R&D activities from both MNCs and SMEs are moving more and more into China. The main reason for this is no more the cheaper talent-pool than in home Countries; the main driver seems now China being a crucial market, which needs products and services tailor-made for its unique characteristics. When they bring creation close this huge market, companies obviously enter the scope of PRC laws and regulations about inventions and know-how, but often ignore the consequences. What foreign companies want is securing full ownership of their R&D knowledge.

To get there and avoid unwanted risks, companies shall be extremely careful in drafting their contracts with R&D personnel, as well as taking due precautions in their internal policies.

Failing this, PRC law will apply by default, which means that in many cases IP rights (basically, the right to apply for invention patents) can belong to inventors rather . than investors. A key-element in this regard is the nature of inventor-company relationship.

Employment agreement

Inventors are often hired with employment contract.

In this case, PRC laws (Patent Law and Implementing Regulations) grant to the employer the ownership of the invention, as long as this is “employment invention”, i.e.:

  1.  Has been accomplished (i) during execution of his own duty, (2) in execution of any task, other than his own duty, which was entrusted to him by the entity to which he belongs; (3) within one year after the retirement, transfer from the entity to which he originally belongs or the labor and personnel relationship being terminated, where the invention-creation relates to his own duty or the other task entrusted to him by the entity to which he previously belonged; or
  2. Has been accomplished by using the material and technical conditions of an employer. Beside these cases, the invention is considered “nonemployment creation” and as such it belongs mandatorily to the employee, any limitations to this right not being allowed.

Very important, even when he has no ownership rights over the invention, PRC law provides that the inventor shall receive both an award from his employer in case a patent is granted to the employment-invention, and a periodic remuneration for the exploitation of such patent.

Such amounts shall be – according to the law – “reasonable”; the law provides minimum thresholds, which apply in case there is no agreement between the parties (3000 RMB as . minimum award and yearly 2% on profits generated from patent).

Needless to say, such minimum thresholds are rarely accepted by the inventors and the matter frequently ends up in litigation.

Independent work

Other times inventions are developed in an independent-work framework, mainly technology consulting, technology service or commissioned technology development schemes. It is a pretty common scheme as it allows companies to enjoy (i) tax/contribution optimization, and (ii) easier contract termination (while, on the other hand, termination of . employment contracts is restricted and extremely expensive and costly). Generally speaking, in these situations the right to patent the invention belongs to: 

  • The technology developer, if the development has been commissioned (the commissioner has a right to exploit the invention free of charge); 
  • The consultant/service supplier, if he has directly developed the technology (even by using the client’s resources/materials); 
  • The client, if he is the one who developed the technology – even by exploiting the work of the consultant/service supplier.

Moreover, if the commissioned technology has not been patented, in the absence of agreement by the parties the developer can exploit and transfer to third parties the unpatented know-how. These provisions can be overturned by the parties’ agreement.

Moreover, they are rather vague: for instance, it could not be crystal-clear under which circumstances it shall be deemed that an invention is developed by the consultant or by the client. Much of this is up to the court’s interpretation. For this reason, it is very important that the invention ownership shall be regulated in detail within the technology contracts.

What to do

The main risks companies may want to avoid are:

Employment invention to be qualified as nonemployment invention

To avoid this risk, the employment contract and the job description shall be carefully drafted. Moreover, it is important to guarantee traceability of all resources/materials used by the employee during the inventions process, as well as of any guidelines/instructions from the employer.

Employee files a law suit for remuneration/award of “employment invention”

Lack of agreement on employee remuneration/award – in case the employment invention is then patented and exploited by the employer – is a typical ground for litigation, which can lead to high damages to be refunded to the same can be said for very general agreements, which do not conceive a sense of “reasonableness”. Remuneration/award for the employee shall be carefully detailed and balanced between the parties (e.g., linking the growth of the remuneration to the degree of exploitation of the invention).

Previous employer claims employee invention

As we have seen, the employer has the right to patent the invention of the employee until one year after the termination of the employment, if such invention is connected to the duties previously attended by the employee. In order to assess and prevent such a risk, it is critical to proceed to due diligence on the past career of the inventor to be hired.