SIPO's Draft Measures on Service Invention

by Sheppard Mullin Richter & Hampton LLP
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[author: Harris Gao]

On November 12, the State Intellectual Property Office (SIPO) released the Draft Measures on Service Invention《职务发明条例草案(征求意见稿)》(the “Draft Measures”) for public comments. Generally speaking, the Draft Measures enhance the rights of employee inventors, but create some uncertainty for employers.

Relevant Provisions under the Chinese Patent Law

Article 6 of the Chinese Patent Law provides that a “service invention” is an invention made in the course of employment duties or mainly using the material and technical resources of the employer, and that the employer owns the patent rights over a service invention, including the right to apply for a patent.

Article 16 of the Patent Law provides that an employer shall pay the inventor an reward upon the grant of a patent over a service invention, and a “reasonable remuneration” upon exploitation of the patent based on the scope of the application of the patent and the economic benefit derived from such application.

The Implementing Regulations of the Chinese Patent Law

Article 76 of the Implementing Regulations of the Chinese Patent Law (“Implementing Regulations”) provides that the employer may enter agreement with its employers with respect to rewards and remuneration for service inventions. Furthermore, employer may also set forth rewards and remunerations in its internal policies and procedures in accordance with the law. If there is no contractual agreement or company policy regarding rewards and remuneration, the Implementing Regulation provides specific rewards which will be payable to employees as a default arrangement, namely,

(1) a reward of no less than RMB 3,000 for the issuance of an invention patent (no less than RMB 1000 for a utility model or design patents) to be paid within three (3) months from the date on which a patent is granted, and

(2) a “reasonable remuneration” upon exploitation of an employee’s invention patent amounting to no less than 2% of the after-tax profit generated from implementation of an invention patent (no less than 0.2% for a utility model or design patent), or 10% of the fee generated from the licensing of the patent.

See Article 77 of the Implementation Regulation.

Some employers have viewed the default arrangement as somewhat un-commercial, particularly a “reasonable remuneration” of no less than 2% of the after-tax profit generated from implementation of the patent, or 10% of the fee generated from the licensing of the patent. Thus, many employers have considered overriding the default arrangement by express alternative provisions in the relevant employment contracts or by internal policies and procedures. One frequent question people asked is whether it would be enforceable if the alternative provisions provide NO reward or remuneration for service inventions.

Draft Measures on Service Invention

Generally speaking, the Draft measures are favorable to employees.

Reasonableness Requirement

Article 19 of the Draft Measures provided that any agreements or internal policies and procedures that nullifies or limits an employer inventor’s rights under the Draft Measures is invalid. Thus, a provision in an employment agreement or internal policy that provides NO reward or remuneration for service inventions will likely not pass the muster under the Draft Measure. Rather, employer should ensure that any such provision would be deemed to be reasonable.

This reasonableness requirement is specifically provided by Article 16 of the Chinese Patent Law, which states that a “reasonable remuneration” should be based on the scope of the application of the patent, and the economic benefit derived from such application. Given the attention focused upon this reasonable requirement, employers may want to consider, at least to some extent, modeling their reward and compensation provision after the default arrangement proposed by SIPO. Specifically, it is questionable whether a scheme under which employees receive the same level of compensation regardless of the value of their inventions, would be deemed to be reasonable.

Enhanced Default Arrangement

The Draft Measures enhanced the rewards and remunerations in the default arrangements. Specifically, Articles 21 and 22 of the Draft Measures provide:

(1) a reward of no less than 2 months’ salary for the issuance of an invention patent (no less than one month’s salary for a unity model or design patents) to be paid within three (3) months from the date on which a patent is granted, and

(2) a “reasonable remuneration” upon exploitation of an employee’s invention patent amounting to no less than 5% of the after-tax profit generated from implementation of an invention patent (no less than 3% for other forms of IP), or no less than 0.5% of the revenue (no less than 0.3 for other forms of IP); or 20% of the fee generated from the licensing of the patent. The remuneration can also be paid an annual payment or lump sum payment, but the amount should be reasonable in reference to its profit or revenue.

To protect employee’s rights to rewards and remuneration, the Draft Measure also provides that an employee inventor has the right to be informed during the prosecution of the service invention. In addition, an employee is entitled to compensation if the employer choose to protect the service invention as a trade secret. See Article 14 of the Draft Measures.

Other Substantive Rights to Service Inventions

The Draft Measures also provide employer inventors with some substantive rights to service inventions.

First, if the employer intends to assign or license a service invention, the employee inventor has a right of first refusal. Second, if the employer choose not to apply for a patent or otherwise protect a service invention, the employer may obtain the service invention free of charge or for an amount to be agreed upon with the employer. If the employee obtains the service invention free of charge, the employer will have a licensee for free. Third, for State Owned Enterprises (SOEs), if a patent is not exploited or licensed after three (3) years from the date of issuance, the employer inventor has the right to use the patent himself or license the patent to third parties.

Conclusions

It is anticipated that the Draft Measures will be formally adopted in 2013. Therefore, it is highly recommended that companies carefully review its employment contracts and internal policies in light of the Draft Measures, and craft intellectual property provisions that avoid some of the potential uncertainties, yet reasonable under the applicable laws and regulations.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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