How to reward and remunerate your inventors in China

Ever since the Chinese Patent Law, amended in 2008, and its Implementing Regulations, amended in 2010, (together referred to as the Chinese patent laws) came into force, concerns have been raised as to the issue of reward and remuneration to inventors of service inventions; many legal counsels of multinational companies have been busy changing their internal policies and employment contracts. Each company may have their own specific concerns and strategies regarding this issue; however, there are several common features in dealing with the reward and remuneration issue, as follows.

Article 16 of the Chinese Patent Law forms the basis for the reward and remuneration issue, and defines the two different concepts.

Reward is the award given to the inventor or designer when their service invention or design is granted with a patent right. It is to acknowledge their contribution to making a potentially valuable invention or design.

Remuneration is to acknowledge the inventor or designer's contribution to bringing economic benefits to the employer by their creation. It is to be granted after a patent generated from a service invention or design is exploited.

"The reward and remuneration should be paid independently and specifically"

These two awards are separate and cannot replace each other. However, according to Shanghai High People's Court's Guideline of Hearing Disputes regarding Inventor/Designer Reward and Remuneration for Service Invention published of June 2013 (the Shanghai Court's Guideline), the employer should be allowed to give the inventor a lump sum for reward and remuneration together. The reward and remuneration should be paid independently and specifically, and should not be mixed up with other payment; otherwise, the risk is it will be deemed as never paid.

The reward and remuneration should be in addition to the salary of the inventor or designer, and the employer cannot refuse to pay such awards with the excuse that the inventor or designer's salary covers the compensation to invent or to design. In addition, such awards should be given for each invention or design, so it is not a good idea for the employer to just add a fixed amount on the top of the monthly salary, even though such a top-up may be called a reward or remuneration.

				Amount to pay
	Manner	Time to pay	Frequency/ term of payment	Invention patent	Utility model patent	Design patent
Reward	Monetary prize	within three months from the date of the announcement of the grant of the patent right	Only once	≥Rmb 3000 (about $500)	≥Rmb 1000	≥Rmb1000
Remun- eration	Monetary prize	After the patent is exploited, each year or a lump sum once and for all.	During the valid duration of the patent	≥2% of the profit for self-exploitation; ≥10% of royalty for licensing	≥2% of the profit for self-exploitation; ≥10% of royalty for licensing	≥0.2% of the profit for self-exploitation; ≥10% of royalty for licensing

The Chinese Patent Law does not specify when, how and what an employer should pay to its employees for their service invention-creation but its Implementing Regulations provides certain detailed stipulations.

According to rule 76-78 of the Implementing Regulations, there are three ways to set the reward and remuneration rules, including: (i) by contract; (ii) by company policy; and, (iii) by statutory standard.

The employer may sign a contract with its employees for the manner and amount of reward and remuneration for their service inventions or designs. A contract prevails over the other two ways. It should be noted that a contract may be invalidated if the contract terms are obviously unfair or unreasonable according to the Contract Law of China. There is no general definition of the terms fair or reasonable to apply in all industries or for all invention-creations; however, it is certain that a symbolic payment of extremely low reward or remuneration such as $1 for a patent would certainly be unfair and unreasonable.

Some companies make company policy to set the rules for reward and remuneration, which is allowed. Nevertheless, employees must get to know the policy beforehand and have the chance to express their opinions on it before they accept it. Again, the terms in the policy should be reasonable and fair.

If there is no contract and no company policy, the statutory standard as prescribed in rules 77-78 of the Implementing Regulations of the Chinese Patent Law should be followed. Below is a summary of such standards:

According to article 10 of the Shanghai Court's Guideline, when the patent is transferred, the benefits obtained by the company through patent transaction should be treated in the same way as the licence fee when calculating the remuneration to the inventor if there is no contract or company policy available.

In order to prevent disputes and to avoid the disclosure of the company's financial data, it is strongly recommended to make a contract or policy in advance, especially for remuneration. A reasonable lump sum of remuneration may be an easier and better choice than the complex calculating formula.

Monetary award is the most common method of reward and remuneration, but it is not the only way. The employer and the employee may also agree on other methods, such as company shares, paid vacation, education opportunities, and promotion opportunities, as indicated in article 4 of the Shanghai Court's Guideline.

The second paragraph of rule 77 of the Implementing Regulations requires the employer to give a more favourable reward to an inventor or designer whose proposal generated the concerned invention or design. That is to say, the employer should differentiate the contribution of inventors and designers to an invention or design and give different rewards in consideration of their contribution. It may not be easy to distinguish the degree of contribution in each case, so it is not realistic to determine different rewards for different contributors if there is more than one. Some companies solve the problem by granting an annual award to Inventors of the Year, with a substantial contribution in addition to normal fixed-amount rewards for each invention made in this year. This is a good solution, which meets the requirements and also encourages employees to come up with valuable ideas.

Apart from the Chinese patent laws, an employer should also pay attention to some other laws, especially the Contract Law of China (chapter 18 in particular), when making policies and contracts regarding the service invention.

"China is making an effort to create an inventor-friendly society"

Article 326 of the Contract Law of China prescribes that the employee-developer of an employee-developed technology has the right of first refusal under the same conditions where the employer is to transfer the concerned technology. According to this article, the employee-inventor may challenge the transfer of a patent to claim that the concerned patent should be transferred to them, which may cause a problem. Therefore, it is suggested reaching an agreement beforehand with the employee that the employee gives up the right of first refusal for all the service inventions they will make.

Although the Chinese Patent Law does not explicitly define the scope of service inventions that are subject to the reward and remuneration rules provided by the Chinese Patent Law, it is assumed that such rules only apply to those inventions made in China according to the jurisdiction regulation of the Chinese laws. Article 1 of the Shanghai Court's Guideline and article 4 of the draft Regulations on the Remuneration for Inventor-employee's Invention (hereinafter referred to as draft Remuneration Regulations) also affirm such a conclusion. The draft Remuneration Regulations was made and published by the State Intellectual Property Office of China in November 2012, appealing for the public's comments and advice.

The employment relationship between the inventor and the patentee is the precondition for the inventor to receive reward or remuneration from the patentee. Therefore, in the situation that entity A hires entity B to make an invention, but the two parties agree that the ownership of the concerned invention belongs to entity A, the employee of entity B who is the inventor of the concerned invention is not entitled to receive reward or remuneration from either entity A or entity B.

If the patent is transferred from entity A to entity B after it is granted, the new owner (entity B) has no employment relationship with the inventor or designer of the patent, so entity B does not need to give remuneration to the inventor or designer when it exploits the concerned patent. Entity A, as the employer of the inventor or designer, should pay remuneration to them for the benefits it receives from entity B for patent transfer, which should be treated the same way as the licence fee as prescribed in the Shanghai Court's Guideline.

Thus, some people may think of escaping the remuneration payment liability by transferring the patent rights to an affiliated company free of charge, or at a very low price, and allowing the affiliated company to keep the profit obtained from the exploitation of the concerned patent. This may not be a good idea. According to article 52 of the Chinese Contract Law, if the contracting parties collude together in bad faith to harm a third party's interests, such a contract may be invalidated. If the patent was transferred free of charge or at a very low price, and the service inventor did not receive reasonable remuneration, it may be determined that the assignment between the patent assignor and assignee is invalid because it violates the Contract Law. In addition, the draft Remuneration Regulations also states in article 22 that in such a situation, the remuneration should be calculated with reference to the market price.

In general, China is making an effort to create an inventor-friendly society so as to attract and foster more talent, and to generate more inventions. Such an intention is well demonstrated in the draft Remuneration Regulations. Many of the provisions in this draft are criticised by and may not be acceptable to employers.

Among all the debated provisions of the draft Remuneration Regulations, the right given to the inventor of a service invention when the employer does not apply for a patent or exploit a patent right, may be one of the most criticised.

Under the current law, the employer has complete and independent authority to decide whether to apply for a patent right for a service invention, and will not encounter problems if it does not actively exploit a patent generated from a service invention, as long as it has rewarded the inventor as required by the law. It does not have any duty to report its decision regarding a service invention to the relevant inventor, and there are no negative consequences to keeping any patent just in paper without using it. The scenario will change greatly if the draft Remuneration Regulations are adopted. According to the draft Remuneration Regulations, the employer will bear the following duties regarding service invention:

"The scenario will change greatly if the draft Remuneration Regulations are adopted"

• According to article 15 of the draft Remuneration Regulations, after receiving the invention report from the inventor for a service invention, the employer should review it and notify the inventor, within a reasonable period of time, of its decision on whether to apply for the patent right, to keep it as a technical secret or to disclose it to the public. If the employer fails to notify in time, it will be deemed as having transferred the right of applying for a patent in China to the inventor free of charge.

• According to article 17 of the draft Remuneration Regulations, the employer should notify the inventor two months before it decides to abandon a patent application or a patent right generated from a service invention; the inventor may be assigned with this patent application or patent right free of charge, if the inventor so asks. However, the employer will have the right to exploit free of charge the concerned patent even after the right is assigned to the inventor.

• Article 31 of the draft Remuneration Regulations puts liability on the employer for its reluctance in exploiting a patent right, stating that the employer shall pay reasonable compensation to the inventor if it has not exploited the right nor prepared for exploitation within three years after the right is granted; the inventor will be entitled to exploit the right himself if the employer refuses to pay. It does not say whether the inventor should pay any fee to the employer when exploiting the concerned patent right, or whether the inventor should share the profit with the employer if any.

For an employer, more administrative work will be needed to manage inventions, inventors and IP rights, and the cost may well increase.

Technology is the key for the development of a company. To give sufficient incentive to inventors to make more valuable inventions is no doubt very important, and it is crucial to control the cost and to reduce risk for the company. A good strategy needs to seek a steady balance.

Lena Shen
		Lena Shen, a partner at Beijing Sanyou Intellectual Property Agency, is an experienced IP lawyer in China. She was educated in both China and the United Kingdom, with an LLM degree in IP law from Queen Mary University of London. Lena specialises in IP litigation and trade mark prosecution and she is appreciated and trusted by her clients for her efficiency and reliability.

Xiaolin Dang
		Xiaolin Dang, a partner at Beijing Sanyou Intellectual Property Agency, is a leading patent attorney in China. He has received various awards from SIPO and ACPAA, for example for having a "leading role in the IP field", and being a "high-level talent in the patent agency industry". Xiaolin graduated from Peking University and studied at Kent Law School in Chicago, receiving an LLM degree in IP law. He specialises in patent litigation and prosecution.