25 Jul 2017 in Newsletter
Proposed Changes to China’s Inventor Reward and Remuneration System
China requires the reward and remuneration of inventors. Reward is a one-time payment to employees for the invention or creation of intellectual property. Remuneration, on the other hand, is required if the employer exploits the intellectual property by using it in commerce by, for example, incorporating the intellectual property into a product or licensing the intellectual property to another entity. Amendments originally proposed in 2015 will likely come into force this year, which will change the required reward and remuneration, as well as when ownership of an intellectual property asset vests in employers or their employees. These changes may have a substantial impact on companies that operate entities in China and on companies that rely on Chinese research and development entities.
Under the current system, the law defines two types of intellectual property creation: “non-service invention-creation” and “service invention-creation.” Depending on the type of invention-creation, the ownership of a new intellectual property asset may flow to an entity, such as an employer, or to the individual inventor. Ownership of service invention-creations normally flow to an entity, such as the inventor’s employer. Service invention-creation may take place as part of the normal or special work of an employee as directed by an employer. Under the current system, ownership vests in the employer even in the absence of a contract explicitly requiring the employee to assign his or her rights to the employer. In contrast, the ownership of a “non-service invention-creation” vests in the inventor or creator. This invention-creation is usually characterized by the fact that it does not take place at work nor employ the employer entity’s resources for the creation of the intellectual property.
Of greater interest to most employers is the reward and remuneration of employees. Absent a contractual agreement to the contrary, under current law employees may claim a right to substantial financial compensation when they invent or create intellectual property assets. In this regard, a sum of no less than RMB 3,000 for invention patents and RMB 1,000 for utility or design patents is prescribed by law as a reward. Remuneration follows the reward. If the employer exploits the invention within the duration of the intellectual property right, the inventor may be entitled to no less than 2.0% of the employer’s profits resulting from an invention or utility model patent, and no less than 0.2% of the profits from a design patent. Alternatively, the entity may award a lump sum to the inventor-creator based on the above percentages. As a third alternative, the inventor-creator may receive an exploitation fee (based on the licensing or sale price of the intellectual property by a third party) and claim no less than 10% of the associated revenue. Historically, contractual agreements have been used with mixed success to limit these amounts below the otherwise dictated amounts.
Proposed changes to Chinese law
China’s proposed changes to the law will potentially impact all of the above-discussed rules. First, the rules will change concerning when a service invention-creation vests in the employer. Under the new rules, the current default rule of the entity being presumed to have ownership (even absent a contract) will change – this will not occur unless the employee enters into a contract specifically assigning his or her rights, reversing the current default of the entity presumed to have ownership (even absent a contract). In addition, if the invention or creation arises outside of the execution of the inventor’s or creator’s normal “tasks,” i.e., outside his or her normal daily-work for the entity, the ownership will no longer necessarily vest in the entity even when the entity’s materials and technical means are used to create the intellectual property. Second, reward and remuneration will change. In the absence of a contract otherwise dictating reward and remuneration for employees, employers may be compelled to pay each employee-inventor a reward which is at least twice the monthly average salary of its staff for invention patents and at least the monthly average salary for staff for other IP rights.
The remuneration calculations are also amended. Under the new rules, remuneration is required to be:
- no less than 5% of the operating profit generated through exploiting a patent or plant variety and no less than 3% of the operating profit generated through exploiting other IP rights;
- no less than 0.5% of the revenue generated through exploiting the patent or plant variety and no less than 0.3% of the revenue generated through exploiting other IP rights; or
- an ongoing payment for the life of the IP right or a lump sum, both consistent with the above percentages.
Finally, at least 20% of the net income generated through assignment or licensing of the right to a third party will now be the default rule absent contractual provisions to the contrary.
Issues for employers and other entities engaging with inventor-creators in China
Assuming that the new laws come into effect as expected, the risks associated with not having clear contractual understandings laid out in advance with permanent employees, temporary employees, and vendors will increase. However, deciding what terms should be included in such contracts is a more challenging question. Chinese courts have not provided substantial guidance on the contractual terms that would provide for adequate reward and remuneration. Chinese courts have stressed “fair” compensation for inventor-creators, but other than this general principle, there is no black-letter law guidance that may be used.
Under the new laws, it will be necessary to contractually ensure transfer of ownership of intellectual property assets and to try to limit reward/remuneration amounts to prevent uncertainty with respect to the amounts due to employees. As a general operating principle, companies engaging with Chinese entities for contract research and development work should consider explicit contractual terms ensuring that the Chinese entity assumes responsibility for securing ownership of any intellectual property that may emerge from such work. The Chinese entity should also be responsible for resolving any claims for rewards or remuneration. Companies that operate in China should consider engaging Chinese legal specialists to ensure that their current and future contracts are consistent with the new regulations as they come into force. Such specialists should have additional insight on the best practices to address these changes in the upcoming years as the Chinese courts provide additional guidance on how they understand the implementation of the new rules. Periodic follow up with them is also prudent to ensure that any “standard” engagement contract with employees is drafted with the evolving understanding of the new rules.