Shall Parent Company Make the Payment for Subsidiary Employees’ Invention for Hire?

(By Albert Chen) In past essays, the author has introduced the legal issues related to the establishment of remuneration for inventions developed under work for hire schemes, and payment of said remuneration. Through a study of two recent cases, the author has found that the comments made by the judge in them is of reference value when deciding the “unit granted the patent right” and the “one liable to prove after tax profits”. In the meantime, the author would like to share his interpretation and analysis in these two posts.

Case summary:

Mr. Wen, the plaintiff, once worked in the Shanghai PUDONG “EV” Fuel Injection Co.,Ltd (hereinafter “EV”) as a general engineer. Shanghai Diesel Engine Co., Ltd (hereinafter “Diesel”) is the major shareholder of EV Company, and holds more than 90% of the company’s shares. Wen resigned in 2005, and by that time had created two inventions, and registered them under Diesel Company’s name, while Wen was recorded as the inventor. In September 2003, Diesel transferred the two patents free of payment to EV, and in the same year, EV licensed the patents to a third party. When Wen resigned from EV, he filed a lawsuit against his past employer with the claim that neither Diesel nor EV had paid him any sort of remuneration for the invention during its transfer and licensing, and therefore claimed payment for his invention.

The case was heard in the Shanghai No.1 Intermediate People’s Court (the “Shanghai Intermediate Court”) in the first instance and in the Shanghai Higher People’s Court in the second instance. Both courts confirmed that EV is the sole owner of the patent, and therefore shall make payment of any requisite remuneration; the specific reason being that the patented invention was created during Wen’s employment at EV, and the agreement between Diesel and EV is determinative as to who actually holds the patent right. Based upon this reasoning, the courts concluded it was EV who held the patent rights subsequent to the rights transfer.

At the end of the hearing, Shanghai Intermediate Court ruled that EV pay the plaintiff remuneration of RMB 270, 000 Chinese Yuan. That verdict was sustained by the Shanghai Higher People’s Court.

Comments from the lawyer:

I. The analysis in the case

The particular characteristics of the preceding case are: 1) the registration, transfer and licensing of the patent involves both the parent company and its subsidy; 2) the invention was developed when the inventor was working for the subsidy, but the patent was first registered under the name of the parent company and subsequently transferred to the subsidy.

As to the determination of facts by both courts, the following three conditions shall be considered when deciding the “entity granted the patent right”, namely the “entity who shall pay the remuneration for an invention made for hire”:

1)       Who employed the inventor when the invention was completed?

2)       Who enjoys the patent right?

3)       Who exploits the patent right afterwards?

In the case, despite the fact that patent was originally registered under the name of the parent company, it was transferred to the subsidy where the plaintiff was employed. At that point, whoever employs the inventor, enjoys the patent right; in this particular case, the patent exploiting entity was clearly EV. Taking this into account, the court easily determined EV to be the “entity granting the patent right,” and therefore found EV to be the entity responsible for the issuance of remuneration to the inventor.

II. Thinking from the case

The above verdict also causes the author to consider other possible situations where the three “who” questions do not necessarily result in pointing to the same person or entity; in that situation, who shall pay the remuneration? In other words, who shall be the “unit granting the patent right” when the patent is registered under the name of affiliates of the inventor’s employer, and then registering company exploits the patent right afterwards?

To solve this problem, it is necessary to check the relevant articles in the law. As provided in Article 6 of the Patent Law:

“An invention-creation that is created in the course of performing the duties of an employee, or mainly by using the material and technical conditions of an employer shall be deemed a work made for hire or work-product.”

In addition, the Implementation Rules of the Patent Law describe the above situation in its Article 12:

“(1) In the course of performing 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 from his retirement, resignation or from termination of his employment or personnel relationship with the entity to which he previously belonged, where the invention-creation relates to his own duty or any other task entrusted to him by the entity to which he previously belonged.”

The above situations, especially the third one, are actually indicating the “unit” to the one who employs the inventor, including public institutions and the administrative authorities. That is to say, a precondition of a work made for hire or work-product is the existence of the labor or personnel relation.

But the author would like to point out an exception. As stated in the Report on the Ownership of Employment Invention-Creations and the Remuneration System as published under the direction of Mr. Tao Xingliang from Shanghai University, for the free transfer of technology between affiliated companies, an inventor can claim a reward or appropriate remuneration from both the employer or the affiliated company of the employer who enjoys the patent right and exploits it. That explains that when one can find any affiliation between companies, and the technology is transferred without any payment, even the employer of the inventor is not necessarily the one registered or enjoys the patent right; and considering the relationship between the subjects, an inventor could theoretically claim remuneration from both companies. At that point, a “transfer without payment” and an existence of any “affiliation” are adequate grounds to find a relationship between business entities.

Although so far the author hasn’t found any cases based on this reasoning, in the interest of seeking practical justice, we believe it could be adopted in similar cases in the future.

Lawyer Contacts

You Yunting86-21-52134918

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