E-News No.46

E-News No.46

PRC’s Draft Employee Invention Regulation Stirs Controversy

by Shi Bisheng (King & Wood Mallesons – China)

A Draft Employee Invention Regulation was published for comment, stirring up a great deal of controversy regarding whether the regulation is necessary, ownership of employee inventions, the employee invention reporting system and the standard of remuneration for employee inventions.

In April 2015, the State Council Legislative Affairs Office of the People’s Republic of China posted the “Draft Employee Invention Regulation” (hereinafter, the “Regulation”) to the public for comments. The Regulation has stirred up a great deal of controversy and this article will briefly discuss the main controversies raised regarding the Regulation, as outlined below:

1. Necessity of the Regulation

During the process of soliciting opinions, objections were raised by companies. They claimed that the Patent Law of the People’s Republic of China and its Implementing Rules, together with other applicable laws and regulations, have provided comprehensive provisions on the service invention system, therefore, legislation should not impose further mandatory regulations.

Inventors and some legal experts have, however, claimed that although the existing laws have given employee-inventors the rights of authorship and the right to obtain rewards and remuneration, there is still absence of clear procedural guidelines for exercising those rights.

2. Ownership of Employee Inventions

Article 7, Paragraph 4 of the Regulation provides: “[i]nventions that are completed by inventors mainly by using the funds, equipment, spare parts, raw materials, propagation materials, technical materials that are not publicly available, and other material and technical conditions of their employers, except that capital shall be repaid or use fees shall be paid as agreed, or the inventions are verified or tested with the employers’ material and technological conditions only after being completed.”

The main objection to the above provision arises from the difficulty in determining whether an invention is “verified or tested with the employers’ material and technological conditions only after being completed.” The primary supporting view is that, absent such contractual provisions, inventions that have been materially completed prior to the testing and verification process do not count as employee inventions.

3. Employee Invention Reporting System

Article 12, Paragraph 1 of the Regulation provides that: “[w]hen employee-inventor reports his invention as a non-employee invention, the company shall provide written response within two months from the date of receipt of such report which meets the requirements under Article 11 of the Regulation; failure to respond within the aforementioned period is deemed to agree with the opinion that the employee-inventor has claimed in the report.”

The main objection to the above provisions is that a failure to respond within a certain period is procedurally flawed and should not lead to the loss of substantive rights. Invention identification is a complex process and if employee-inventors offer a massive amount of reports, the identification process will be burdensome. The primary supporting view is that, absent this provision, the company may lapse in replying to reports submitted by the employee-inventors, and it may bring losses to employee-inventors.

4. Standard of Remuneration for Employee Inventions

Article 21, Paragraph 3 of the Regulation provides that: “[a]bsence of contractual provisions or company regulations regarding remuneration to employee-inventors, the company shall provide employee-inventor the remuneration of no less than 20% of the net income of transfer or licensing after the company transfers or licenses others to implement the intellectual property.”

The main objection to the above provision is that 20% of net income of the transfer or licensing is too high. Such a royalty fee or transfer fee does not necessarily represent the value of the invention. Other factors such as commercial operations may play a major role in the deal. The primary supporting view is that when someone is willing to purchase a service invention, it is mainly because of the value of the invention, in which the employee-inventor’s labor played a major role.