1.Why are multinationals increasingly going to China to tap into Chinese employees for R&D? What are the challenges inherent in such moves?

2.What are some critical elements of the Chinese remuneration of employee inventors?

3.What can multinationals do to ensure that they do not break such remuneration rules?

Full Text: Chinaas remuneration requirements for employee-inventors can cause trouble for unwary employers. Catherine Zheng explains how to avoid problems arising from employee-created intellectual property Multinational companies are increasingly looking to tap into China's innovation potential, opening research centres and entering into research-oriented joint ventures with Chinese institutions. Companies need to be aware of the country's employee remuneration rules, embodied in the Patent Law as well as the implementation regulations, to avoid legal problems down the road. The practice As part of a company's inventor-incentive policy, the employer is often willing to award its employee for a patent invented during the course of employment by awarding them a lump sum payment. Such a payment is usually built into the employment contract. The employer also often tries to waive the remuneration for commercialisation of the service invention. Though the law in China lays out the minimum amounts for such compensation, there are issues concerning the reasonableness of the compensation. Governing laws China's Patent Law requires that employers compensate employees for their inventions. Article 16 of the Patent Law provides that a state-owned entity that is granted a patent right should reward the inventor of a service invention. Furthermore, upon exploitation of the patented invention, the entity must also pay the inventor a reasonable remuneration based on the extent of exploitation and the economic benefits yielded. The Implementing Regulations of the Patent Law also give guidance. Rule 76 of the Regulations provides that an employer may enter into a contract with the employee-inventor in specifying the means and amount of the reward and remuneration in accordance with Article 16 of Patent Law. Although the rules allow agreements to be made between employers and employee-inventor in relation to rewards and remuneration for the service invention, such agreements need to be reasonable to be enforced. There are suggestions that the various compensation rights of an employee-inventor may be contracted out in the employment contract. However such terms will probably be invalid if the court finds the terms to be unfair or unreasonable. As such, it is advisable that the agreement terms provide at least the regulatory minimum. In drafting the terms of such agreements, employers should consider the regulatory minimum level of compensation. Rule 77-78 of the Regulations provides a fall-back scheme of reward/compensation in the absence of express agreement between the employer and the employee inventor. Under Rule 77-78, upon patent issuance, the employer who is granted the patent must within three months from the date of the announcement of the grant reward the employee-inventor with a sum of prize money. The sum for the service invention must not be less than Rmb3,000 ($485) if it is an invention patent or Rmb1,000 ($161) if it is a utility model or design patent. Upon commercial exploitation of the service invention, the employer must pay the employee-inventor from the after-tax profits generated within the duration of the patent right a sum no less than: 2% of the annual profits from such exploitation of an invention patent or a utility model on an annual basis for each year that profits are generated by the invention; or, 0.2% of the annual profits from such exploitation of a design patent on an annual basis for each year that profits are generated by the invention. Alternatively, the employer can make a one-off payment equivalent to the total of all annual payments that it would otherwise need to pay the employee-inventor based on the above requirements. In calculating this one-off payment, the employer will need to take into account all annual payments that it should have paid to the employee-inventor in the past as well as a reasonable estimate of all annual payments that it would need to pay to the employee-inventor in the future. For example, if a lump-sum payment were to be made 16 months after an invention patent was first commercially exploited, the payment should be 2% of all profits generated by the invention patent in the previous 16 months as well as 2% of all profits which is estimated to be generated by the invention patent in the future. Furthermore, if the employer licenses the patent to another entity, the employer should reward the employee-inventor a sum no less than 10% of all licensing fees generated by the patent during the lifetime of the invention. Minimum is often not reasonable Although there are few published cases regarding the employee's awards after a service invention is granted, the case law is clear that the courts have ordered reasonable remuneration for the exploitation of the service invention where the employer has failed to do so. The reasonable remuneration appears to be much higher than the regulatory minimum. Gou Hui v Beijing Luxiang Technology Development provides an example of the courts being willing to award an amount it deems reasonable. Gou Hui, an ex-employee of Beijing Luxiang Technology Development (Luxiang) is the inventor for a "shear asphalt mixer" utility model. After the invention was completed, 20 asphalt mixers embodying the patented technology were built by a licensee at a cost of Rmb100,000 per unit ($16,100). Among these machines, five were used by Luxiang for asphalt production and the remaining was sold at Rmb280,000 each. Gou never received any award or compensation from Luxiang. Gou argued that Luxiang had implemented the patented technology in manufacturing the asphalt mixer and was therefore under an obligation to compensate the inventor. Luxiang denied that it manufactured any of the mixers, claiming that only the licensee was responsible. Further, Luxiang claimed it did not receive any licensing fee nor a share of the profit from selling the mixers. The Beijing Second Intermediate People's Court decided that Gou is entitled to an award of Rmb20,000 ($3,200) based on the grant of the utility model. The amount was calculated based on the contribution made by Gou to the invention and the economic value of the utility model, taking into account the principle of fairness and the aim of promoting technological advance. On the implementation and licensing issues, the court was not convinced by Luxiang's argument that it gained nothing from the sale of the mixer and that it did not receive any licensing fee. Instead, the court ruled for a reward of Rmb96,000 to Gou for Luxiang's implementation of the technology. The court arrived at this amount after considering the technical contribution, economic value of the utility model, the number of mixers made and sold, the selling price and the cost for producing the mixers. Draft regulations on service inventions While the Implementing Regulations in force are mainly targeted at state-owned entities, there are already a number of explanations issued by various local government authorities extending the Implementing Regulations to private entities. In line with this trend, SIPO released the first draft of the Draft Regulations on Service Inventions for comments by the public on November 12 2012 (the period for public comments closed on December 3 2012). It is clear that the Draft Regulations have a greater focus than the Implementing Regulations on protecting the rights of employee-inventors employed by private entities. The Draft Regulations attempt to remedy various shortfalls and clarify certain provisions concerning employee remuneration, such as providing further procedural details on how an inventor may claim his inventorship and reasonable reward under the law. SIPO has indicated that the Draft Regulations are aimed at protecting the financial compensation of employee-inventors and increasing China's development of innovation and technology. It is unclear to what extent SIPO is willing to amend the current draft before submitting it to the State Council for approval and there has been no official indication of when the Draft Regulations will come into effect. No elimination or limit of employee rights As discussed above, the current regime does not expressly prohibit the elimination or contracting out of employees' rights, although it is advisable that the agreement terms provide at least the regulatory minimum. On the other hand, Rule 19.2 of the Draft Regulations adds a new limitation, stating that the agreement between the employer and employee may not "eliminate" or "limit" the employee's rights under the Draft Regulations. Such clauses are nullified under the Draft Regulations. However, the Draft Regulations do not define what level of reward and remuneration would be considered to improperly limit the employee's rights . Rules 19, 20 and 23 of the Draft Regulations provide a general guideline that in setting the amount of reward and remuneration, the employer must take into account the employee's opinion, the potential profit from the employment invention and the economic contribution of the invention to the entire product or process. Furthermore, the employer must inform the inventor of his or her rights as an inventor and provide information on the economic benefit earned by the entity by exploiting, assigning and licensing of the service invention. Increased regulatory minimums Rule 21 of the Draft Regulations increases the default minimum reward for patentable employment inventions to twice the average monthly salary of the company's employees. Rule 22 of the Draft Regulations increases the default minimum remuneration for a patentable invention to 5% of the operating profit earned from exploiting such invention, or 0.5% of sales revenue from exploiting the invention, or a comparable lump sum or multiple of the employee's salary after considering the revenue and sales figures. If annual payment is made to the employee, the employee's wage should also be taken into account. However, in any case the reward should not exceed 50% of the revenue from implementing the intellectual property. Furthermore, if the patent grantee licenses the relevant patent to another entity, the employer should reward the employee-inventor a sum no less than 20% of the licensing fees. The Draft Regulations also expand the types of intellectual property that would entitle the employee to a reward to also include plant breeder's rights, layout designs of integrated circuits, computer software and trade secrets. What should you do? It seems to be costly and burdensome for companies, especially high-tech companies, to reward employees for service inventions and other IP rights. In view of the Draft Regulations and the increased compensation requirements, employers are encouraged to carefully review their existing employment contracts and to set up and implement well-drafted policies to reward employees for their service inventions. In drafting the terms of such policies and agreements, it is advisable that the agreement terms provide at least the regulatory minimum level of compensation under the Draft Regulations as they nullify any contractual clause proposing to remove or limit the employee's rights under the law. Employers should also consider setting up an internal system which clearly records employee invention details including the inventor, owner, level of commercial exploitation and profits generated by each employee invention in anticipation of any future disagreements or disputes. Furthermore, employers should discuss with their employee-inventors and agree on the level of compensation to be paid for each invention. Employers may consider setting up internal procedures for an independent party to decide on a reasonable level of compensation should the employer be unable to agree with the employee on the appropriate level of compensation. Such agreements and procedures should be clearly recorded.