SERVICE INVENTIONS
January-February 2013 China Bulletin

In November, the State Intellectual Property Office released the Draft Service Invention Regulations (reviewed in the November-December China Bulletin).  Of particular concern in the regulations is an expansion of the scope of service inventions to know-how, requiring employers to track inventions and inventors themselves post-employment and potentially across generations.  Several provision in the regulations also would expose employers to new claims by employee-inventors.  The American Bar Association, the US-China Business Council and other organizations and businesses have expressed concern about several provisions of these regulations to the State Intellectual Property Office (SIPO).

Final regulations have not yet been issued, but on January 5, 2013, SIPO, the State-Owned Assets Supervision and administrative Commission, Ministry of Human Resources and Social Security, Ministry of Education and several other ministries jointly issued an opinion on protecting the rights of state-owned enterprise employees to service inventions.  The opinion states that compensation for an employee-inventor must be at least 3% of operating profits from the invention and 20% of royalties from assigning or licensing the invention.

This January 5 Opinion does not apply to privately owned companies, but like the Draft Service Invention Regulations, it permits an employer to reach an agreement with its employees regarding service inventions.  The compensation percentages in the opinion are fall-back provisions if the parties have not reached an agreement or otherwise set terms of compensation.

Employee inventions fall into one of three categories determined by Article 6 of the Patent Law:  1) inventions made by an employee in executing the tasks of his/her employer, 2) inventions made by an employee using the material and technical means of his/her employer, and 3) other or non-service inventions.  The right to apply for a patent for the first two categories belongs to the employer, but the right to apply for a non-service invention belongs to the employee.  Article 6 further expressly provides that the employer and inventor may assign the right to patent a category 2) invention (using employer’s material and technical means) according to an agreement between them, e.g., to the employee instead of the employer.

If the Draft Service Invention Regulations become law in their current form, they will impose added costs and a substantial additional compliance burden on American high-tech companies operating in China.  If they wish to minimize risks form the challenging provisions included in the final Regulations, high-tech companies are well-advised to ensure they have invention agreements with employees in place that set out reasonable compensation for inventions, as well as time and method of payment.

Questions? Contact Allan Marson at china.desk@ishimarulaw.com for a complimentary response.