Reward and remuneration for service inventions

Under the Patent Law, inventors are entitled to reward and remuneration for their service inventions. This chapter will outline the provisions and practices related to the reward and remuneration of service inventions in China under current laws, regulations and judicial practice.

Content of reward and remuneration

Article 15 of the Patent Law states that:

The entity that is granted a patent right shall award to the inventor or creator of a service invention-creation a reward and, upon exploitation of the patented invention-creation, shall pay the inventor or creator a reasonable remuneration based on the scope of the publicity and application of the invention-creation and the economic benefits yielded.

After the grant of a patent for an invention-creation, the inventor or creator (hereafter, ‘the inventor’) of the invention-creation should be rewarded and, after reaping the economic benefits from exploiting the invention-creation, remunerated.

Reward has nothing to do with whether the invention-creation has been exploited and the economic benefit obtained therefrom; the employee-­inventor has the right to request a reward once the patent right is granted.

In contrast, remuneration is related to the exploitation of and the economic benefit derived from the invention-creation. For service inventions, the inventor shall neither be denied a reward because they have been remunerated, nor shall they be denied remuneration because they have been rewarded.

Obligor for reward and remuneration

According to the Patent Law, “the entity that is granted a patent right” has the obligation to award a reward and pay remuneration to the employee-inventor. Since a service invention has roots in the employment relationship between an entity and the inventor, “the entity that is granted a patent right” can usually be understood as the employer in the employment relationship; nevertheless, reality is somewhat more complicated than this.

Employment relationship

In practice, an employment relationship in the context of a service invention may come in various forms, the most common of which is an employment relationship formed by a labour contract entered into between an entity and the inventor. The employment relationship can also be a temporary one established without the signing of any labour contract.

The entity and the inventor can also form an employment relationship in the context of a service invention, typical examples of which include internship (Minminzhong, Case No. 297/2019), rehiring after retirement (Hugaominsan(zhi)zhongzi, Case No. 99/2009) and secondment (Minshenzi, Case No. 1486/2011).

Assignment of rights in service inventions

According to the Patent Law, “the entity that is granted a patent right” has the obligation to provide reward and remuneration to an employee-inventor.

Generally speaking, the entity that is granted a patent right is the employer of the inventor; however, in practice, the rights and interests in a service invention may be assigned by the employer to a third party.

After the assignment of the rights and interests, the entity that is granted a patent right is no longer the employer of the inventor and has no employment relationship with the inventor.

This raises a question: who should be responsible for providing the reward and remuneration for the service invention?

In Hugaominsan(zhi)zhongz (Case No. 120/2014), Zhang, as one of the inventors, created a service invention during his employment with 3M China. The invention was later assigned by 3M China to 3M Innovation under an agreement between the affiliated companies.

In this case, the Shanghai High People’s Court concluded that the legal rights of the inventor to reward and remuneration should not be impeded by an internal agreement between the affiliated entities within a multinational corporation; therefore, 3M China should still remunerate Zhang for his service invention, even though it is not the patentee of the invention in suit.

Moreover, as 3M Innovation is not Zhang’s employer, and given that the Court concluded that 3M China should pay remuneration to Zhang for his service invention, Zhang’s request for remuneration from 3M Innovation has neither factual nor legal basis.

In light of this case, in the event of the assignment of rights in a service invention, the employer of the inventor still has the obligation under the Patent Law to provide reward and remuneration to the inventor.

Service inventions attributed to more than one entity

A service invention is usually owned by a single entity; however, there are circumstances in which a service invention may fall under the ownership of more than one entity. For example, if the inventor leaves the entity at which they were employed when they made the invention related to a task assigned by the original entity, the service invention may be attributed to both the new entity and the original entity (Huminzhong(zhi)zhongzi, Case No. 258/2017).

In cases where the service invention is attributed to more than one entity, which entity should be responsible for providing the reward and remuneration?

While there is a lack of express provision in this regard in the laws and regulations, we opine that both the present and the former entity should be the entity or employer in a service invention-related context and should be the original owners of the service invention.

Consequently, given their ownership of the service invention, both entities should, as a consideration, assume the obligation of providing reward and remuneration to the inventor.

Manner and amount of reward and remuneration

Principles of determining reward and remuneration

Article 76 of the Implementing Regulations of the Patent Law (the Implementing Regulations) provides that an entity may enter into an agreement with the inventor that stipulates, or stipulate in its company policy, the manner and amount of reward and remuneration for service inventions.

Articles 77 and 78 of the Implementing Regulations further provide that where a relevant agreement or policy is absent, the statutory standards for issuance of the reward and remuneration shall be adhered to.

In brief, in determining the manner and amount of the service invention reward and remuneration, the principle of contractual agreement prevailing over statutory standard shall be observed.

Statutory standards of reward and remuneration

Regarding reward, Article 77 of the Implementing Regulations provides that in the absence of a relevant contractual agreement or company policy, the entity that is granted a patent right must award a bonus to the inventor within three months of the patent being granted. The bonus for a single invention patent should be no less than Rmb3,000, and that for a utility model patent or a design patent should be no less than Rmb1,000.

Regarding remuneration, if the entity that is granted a patent right has not entered into an agreement with the inventor that stipulates, or the company policy does not stipulate, the amount of remuneration, the entity must pay remuneration to the inventor in accordance with the provisions of Article 78 of the Implementing Regulations (see Table 1).

Agreement or policy on reward and remuneration

Remuneration for service inventions is not limited to cash. Specifically, Article 15.2 of the Patent Law provides that:

The state encourages the entity that is granted a patent right to implement property right incentives by means of offering stock, option, dividend, etc to allow inventors or creators to have a reasonable share of the benefit from the innovation.

The manner and amount of reward and remuneration follow the principle of contractual agreement prevailing over statutory standard.

In practice, given the unequal status between the inventor as an employee and the entity as the employer, where the inventor is affiliated to the entity and is subject to the entity’s direct control and influence over such important matters as salary issuance, it will be difficult, should both parties be allowed to enter into an agreement on their own, to effectively protect the inventor’s rights to reward and remuneration for his or her service invention.

Consequently, in judicial practice regarding service invention reward and remuneration disputes, the courts, while observing the principle of contractual agreement prevailing over statutory standard, may also review the legitimacy of the contractual agreement or the relevant company policy in terms of procedural legitimacy, as well as substantive legitimacy and reasonableness.

Regarding the procedural legitimacy of the agreement or policy on reward and remuneration, the agreement or company policy should comply with the requirements in the Labour Contract Law; thus, when entering into an agreement with the inventor or formulating a company policy on reward and remuneration:

• a public announcement or notification should be made to ensure the employees are aware of the policy;
• channels should be provided for the employees to submit their proposals and voice their comments; and
• the manner and amount of reward and remuneration should be determined by negotiation.

Rule 19 of the Draft Service Invention Regulations also provides that when determining the manner and amount of reward and remuneration, an entity should consider the opinions of the employee-inventor.

In Zuigaofaminshenzi (Case No. 3003/2015), the inventor participated in the drafting of 3M China’s invention incentive policy as well as discussion over the policy. The Supreme People’s Court opined that:

3M China Limited has conducted negotiation with the employees during the policy formulating process, and it is not inappropriate for the first- and second-instance courts to determine that such bonus scheme belongs to the entity’s company policy stipulating the service invention remuneration under the Implementing Regulations.

In contrast, in Huminzhong (Case No. 497/2019), the employee-inventor Chan held that “the invention reward and remuneration policy of the defendant has not undergone discussion through the employee representative congress.” The court concluded that the defendant had failed to produce evidence to prove that its provisions on reward and remuneration for inventions were formulated in accordance with the law and, when combined with the unreasonableness of the amount of the reward and remuneration, found that the service invention remuneration should not be determined on the basis of those provisions.

As relatively clear and stringent standards are in place for the review of procedural legitimacy, entities must clearly inform employees about their rights as employee-inventors and take the utmost care to ensure the procedural legitimacy of each stage of the process when entering into an agreement or formulating the company policy to avoid having the agreements or company policies be deemed invalid in future disputes.

In particular, complete dossiers should be kept regarding, among other things, meetings and discussions between the entity and the inventor concerning policies over reward and remuneration.

Regarding the legitimacy and reasonableness of the content of the agreement or policy on reward and remuneration, in adjudicating on disputes involving service invention reward and remuneration, the court will determine, as a general practice, the reward and remuneration in accordance with the agreement or policy, as long as the agreement or policy is procedurally legitimate.

If the inventor, the more disadvantaged side, files a complaint about the non-legitimacy or unreasonableness of the content of the agreement or policy, the court may also examine the legitimacy and reasonableness of the substantive content of the agreement or policy.

Regarding the legitimacy of the content of the agreement or policy on reward and remuneration, Rule 18 of the Draft Service Invention Regulations stipulates that any agreement or provision that eliminates the inventor’s rights under the Regulations or imposes additional unreasonable conditions to those rights shall be invalid.

In Minshenzi (Case No. 187/2019), the employing entity stipulated in its reward and penalty rules for patent management that: “Patent incentive reward and remuneration will be issued collectively on a half-year basis, and the inventor who has resigned before the issuance date will not be awarded the reward and remuneration.”

According to the Supreme People’s Court, the provision essentially imposed a condition on the employing entity’s statutory obligation under the Patent Law that unreasonably eliminates and li­mits the legal rights to reward and remuneration of the inventor who left the entity, and relieves the entity of its mandatory reward obligations.

The provision, therefore, fulfilled the requirements under Article 26.1 of the Labour Contract Law rendering it invalid. Accordingly, the Supreme People’s Court concluded that the provision does not have contractual binding force on the inventor; therefore, the inventor is still entitled to the service invention reward.

Regarding the reasonableness of the content of the agreement or policy on reward and remuneration, the court will usually not determine the amount of the reward and remuneration on the basis of an agreement or policy in which the reward and remuneration stated is obviously unreasonable.

For instance, the Guidelines on Adjudication of Disputes Involving Reward and Remuneration to Inventors or Designers of Service Invention-Creations (the Guidelines) issued by the Shanghai High People’s Court state that: “If the amount of the agreed reward and remuneration is extremely low and is obviously unreasonable, the reward and remuneration shall not be determined on the basis of the agreement.”

However, owing to significant variation in reward and remuneration among different industries, enterprises and technical fields, no definite guidelines have yet been provided under current laws and regulations, and there is no judicial practice regarding what constitutes a reasonable amount of remuneration. In practice, the courts mainly determine reward and remuneration on a case-by-case basis, taking into account the actual circumstances and the type of service inventions of the respective cases.

Regarding whether the statutory standards of reward and remuneration should be directly applied in cases where the agreement or policy is unreasonable, the Guidelines consider that the court should determine a reasonable reward and remuneration on the basis of the actual circumstances of the case, rather than by directly applying the statutory standards of reward and remuneration, because the existence of the agreement or policy has ruled out the application of the statutory standards.

In Huminzhong (Case No. 497/2019), the Shanghai High People’s Court confirmed an opinion of the first-instance court:

The amount of the remuneration for a service invention stated in the provision is not related to the benefit from the exploitation of the patent and differs considerably from the statutory standards under Article 77 of the Implementing Regulations. As such the stipulated remuneration amount cannot be deemed a reasonable remuneration. This is why the first-instance court did not support the defendant’s assertion that the service invention remuneration of this case should be determined in accordance with said provision.

In determining the service invention remuneration, the Shanghai High People’s Court ultimately neither referred to the provision of the entity nor directly applied the statutory standards; instead, it exercised its discretion to decide the amount of remuneration by taking into account the contribution of the service invention in suit to the profit of the product, the actual circumstances of the case and other relevant factors.

Compensation for service inventions protected as trade secrets

Service inventions are often protected by patents; however, in some cases, enterprises may choose to protect their service inventions as trade secrets.

For service inventions that are protected as trade secret, it is generally believed that the creative work of the inventor should also receive compensation. For example, Article 849 of the Civil Code states that an individual who has accomplished a technological work product has a right to receive reward.

Further, Rule 24 of the Draft Service Invention Regulations also provides for compensation for trade secrets:

For an achievement of mental creation that is eligible for a patent application . . . the entity that decides to protect it as a trade secret should pay reasonable compensation to the inventor based on the contribution of the trade secret to the economic benefit of the entity by entering into an agreement with the inventor or by reference to the provisions under this Chapter.

Comment

Both the legal framework and legal practices in China have been focusing on reward and remuneration for service inventions, encouraging employers to share the benefits obtained with their inventor employees. Employers should bear in mind that it is an important legal obligation to ensure that inventors of service inventions are reasonably recognised and rewarded – a practice that is also beneficial to generating innovation and facilitating continued development.