If your company is involved in an industry where it is likely that at least one of your employees is likely to invent something in the course of his duties or using company resources, you need to remember that the treatment of employee inventions works differently than it probably does in your home jurisdiction. Naturally, it will benefit you to gain at least some familiarity with the basics of the PRC rules for employee invention compensation.
The most important thing to remember about PRC inventor remuneration law is that it has a history of changing rather rapidly and that this trend seems unlikely to change in the near future. Not only are the sources of the laws themselves (statutes and implementing regulations, for example) likely to change, but enforcement practices can change to some extent even without a formal change in the law.
Sources of Law
Patent law in China is defined largely by the terms of the PRC Patent Law and its Implementing Regulations. The Law on Promoting the Transformation of Scientific and Technological Achievement (“PTSTA”) regulate governs non-patented inventions. Under PRC law, employees who create inventions are entitled to some sort of compensation even if it is the employer, not the employee, who holds the patent.
Types of Employee Inventions
PRC law classifies employee inventions into three types:
- Service Inventions: Service inventions are inventions that are created by an employee during the course of performing his duties for his employer. The right to apply for a patent belongs to the employer in this case.
- Service-related inventions: Service-related inventions are inventions that were created by an employee utilizing employer resources, including “material and technical conditions” and not excluding company money and trade secrets. The right to apply for a patent belongs to the employee, unless the employer and the employee contract otherwise and the employee receives fair compensation.
- Non-service inventions: Non-service inventions are inventions created by an employee using his own time and resources without significant employer assistance. The right to apply for a patent belongs solely to the employee.
Reward and Remuneration Standards: Regulatory “Fallback” Minimums
Article 16 of the PRC Patent Law requires employers to provide employee inventors with compensation. The statutory minimums are set out in detail below:
If the invention is patented
- The “reward” (initial compensation) for patented inventions must be at least RMB 3,000 per invention patent and RMB 1,000 per utility model or design patent. It must be paid to the employee within three months of the grant of patent.
- The “remuneration” (additional compensation) for patented inventions must be paid to the employee each year until the patent expires; or in a lump sum payment of (i) at least two percent of the operating profit from an invention patent or utility model, or (ii) at least 0.2% of the operating profit from a design patent.
- A fee of at least 10 percent of the exploitation fee must be paid to the employee at the time that the employer licenses an employee-created patent to a third party.
If the invention is not patented
- If the employer uses a non-patented invention created by an employee, the employee must be compensated in the amount of at least five percent of the additional profit generated by the invention for three to five years in a row.
- If the invention is assigned, the employee must be paid at least 20 percent of the net proceeds of the assignment.
The foregoing standards apply throughout an employee’s period of employment and for one year after his retirement, resignation, or termination under Rule 76 of the Implementing Regulations of the PRC Patent Law. These minimum standards can be raised or lowered by company policy or by contract between the employer and the employee – but in any case, they must be “reasonable.”
Lingering Legal Risks
Of course, specifying a lower level of compensation might trigger a dispute if the employee considers the payment to be less than reasonable. Since “reasonable” is such an ambiguous word, and since PRC labor arbitration is well known to be employee-friendly, it is best to take care not to abuse the right to lower inventor compensation by setting compensation too low.
At least two judicial decisions have served to illustrate the attitude of the PRC People’s Courts towards employee inventor compensation based on company policy rather than the regulatory “fallback” minimum described above:
- In Zhang v 3M (2015), the Shanghai Higher People’s Court affirmed the trial court’s decision that 3M China’s remuneration rate (which was much lower than the regulatory fallback minimum) was insufficient because 3M China’s inventor compensation policy lacked specific data to justify its calculation of the remuneration rate. Some suspect, however, that it was the amount itself that was the real problem.
- In Liang v. Shanghai Zhongji Company (2014), the dispute arose because the company policy specified a range of possible compensation amounts; predictably, the defendant awarded the plaintiff an amount at the lower end of the range while the plaintiff demanded an amount at the higher end of the range. The Shanghai Higher People’s Court basically split the difference between the two competing claims.
The Fourth Amendment of the PRC Patent Law
Since the PRC Patent Law is currently in the final stages of its fourth revision, some of the foregoing legal standards could change soon. What is most likely to change is that employers and employees will be permitted to negotiate the compensation in the form of property rights such as stocks, stock options, and dividends.
This modification could make a real difference in small companies. If the employee gains a significant equity stake as a consequence of his invention, he will likely be more motivated to create inventions and will be better incentivized to help his employer exploit the invention for profit.