If an employee invents something and their employer is entitled to ownership of that invention, should the inventor be compensated by their employer for the benefit the employer receives from the success of the patented invention?

The issue can be a contentious one.  Employees may feel that they should be rewarded for their achievement and for any benefit the employer receives from that work, while an employer may consider that what the employee has done is part of the job that the employee is already paid to do.

New Zealand and Australia1 have no statutory provisions providing compensation to an employee for commercial benefit that an employer receives from the success of an invention. Instead, contract and common law rules apply.

Some more fortunate employees may have IP clauses in their employment contracts that state they receive some remuneration from their employer for successful inventions.  But otherwise, there is no obligation for an employer to compensate an employee in New Zealand or Australia. To the best of our knowledge, no issue has arisen or has been considered by the New Zealand Court.

However, even where there is a statutory provision such as in the UK,2 China,3 or Japan,4 this does not necessarily mean that an employee will be duly compensated.  For example, sections 40(1) and 41 of the UK Patents Act 19772 provide that if an employer derives an “outstanding benefit”, an employee is entitled to a fair share of this benefit.  In the recent UK High Court case of Shanks v Unilever, Prof. Shanks invented the technology and assigned his rights to Unilever, who then licensed the technology.5  Shanks sued Unilever for compensation under the s40(1) provisions in the UK Patents Act.  It was calculated that Unilever received a benefit of £24.5m (approx. NZ$50m) from Shanks’ technology.  While this no doubt was a commercial success, interestingly, £24.5m was not sufficient to meet the “outstanding benefit” requirement because Unilever regularly makes large profits and £24.5m represented only a small portion of their profits. Thus, Prof. Shanks was not compensated.

Japan also provides a statutory requirement for “reasonable value” to be provided to an employee.4Nakamura, who won the 2014 Nobel Prize for invention of the blue LED, was successfully able to obtain ¥843 million (approx. NZ $10m) in compensation from his employer Nichia Corp in an out of court settlement on the basis of this provision.6 

It is quite clear that even in countries with a statutory provision, it is not a simple straight forward process for an inventor to be compensated.  Employee inventor compensation in the absence of specific contractual agreement may still involve lengthy and expensive battles through the court system.  Provision of fair and reasonable compensation to employee inventors can avoid more serious problems and help to incentivise innovation.