2, 2013 | Author: Song Lin
  • Law Firm: Foley & Lardner LLP - Shanghai Office
  • On November 12, 2012, the State Intellectual Property Office of the People’s Republic of China (SIPO) issued the Draft Rules on Inventor-Employee Inventions (Draft Rules) for public comment. The Draft Rules, in their current form, affect a wide array of business and corporate entities and their employees. This article will focus on an issue that will be of particular importance to these entities and their employees: the provisions governing reward and remuneration.

    Conflicts Between the Draft Rules and the Implementing Rules for the Patent Law
    In 2009, China published the third amendment to the Patent Law and the Implementation Rules for the Patent Law (Implementing Rules). The Implementing Rules set forth the reward and remuneration framework for inventor-employee inventions. A discussion regarding the framework under the Implementing Rules can be found in the article titled, “A Potential Trap for the Unwary: Inventor/Creator Remuneration and Reward Under the Third Amendment.”1 Conflicts appear when comparing the framework established by the Implementing Rules to the proposed provisions set forth in the Draft Rules. As such, there has been some confusion regarding the relationship between the Implementing Rules and the Draft Rules, and further guidance is needed. Since guidance documents or transition measures have not been promulgated officially, this article seeks to reconcile the different provisions between the Implementing Rules and the Draft Rules.

    The subject matter of the inventions covered under the Draft Rules is broader than that under the Implementing Rules. For example, work products such as patents, new plant varieties, integrated circuit layout design, and technical secrets fall under the subject matter of the Draft Rules. However, the Implementing Rules only govern inventions protected by patents. For inventions not protected by patents, the Draft Rules will be applicable when they are passed by the legislative authority in the future. For conflicts existing in the field of patent inventions, it is hoped the legislative authority will during the legislative process reconcile the conflicting provisions directed to the same subject matter as codified in the Implementing Rules and the Draft Rules. Given that the same legislative authority is promulgating the Implementing Rules and the Draft Rules, the legal hierarchy of the two Rules is the same. However, using the principle of “Priority of New Law Over Old Law,” the Draft Rules will likely preempt the Implementing Rules if conflicts remain.

    Contract-First Principle
    The Contract-First Principle is applicable to both the Draft Rules and the Implementing Rules. The Contract-First Principle provides that an agreement between an entity and that entity’s inventor-employee or an entity’s policy statement is prioritized in guiding the distribution of the inventor-employee’s remuneration and reward.2 However, the second paragraph of Article 19 of the Draft Rules may appear to be contradictory to this principle by stipulating that “[a]ny agreement or policy eliminating or limiting the right to which the inventor is entitled in accordance with the Rules is invalid.” The purpose of this provision and the Draft Rules at large is to make sure that inventors enjoy certain rights, especially the right of reward and remuneration and a right of first refusal. Therefore, if an agreement or policy provides that the inventor-employee will not enjoy any rights to the inventor-employee’s invention, such agreement will be contrary to the purpose of the Draft Rules and will be invalidated. However, it is important to note that the word “limiting” is not clearly defined. As such, legal scholars are not sure whether any limitations, or what degree of limitations, to the inventor’s enjoyment of the right will hold the agreement or policy invalid. For example, entities may require that an inventor-employee work for such entity for a minimum period of time as a pre-condition of enjoying any inventor’s rights. In some instances, such a requirement may be reasonable given the business environment and business customs. However, if such reasonable limitations invalidate an agreement or policy, it could become burdensome for the entity and ultimately hurt innovation. As such, it is a good idea to delete the word “limiting” or leave an industry-specific third party to judge whether “limiting” is appropriate based on the entity’s business model rather than invalidating any agreement or policy directly.

    When no agreement or policy statement between an entity and its inventor-employee exists, the Draft Rule provides for the following default rules:

    • Patent invention or new varieties of plant: Not less than 200 percent of the monthly average wages of the workers in entity
    • Other intellectual property: Not less than the monthly average wages of the workers in the entity3

    On the other hand, the minimum rewards stipulated in the Implementing Rules are as follows:

    • Invention: Not less than 3,000 RMB (approximately $483)
    • Utility model or design: Not less than 1,000 RMB (approximately $161)4

    In comparing the stipulated minimum rewards in the two rules, one can see that the amounts have been raised significantly. Though the monthly average wages of the workers in an entity depend on the specific entity’s economic profit, we can observe a general picture of the minimum rewards based on the social monthly average wages. For example, the Shanghai government had published that Shanghai’s 2011 average monthly salary is 4,331 RMB. This significantly raises the reward and has the potential to impose an onerous burden to the entity.

    Further burdening the entity, rewards will usually be paid to the inventor-employee after the intellectual property right is granted, regardless of whether the inventor-employee’s invention is utilized or not. This is problematic because the value of an invention will not be realized until it is utilized, rather than when such invention is granted an intellectual property right. It is more reasonable to let entities hold the reward until the invention is utilized. However, neither the Implementing Rules nor the Draft Rules adopt this reasonable provision. It is clear that both the Implementing Rules and the Draft Rules are inclined to protect the inventor-employee’s rights because the entities automatically own the title to inventor-employee’s invention. However, it is recommended that the legislative authority balance the interests of the entity and inventor-employee by considering the developmental stage and economics of the Chinese entity. In its current form, the minimum reward in the Draft Rules may be too high for some entities to bear. Perhaps the level stipulated in the Implementing Rules is a better fit. Finally, it is unclear whether the “patent invention” in the Draft Rules refers only to “invention” or whether it includes “utility model and design.” In short, the Draft Rules need further clarification in addition to ensuring reasonable rewards.

    With respect to legal remuneration, the Draft Rules provide:

    • Invention or new varieties of plant: Not less than five percent of the operating profit or not less than 0.5 percent of the revenue earned from exploitation of the patent invention or new varieties of plant
    • Other intellectual property: Not less than three percent of the operating profit or not less than 0.3 percent of the revenue earned from exploitation of other intellectual property right5

    The remuneration stipulated in the Implementing Rules is:

    • Invention and utility model: Not less than two percent of the profits after the taxation earned from exploitation of the invention or utility model
    • Design: Not less than 0.2 percent of the profits after the taxation earned from exploitation of the design6

    Comparing these two valuation methods regarding remuneration, one can see two main differences: (1) the percentage and (2) the valuation basis. Currently, it is not clear why the Draft Rules adopts such percentage and valuation basis. It is likely that the entities affected by the Draft Rules will object to the new standards of remuneration.

    One advantage of the Draft Rules over the Implementing Rules is that the Draft Rules cap the remuneration by providing that “[t]he accumulated amount of the remuneration above will not be more than 50% of the accumulated operating profit of exploiting the intellectual property right.”7 However, entities may still question such a cap provision. For example, consider a product that is covered by 10 patents. Under the Draft Rules, if each invention has one inventor who receives the maximum remuneration of 50 percent of operation profit, the amount of remuneration paid by the entity would be 500 percent of the operating profit. Even if only two patents with two separate inventors cover a product, a 50 percent remuneration rate may inhibit production of the product. Such questions were raised during the legislation process of the third amendment to Patent Law and the Implementing Rules, but the Implementing Rules did not provide an answer. However, the Draft Rules clarify the issue by providing, “When an entity is deciding the amount of the remuneration, factors shall be considered such as the economic contribution to the entire product or process made by each inventor-employee’s invention, and the contribution into each inventor-employee’s invention made by every inventor, etc.”8 By codifying this provision, entities can avoid the above situation by distributing all profits generated from the product covered by more than one invention to inventor-employees in an equitable fashion.

    In addition, the Draft Rules provide not less than 20 percent of the net income of an assignment or license as remuneration to the inventor when an entity assigns or licenses an intellectual property right. Such remuneration standard may prove to be a heavy burden to the affected entities.

    A Right of First Refusal
    A right of first refusal provides that before an entity transfers an invention to a third party, the inventor-employee shall have a right to buy that invention on the same terms. Strictly speaking, a right of first refusal does not belong to reward and remuneration. However, since the right of first refusal is a right granted to an inventor-employee by the Draft Rules, it is relevant to the discussion. Entities, especially foreign entities, may object to codifying the right of first refusal into the Draft Rules since granting such right of first refusal to an employee is in contravention with typical inventor-employee’s labor contracts with their employers. Generally, most labor contracts will prevent an employee from engaging in a competing business against such employee’s employer. Given the potential conflict, it would seem that the legislative authority nevertheless provided for the right of first refusal to the inventor-employee because the legislative authority believes the inventor will understand the invention better than any other party and will find a better use of such invention. While this idea is fair in principle, the legislative authority needs to consider the actual business environment. The legislative authority should focus on balancing the interests between the inventor-employee and the relevant entity by limiting the right of first refusal to situations where such inventor-employee does not compete with the entity.

    The Draft Rules were designed to further protect an inventor-employee’s rights by imposing restrictions and requirements on the employer entity. Such provisions may be welcomed given the historically weak bargaining position of employees in China. However, such restrictions and requirements risk reducing the competitiveness of impacted entities and may ultimately stifle innovation. As such, the legislative authority should look to balance the interests of two sides.

    2The first paragraph of the Article 19 of the Draft Rules.
    3Article 21 of the Draft Rules.
    4The first paragraph of Article 77 of the Implementing Rules.
    5The first paragraph of Article 22 of the Draft Rules.
    6Article 77 of the Implementing Rules.
    7The second paragraph of Article 22 of the Draft Rules.
    8Article 23 of the Draft Rules.