SHANGHAI SERVICE INVENTIONS OPINION
August-September 2013 China Bulletin

In August, 2012, the China State Intellectual Property Office (SIPO) issued draft regulations that caused consternation among employers because, if promulgated, they would have created substantial new administrative burdens and legal uncertainty with regard to remunerating employee inventors (see Draft Rules on Service Inventions, November-December, 2012, China Bulletin).  The draft regulations were not promulgated, but in January, 2013, SIPO and several ministries did issue opinions that apply to state-owned enterprise employees (see Service Inventions, January-February, 2013, China Bulletin).  In a more recent development, the Shanghai High People’s Court issued the Guidelines on Adjudication of Disputes Involving the Rewards and Remuneration of Inventors or Designers of Service Inventions and Creations (the Guidelines) on June 25th.  This opinion, posted and then removed from the Court’s website, should, if followed by lower courts, provide substantial reassurance and certainty to employers in Shanghai.

Key burdens that the 2012 SIPO draft regulations would have imposed on employers include: 1) deciding within 6 months whether to apply for rights over the invention, 2) providing information to the inventor about any rights application, 3) informing the inventor one month before withdrawing an application and, if requested, negotiating with the inventor for rights to the invention, 4) granting an award to the inventor when the employer receives a right (e.g., patent registration), or assigns or licenses the invention, 5) reporting to the inventor the economic benefits the employer realizes from exploiting the invention, and 6) affirming that the inventor has a right of first refusal to procure rights to the invention when the employer assigns it.

The Guidelines, in contrast, emphasize that the provisions of the Patent Law and Patent Law Implementing Regulations apply to inventions and remuneration of inventors in China.  They make no reference to SIPO’s 2012 draft regulations, which have still not been promulgated.

While the Guidelines require that the court refer to both the Contract Law and Labor Contract Law to determine the validity of an agreement on inventor remuneration, they emphasize principles (capacity of parties, specificity and clarity of provisions and conforming to mandatory laws) more in line with general contract rules than with those specifically applying to labor contacts.  Further, the Guidelines state that disputes should be treated as patent disputes under the jurisdiction of the People’s Courts, suggesting that they do not fall under the jurisdiction of the labor tribunals, which are often employee-friendly and not experienced with intellectual property questions.

The Guidelines emphasize that the employer and inventor are not bound by statutory remuneration standards and methods, provided they have previously agreed to other terms.  In addition to reaching mutual agreement in a contract, the employer can set the terms of remuneration in its company rules and regulations (e.g., handbook), provided it complies with the “democratic” consultation procedures in the following excerpt from Article 4 of the Employment Contract Law:

“Where an employer formulates, amends or decides rules or important events concerning the remuneration . . , which are directly related to the interests of the employees, such rules or important events shall be discussed at a meeting of employees’ representatives or the general meeting of all employees, and the employer shall also put forward proposals and opinions to the employees and negotiate with the labor union or the employees’ representatives on an equal basis to reach agreement on these rules or events.”

In the absence of either an agreement or valid company rules, the default provisions of the Patent Law apply, highlighting the value of having a prior agreement or rules dealing with inventor remuneration.

The Guidelines allow for remuneration by stocks, options, increases of salary and paid leave, as well as cash.  They expressly state that the employer can pay the remuneration as one lump sum (thereby avoiding the burdensome calculation requirements in the proposed SIPO draft regulations), but provide that the amount of the payment is to be determined with reference to the average value of inventions in the relevant field of research.

If the employer pays employee-inventor in cash, the parties may agree on an amount that is more or less than the statutory standard, thereby providing substantial commercial flexibility.

The Guidelines note that courts should presume agreements reflecting the nature of the business, industry and purpose of any patent application to be reasonable, and should respect the parties’ operational and personal autonomy.  Although a court can increase remuneration that is particularly low, and thus unreasonable, it should not automatically revert to the statutory standard, but determine the remuneration based on specific circumstances of the case.

The Guidelines also address commissioned research and dispatched employees.

They provide that an inventor who is the employee of the commissioned party is not entitled to remuneration if the rights to the invention vest in the party commissioning the research because the commissioned party does not own the rights to the invention and the inventor is not employed by the commissioning party.  While reasonable from the view of the employer, this result seems anomalous since the employee’s contribution is the same regardless of whether the rights to the invention vest in his/her employer or in a commissioning party.

An employee dispatched to provide labor services to another entity can claim remuneration from the entity that uses his/her services and thus receives the benefit of the invention.

The Guidelines have not addressed all areas of concern raised by the 2012 SIPO draft regulations, but their emphasis on respecting the autonomy of the parties and any agreement they have reached is very welcome, particularly in light of Article 19 of the SIPO regulations, which would have invalidated an agreement “limiting the rights of the inventor”.  The Guidelines should provide comfort and a degree of predictability and certainty to the many R&D centers in the Shanghai area.  It is to be hoped their provisions will be followed by courts in other areas and adopted in guidelines currently being drafted by other regional governments in China.

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