Understanding Chinese Inventor Reward and Remuneration

By: Lisa L. Mueller

Employee compensation or remuneration for inventions developed and patented during course of their employment is a complicated and often expensive issue faced by multinational companies having research and development facilities in multiple countries throughout the world.  With more and more companies choosing to conduct research and development directly in China, it is important for companies to understand China’s inventor remuneration law.  Specifically, in China, the statutory basis for inventor reward and remuneration is found in Article 16 of Chinese Patent Law.  More particularly, Article 16 states that:

“The entity that is granted a patent right shall award to the inventor or creator of a service invention–creation a reward and, upon exploitation of the patented invention-creation, shall pay the inventor or creator a reasonable remuneration based on the extent of spreading and application and the economic benefits yielded.”

According to the revised Implementation Rules of the Chinese Patent Law (Rules) which came into effect on February 1, 2010, the statutory remuneration scheme provided in Article 16 applies to all business entities that own a Chinese patent (such as an invention patent, an utility model patent, or a design patent) regardless of the nationalities of the inventors.

For any company doing business in China, Article 16 raises the basic question as to what constitutes “reasonable remuneration”?  Some guidance can be found in Rules 76-78.  Specifically, Rule 76 provides that a company that owns a Chinese patent can specify the amount of remuneration and manner in which remuneration is awarded:

1.  By contract with the employee-inventor; or

2.  By specifying in its corporate by-laws or corporate policy documents its employee-inventor remuneration policy.

In the absence of any contract or corporate policy regarding employee-inventor remuneration, Rules 77 and 78 provide a two-stage remuneration scheme:

1.  Upon issuance of a patent, the employee-inventor should be awarded no less than 3000 RMB for an invention patent or no less than 1000 RMB for a utility model patent or design patent which is to be paid no later than three months after grant of the patent; and

2.  Once the invention is commercially exploited, the employee-inventor should be awarded no less than:

a.   2% of the annual profits resulting from such exploitation of the invention patent or utility model patent; or

b.  0.2% of the annual profits from exploitation of a design patent.

Alternatively, in lieu of the above payments, an employer can choose to make a one-time lump sum payment to the employee-inventor based on the above rates.  Additionally, if a company licenses s patent to a third party, the employee-inventor is entitled to no less than 10% of the licensing revenue.  Furthermore, employee-inventor remuneration must only be paid during the period of time that the patent is valid.  If the patent is found to be invalid, then the employer is relieved of its obligation to make any further remuneration payments to the employee-inventor.

Generally, it is preferred that an employer and employee-inventor execute a contract that specifically deals with inventor reward and remuneration.  In terms of the compensation to be paid to the employee-inventor under such contracts, compensation may be paid in any form, such as cash, shares, equity or any other form that might be agreed upon by the parties.  One interesting question that arises in this context is what happens if a contract between an employer and employee-inventor provides for a payment of 0.1% of the annual profits for an invention patent or a utility model patent.  Is such compensation “reasonable” under Article 16 despite the fact that statute provides for a minimum payment of 2% of the annual profits in the absence of an agreement?  While currently there is no case law that has specifically addressed this issue, several judges from the high court/supreme court have stated unofficially that a contract between the parties agreeing to such payment will be upheld and enforced unless the contract is invalid for one of the reasons pursuant to Articles 52-53 of the People’s Republic of China (PRC) contract law or rescinded for one of the reasons pursuant to Article 54 of PRC contract law.

Another interesting, yet unresolved question, relates to who is responsible for remuneration payments once a patent is assigned from the original employer to a third party or even from a parent company to one of its subsidiaries.  Is the original employer liable for such payments or the new assignee? Or should the original employer be held to be jointly and severally liable?

While no official statistics are available as to the number of inventor remuneration law suits that have been filed in China, there are approximately 100 such suits filed annually.

Thanks to the CCPIT Patent and Trademark Law Office for providing their insights to the BRIC Wall on China’s Inventor reward and remuneration scheme.