Employee-inventor compensation: a cross-border comparison

Until recently, the UK was seen as a tough jurisdiction for employee-inventors to recover compensation from their employers for their successful inventions. This perception is likely to change given the Supreme Court's landmark decision in Shanks v Unilever (October 2019).

Under English law the rights to an invention made during the course of employment are generally owned by the employer, but a mechanism exists in English patent law (see sections 40 and 41 of the Patents Act 1977) to pay employee-inventors a "fair share" of the profits made by their employers from exploiting or licensing those inventions (or the patents protecting them) which are of "outstanding benefit" to the business. Although that mechanism has existed for many years, few disputes have made it to court, and before the Shanks decision only one case had resulted in a significant award for the employee (Kelly v GE Healthcare, 2009).

In October 2019, the Supreme Court awarded Professor Shanks £2 million ($2.6 million) for a blood glucose testing invention he created in the 1980s while he was employed by a Unilever company. The patents protecting the invention went on to earn Unilever over £24 million in revenue as the technology became used in most blood testing kits on the market. Overturning the decisions of the three tribunals below, the Supreme Court concluded that the invention was of "outstanding benefit" to Unilever and that Shanks was entitled to a fair share of that benefit.

The key takeaways from the Supreme Court judgment are how to:

• identify the relevant business in order to assess the benefit of the patents;

• assess whether the patents have been of outstanding benefit to that business (given its size and nature); and, if so,

• assess what the employee-inventor's fair share of that benefit should be.

In the Shanks case there was a huge disparity between the amounts the inventor was paid (by way of salary and the £100 to assign his rights to the invention) and the revenue Unilever derived from the patents with relatively little effort or risk. This, and the evidence before the UKIPO of similar employee compensation schemes, appeared to persuade the court to redress the balance and award Shanks 5% of the benefit (with an uplift to reflect the impact of time on the value of money).

While the rights to employee inventions under patent/utility model law initially vest in the employee, the employee is obliged to notify their employer of the invention. The employer can then claim the invention on payment of reasonable remuneration.

The amount of remuneration is calculated using the following formula: value of the invention to the employer x employee's contribution factor x co-inventor's share.

If the employer exploits the invention themselves, the value of the invention is usually a hypothetical royalty applied to the employer's net revenue from the sales, even if (as is regularly the case) it is much lower than the employer's actual profits (Federal Supreme Court decision Antimykotic Nailpolish). For intra-group sales, the transfer price paid to the employer is used, provided it is a fair market rate. A transfer price of ¼ of the sales price to the other group company has been considered to be a fair market rate. If the invention is transferred to a third party or another group company, the value of the invention is the sales price. The value to the group company is irrelevant, unless the different group companies are considered to be one economic unit.

The contribution factor is calculated according to a point system taking into account (i) the contribution of company experience, existing work products and other employees to the invention and (ii) whether the employee is employed to invent.

The co-inventor share takes into account the contribution of other employee co-inventors.

Remuneration is usually paid as a lump sum, annually in arrears. If exploitation of the invention significantly exceeds expectations, the employee can request an increase of the agreed lump sum.

Either party can request an adjustment if circumstances significantly change once the lump sum has been agreed, but the employer cannot recover remuneration already paid to the employee.

If the employer achieves high revenues from the invention, the amount of remuneration payable can be quite significant. For example, in the Antimykotic Nailpolish case, more than €1 million ($1.1 million) has been paid to one of the employee-inventors.

Under French law, inventions made by employees fall into one of three categories:

1) Inventions made in the course of the employee's duties. These automatically belong to the employer and give rise to the payment of additional remuneration.

2) Inventions made outside the employee's normal duties, but in relation to their employment. These may be assigned to the employer upon request, subject to the payment of a fair price.

3) Other inventions belong to the employee.

Although under Article L 611-7 of the French IPC, additional remuneration is calculated in accordance with collective agreements, company agreements and individual employment contracts, in practice these agreements rarely include such provisions or include provisions which are unenforceable since they restrict the employee's statutory rights (e.g. provisions requiring an outstanding benefit to be derived from the invention, or a commercial use or grant of the patent).

Where there is no applicable provision, the French courts will determine the amount to be paid by considering the circumstances surrounding the development and commercialisation of the invention. According to a study based on 58 court decisions handed down between 2005 and 2018, the average additional remuneration paid per invention is €25,000. While the criteria used to determine the additional remuneration are similar to those in the UK, the test is less strict, as there is no requirement for the invention to be of "outstanding" value to the employer. As such, awards are regularly given, and companies should agree specific rules for calculating additional remuneration with employee representative bodies, or at least develop an internal policy for their employees.

The fair price should reflect the value of the invention at the date when it is transferred to the employer. Generally, a fair price award tends to be higher than an additional remuneration award. For instance, the Paris Court of Appeal recently awarded €100,000 as a fair price, taking into account (i) the employer's turnover, and (ii) the fact that the invention enabled the company to reposition itself in the relevant market (January 15 2019, Case No. 17/08434).

Generally an employee owns the patents protecting their inventions, unless the employee is employed to invent, in which case the employer is entitled to the patents (Article 12(1) of the Dutch Patent Act (DPA)). There are special rules for interns and academic researchers, where the first owner of the patents is usually the employer.

It is possible to contract out from the above provisions. Usually employment contracts provide that the employer is entitled to any patents and other rights, although in certain industries, other arrangements are seen.

If the employer is entitled to the patent and the inventor has not been compensated in the form of salary or other payment, the employer must pay the employee additional remuneration, taking into account the commercial importance of the invention and the circumstances in which the invention was devised (Article 12(6) of the DPA).

Where an employee is a researcher in a specific field, it is presumed that the employee's salary is sufficient compensation for the patent (Van Ginneken/Hupkens, Dutch Supreme Court (DSC), 1994).

In another decision (TNO/Ter Meulen, 2002), the DSC confirmed that additional remuneration is only awarded in exceptional circumstances. The DSC held that the particular circumstances of the case should be taken into account, for instance: i) the employee's role within the organisation, ii) their salary and other employment benefits, iii) the nature and (financial) significance of the invention, and iv) the extent of the employee's contribution to the invention. (The lower courts have also taken other factors into account, such as the involvement of other employees and the provision by the employer of research facilities and opportunities.) The DSC ruled that equity does not require that the remuneration should be equal to the actual benefit resulting from the invention.

It is not possible to contract out from the equitable remuneration provisions. The right to claim remuneration lapses three years after the grant of the patent.

Article 64 of the Italian IP Code provides that employee inventions fall into one of three categories:

• if the invention is made in the course of employment by an employee employed to invent and the employee is remunerated for that, the rights to the invention belong to the employer (so called "invenzione di servizio");

• if the invention is made in the course of an employee's normal duties but the employee is not remunerated for inventive activity, the invention belongs to the employer, but the employee is entitled to a reasonable reward (so called "invenzione d'azienda");

• if the invention is made by an employee outside their normal duties (i.e. on his/her own initiative), the rights to apply for a patent and to exploit the invention commercially belong to the employee. However, if the invention falls within the employer's field of activity, the employer can acquire the invention (and the right to acquire any overseas patents for the same invention) or an exclusive or non-exclusive licence to use it on payment of a fee. The fee is determined by taking into account any support that the inventor received from the employer in order to make the invention (so called "invenzione occasionale").

There is a presumption under the Italian IP Code that an invention has been made during the course of employment where an application for a patent falling within the employer's field of activity has been made within a year from termination of employment, unless the employee proves otherwise.

In invenzione d'azienda, the employee is entitled to a reasonable reward only if the employer or its successors in title obtain a patent on the invention or protect the invention as a trade secret. However, in the latter case, a reasonable reward is due only if the invention meets the requirements of patentability. In order to ensure that the patent prosecution process, and hence the award of the reasonable reward to the inventor, is concluded promptly, an advance examination of the application may be allowed if the employer requests.

As for the amount of the reasonable reward, Article 64 of the Italian IP Code sets out a list of criteria that must be taken into account:

• the importance of the invention;

• the tasks carried out by the employee;

• the remuneration received by the inventor; and

• the contribution that the employee received from the employer's organisation.

It is important to note that the Italian courts (see Italian Supreme Court decision no. 8368/2014) often apply the so called "German formula" according to which the amount is determined by multiplying the economic value of the invention by a proportional value which is based on three factors: (i) the type of problem solved; (ii) the solution to the problem; and (iii) the tasks carried out by the employee.

Under Chinese patent law, the default position is that an employer has the right to apply for a patent for a "service-invention creation". A service-invention creation is an invention made by an employee when performing any task for their employer, or by using the employer's materials or equipment.

Although service-invention creations belong to the employer, employee-inventors are rewarded for them, with the remuneration being determined by reference to:

• Agreements;

• Reasonableness; and

• Statutory standards.

Any agreement reached by the parties takes precedence over the statutory standards, but the agreement must be reasonable. If there is no agreement between the parties, then the statutory standards under Articles 77 and 78 of the Rules for the Implementation of the Patent Law apply.

The statutory standards require that a bonus be paid to the inventor within three months of grant of the patent, with the bonus for a patent being at least RMB 3,000 ($430), and at least RMB 1,000 for a utility model or design patent (see Article 77 of the Rules for the Implementation of the Patent Law). The statutory provisions also provide that the inventor should be paid a royalty of not less than 2% per annum of the profits generated by the employer from exploiting the invention or utility model (and not less than 0.2% per annum for a design). The inventor can be paid a lump sum instead based on the above percentages.

Where the employer licenses a third party to exploit the patent or design, it must reward the inventor or designer at a rate of no less than 10% of the royalty fee it receives (see Article 78 of the Rules).

These statutory percentages could result in very large payments to the employee for a very successful invention. Thus, employers usually set much lower remuneration percentages for exploitation and/or licensing in their employment contracts. While there is nothing to prevent an employee from challenging the reasonableness of the remuneration, the company can defend its position if it can show that: the employee's role was limited or the majority of work was done under instruction from overseas staff; many staff were involved; the employee was already well remunerated and their role was to develop technology for the company; or that this level of remuneration was in line with the remuneration generally applied in the relevant jurisdiction. Depending on the sector, other factors may also be relevant. For pharmaceutical companies, for example, it is common to refer to the overall cost and time required to bring a drug to market.

Another option is to pay a lump-sum reward corresponding to remuneration for exploitation of the invention. This may be appropriate where it would be difficult to determine the sales or operating profit from exploitation of the invention.

Although not all court cases are reported in China, there are surprisingly few reported disputes relating to remuneration for service inventions. This may be because employees consider their whole package of salary, bonus and other rewards to determine whether their contribution to the company has been properly valued and may not be inclined to bring a legal claim against their employer.

There are some cases which do give guidance on application of the above principles:

• Qianming v Shanghai Ang Feng Company (2013) upholds the principle of giving priority to agreements. The court upheld the terms of an agreement between the company and an employee which stated that the remuneration for patent exploitation should be 1% of the total sales of the relevant product. The remuneration paid was RMB 212,451;

• In Liang v Shanghai Zhongji Company (2014), the court held that where there were policies in place that specified the amount of remuneration, and the employee was aware of the company policies, the remuneration should be calculated according to the terms in the policy. Therefore the court recognised the fee of RMB 25,000 which the employer had already paid for over 40 utility models and ordered a further payment of RMB 45,000 for the remaining one utility model and 19 designs; and

• Zhang Weifeng v 3M (2015) from the Supreme People's Court suggests that the courts should try to find a way to award remuneration even if it cannot be calculated easily and such remuneration should be reasonable. In this case, the court held that the remuneration rate set in 3M's China On-duty Invention Bonus Program should be applied even though it was much lower than the statutory minimum since 3M had sought its employees' input before implementing the programme. Taking the employee's entire compensation into account (including salary) the court awarded the employee over RMB 200,000 for 3M's exploitation of the patent between 2010 and 2012.

While these cases provide some general guidance to inform discussion on employee-inventor remuneration there is still no clear test to establish what constitutes reasonableness, which ultimately will be determined by the courts based on the facts of a particular case if there is a dispute. The best solution is to try to avoid future litigation by putting in place a detailed and robust employee-inventor remuneration scheme, which reflects the particular company, the role of its employees and the type of inventions they could develop and how they might be exploited.

A key differentiating factor between jurisdictions seems to be whether an invention has to be outstanding or exceptional before an inventor is entitled to any statutory award. In China any invention made by an employee will qualify for a reward (assuming there is no enforceable agreement between the employer and employee in place). France is one of the most generous jurisdictions in Europe for employees as can be seen by the number of awards that the courts make. Italy and Germany have a more conservative approach, although regular awards are made. In the Netherlands and the UK, statutory awards to inventors are rare.

While there is some consistency in the factors that the courts consider when determining whether any award for an employee-inventor is payable, the amounts awarded still vary considerably between jurisdictions. The Shanks decision is encouraging for UK employee-inventors, but awards of this magnitude are still likely to be the exception rather than the rule.

Prudent employers, wherever they are based, should look at their employment contracts for their innovative employees and consider drafting bespoke remuneration and incentive provisions to clarify how employees will benefit from their inventions, to ensure they are in line with the thinking of the courts in their jurisdiction. Had Shanks received a reasonable payment for his invention at the time through a suitable incentive scheme, the result of the case may have been different.

L-R clockwise: Sarah Turner, Mattie de Koning, Ina vom Feld, Mickael Da Costa, Francois Jonqueres, Monica Fang, George Chan, Andrew Hutchinson, Priya Nagpal, Stefania Bergia