Case Study: How to reward and remunerate inventors in China?

Whether to compensate inventors and how to compensate inventors for their innovative work have been important topics in some countries such as Germany, Japan and China. The purpose of compensating inventors is to motivate researchers and promote innovation. Yet this has been both complicated and difficult in practice. For instance, in China, the Chinese Patent Law and its Implementation Rule are the basis for inventor remuneration, and different authorities have also actively issued their own regulations. However, among the different laws, rules and regulations (hereinafter “Rules”), there exists quite some inconsistency, such as in the amount of the inventor remuneration. Under such circumstance, industries are curious how the Rules will be applied and interpreted by the courts in case of any disputes.

In December 2015, the Chinese Supreme Court published the final judgment of a case regarding inventor remuneration. The parties of the case included 3M China, 3M Innovation Property Company and an ex-employee of 3M China. This case drew a lot of attention from the industries, especially multi-national-companies (hereinafter “MNCs) which have R&D activities in China.

The purpose of this article is to both summarize the 3M case to demonstrate how the Rules were applied and interpreted and to share my comments on the judgment and proposals on how to handle the inventor remuneration in China under the current legal framework.

PART ONE: 3M Case

I.  Relationship of All Parties

Plaintiff: Mr. Zhang

Mr. Zhang was an ex-employee of 3M China. He joined 3M China as an Engineer in April 2003. Through January 2005, Mr. Zhang made an invention together with his colleagues who worked in the USA.

Defendants: 3M China and 3M Innovation Property Company (hereinafter “3M IP Co.”)

Both 3M China and 3M IP Co. are 100% subsidiaries of the 3M Group. In January 2006, the three companies signed both a Contract Research Agreement and an Intellectual Property Agreement, which agreed that 3M China shall provide research services to 3M Group and shall assign all research results to 3M IP Co. As a result, 3M IP Co., being the owner of all research results and intellectual property (hereinafter “IP”), can license its IP to 3M China and collect license fees.

Based on these two agreements, 3M China assigned Mr. Zhang’s invention to 3M IP Co. On 1 June 2006, 3M IP Co. filed a PCT patent application based on Mr. Zhang’s invention. Later, the PCT patent application entered China. The Chinese patent was granted on 17 March 2010.

II.  Disputes Started from 3M China’s Invention Remuneration Plan

Just before the Chinese patent was granted, 3M China started to draft an Inventor Remuneration Plan (hereinafter “Plan”) in order to reward and remunerate its inventors. During the drafting process, employees’ comments on the draft Plan were collected. Mr. Zhang commented that the amount of the remuneration could be increased, but his comment was not accepted.

The Plan became effective on 1 September 2010. A month later, Mr. Zhang resigned from 3M China because he was not satisfied with the low compensation according to the Plan.  After his resignation, Mr. Zhang was paid twice in November 2011 for his contribution to the invention. The payment included 500 RMB and 17,168.12 RMB (after tax), which did not meet his expectation. Therefore, one year later he filed a lawsuit to Shanghai No. 1 Intermediate Court against 3M China and 3M IP Co.. His claims mainly included that:

1. The Defendants infringed the Plaintiff’s right of receiving inventor remuneration;
2. The Defendants shall remunerate the Plaintiff 2 mio. RMB for 2010 and 2.4 mio. RMB for 2011 and 2012; and
3. The Defendants shall pay interest 236,827.58 RMB due to delayed payment.

3M China and 3M IP Co.’s counterclaims mainly included that:

1. Because the invention in question was not generated in China and the Plaintiff did not make substantial contribution to the invention, the Chinese Patent Law was not applicable;
2. Because 3M China was not the patentee, it was not obliged to pay the inventor remuneration to the Plaintiff; and
3. If the Plaintiff has to be remunerated, the 3M China’s Plan shall be applied to calculate the amount of the remuneration rather than the Chinese Patent Law and its Implementation Rule.

III.  Timeline of the Lawsuits

The first instance at Shanghai No. 1 Intermediate Court last two years, i.e. from November 2012 to November 2014. After that, Mr. Zhang appealed to Shanghai High Court which last 3 months. However, he was still not satisfied with the judgment. Then he appealed to the Supreme Court for Retrial, which last about 6-7 months. By December 2015, the final judgment was made and published.

 IV.  Judgment by the Supreme Court

The focuses of the case were whether the Chinese Patent Law was applicable, whether the Plaintiff was entitled to claim inventor remuneration and how much the remuneration should be paid to the Plaintiff. The Supreme Court decided on the three questions respectively.

Judgment 1: Applicability of the Chinese Patent Law

The invention in question was completed by four inventors, while Mr. Zhang was named as the third inventor. During the invention work, he worked full-time in China. The patent application was filed in China via PCT, and the patent right was granted in China.

The Supreme Court concluded that the invention should be deemed generated in China as long as part of the invention was completed in China. Therefore, Chinese Patent Law and its Implementation Rule are applicable in this case.

Judgment 2: Legality of the Plaintiff to Claim Inventor Remuneration

The invention was actually assigned from 3M China to 3M IP Co. before it was applied for patent. Because it was not the owner of the Chinese patent, 3M China argued that it was not obliged to pay Mr. Zhang for the inventor remuneration. Meanwhile, 3M IP Co. argued that it was not the employer of Mr. Zhang, so it had no obligation to remunerate him too.

However, the Supreme Court concluded that the assignment of the invention from 3M China to 3M IP Co. did not prevent the Plaintiff’s entitlement as an inventor from receiving the inventor remuneration from his employer. Therefore, 3M China as the employer of Mr. Zhang is obliged to pay him. 3M IP Co. is not the employer of Mr. Zhang, so it is not obliged to pay the inventor remuneration.

Judgment 3: Amount of the Inventor Remuneration

3M China’s Plan defined how to calculate the amount of the inventor remuneration, which is based on sales revenues. However, the Plaintiff did not provide evidence of sales figures. Meanwhile, the Defendant did not want to provide the sales figures.

Under such circumstance, the Supreme Court first concluded that the 3M China’s Plan fulfilled the procedural requirements of the Chinese Patent Law and its Implementation Rule, i.e. employees’ comments were asked in the course of drafting the Plan. This means that the Plan is valid, so it should be used as the basis to calculate the amount of the inventor remuneration.

However, because none of the evidence such as the sales revenues, the fee of assigning the invention from 3M China to 3M IP Co.  or the license fee was provided, it was impossible to calculate the amount of the inventor remuneration based on the 3M China’s Plan. Consequently, the Plaintiff’s claim for the remuneration nearly up to 4.4 mio. RMB could not be justified. In the end, the Supreme Court concluded that 200,000 RMB compensation according to the 1^st Instance was reasonable by considering the overall situation.

PART TWO: Comments on the Judgment

Industries were very keen to learn the final judgment because it may be highly valuable for them to learn how to handle inventor remuneration in China. However, there are still open issues.

I.  Reasonableness of the Amount of the Inventor Remuneration

According to the 3M China’s Plan, the inventor remuneration includes lump-sum payment and royalty payment. The royalty payment was calculated as following

Royalty payment = annual sales revenues × 0.01% × product contribution × patent contribution × inventor contribution.

However, the Implementation Rules of the Chinese Patent Law stipulate that the minimal royalty payment should be not less than 2% of the business profit if no internal policy or agreement is available. In practice, when companies draft their own inventor remuneration policies, the “2% of the business profit” is often considered as guiding criterion to avoid “unreasonableness”.

In this case, the Courts did not decide whether the royalty calculation in 3M’s Plan was unreasonable or not, even though the Plaintiff argued that the difference between “2% of the business profit” and “0.01% of the sales revenues” was more than 200 times. The Courts simply concluded that the Plan has higher priority over the Chinese Patent Law and its Implementation Rule.

For industries, it is confirmed that the internal inventor remuneration policy is important basis to calculate the amount of the inventor remuneration. However, it is still uncertain how much remuneration is acceptable because the Courts were silent about it in this case. Therefore, the amount defined in the 3M China’s Plan should not be used as a reference for the industries.

II.  Evidence about Sales Revenues and Other Financial Figures

To calculate the amount of the inventor remuneration, the Parties shall provide evidence of sales revenues or other financial figures. However, in this case such evidence was missing. Furthermore, the Courts did not take initiative to investigate and collect relevant evidence at all. To the contrary, the Courts made judgment simply based on “reasonable consideration”.

Normally, employers are at stronger position than employees in providing such figures. However, like in this case, if the employer refuses to provide any evidence and the court is not obliged to obtain the evidence, the overall situation is not in favor of the employee.

In addition, the Courts’ “reasonable consideration” is unforeseeable, which is risky for both employers and employees.

III.  Legitimacy of Evidence

In this case, the Plaintiff took copies of the <Service Research Contract>, the <Intellectual Property Agreement> and the <Plan> when he resigned. However, these documents were internal documents of 3M China. Therefore, 3M China questioned the legitimacy of the above evidence. However, the Courts deemed such evidence as legitimate.

I totally disagree with the Courts’ judgement. This means that employees can take any internal or even confidential documents from the employer when they leave the employer, by just arguing that such documents may be useful in future legal proceeding. There is no legal basis for such judgment.

Therefore, as a reminder, employers should classify their documents and require employees return all internal and confidential documents to avoid 3M China’s situation.

PART THREE: Proposals to Industries

Even though the 3M case was not crystal clear on some issues that the industries concern, it can still be used as a good example how to handle the inventor remuneration in China.

I.  Set up internal inventor remuneration policy

Under the circumstance of globalization, inventions are often generated by a group of inventors. It is highly possible that these inventors are from different countries, work together on the same projects and contribute to the same inventions. If there is an inventor from China, I mean working in China during the invention work, such invention will be regarded as being made in China. According to this case, the Chinese laws will be applicable. Accordingly, the legal requirements on the inventor remuneration will apply.

Meanwhile, many MNCs centralize their ownership of inventions and patents to a specific organization outside China, such as 3M IP Co. The reasons may include easy management, tax advantage, risk control, etc. Therefore, it is very possible that the inventions are already transferred outside China even before they are applied for patents. However, according to this case, such transfer does not release their obligation to reward and remunerate their employee-inventors who contribute the inventions in China.

Based on the above, I would like to propose that the MNCs set up own internal inventor remuneration policy as early as possible. In addition, this may avoid other Rules being applied. Those Rules often stipulate much higher amount of the inventor remuneration.

II.  Contents in the inventor remuneration policy

Except fulfilling the procedural requirements, the inventor remuneration policy should include at least the followings.

1. When and how should the invention be reported?
2. Who has the right to decide whether to file patent or not and the timeline?
3. What is the scope of the remuneration, e.g. patent applications, patents, trade secrets?
4. Who are entitled to the inventor remuneration, e.g. employees, ex-employees?
5. What is the calculation basis, e.g. gross sales revenues, business profit after tax?
6. How is the remuneration paid, e.g. lump-sum, royalty?
7. What can be alternative of the monetary remuneration, e.g. promotion, certificate, holiday?
8. When is the remuneration paid?

III.  Amount of inventor remuneration

Some companies prefer lump-sum payment, some prefer royalty payment, some prefer non-monetary reward, etc. They are all fine, but they must be clearly defined. However, complicate calculation methods, especially those involving many parameters, require more clarification and thus may easily cause more disputes.

There is no standard amount suitable for all. The amount of the remuneration can vary largely from industry to industry. However, I would like to suggest that companies discuss with your peer companies (better also involve local Chinese companies) and agree on a benchmark, which may help avoid “unreasonable” claim in case of lawsuits.