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China Issues New Patent Law Regulations on Remuneration for Employee Inventions

June 17, 2010
by: Chunsheng Lu, Esq. and Gary P. Biehn, Esq.

Introduction

Foreign companies conducting research and development in China can benefit from favorable provisions in Chinese Patent Law that grant such companies ownership of inventions developed by their employees.  The most recent amendments to the Patent Law were published on October 1, 2009, and were followed by Implementing Regulations (the Implementing Rules) of the Patent Law, which were issued on January 18, 2010 with an effective date of February 1.  One critical change in the law addresses remuneration of employee-inventors by their China-based employers.

Generally, under Chinese law, an inventor may apply for a patent for an invention, unless that invention was made in an employment context.  Chinese Patent Law refers to employers as “entities” and accordingly, where an employee creates an invention “in execution of the task of an entity,” only that entity may apply for the patent rights to the invention.  Where an invention is either made (1) in the scope of an employment duties or (2) by using mostly the “material and technical means” of an employer, the exclusive right to patent the invention transfers from the employee to the employer

New Implementing Rules 76, 77 and 78

Article 16 of the Patent Law obligates employers to pay their employee-inventors a “reasonable remuneration” for their inventions.  Under Implementing Rule 76, companies are free to contract with their employees for the amount the employee will receive for inventions, so long as the amount “is reasonable.”  Companies engaged in business in China should note that in the absence of a specific company policy regarding remuneration, Implementing Rules 77 and 78 govern the amount an employer must pay to the employee-inventor.

Implementing Rule 77 states that where “no agreement exists” between the employee-inventor and the entity regarding remuneration, the entity must award “a sum of money as prize” to the inventor within three months of the entity receiving the patent.  Specifically, Implementing Rule 77 states that the sum of money “must not be less than 3,000 Yuan” for an invention (USD 430), or 1,000 Yuan (USD 147) for a design or utility model, or a “favorable” amount for an idea which leads to a patented invention.

Implementing Rule 78 addresses the default remuneration standard during the course of the commercial exploitation of the patent.  Under this Rule, and in addition to the payment described in the preceding paragraph, the employee-inventor must now be compensated at no less than 2 percent of annual profits for an invention or utility model. With respect to employee-inventors who develop a design that becomes a patented invention must be awarded no less than 0.2 percent of annual profits relating to such an invention.

As an alternative to incrementally paying a percentage of business profits to the employee-inventor, Implementing Rule 78 also allows a company to pay a single lump-sum as remuneration, calculated based on the appropriate percentage, and agreed to by the parties.

Lastly, Implementing Rule 78 allows the entity holding a patent to authorize another entity to exploit that patent for business purposes (for example, pursuant to a licensing agreement).  Under this scenario, by default the employee-inventor must receive “not less than 10 percent” of the exploitation fee.

Conclusion

In light of these new Implementing Rules, it is important—to avoid the potential significant remuneration costs—for entities operating in China to develop and adopt policies regarding remuneration and implement such policies pursuant to written contracts with employee-inventors.  Although it is typical in a western employment context that an employer requests employees to sign an intellectual property right assignment and waiver agreement pursuant to which the employees are entitled to nominal remuneration for inventions, the approach could be subject to challenge in a Chinese court.  Moreover, even in the West, the “hired to invent doctrine” only applies in the employment relationship; it does not apply to independent contactors.  An independent contractor, although specifically engaged to create a design or invention, is still the owner of the design or invention and the patent rights.  Determining how to properly characterize the relationship is often not straightforward.

While theoretically any right, including this right to remuneration under Article 16 of the Patent Law, may be waived under China law, the long established Chinese contract law tradition requiring fairness in all contracts may be given significant weight by a court, in which caseany such waiver could be held to be unfair and voidable.  In view of this risk, a better practice may be for a China-basedemployer to adopt policies or enter into contracts with its employees under which the remuneration standard is slightly higher than the minimum standards under the Implementing Rules, to limit the risk of possible excessive remuneration that would be otherwise applicable in absence of such policies or contracts.  

For more information regarding this alert, please contact Gary Biehn (215.864.7007; biehng@whiteandwilliams.com) or Chunsheng (Tony) Lu (215.864.7006 luc@whiteandwilliams.com).

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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