IP Focus: Issues with R&D centres

3) within one year after the retirement or transfer of the employee from the original employer, where the invention-creation relates to the employee's duty or the other task entrusted to the employee by the previous employer; or

4) mainly by using the material and technical conditions of the employer (including the employer's money, equipment, spare parts, raw materials or technical materials not disclosed to the public). In this case, however, the service-invention belongs to the employer only in the absence of a different agreement by the parties.

Beyond these cases, the invention is considered as a non-service invention, which always belongs to the inventor. Qualifying an invention as service rather than non-service is critical; even if the law seems to set a clear difference, in practice, the border may be rather blurry and uncertain.

PRC courts use a substantial approach to assess the existence of an employment relationship. Employees temporarily transferred from other entities are considered as normal employees for service-invention purposes. Legal relationship, employment subordination as well as payroll are used to assess the existence of an employment relationship. For example, a former employee immediately re-hired as an independent consultant after his retirement was deemed an employee and his invention – developed after the re-hire – was considered a service-invention on the grounds that there had been neither substantial interruption of the employment nor any change in the way the employee performed its work. This was held in the Sinopec Shanghai v Gao Xi before the Shanghai People's Court in 2008.

Particularly dangerous is the invention by newly-hired employees during the first year of employment, which belongs to the previous employer if linked to the tasks carried out with the previous employer. In Connings v Shanghai Hongliu in 2012, Shanghai High Court held that the invention developed by four newly-hired employees could actually be linked to their tasks under the previous employer – as shown by the corresponding job description – who was therefore granted the patent application right. Courts can also question inventions accomplished after such one-year period, if they are too similar to inventions within this period.

As for inventions developed by using the employer's resources, courts distinguish whether the employee had mere access to such resources – which shall not configure per se service-invention – or rather had actual intention of using those to develop a new invention. Another decisive element is the actual role played by such resources in the creation process. For example, if their use is not a decisive element in the invention development or creation process, the court can deem it as a non-service invention.

Other times, inventions are developed in an independent-work framework, which can be qualified – pursuant to the PRC Contract Law (中华人民共和国合同法) – as technology consulting, technology service or commissioned cooperative technology development.

These scenarios are not uncommon, as they allow companies to save on tax and social contribution and terminate contracts much more easily than employment contracts. Generally speaking, in such cases, the right to apply for a patent belongs to:

• the technology developer, if the development has been commissioned (the commissioner has a right to exploit the invention free of charge);

• the consultant or service supplier, who has directly developed the technology (even if by using the client's resources and materials);

• the client, if he is the one who developed the technology – even by exploiting the work of the consultant or service supplier.

Moreover, if the commissioned technology has not been patented, in the absence of an agreement by the parties, the developer can exploit and transfer to third parties the unpatented know-how. However, these provisions can be – and normally are – overturned by the parties' agreement.

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Pre-emption

Even if the employer owns IP rights over service-inventions, the employee-inventor enjoys pre-emption right over the transfer of such service-invention (Article 326.1 of the Contract Law). It is not uncommon that IP rights generated through R&D in China are assigned to an overseas parent company or related companies for no or little consideration. This may possibly be challenged by the tax authorities for anti-avoidance; moreover, companies need to secure waivers from their employees of any such pre-emption right.

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Inventor remuneration

According to Articles 77 and 78 of the Patent Law Implementing Regulations, the inventor-employee has the right to receive remuneration from the employer when the latter is granted a patent for that service-invention and exploits such patent.

The amount of remuneration shall be agreed between the parties, either in the employment contract or in the internal regulations of the employer. However, if no such agreement exists, the law provides minimum thresholds:

• a one-lump sum of Rmb3000 ($500) as award for each patent granted and at least Rmb1000 for each utility model or design patent granted;

• yearly amount of 2% on profits from patent or utility model exploitation, or yearly amount of 0.2% on profits from design patent exploitation;

• no less than 10% of the royalty perceived for patent licensing to third parties.

Despite no specific provision, some decisions seem to imply that invention remuneration can be already included in the salary. It is advisable however, to avoid requalification, a reasonable salary structure aligned with the profits derived from the patent and the legal thresholds.

Employers shall be aware that disputes over the amount of such remuneration are anything but rare. Some of the most challenged issues are:

• Patent exploitation by the employer: technical comparisons between the service-invention and the patent granted or the product sold by the employer is a key element to assess whether the employer has actually exploited the invention. Courts often rely on an independent expert's opinion. Circumstantial evidence can also be used and in Pan Xiping v Shenzhen Jinshanjiang, before the Guangdong High Court, the Court considered that the employer had exploited the service-invention based on the fact that the product packaging showed the patent number and that the product's name was very similar to the patent name;

• How much the invention has contributed to the profits: sometimes, service-invention accounts only for a portion of the profits. In Weng Like v Shanghai Pudong 'EV' Fuel Injection, the Shanghai High Court deemed that the technology exploited (transfer) by the employer actually made minor use of the patented service-invention and therefore calculated the remuneration accordingly;

• Amount of the remuneration: courts have a substantial approach and can proactively investigate to assess the real profits from the inventions. In Pan Xiping v Shenzhen Jinshanjiang, an employee sued his employer claiming remuneration for the invention, which the employer had successfully patented and then licensed to a related company. The Court ruled in favour of the employee and quantified the remuneration. In doing so, it assumed that royalties in an intra-group licence agreement are not a fair benchmark. Therefore, the court was free to assess – based on its own discretion – a higher value of the patent and on such value it calculated the remuneration for the employee.

In some cases, inventors shall also be remunerated with reference to unpatented inventions. Under the Contract Law (Article 326.1), when an employer transfers or uses technology developed by an employee, a percentage of these proceeds shall be given as a reward to the inventor. However, this provision does not specify the minimum percentage of the proceeds.

Even if regulation still focuses on individual inventors, inventions today always – or almost – come from team-work. PRC courts seem aware of this and in various cases have granted remuneration to several inventors involved in the same creation process.

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Changes to service inventions

PRC legislation regarding inventions is comprised of several pieces of legislation, sometimes overlapping and with an unclear relationship between them. Besides the general framework of the Patent Law and its Implementing Regulations, the Contract Law also has relevant provisions, as well as other specific or local regulations.

The State Intellectual Property Office (SIPO) is in the process of enacting new Service Invention Regulations (国家知识产权局职务发明条例). At the time of writing, the Regulations are still in the drafting phase. Based on the current draft, we expect, when approved, substantial changes. For example, the current draft:

• expressly states the employee's obligation to report any invention, both service and non-service related to the employer;

• provides for a disposal procedure whereby the employer can choose whether to apply for a patent, keep the invention a secret or disclose it to the public domain;

• changes remuneration amounts and criteria. For example, awards for patent grant shall be at least 200% of the inventor salary; exploitation of new patents shall be at least 5% of the operating profits. Patent licence remuneration shall be at least 20% of the licence fee.

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Best practices

Foreign companies setting up R&D activities in China shall focus on internal policies aimed at:

• strengthening confidentiality protocols (with both legal and physical means);

• avoiding employee's invention from becoming a non-service invention. The employment contract and the job description shall be carefully drafted. Traceability and records of all resources and materials used by the employee, as well as guidelines and instructions from the employer, are also important;

• implement reasonable remuneration policies. In particular, these shall enhance teamwork, avoiding individual competition which leads to lack of cooperation between team members – in the end, this is a lose-lose scenario;

• conduct technical and legal due diligence on newly-hired employee so as to avoid losing their invention to the former employer.

Nicola Aporti, HFG, Shanghai

Nicola Aporti

Head of Corporate and Head of Food & Drug Regulatory

Nicola supports international companies in establishing and running their operations in China. He has substantive experience in the corporate (set-up, M&A, restructuring, administrative problem solving), food & drug regulatory, labor and contractual (distribution, franchising, manufacturing) areas. Most of his clients come from the automotive, food, pharmaceutical and cosmetic industries.

With a project-management approach, Nicola helps clients by implementing complex projects throughout various regulatory issues involved (tax, custom, financial, product registration and safety, environmental) and providing turn-key solutions. At HFG, Nicola is responsible for international business development and he often cooperates with education institutions and industry associations by giving lectures or seminars about the Chinese legal system.

Since 2010, Nicola has been a lecturer at the Shanghai Normal University for international students on PRC corporate topics. Nicola completed his international law studies between Italy, France and Australia and holds a degree in Law from the University of Ferrara.

In 2005, he was admitted to the Italian bar. Nicola speaks, reads and writes Mandarin Chinese and is fluent in English, French and Italian.