Rewards for employee inventions in China for foreign companies

In China, corporate innovation activities are intensifying as the protection of intellectual property rights is strengthened across the board. In order to motivate inventors and encourage them to participate more actively in research and development (R&D), there is a growing awareness of inventors' research achievements, and inventor incentive systems within companies are gradually being developed.

As the globalisation of R&D progresses, more and more foreign companies are conducting R&D by establishing bases in China or by collaborating with local Chinese subsidiaries. Under these circumstances, the issue many foreign companies is facing is how to encourage the inventors of employee inventions originating in China.

This article will explain some points about the reward system for employee inventions in China based on actual cases.

According to the Chinese Patent Law (as amended in 2000), inventions completed by an employee in the performance of the company's duties or mainly using the company's material and technical conditions are employee inventions. Patent application rights and patent rights related to employee inventions belong to the company to begin with. The law states that the organisation should reward the employee inventors after patent rights have been granted for employee inventions.

Rewards for employee inventions are primarily based on employment relationships, but in the case of foreign companies, employee inventions made by employees of Chinese subsidiaries are often transferred to the parent company and filed in the name of the parent company. At that time, the inventor is not an employee of the parent company, and the parent company cannot pay the reward. There is an argument that the Chinese subsidiary is not the patentee and should pay the reward according to the provisions of the Patent Law.

In the employee invention compensation claim case filed by a former 3M Chinese employee in 2014 (H. G. M. S. (Z.) Z. Z. No. 120 Civil Judgment), the court found that the Chinese subsidiary of a global company should pay the reward for inventions created by it.

According to 3M's intellectual property policy, 3M China's right to employee inventions will be transferred to 3M Innovation Company, another subsidiary of 3M, and a patent application will be filed in the name of 3M Innovation Company.

The court stated that the intent of the provisions of the Patent Act concerning the payment of rewards to employee inventors is to provide employee inventors with a labour remuneration equivalent to their contribution, and that the rights of the employee inventors to obtain reward cannot be eliminated through internal consultations within the global companies.

Although 3M China is not the owner of the patent at issue, the court ruled that it should reward the inventor as the employer of the employee inventor in this case.

Also, in CMECH's employee invention incentive claim case in 2018 (Y. M. Z. No. 1824 Civil Judgment), the court ruled the same.

CMECH transfers the rights to its employees' inventions to its affiliate company, BETTELI, and after BETTELI has filed a patent application in the United States, BETELLI commissions the manufacture of the patented product to CMECH, and the manufactured products are all exported and sold in the United States.

The court ruled that a ‘patented organisation’ as defined in the Patent Act is an organisation that has an employment relationship with the inventor and should have the right to apply for a patent on the employee invention once the employee invention is completed. CMECH is not the owner of the US patent, but has an employment relationship with the inventor and the court ruled that BETTELI commissioned the patented product to manufacture the patented product and actually made a profit, so it should pay the inventor a reward.

As can be seen from the precedents above, regardless of the intellectual property management policy within global companies, Chinese subsidiaries are obligated to reward inventors for employee inventions created by Chinese subsidiaries.

In addition, even if a patent application is not filed in China for an employee invention of a Chinese subsidiary, reward for the inventor is required if the company makes a profit from the employee invention.

Rewards for employee inventors are divided into incentives and remunerations, each with different payment conditions. Incentives should be paid to inventors after patents related to employee inventions have been registered, but remuneration should be paid to inventors in proportion to the profits earned by exploiting the patents, under Article 15 of the Patent Law.

There are many cases in which the inventor was paid under an unclear name, and the inventor requests a reward for an employee invention again, or cases in which incentives were paid after the registration of the patent but the inventor requests a remuneration after the patent exploitation since it was not paid.

In Lier Chemical's employee invention reward dispute case in 2018 (C. M. Z. No. 615 Civil Judgment), Lier paid CNY 100,000 ($14,000) in incentives to the team members, including the plaintiff, when the research results were published, and gave the plaintiff 1% of the company's stock to encourage the work of the plaintiff, who was the leader of the research and development team. The plaintiff received a profit of about CNY 30 million from the shares.

Nevertheless, after the patent based on the research results was registered, the plaintiff claimed compensation from Lier for exploitation of the patent. The court ruled that the CNY 100,000 and 1% of the company's stock were incentives for research and development activities before filing a patent application, and the court found that it was not an employee invention reward under the Patent Law. The court ruled that Lier was obliged to pay the plaintiff further compensation based on the profit from the exploitation of the patent.

Various incentives are sometimes given to developers during development to promote R&D activities, but such incentives are not incentives for employee inventions as stipulated in the Patent Act. To prevent disputes, it is better to clearly define the conditions and timing of the payment of incentives and rewards in line with the provisions of the Patent Law, and to clarify the name of the incentives and their relevance to employee inventions when paying rewards in company rules.

Pursuant to the provisions of the Implementing Regulations of the Patent Law, the company may stipulate the method and amount of reward with the employee inventor, and if there is no such stipulation, the company shall pay incentives and remuneration above the minimum stipulated in the Implementing Regulations of the Patent Law.

Therefore, if the company has rules for employee inventions, rewards should be given according to the company rules. In addition, the amount of rewards determined by internal regulations does not have to be above the legal minimum amount. The court allows that “A company may, according to its own characteristics and needs, agree to reward inventors with incentives higher than the statutory minimum standards, but this is the company's voluntary choice and is not obligatory. The amount of incentives agreed between the company and the inventor to be higher or lower than the statutory minimum standards” ((2014) S. Z. M. C. Z. No. 06031 Civil Judgment).

However, there are some restrictions on internal regulations. For example, since the criteria for a vague agreement that a promotion or an increase in wages will be given for the completion of an employee invention are unclear, it is deemed that they do not conform to the provisions of the Implementing Regulations of the Patent Law. Also, it has been found that the provision of incentives for employee inventions that can reduce the company's production costs and increase profits is not in line with the provisions of the Implementing Regulations of the Patent Law because it imposes excessive conditions ((2013) S. Z. F. Z. M. C. Z. No. 272 Civil Judgment).

In other words, contractual priority does not mean that companies can establish internal rules just for their own convenience, and there is a certain degree of freedom in terms of specific amounts and payment methods, but the overall content must comply with the legal framework.

Although there are not many legal provisions regarding employee inventions in China, due to the vigorous innovation activities, there have been many disputes related to employee inventions in recent years.

For foreign companies, when developing R&D activities in China, it is necessary to have a good grasp of the employee invention system in China and formulate employee invention regulations for the Chinese subsidiary accordingly to stimulate the motivation of local inventors and produce better technical results.

In addition, since the employee invention system in China has unique provisions, it is better to create internal rules that balance the interests of the company and the interests of inventors while considering the business in China, since there is a possibility of causing inconvenience if the relevant provisions of the parent company are applied to the Chinese subsidiary as they are.