The most recent amendment to Japan's Patent Act, effective April 1, 2016, modifies the right of an employee inventor to "reasonable" compensation in response to calls for change from companies, but falls short of creating a bright-line rule on acceptable compensation.
Since 1921, Japan's Patent Act has included a general framework for granting an employee inventor the right to reasonable monetary compensation for transferring to her employer her right to receive a patent. Inventors had not sued their employers in significant numbers based on this right, however, until a rash of high-profile suits in the early 2000s, one of the earliest and most prominent being the "blue diode" case. Concerned about the financial risks under a system in which the courts would, after the fact, re-evaluate what a reasonable compensation should be, employers prompted the Diet to amend the Patent Act in 2004. The 2004 amendment stated that payment paid pursuant to a company policy is "reasonable" (and hence acceptable) if employees were consulted about the policy, the policy was disclosed to the employees, and employee inventors were given a chance to comment on the payment paid.
The 2004 amendment embodied the changes desired by employers, and there was an expectation that their compensation policies would be insulated from second-guessing by the courts. However, the procedures for justifying a compensation policy and payments made thereunder were complicated to follow and document, and due to the vague standards for employee consultation under the Act and the fact-intensive nature of any employee dispute, an employer could never be sure that its policy would pass court scrutiny. As a result, there were renewed calls on the Diet to revisit how inventor compensation should be addressed under the law.
The 2015 Amendment
The 2015 amendment of the Patent Act (the "2015 Amendment") confirms an inventor employee's right to receive reasonable compensation, but expands the forms of compensation and modifies how it is determined. Acceptable compensation under the pre-amendment Patent Act was arguably limited to money. The 2015 Amendment allows the employer to compensate the employee with not only money, but also "other economic benefit". Guidelines issued by the Ministry of Economy, Trade, and Industry on April 22, 2016 (the "Guidelines") clarify that "other economic benefit" includes stock options, foreign study opportunities, and extra vacation days, but excludes honorary titles and appreciation certificates.
The Guidelines also build on the procedures first introduced in the 2004 amendment and set forth more details concerning the procedures that an employer must follow to support its inventor compensation policy and any revisions thereto. The procedures largely borrow from Japanese labor law practice and consist of the following steps:
- Discuss with potential inventor employees the company's proposed compensation policy before adopting it. The inventor employees can appoint a representative to discuss on their behalf. The discussions do not need to result in an agreement.
- Make the final compensation policy easily accessible to potential inventor employees by, for example, displaying it on the company intranet or a bulletin board. The policy must clearly state what factors will be used to calculate the invention compensation.
- Give the inventor an opportunity to ask questions and to give feedback about the fairness of her specific compensation. The employer must respond in good faith and with due process to the questions and opinions of the employee, but the employer and inventor do not need to reach an agreement.
The 2015 Amendment also allows, for the first time, an employer to cause the right to receive a patent to vest directly in the employer rather than the employee. To do so, the employer must have an internal policy announced to its employees that calls for such vesting. Direct vesting in the employer does not change, however, the employer's obligation to reasonably compensate the employee inventor.
A company whose employees create patentable inventions in Japan should establish an invention policy that sets forth an inventor compensation formula and calls for patent rights to vest directly in the company. The company should understand and follow the procedures published in the Guidelines issued by the Ministry of Economy, Trade, and Industry so that its policy and compensation formula can be strongly defended in court if necessary. The outcomes of disputes with employee inventors over compensation will hinge on the company's execution and documentation of those procedures.