Preventing unnecessary losses from R&D activities in China

In recent years, increasing numbers of European companies have moved research and development (R&D) activities to China. For some, their China R&D is focused on innovations specifically for the Chinese or Asian markets; others have moved global R&D units to China in order to draw on its talent pool and through a desire to diversify their global research community.

In this article, Oliver Lutze, Principal of Spruson & Ferguson, highlights some of the pitfalls to be aware of when starting R&D activities in China.

Pitfall #1: Insufficient IP awareness and training of staff

China’s business environment is fast paced – it demands that companies hit the ground running and continuously adapt their business activities. Latecomers are often at a disadvantage to early-entrants, which has led to many companies creating R&D functions, and even whole R&D centres, within extremely short time frames, with scientists being hired in large numbers at the establishment phase under time constraints. Often, such teams are under pressure to quickly produce output in a newly established facility, and local IP support is either lacking or there appears simply no time to utilise it. This can lead to a loss of valuable inventions, as they are not being patented. Additionally, many newly-hired scientists are local hires or returning scientists from the US who often lack profound knowledge of Chinese patent laws.

For example, unlike the US, in China it is not possible to disclose an invention in any kind of publication first and then file an invention patent application: the IP is lost for most countries through a lack of patentability caused by the act of publication. Many scientists also do not have sufficient awareness of the need to obtain a high-quality invention patent filing before an invention can be published or disclosed to clients without a confidentiality agreement in place.

In order to capture inventions from a new R&D unit the following appears to be a must: 1) the training of scientists by a patent counsel who can talk on their level; 2) the establishment of a documentation and evaluation system for invention reports; 3) the review of employment agreements so that they include provisions on confidentiality obligations, incentives and IP ownership clauses (employees must also be trained on this); and 4) access to an IP counsel during the drafting of patents to ensure that IP meets local and international filing requirements.

Finally, management needs to continuously highlight the importance of know-how and IP protection for a sustainable innovative business and make it a prominent goal for R&D employees to focus on and to report any IP creations.

Pitfall #2: Mistakes through non-compliance with the Chinese Patent Law

Reporting inventions to an overseas headquarters for drafting and filing outside China is one of the biggest mistakes that results in the loss of IP in China. While the overseas IP counsel will be experienced in drafting and filing advanced patents which fulfil international standards, such procedure violates statutes of the Chinese Patent Law. All inventions completed in China must either undergo a confidentiality examination by the Chinese patent office (SIPO) before being filed outside China, or be filed in the Chinese patent office first. If this provision is not complied with, all resulting patents in China based on this invention will be invalid. There is no way to correct this mistake. To avoid this problem, it is necessary to request a confidentiality examination with a full Chinese language description of the invention (a two-week procedure), or file a patent application with the Chinese patent office first. This patent application can then be filed as an international patent application (PCT system) using English text.

Pitfall #3: Potential disputes with employees over ownership of IP or over payable benefits after ownership transfers to the employer

Ownership of copyrights and patents in China requires special attention. Except for complex exemptions and limitations, and in the absence of provisions in the employment contract, a copyright is generally owned by the employee as author (Article 11, Copyright Law) and not the employer. Exemptions from this generally unfavourable principle include copyrightable works that meet the criteria of special works created in the course of employment (Article 16, Copyright Law). These include copyrightable work products created while using materials and technical means of the employer and which are created under the responsibility of the employer. Such special works are automatically owned by the employer and include, for example, computer software, engineering or product design drawings. Nevertheless it is highly recommended to clearly define the ownership of work products to be fully retained by the employer in the work contract.

Inventions that can be patented are owned automatically without any assignment by the employer, if they are service inventions. The criteria for a service invention are usually met for inventions created during the employment and under guidance of the employer. However, inventions not meeting the criteria are by law owned by the employee as non-service inventions.

The ownership of inventions can be usually clarified and disputes are rare. However, a topic that has been discussed in the European Chamber’s IPR Working Group in recent years concerns the lack of clarity of the laws and regulations with regard to inventors’ rights after ownership transfer to the employer.

China requires the employer to pay rewards and remuneration if a patent is granted and the invention is commercially used. According to the Patent Law, statutory terms that apply for invention patents include, for instance, monetary payments of a patent grant of CNY 3,000 and a two per cent share of the profits of a commercialised product making use of the invention. These statutory terms are under discussion for significant increases (e.g. a sharp jump to a five per cent share of profits) according to a pending draft for a national regulation on service inventions. The unclear scope of the statutory terms and the current law development regarding increased payment amounts may not fit many industry sectors, meaning there is a need for a way out of the statutory system.

Fortunately, the law allows companies to enter into individual agreements with inventors on reward and remuneration matters or to establish legally-enacted company policies for inventor remuneration. The latter may be preferred, as finalising individual agreements after each invention may be a huge burden to employers. These policies may also give employers an opportunity to define all details that are otherwise unclear in current legal practice, e.g. payments to former employees and sharing of payments among several co-inventors.

While Chinese government officials and judges have indicated to European Chamber members on several occasions that such agreements and policies should prevail in any dispute with an employee, there remains a major problem. Any agreement or policy may be challenged as ‘unreasonable’ by the employee, especially if the concepts vary strongly from the statutory terms. Employers are therefore in open waters when drafting remuneration policies as it involves risk. Nevertheless, it is strongly advisable to define the amount of benefits to employee-inventors, and for all company practices, through an official company policy or other agreements rather than relying on unshaped practice using the statutory terms of the law. Otherwise unpleasant disputes in the courts may ensue.

This article was first published in the September/October edition of EURObiz, the Journal of the European Union Chamber of Commerce in China.