The Draft Regulations on Service Inventions were released by the State Intellectual Property Office for public comments on 12 November 2012. The remuneration scheme set out in the Draft Regulations is largely inspired by the German law on employee inventions remuneration. The Draft Regulations form part of the initiatives under the central government’s National Medium - and Long-term Talent Development Plan (2010 - 2020) to build a highly skilled workforce in China, and try to achieve this by strengthening the right of an employee inventor to a higher level of remuneration in China. It also introduces a number of reporting requirements on the part of the employer in order for the employee inventors to assess what level of remuneration is due.

The Current Scheme

As shown in table 1, under the current law governing the renumeration of employee inventors, in the absence of an agreement between the employer and employee (Article 76 to 78 of the Implementing Regulations of the Patent Law), the minimum amount of compensation is:

  1. A reward payment. The minimum value for this payment will depend on the type of patent used to protect the invention. For an invention patent the minimum reward is RMB 3,000 (~EUR 360); for a utility model patent, the minimum reward is RMB 1,000 (~EUR 120).
  2. Remuneration from exploitation - an inventor should be paid at least 2% of the employer's business profit made from the exploitation of an invention or utility model patent, or an equivalent lump sum.
  3. Remuneration from licensing - where the employer licenses an invention or utility model patent to another party, the inventor should receive at least 10% of the royalties paid.

The New Scheme

As shown in table 2, under the current Draft Regulations, any agreement eliminating or limiting the rights which the inventor is entitled to would be invalid (Draft Article 19). 

Draft Articles 21 and 22 increase the statutory minimums to:

  1. Reward – for an invention patent or plant variety rights, a total minimum reward of two months' average employee salary; for other IP rights, including utility model patents, the minimum reward will be one month's average employee salary.
  2. Remuneration from exploitation – an inventor should receive at least 5% of the employer's operating profit (or 0.5% of sales) made from the exploitation of an invention patent/plant variety rights; for other IP rights, 3% (or 0.3% of sales).
  3. Remuneration from assignment or licensing - where the employer assigns or licenses an invention or utility model to another party, the inventor should be remunerated at least 20% of the fees obtained.

Compensation process

As shown in the flow chart, there are several steps to the compensation process:

An employee inventor is obliged to file an invention report with the employer within 2 months of completing the invention (Article 10). The report should state whether the invention is regarded by the employee as a service-invention or not. If the employee considers the invention to be non-service related and the employer disagrees, the employer must file a written objection within 2 months of receiving the report. The employee has another 2 month period to reply.  If the dispute cannot be resolved, either party can start court proceedings or arbitration.

If the inventor agrees that it is a service invention, the employer needs to decide within 6 months whether to protect the invention as a patent or a trade secret. If the employer decides to protect the invention as a trade secret, the inventor also has the right to a reward and/or remuneration.

If the employer decides to protect the invention as a patent, the inventor has the right to a reward within 3 month after the patent is granted, and also a reasonable remuneration within 3 months of the year end audit (in calculating the operating profit) or 3 months of obtaining the fees from the licence/assignment.

Disclosure Requirements

Under Draft Article 20, the employer is obliged to inform the inventor of the economic benefit earned by the company by exploiting, assigning or licensing their invention. This will be challenging for companies operating in the electronics sector which may own hundreds if not thousands of patents which are often cross-licensed in a single transaction. In addition such information may be highly sensitive and confidential, and the employer may be unwilling to disclose it to an inventor who may have left the company by then and work for a competitor.

Additional substantive rights

The Draft Regulations provide additional substantive rights for employee inventors too. For example, Draft Article 29 gives the inventor the right of first refusal on any IPR in his invention should the employer decide to assign it. Draft Article 16 provides that inventors are able to request assignment of IPR to themselves if the company intends to terminate or abandon the application of the employee inventions. This could prove cumbersome for complex corporate and commercial transactions where portfolios of IPRs are to be assigned.

Conclusion

The draft regulations’ long term aim – to protect and incentivize talented and innovative employees – is one which would, in principle, benefit the electronics sector in China. But ensuring compliance will create an administrative burden and costs, and in some cases, complying with remuneration and reward provisions may discourage corporations from investing in research and development in China.

Such concerns have been raised during the consultation process; the next step is to see how well any amendments to the next draft regulations address such concerns.