Employers in technology-centric industries are often insufficiently aware of the relevance of patent law and, specifically, employee invention regulations in Germany. It is not uncommon for a patent to be registered in the name of a company, while it in reality belongs to the employee or freelancer who made the invention. Further, employee claims for additional remuneration based on inventions, technical improvements or even non-technical improvements can raise major issues in the context of a transaction or in business practice. This article provides a basic overview of the relevant laws and some of the most common issues and tripwires in this area.
Section 6 of the German Patent Act (Patentgesetz or PatG)1 provides that the so-called right to obtain a patent (Recht auf das Patent) vests in the inventor as an individual. If the inventor is an employee, there is no “work for hire” doctrine, which is commonly found in the US (among other jurisdictions). If the employer desires ownership of the invention and the issuance of a patent, it is necessary for the employer to comply with specific statutory requirements under the German Act on Employee Inventions (Arbeitnehmererfindungsgesetz or ArbnErfG)2 and, depending on the facts of the case, the contractual obligations in any employment agreements and agreements with third party inventors.
The ArbnErfG does not adhere to “work for hire” principles, but instead gives an employer the option to claim an invention made by an employee, provided that certain requirements are fulfilled. This Act also entitles the employee to additional compensation as described below.
The ArbnErfG applies to both patentable inventions and unpatentable technical improvements made by employees (including interns, trainees and similar persons within an organization), regardless of whether such inventions or improvements are referenced in an employment agreement, although such reference is advisable. The ArbnErfG does not apply to freelancers, general managers, comparable executives, retired employees or agents. The scope of the ArbnErfG extends throughout Germany’s territories, irrespective of the nationality of either employee or employer.
Formalities, Rights and Obligations Regarding Employee Inventions
Once an employee has made an invention, the ArbnErfG obligates him or her to report such invention to his or her employer. This report triggers several legally important consequences:
- Upon receipt of the invention report, only the employer is entitled to apply for patent protection for the invention and is obligated to do so “without undue delay.” This obligation may conflict with the employer’s four-month deadline to “claim” or “free” the invention (as discussed further below). However, these two obligations are independent, such that the employer must apply for patent protection even if the decision of whether to claim or free the invention has not yet been made. Failure to apply for patent protection “without undue delay” may result in liability to the employer for damages suffered by the employee, including, but not limited to, loss of patentability.
- The employer has four months from the time of the invention report to decide whether to claim (i.e., appropriate the exploitation rights in) the invention. If the employer does not claim the invention, it becomes “free,” meaning that it becomes the employee-inventor’s property and the employee alone may then decide whether to (i) continue any patent application process already initiated by the employer in his or her own name, (ii) apply for patent protection himself or herself or (iii) forego patent protection altogether. The employer may be required to negotiate with the employee to obtain a license should the employer subsequently desire to use the invention. The employer may also face claims for unjust enrichment or damages if the employer had already been using the invention. In addition, the employee may sell or license the invention to a competitor of his or her employer. On the other hand, if the employer expressly claims the invention for itself, the employer will own all exploitation rights and the employee may claim additional compensation in accordance with the ArbnErfG (as discussed further below). If the employer does not act to claim or free the invention, the invention is deemed to have been claimed by the employee, but only with respect to inventions made and reported on or after October 1, 2009. This assumption that the employer has claimed the invention by remaining silent does not apply to inventions made and reported before October 1, 2009. Pursuant to the law previously in effect, an employer was required to expressly claim an invention in writing to prevent it from reverting to the employee or becoming “free.”
If these requirements of the ArbnErfG are not satisfied, uncertainty may result for purposes of determining who holds the rights in the invention and whether a patent may be issued for it. These issues may be resolved by subsequent agreement, including by a nonverbal or implied agreement.
Additional Compensation for Employee Inventions
Once an employer has claimed (or is deemed to have claimed) the invention, the employeeinventor is entitled to reasonable additional compensation. A compensation claim does not affect the ownership of the claimed invention or the patent that may be issued for it and can be enforced only as a claim for payment.
In principle, a claim for additional compensation persists for the life of the patent issued for the invention. Prior payments, however, cannot be reclaimed by the employer if the invention is later found to be unpatentable. The additional compensation generally becomes due and payable three months after the date on which the invention is first used by the employer.
The employer and the employee are free to negotiate and agree on reasonable compensation, which may be subject to judicial review for “reasonableness” in the event of a dispute or failure to reach an agreement. The compensation for employee inventions may also be subject to shop agreements. While there are certain “guidelines” governing compensation for employee inventions, they are non-binding and there are various types of compensation available for employee-inventors. Among the most common are one-time lump-sum payments and running payments based on the benefits that the employer reaps from the use of the invention similar to license fees or one-time or recurring lump-sum payments. While the employer initially may decide on the type and amount of additional compensation, the employee may subject this employer decision to judicial review and even claim an unspecified “reasonable amount” of additional compensation. Therefore, it is important for the employer to take into account all relevant factors in deciding on the compensation, including, but not limited to, the value of the invention, the type of invention, the employee’s role and responsibilities with respect to the invention and common license fees within the industry.
Inventions Not Made by Employees
Since the ArbnErfG only applies to employees, companies using freelancers or other external service providers in technical capacities should ensure that agreements with such individuals include specific provisions on inventions made in the context of their services to the company. Otherwise, inventions made by such third parties will belong to them alone and the company may need to obtain licenses to use them. In addition, it is important to include confidentiality provisions with regard to technical developments to ensure that such technical developments cannot be published before a decision has been made as to whether to apply for patent protection.
Depending on the type of agreement and the identity of the third party, it may be sufficient to incorporate the ArbnErfG as part of the agreement. In addition, the best choice for an employer may be to design an agreement that includes obligations to report inventions accompanied by options to have inventions assigned to the principal or a fully comprehensive assignment provision. The law allows for great flexibility in this regard, as each individual case should be carefully considered.
In some cases, it is of equal importance to include provisions on inventions and the rights therein in service agreements with managing directors and similar executives because such directors and executives do not fall within the scope of the ArbnErfG. This concern is especially relevant with regard to managing directors who hold equity in the company and are or were heavily involved in the technical developments that contributed to the company’s success.
As noted above, the ArbnErfG does not apply to unpatentable and non-technical improvements or suggestions made by employees. However, the courts recognize that such improvements or suggestions may result in an employee’s claim for additional compensation in certain cases. Furthermore, shop agreements are common in Germany and sometimes include major risk factors. For example, if a shop agreement includes a calculation method for additional compensation based on added revenue or savings caused by the improvement, but does not provide for a cap on such compensation, the calculation may result in economically unreasonable compensation accompanied by lengthy and difficult disputes.
Risks and Consequences
From the employer’s perspective, the potential risks that may arise from improper handling of inventions and improvements made by employees, freelancers and other third parties include:
- Failure to obtain rights to an invention or the issuance of a patent
- Loss of rights to an invention or the issuance of a patent
- Exposure to claims for damages or unjust enrichment
- Disputes concerning claims for additional compensation
- Obtaining a license on terms that are less favorable than those that could have otherwise been obtained
- Unreasonable compensation claims for relatively minor improvements
Consequently, from the perspective of an investor or purchaser, these risks may translate into:
- A lack of certainty of ownership of intellectual property of a target company
- Difficulty calculating potential exposure to third party claims for damages or additional compensation
- Unforeseeable potential exposure to litigation
Hence, employers should institute policies to ensure the proper handling of employee invention matters, including compliance with the requirements of the ArbnErfG and the calculation of reasonable compensation. It is of equal importance to carefully consider provisions safeguarding the company’s rights to inventions made by third parties in the course of certain agreements and to use caution in drafting and negotiating shop agreements in connection with inventions or improvements.
From the perspective of an investor or purchaser, employee inventions and related issues must be a focal point of due diligence concerning technology-dependent target companies. Both the due diligence process and the subsequent negotiation of the transactional documents, including the particular representations and warranties contained therein, should be individually tailored depending on the type of target company, its technology and the risks identified.