The Implementing Regulations of the PRC Patent Law (“Implementing Regulations”) were recently revised to implement the Third Amendment to the PRC Patent Law. The revised Implementing Regulations came into effect on 1 February 2010, and contain new provisions with respect to the reward regime for employee inventions, an area of law that has been watched with keen interest by both Chinese and foreign companies involved in research and development (R&D) activities in China.
In the past, many employers have tended to disregard the general requirements under the Patent Law for a PRC employer to pay a financial reward to its employees upon the grant of a patent and subsequent licensing or transfer. However, the revised Implementing Regulations now explicitly extend these requirements to all employers in China and impose specific rewards which will be payable to employees as a default position if the relevant employment contracts are silent. As a result, the risk of enforcement in China is now far greater.
In practice, the default arrangements may be somewhat un-commercial. Employers should therefore consider overriding the default arrangements by express alternative provisions in the relevant employment contracts, provided that such alternative provisions are reasonable.
The recent changes to the reward regime in China are discussed in more detail below.
General Provisions under the Patent Law
Articles 6 and 16 of the Patent Law (which are not changed by the Third Amendment) set out the general position with regard to ownership of patent rights and remuneration of inventors in the PRC.
Article 6 of the Patent Law provides that a “service invention” is an invention made in the course of employment duties or mainly using the material and technical resources of the employer. Although the default position under Article 6 is that the right to apply for a patent over a service invention belongs to the employer, whereas the right to apply for a patent over a non-service invention remains with the inventor or designer, companies can expressly override the default rules and determine the ownership of patent rights and the right to apply for patents by contract.
Article 16 of the Patent Law provides that a company that obtains a patent over a service invention must, upon exploitation of the patent, pay the inventor a reasonable remuneration taking into account the extent to which the patent is exploited and the income earned from such exploitation.
New Implementing Regulations
The previous version of the Implementing Regulations already provided for a detailed reward payment system applicable only to State-Owned Enterprises (SOEs), under which employees were entitled to payment of a lump sum upon grant of a patent and a percentage of the annual revenue and licensing royalties generated by the patent. For example, the original Implementing Regulations provided the following default arrangements: (1) a minimum reward of RMB 2,000 to be paid within three (3) months from the date on which a patent is granted, and (2) a “reasonable remuneration” upon exploitation of an employee’s invention patent amounting to no less than 2% of the after-tax profit generated from implementation of the patent, or 10% of the fee generated from the licensing of the patent.
The new Implementing Regulations contain a number of amendments as follows:
- The reward provisions now apply to all entities in China, not just SOEs.
- The minimum amount of reward, which must be paid within three (3) months from the date on which a patent is granted, has been increased from RMB 2,000 to RMB 3,000 for an invention patent and from RMB 500 to RMB 1,000 for a utility model or design patent.
- The detailed provisions above will only apply in the absence of specific reward provisions in company regulations or employment contracts (i.e. employers are free to implement their own reward system).
Although some Chinese companies appear to have voiced concern with the default arrangement in the original Implementing Regulations requiring a “reasonable remuneration” of no less than 2% of the after-tax profit generated from implementation of the patent, or 10% of the fee generated from the licensing of the patent, that provision remains unchanged in the new Implementing Regulations. Consequently, absent an agreement to the contrary, this default arrangement now applies to all employers in China.
Dealing with the New Implementing Regulations
If employers are to take advantage of the ability to formulate and document their own reward system in respect of employee inventions, they must be careful to ensure that any remuneration paid to an employee upon exploitation of a patent is reasonable.
Not only is this reasonableness requirement specifically contained in Article 16 of the Patent Law (which states that the reward must be reasonable based upon the scope and extent of application of the patent and the economic benefits it yields to the employer), but it has also been emphasized by the State Intellectual Property Office (SIPO) in its Explanation of the Draft Amendments (SIPO Explanation). The SIPO Explanation states that the detailed provisions in the Implementing Regulations (which were in draft form at the time the SIPO Explanation was issued but have since come into force) may still apply despite an express agreement between the employer and the employee, if that agreement is held to be “unreasonable”.
Although a definitive interpretation of this reasonableness requirement has not yet been issued by the relevant PRC authorities and/or courts, given the attention focused upon the requirement within the legislation itself, it is questionable whether a scheme under which employees receive the same level of compensation regardless of the value of their inventions, would satisfy the new Implementing Regulations. Employers should therefore consider more sophisticated reward mechanisms to reduce the risk of claims from dissatisfied employees. Possibilities include:-
- Payment of different levels of reward, for example, a certain fixed lump sum payable for standard patents and a larger lump sum payable in respect of ‘blockbuster patents’ of significant economic value; and/or
- Payment of certain sums against certain triggering events, such as: (i) the filing of a patent application; (ii) the grant of a patent; (iii) the first transfer of the patent to a party outside the company group following its grant in China; and (iv) the commercial exploitation of the patent.
Whilst there is no guarantee that such mechanisms would be completely immune to challenge as each case will depend on the specific circumstances, the risk would be greatly reduced where employers can demonstrate that they have specifically addressed the issue of employee rewards and formulated a scheme that is based upon clear and objective criteria.
Such reward scheme should be documented in a company’s employment agreements and set out in the Employee Handbook which should expressly state that the scheme addresses, supersedes and is in lieu of all rights of the employee to receive compensation under the Patent Law.
Provided that employees are satisfactorily rewarded for their technological achievements in accordance with the Patent Law and Implementing Regulations, it will still be possible going forward for companies to require employees to assign to them all patent rights and waive any moral rights they may have in their inventions. As a practical measure to reinforce such assignment obligation, employers should also make sure that their employment contracts contain clear disclosure obligations requiring an employee to notify the employer of all inventions (and other works) created during the course of employment that (i) are relevant to the employer’s business; (ii) arise out of tasks or assignments that are part of the employee’s job responsibilities; and (iii) were created using any of the company’s resources (such as time, materials or space). It may also be sensible to request a list of inventions created by the employee prior to his employment to avoid any disputes over whether or not such inventions were created during the employment.
Following recent developments, the PRC Patent Law now requires all companies in China to compensate their employees for their inventions in accordance with specific levels of reward. Companies should note, however, that the statutory rewards are applicable only in the absence of express provisions in the employment contracts dealing with compensation for inventions. It is highly recommended, particularly in light of significant intellectual property infringement and high turn-over of staff in China, that companies clearly document all of the respective rights of the employer and employees within the employment contracts, including provisions on rewards for employee inventions.