By Xu Jing,Ye Wanli King & Wood Mallesons’ IP group

On July 22, 2020, Shanghai Higher People’s Court (“SHC”) issued its final judgment on an inventor remuneration dispute between Chen and Company A (“Company A”), and ordered the defendant to pay inventor remuneration to the plaintiff in an amount of RMB 150,000. This case follows another case decided by SHC in 2015 – Zhang v. Company B (“Company B”), where SHC restated the principle that a mutual contract or a lawful reward and remuneration policy overrides the default legal scheme, and granted a discretionary award for the inventor-employee after review of lawfulness and reasonableness and consideration of all relevant factors. This note is an overview of Company A and the current law and practices ended with our recommendations to employers.

Company A

  1. Facts

The plaintiff was the inventor of the bottle design for a beverage product. The design was covered by a PRC design patent, which was granted on January 5, 2005 and owned by the defendant’s parent company. The design patent had been used for the beverage product since 2004 and was still being used until 2011.

The defendant’s inventor reward and remuneration policy came into effect on June 1, 2013, which provided that all inventions completed in the PRC and owned by the defendant were qualified for reward and remuneration. For design patent, the reward and remuneration were RMB 2,000 after the patent application was accepted, and RMB 3,000 after grant.

In August 2015, the defendant informed the plaintiff that it would pay RMB 1,000 as reward and RMB 1,500 as remuneration for the design patent. The plaintiff contested, arguing that the reward and remuneration policy had never been negotiated by the employee representative meetings and the standards were significantly lower than the default legal scheme under the Implementation Regulation to the PRC Patent Law (the “Implementation Regulation”).

  1. First-Instance Judgment

The plaintiff filed the lawsuit with the Shanghai Intellectual Property Court (“SIPC”) in 2018, seeking an order for the remuneration in amount of RMB 1,000,000, on the basis of 0.1% of the operating profits. One of the primary defense was that the defendant promulgated the policy lawfully and made the payment according to the policy, and the contribution of the design patent to the profits was very low.

SIPC ruled that: 1) while the defendant was not implementing the design patent directly, it, as the plaintiff’s employer, was still obligated to pay remuneration; 2) while a lawful and reasonable company policy might override the default legal scheme, but the defendant did not produce any evidence to prove the lawfulness of its policy, and its remuneration calculation did not reflect contribution that could generated from implementation of patents and was substantially lower than the default legal scheme; 3) the plaintiff’s claim was groundless as well, as he failed to produce any evidence showing the sales figure and the operating profits of the patented products and the packaging’s contribution to the profits. In consideration of several factors, such as the patent and its implementation, the contribution to the product, the number of inventors, the court used its discretion to determine the amount of remuneration as RMB 150,000.

  1. Final Judgment

Both parties appealed to SHC. In the appeal, SHC rejected the plaintiff’s argument that the defendant should undertake the negative effects for failure of producing relevant data as evidence, which was groundless under the current laws, and the plaintiff’s new evidence was unable to prove scale of sales or profits of the products using the bottle design. As for the defendant’s argument that the granted remuneration was unreasonably high, SHC reject it as well, saying that the discretionary award granted by SIPC had taken all relevant factors into consideration and the defendant did not produce any new evidence to support its argument. SHG rejected the appeals and upheld the SIPC’s decision.

Inventor Remuneration Laws and Practices in China

  1. The Implementation Regulations

According to Article 76 of the Implementation Regulations, a patentee-employer may reach an agreement with the inventor or have policies to determine reward and remuneration for inventions. Article 78 provides that, if the patentee-employer does not have agreements or policies on rewards and remuneration, the default legal scheme for remuneration would be: 1) at least 2% of after-tax profits for invention or utility model and at least 0.2% of after-tax profits for design patent; or 2) if the patent is licensed, at least 10% of after-tax income from the patent license.

The Implementation Regulations clarifies that any agreement on remuneration, either negotiating directly with the inventor or through a lawful company policy, overrides application of the default legal scheme; absent such agreement would result in application of Article 78 of the Implementation Regulations.

  1. SHC’s Guidelines on Adjudication of Disputes involving Inventor Reward and Remuneration

In 2013, SHC issued the Guidelines on Adjudication of Disputes involving Inventor Reward and Remuneration (the “Guidelines”). This is currently the most detailed and effective court rules on inventor remuneration laws, which has binding effects in Shanghai Courts and can be deemed as a secondary authority in other courts. Some highlights are as follows:

  • Formality and Content of the Agreement (Articles 3 and 4) – Employer may directly negotiate with employee, or set remuneration policies in accordance with the laws. The method of remuneration is not limited to monetary compensation, and if employer chooses to use monetary compensation, the standard can be higher or lower than the default legal scheme under Article 78 of the Implementation Regulations. The authority reserves to employers according to their own specific business needs.
  • Determination on Lawfulness of Agreement (Article 5) – For agreements between employer and inventor-employee, the court shall examine lawfulness in accordance with the Contract Law and the Labor Contract Law to determine whether the agreement is effective and enforceable. For company policies, the court shall focus on examining whether the policy meets the procedural requirements according to the Company Law and the Labor Contract Law.
  • Determination on Reasonableness of Agreement (Article 6) – Generally, the court shall respect employer’s own decisions, and such policies are presumed to be reasonable. However, if the agreement is unconscionable, the court may use its discretion to determine a reasonable remuneration, but not the default legal scheme.

Most of the inventor remuneration disputes are arising out of the issues of lawfulness and reasonableness of company remuneration policies.

  1. Lawfulness of Reward and Remuneration Policy

On lawfulness of the company policy, the court generally focus on whether the policy meets the procedural requirements under the Company Law and the Labor Contract Law.

Article 4 of the Labor Contract Law requires that those company policies that could have impact on employee’s fundamental interests shall be discussed through employee representative meetings or with all employees, and without such process, the policy does not have binding effect on employees. In Company A, the plaintiff argued that the defendant did not hold the employee representative meeting to discuss the policy, and the defendant did not produce any evidence to prove that the policy met the procedural requirements, and then the court did not recognize it, in light of all other reasonableness factors, as a reference to determine remuneration. In Company B, on the contrary, evidence showed that the plaintiff attended drafting and discussion of the remuneration policy, and thus found it lawful.

Article 26 of the Labor Contract Law provides that any provisions that waives the employer’s legal responsibilities or eliminate the employee’s fundamental rights are invalid. In Wang v. Company H, Shenzhen Intermediate People’s Court ruled that the company’s policy excluding departed employees from remuneration was invalid and thus the relevant provision in the policy was invalid.

  1. Reasonableness of Reward and Remuneration Policy

As for the reasonableness, the disputes concentrate on the remuneration calculation. As provided under the Implementation Regulations and the Guidelines, the legislature and judiciary incline to respect reasonable scope of authorities owned by employer and the agreements with employees. Even if the terms are unconscionable, the court does not directly apply the default legal scheme but applies a totality of all the circumstances approach to use its discretion to determine a reasonable amount. The general principle under Article 16 of the Patent Law governs – scope of implementation and economic interests obtained through implementation.

Recommendations to Patentee-Employers

As discussed above, the current practice does not give clear guidance on the reasonable standard for remunerations, leaving board scope of discretion to judges to reach balance and justice in individual cases. From released decisions, when the court determines the reasonable remunerations, courts generally consider whether the patent’s contribution matches the remunerations. That said, as products and industries vary significantly, it is difficult to have a relatively unified standard to determine reasonableness. In light of this, employers would not need to take too much consideration on the detailed amounts to meet the reasonableness requirements under the law.

In order to maximize the chance that employees recognize the remuneration policy and then exclude application of the default legal scheme, employers should pay more attention on the procedural aspects. The current laws and cases have provided relatively clear guidance on the lawfulness issue, and employers should take reasonable measures to avoid court’s nullification of the policy or application of the default legal scheme in drafting, promulgation, notification, negotiation and other critical phases of policy implementation. Specifically, employers should use express and explicit notices to inform new or departing employee about their inventor rights. For drafting, amendment and abolishment of relevant policies, employers are recommended to strictly follow the Labor Contract Law and company’s internal regulations, such as holding an employee representative meeting, to make the decision and keep complete records. Additionally, for those minor modifications to the reward and remuneration policies, employers is recommended to comply with the procedural requirements, such as publishing to employees, in order to keep the policy meeting the lawfulness requirements.