Overall, the basic framework of the law has remained unchanged, even after the amendment. Similar to German law, (i) the invention right is owned by the employee as the inventor, (ii) the right can be transferred to the company by its unilateral notice and (iii) reasonable compensation must be paid to the employee for the invention right. Further, as there are few details in the Japanese Patent Act related to employee invention regulations, each company needs to provide internal rules regarding employee inventions to impose the necessary employee obligations such as reporting obligations (as in Art.5 Arbeitnehmererfindungsgesetz, ArbEG). When compared to German law, Japanese law tends to focus on each company’s internal rules.This newsletter article focuses on requirement (iii) reasonableness of compensation to be paid to the employee and the procedure conducted by the company to determine the reasonable amount of compensation.
Instead of providing a precise calculation method set forth in the law (i.e., the German approach which applies the calculation method under the Directive issued by the Federal Minister of Labour (Richtlinien für die Vergütung von Arbeitnehmererfindungen im privaten Dienst)), Japanese law looks at the reasonableness of a company’s procedure in determining the calculation of compensation. This “procedural approach” first became effective in the 2005 amendment of the Japanese Patent Act and remains unchanged after the amendments in 2016. Article 35(5) of the Japanese Patent Act provides three steps with regard to the procedure:
(i) consultation with the employee when establishing the calculation method of the compensation amount,
(ii) disclosure of such calculation method to the employee, and
(iii) providing the employee with an opportunity to be heard with regard to applying such calculation method to the actual invention. Consultation and disclosure can be conducted with all employees at one time before an invention is created and the opportunity to be heard is supposed to be done with each individual employee who has created the invention. As a matter of formality, the consulted calculation method is mostly provided in the company´s internal rules which are disclosed to the employee.If such procedure is deemed as unreasonable, the payment of compensation must be reconsidered by the court and the appropriate amount to be paid will be determined by taking into account all of the relevant facts of the case (e.g., revenue amount in relation to products using the patent, the patent´s contribution to such revenue, contribution to create such patented invention by the company and the employee, etc.). Unfortunately, this broad standard, as well as subsequent case law on this issue, did not provide companies with foreseeability, and therefore, it became more imperative that companies take adequate measures to ensure that the payment of compensation procedure is reasonable.
(i) existence of “sufficient and substantial discussions with the employee,”
(ii) which would be accomplished by “guaranteeing the opportunity to participate in deciding the compensation amount,”
(iii) and “having a sincere attitude towards the employee´s opinion during the discussions”.
In the case (the “Nomura Securities” case), the plaintiff who made the invention was an employee hired as a marketing staff in the company. There was an employee invention rule (“Invention Rule”) in the company which was effective before and during his employment. The plaintiff claimed after being dismissed by the company that the payment of compensation under the Invention Rule was unreasonable and an appropriate amount should be determined by the court. The plaintiff claimed that with regard to the compensation procedure, the company did not perform any of the three steps in accordance with the Japanese Patent Act.
The court held that regarding the first consultation step, the Invention Rule was not discussed with employees before and after the plaintiff was employed. It was insufficient to have the newly-hired employee “check” the Invention Rule, but a discussion in person or an explanation with the employee´s acknowledgment could be deemed as reasonable consultation step. Note that the guidelines also mention that explanation of the calculation method followed by Q&As (instead of an acknowledgment) made to inventor employees who joined the company after the internal rules have been established, could be considered a reasonable consultation step, especially in cases where consultation was made sufficiently with the other employees when establishing the internal rules.
For the disclosure requirement, the court found that there was insufficient evidence of the company’s disclosure of its calculation method to employees and the plaintiff. The disclosed rule of the company only mentioned that the company will pay compensation to the employee for each of following cases: (1) when an employee invention transferred to the company is filed for patent prosecution, (2) where the company is granted a patent for the employee invention, or (3) where the company exploited the employee invention and gained monetary interest. Payment of compensation would be determined by a procedure that will be separately set forth. Consistent with the guidelines, a company should let the employee, as an inventor, recognize that there is an internal rule with a calculation method which he/she is able to check.
There was also no opportunity for the plaintiff to be heard, and the company did not establish an internal system to allow employees to discuss or oppose a company´s decision. The court requested such an opportunity while the plaintiff argued that the invention right transferred to the company and that no discussion was possible regarding the compensation amount. The guidelines also recommend that companies request an opinion from the employee in cases where the employee doesn’t provide his/her own opinion.
This amendment facilitates the discussion around ownership of service inventions in favour of the employer in many cases. At the same time, in practice, the number of cases increases in which an employee receives reasonable compensation for the claimed invention (even if the invention is claimed by a deemed declaration). Therefore, the question of a fair compensation agreement is still an important topic in Germany.
In this respect, German law is a bit more employer-friendly than Japanese law. As a starting point, the reasonable amount of compensation is to be established through an agreement between the employer and the employee. However, if the parties cannot reach an agreement, the employer has the right to determine an amount of compensation that it regards as reasonable. After such a determination by the employer, the employee is merely able to object to the determination in writing or by e-mail within two months. Otherwise, the determination becomes binding (unless it is unfair).
German law provides guidelines for calculating reasonable compensation (cf. § 11 ArbEG). These guidelines are non-binding but are frequently utilised in practice, and the Arbitration Board at the German Patent and Trademark Office often uses them when preparing its settlement proposals. In the last 10 years, standardised company compensation systems have become very relevant, and their transparency creates industrial peace. Lump-sum compensation schemes are often equally popular with employees and employers, i.e. where the employee receives a lump-sum payment when certain levels are reached, such as making the notification of an invention, filing a patent application or receiving the notice of grant of a patent. Regardless of how a compensation model is designed in business practice, one should always ensure that it is tailored to the situation in the individual company.
In particular, the compensation system may not unreasonably disadvantage the employee inventor as compared to the compensation guidelines. There is no “German standard model”, and what suits one company may be wrong for another. However, in contrast to Japanese law, the German legal system is more accommodating in that a company compensation system need not be discussed individually with each employee, but may, for example, be made to apply directly to each employee – including new ones – by company practice or even by operating agreement.
