In April 2015, the Legislative Affairs Office of the State Council P.R. China released the "Regulations on Service Inventions (Draft for Review)" (the "Regulations") to the public for comment. The Regulations provide detailed provisions regarding the ownership of service inventions, the service invention reporting system, the reward and remuneration system for the employee-inventor, and so forth. Ever since their release, the Regulations have stirred up a great deal of controversy. If the Regulations are eventually implemented, it can be expected that they will have a significant impact on Chinese companies. This article will briefly discuss the main controversies raised regarding the Regulations.

Necessity of Crafting the Regulations

During the process of soliciting opinions in relation to the introduction of new regulations, relatively uniform objections were raised by companies. They claimed that the Patent Law of the P.R. China and its Implementing Rules, together with other applicable laws and regulations, already provide comprehensive provisions on the service invention system. The existing issues in practice are caused by internal management of individual companies, and therefore, legislation should not impose further mandatory regulations.

Inventors and some experts have, however, claimed that although the existing laws have attributed the ownership of the service invention to the employer-company and have given the employee-inventor the right of authorship and the right to obtain rewards and remuneration, there is still an absence of procedural regulations for exercising an employee-inventor's rights. As the employee-inventor is always in a vulnerable position, the employee-inventor hopes to fully exercise his or her rights in the service invention system through new legislation binding on the employer-company.

Ownership of Service Invention

Article 7, paragraph 4 of the Regulations provides that an invention is a service invention if it amounts to an: "[i]nvention that is completed by an inventor mainly by using the funds, equipment, spare parts, raw materials, propagation materials, technical materials not publicly available, and other material and technical conditions of his employer, except that funds shall be repaid or use fees shall be paid as agreed, or the invention is merely verified or tested with the employer's material and technical conditions upon completion of the invention."

The main objection to the above provision arises from the difficulty in determining whether, in practice, an invention is "merely verified or tested with the employer's material and technical conditions upon completion of the invention". The reasons for the above difficulty are that it is difficult to determine the “completion” time of an invention and it is also difficult to determine to what extent the employee-inventor has utilized the company’s material and technical conditions. Additionally, considering the significant work experience the employee-inventor has already gained from the company constitutes the base for him or her conceiving an invention, if the employee-inventor is also allowed to use the company’s assets to verify the invention then it would be unfair to the company if the invention was characterized as a non-service invention. 

The primary supporting view is that, in practice, the company may reach an agreement with the employee-inventor as to his or her rights and obligations when using the company’s assets such as the instruments and equipment to verify or test the invention. However, in absence of the above provision, an invention that has been materially completed prior to the verification and testing process does not count as a service invention. Therefore, the above provision is considered appropriate.

Service Invention Reporting System

Article 12, paragraph 1 of the Regulations provides that: "[w]hen employee-inventor reports his invention as a non-service invention, the company shall provide a written reply within two months from the date of the receipt of such report which complies with Article 11 hereof; failure of giving such a reply within the aforementioned period will be deemed to the employer-company's consent that the invention is a non-service invention."

The main objection to the above provision is that a failure to give a reply within a certain period of time is a procedural mistake and should not lead to the loss of substantive rights. Invention identification is a complex process and if the employee-inventor provides a large volume of reports, the identification process will be burdensome. 

The primary supporting view is that, when the employee-inventor claims in his report that the invention is a non-service invention, the company may raise objections or acknowledge the claim expressly or impliedly. Therefore, there is no loss or alteration of the company’s substantive rights. However, in absence of the above provision, the company may delay in replying to the report submitted by the employee-inventor, and this may cause loss to the employee-inventor.

Standard of Remuneration for Service Invention

Article 21, paragraph 3 of the Regulations provides that: "[i]n absence of contractual provisions or company regulations in accordance with the laws on the remuneration of the employee-inventor, the company shall provide the employee-inventor with no less than 20% of the net income generated from assignment or license as a remuneration after the company assigns or licenses others to exploit the intellectual property. "

The main objection to the above provision is that 20% of net income generated from the assignment or license is too high. Such a high royalty fee or assignment fee does not necessarily represent or reflect the value of the invention. Other factors such as commercial operations may play a major role in the deal.

The primary supporting view is that someone is willing to purchase a service invention because of the value of the invention in which the employee-inventor’s labor contributes a major proportion. It is reasonable to extract no less than 20% of the net income from the assignment or license of the service invention. Similar provisions can be found in other laws and regulations, and in reality, many companies perform an even higher standard than 20%.