How Chinese Courts Determine Remuneration for Employee Inventions?

(By Albert Chen) Yesterday’s post introduced regulations concerning calculation and payment of remuneration for the invention made for hire. The post also pointed out problems in the existing law, both at the by the central government and local level, namely that they lack binding authority, have low enforcement, or provide inadequate regulation on the liability of the unit.

The author has conducted research on these points in the established cases in China and found a case decided last year by the Guangdong High People’s Court (“Guangdong Court”), which is of referential value to settling the above problems.

I. The case and its hearing in court

Pan was the employee of Shenzhen Jin Sha Jiang Investment Co., Ltd (“Shenzhen Company”), and his two inventions were granted patent rights during his employment with the company. Afterwards, Shenzhen Company licensed the patents to its associated enterprise, Yunnan Science Valley Co., Ltd (“Yunnan Company”), but it paid no reward or remuneration to Pan. Dissatisfied, Pan filed a lawsuit against Shenzhen Company, claiming the reward and remuneration totaling RMB 20 million.

After the hearing in the first instance, the court refused the plaintiff’s claim of reward payment, basing its ruling on the fact that in the Patent Law and Implementing Regulations of the Patent Law (“Implementing Regulations”), the reward for the invention made for hire must be paid within 3 months of the patent announcement. The patents involved in the case, however, were respectively announced in 2004 and 2007, and the plaintiff filed the case in 2011, later than the  limitation for legal proceedings. Therefore, the court ruled that Pan could not gain legal protection.

The first instance court affirmed that remuneration for the patent is the legal obligation of the unit granted the patent and concluded that the conditions for the remuneration payment are as follows:

(1) The invention/creation has been granted the exclusive right and be within the protection term;

(2) The invention/creation has been exploited or licensed for exploitation;

(3) Utilization of the patent has resulted in profit, licensing fees, or other economic results.

In the case, the court affirmed that the plaintiff had proved that the invention/creation was still in its exclusivity and that one of the patents had been licensed to a third party for utitlization. On the other hand, however, the plaintiff did not submit proof to demonstrate utilization by the defendant, license of the other patent, or economic gains from the utitlization or the license. Considering these factors, the first instance court made its judgment by consulting the Patent Law rather than strictly following it. During the judge’s deliberation, the gains from the exploitation and license that would necessarily result were also considered. Therefore, in the end the court awarded RMB 1 million in compensation.

Dissatisfied with the decision of the first instance court, the defendant appealed to the Guangdong High Court, arguing that because the original court based its investigation on the existence of the license agreement, the compensation must be calculated based on the amount agreed to in the contract. But, after the hearing by the Guangdong High Court, the judge ruled to maintain the decision of the first instance. Moreover, regarding the defendant’s argument, the judge found that the agreement involved in the case was executed by two associated companies; therefore, it would be unfair to calculate compensation based on the standard set in that agreement. For this reason, the court consulted the statutory standard rather than strictly following it in its decision-making, and the set the final compensation amount at RMB 1 million yuan.

II. The focus of the case

In addition to the statutory conditions for the compensation payment for the invention made for hire, the following views of the courts in this case deserve attention:

First, when no specific agreement or company regulation exists on the compensation amount, the court shall consider the economic gains from the patent exploitation and licensing to decide the compensation to be made to the inventor or creator. In that case, the standards found in the Implementing Regulations do not need to be mechanically obeyed. Also, it should be noted that even if the plaintiff has made no demonstration of the unit’s gains from utilizing or licensing the patent, the court may actively investigate the economic results brought about from such actions in order to make its decision.

Second, based on the opinions of the courts hearing the cases, especially views of the Guangdong High Court, when the Patent Licensing Agreement is signed by associated companies, the contract cannot be used as the reference to calculate compensation; otherwise, it may violate the reasonability or objectivity in the case hearing. Therefore, the payable compensation shall be calculated based on the gains objectively produced.

In fact, the above two points, on the one hand, match the regulation in the Shanghai Implementing Measures on the Ownership of and Compensation for The invention made for hire (“Shanghai Measures”) on the three other main elements to be considered for further calculation. On the other hand, the liability for the compensation payment failure by the employer shall only be limited to repayment, and it shall bear no other liability, such as pensions or overdue fines.

Aside from the decision of the employer, this case should also remind the inventor or creator to claim the right as early as possible in order to better guarantee his rights. In the last post, the author stated that according to the Implementing Measures, the compensation shall be paid within three months of the announcement of the patent when the employer is granted the patent right. But, if the inventor or creator makes no claim for the reward or compensation during that period, then by the general principle of the law, while they will not lose the right to demand the payment, they might not gain support from the judicial organs in their compensation claims.

Although the case provides guidance for coming cases, China ultimately is not a case law country, and how to balance the interests between the units granted the patent and the inventor remains a problem to be solved. Under the current system, for the long-term benefit of both the employer and the inventor, making a timely payment of the reward or compensation is a win-win for both parties. Otherwise, the employer might face loss of the technology, and the inventor may be trapped in endless recourse from the employer.

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How Chinese Courts Determine Remuneration for Employee Inventions? — 1 Comment

  1. When companies are not willing to pay fair rewards for their inventors they are actually killing their supply of inventions. Why would any inventors bother to do anything if their employer only exploits them?

    Is it amazing how many companies are still behaving like this. What are this decision maker doing, this kind of behavior is killing their company? This is not about law, that is if they should they pay or not because of legal obligation. They should pay only because fair treatment of inventors is good for business. It is irrelevant if law requires this or not.

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