Compensation for Employee Inventions

Major inventions require high capital investment in the research and development process. More often than not, individual scientists may not have the requisite resources to carry out the invention single-handedly. Thus, it is seen that the scientists usually take employment in the R&D department of a corporation or in universities which promote research activities and inventions.

However, in both the forms of employment mentioned above, the scientists involved in the actual invention are not the owners of the invention or patent. It is either the employer or the university who own the patent for the same.

However, it is a little insensitive to expect these scientists to be satisfied only with their monthly salaries drawn from the particular employment while the employer is earning multiple profits arising out of the patented invention.

It is in this context that I aim to study the right of an employee for compensation from the employer. I would limit my area of study to private employers only.

Any government funded research or invention carried out in a university is covered by separate legislations, for instance, the Bayh-Dole Act in the United States governs the federal funded research in a university and provides for the ownership of patent to remain with the university instead of being transferred to the government. Even in India, a similar legislation like the US Bayh-Dole Act is in the pipeline.

Who can apply for a patent? [1]

An application for a patent for an invention may be made by a person claiming to be the true and first inventor of the invention or his assignee, or by the legal representative of any deceased person who immediately before his death was entitled to make such an application [2] . The term true and first inventor means that the claimant has to be the actual inventor and not merely be the first importer of the invention or the first person to whom the invention is communicated from outside India. In case the inventor is employee of an organization, the inventions made during the employment would be patentable in the name of the employee. However, the ownership of the patent (i.e. rights of using, manufacturing, selling etc.) will be dependent on the terms of contract between the employee and employer. It is a common practice in the R&D organizations to keep the ownership rights with the employer though the patent is in the employee’s (inventor’s) name.

Contract of service and Contract for service

In the United States, a patent is issued as a grant of a property right to the inventor by the U.S. Patent and Trademark Office (PTO). Generally, the term of a patent is 20 years from the date the patent application is filed. The patent confers “the right to exclude others from making, using, offering for sale, or selling” the invention in the United States or importing the invention into the United States. But the patentee is responsible for enforcing the patent, without aid from the PTO. For companies, the critical question is: Who owns the patent?

According to Antoinette M. Tease, a registered US patent attorney, employers “do not own the right to inventions developed by their employees unless they have a written assignment of patent rights to the employer or unless the employee was hired to invent that particular invention.” [3]

It has to be shown that when the employer advertised for the position, they made it clear that the employee was being hired to invent.

That is why it is important that all employees – from the receptionist to the CEO – should sign a separate, written agreement as of the date of hire. It is not known when someone in the company might invent something. One might hire a CFO who invents a business method for e-commerce.

Tease says employers should not rely on a patent assignment provision in the employee handbook because some states do not treat an employee handbook as contractually binding.

Independent contractors’ service agreements should have a patent assignment provision, Tease adds. “There’s no ‘hired to invent’ doctrine for contractors.”

A contract of service is a contract of employment involving an employer-employee relationship while a contract for service is a contract with an independent contractor.

In case of the former, the patent for the invention is generally in the name of the employee while the rights of ownership of the patent rests with the employer through assignment or otherwise through a contract.

In case of the latter, the ownership of the patent for the invention would depend upon the contract of the employee who has been especially hired to invent.

Employees right to compensation – A statutory right in some jurisdictions

The ownership of an invention is decided by national law.

In Sweden there is a special law governing employers’ rights to employees’ inventions, namely the Act on the Right to Employee’s Inventions no. 345 of 1949. The Act applies to patentable inventions made by employees in their private or public employment. (The Act on the Right to Employee’s Inventions is not applicable to inventions made by university researchers (teacher exception).

The Act on the Right to Employee’s Inventions is mostly non-mandatory, and individual contracts or collective agreements may govern the transfer of patent rights in inventions, and in the private sector, rights in employee inventions are also regulated by collective agreements. However, the most important employee rights are mandatory. Thus, for example, the employee has a mandatory right to a reasonable remuneration in compensation for the rights transferred to the employer. An employee cannot be deprived of this right by way of an individual contract or collective agreement.

An employee’s right to reasonable remuneration follows Sec. 6 of the Act on the Right to Employee’s Inventions. The size of the remuneration is to be determined by the parties involved. The parties involved shall decide on the amount of the remuneration. The value of the invention, the scope of the rights acquired by the employer, the terms of employment and the significance that the employment may have had in making the invention are factors taken into consideration when determining the amount of remuneration.

The weaker the connection between the scope of employment and the invention, the stronger is the right to remuneration. The compensation right must be exercised within 10 years from the day the employer was notified by the employee. [4]

Under UK law, ownership of inventions by employee inventors is determined by statute (Patents Act 1977) which overrides contract law and specifically any items in contracts of employment. In the UK, contract law is therefore generally only relevant in determining ownership of inventions made outside of employment, e.g. by consulting engineers or scientists.

The Patents Act 1977 implements a statutory regime whereby an employee of a company may become entitled to a measure of financial reward or compensation where the employer has obtained a benefit from a patented invention made by an employee. The measure of compensation relies upon the extent of the contribution made by the employee to the patent. [5]

For a UK-resident employee inventor, the UK Patents Act states that the first owner of an invention made by that employee will be the employer, if the invention was made during the course of the employee’s normal duties, or during course of duties specifically assigned to the employee [6] . These provisions apply provided that the duties were such that an invention might reasonably be expected to result.

The first owner of an invention may subsequently assign the invention to other parties.

A UK-resident employee inventor may be entitled to additional compensation for an invention that is of outstanding benefit to the employer [7] . The rights for the invention may have passed to the employer because one of the above circumstances apply [8] . Alternatively, the rights may have been assigned from the employee to the employer, or the employee may have provided the employer with an exclusive licence for an application or a patent for the invention [9] .

In order for such an employee inventor to be entitled to compensation the following conditions must apply [10] :

(a) a patent must have been granted for an invention;

(b) the invention or the patent must be of outstanding benefit to the employer; and

(c) by reason of those facts it is just that the employee be awarded compensation

To decide if an invention is of outstanding benefit to an employer, a court will consider the size and nature of the employer’s business. A court will determine the amount of the benefit that is attributable to the invention and then decide whether this benefit is outstanding in the circumstances. [11] The benefit must be derived from the patent, and not simply the invention.

The following factors are considered when determining the value of the fair share:

the employee’s duties;

the employee’s emoluments;

the effort and skill contributed to the invention; and

the contribution of the employer in making, developing and working the invention.

The landmark cases which paved the way for employee compensation

Kelly and Chiu v. GE Healthcare Limited

Despite employee compensation for invention being a statutory right under the Patents Act 1977 in UK, this right had never been enforced by the courts nor had any compensation ever been granted by the UK courts.

The very first case to highlight the issue of employee compensation for an invention and to grant compensation for the same was Kelly and Chiu v. GE Healthcare Limited [12] decided by the England and Wales High Court, Chancery Division, on 11.2.2009 by Hon’ble Mr. Justice Floyd.

Drs Kelly and Chiu were research chemists employed by Amersham International plc (which was taken over by General Electric Company and is now known as GE Healthcare Limited) (Amersham). They worked, as part of a team, on a research project run by Amersham for the development of radioactive imaging agents and were named (with other individuals) on a number of patents as inventors of a successful compound which formed the basis of the radioactive imaging agent, Myoview. Sales of Myoview have exceeded GBP1.3 billion since its launch.

Under section 40(1) [13] of the Patents Act 1997 (prior to its amendment by the Patents Act 2004) an employee who has made an invention which belongs to the employer and for which a patent has been granted may claim compensation from the employer. The patent must be of outstanding benefit to the employer (having regard among other things to the size and nature of the employer’s undertaking) and that by reason of those facts it must be just that the employee should be awarded compensation.

The judge, Floyd J, held that “outstanding” means “something special” or “out of the ordinary” and more than “substantial”, “significant” or “good”. The benefit must also be something more than one would normally expect to arise from the duties for which the employee is paid. The patent must be a cause of the benefit received by the employer and it is useful to consider what would have been the position of the company if a patent had not been granted. Floyd J found that the patents were of outstanding benefit to Amersham and that it was just to award Drs Kelly and Chiu compensation. The patents protected the business against generic competition and reduced profits after the expiry of the regulatory data exclusivity period. Further, the fact that Amersham had a “patented blockbuster radiopharmaceutical” in Myoview was a major factor in its completion of a number of corporate deals.

If a claim under section 40(1) is successful, the employee is entitled to a fair share of the benefit which the employer has derived, or may reasonably be expected to derive, from the patent. In determining the amount of compensation to be awarded under section 41, Floyd J considered various factors including:

The employee’s duties, remuneration and advantages he derived from his employment or in relation to the invention

The effort and skill devoted to the invention

Any contributions made by third parties; and

The contributions made by the employer.

Floyd J found that the “absolute rock bottom figure for the benefit from the patents” was GBP50 million but stated that he had no doubt that the real benefit to Amersham was much greater. Compensation in the amount of GBP1 million was awarded to Dr Kelly and GBP500,000 was awarded to Dr Chiu.

It may be further noted that [14] :

Compensation was awarded even though both scientists were part of a research team and were not the only inventors named on the patent.

Floyd J stated that “aside from the facts of this case … the employee’s share of the value of a patent might in principle lie somewhere in the broad range from nil to as much as 33 per cent or beyond”.

Section 40(1) of the Patents Act was amended with effect from 1 January 2005 such that compensation may now be granted for any of the invention itself, the patent for it or the combination of the patent and the invention.

An employee may, under section 40(2) [15] of the Patents Act, claim compensation where an employee assigns, or grants an exclusive licence, to rights in an invention or in any patent or application for a patent for the invention to an employer and the benefit derived by the employer from the contract of assignment or licence is inadequate in relation to the benefit derived by the employer from the invention or the patent for it or both.

Shanks v. Unilever

Post Kelly & Chiu v. GE Healthcare case; in December 2009 the High Court of England decided another case relating to employee compensation. The case of Shanks v. Unilever [16] was decided by Justice Mann on 3.12.2009.

The decision relates to a patented invention – a measuring device for use in diabetic testing kits – first developed in 1984 by Professor Shanks while he was an employee of Unilever Central Resources Ltd (CRL). The patent was later assigned by Unilever CRL to its parent company, Unilever plc, for a nominal sum.

After initiating employee inventor compensation proceedings against Unilever under section 40 of the Patents Act 1977, Professor Shanks decided to ask the hearing officer at the Intellectual Property Office to clarify the meaning of another section of the Patents Act which could have a significant bearing on the amount of compensation awarded. Specifically, the hearing officer was asked to interpret section 41 of the Patents Act, which is intended to help establish the amount of benefit the employer gained from the patent. Section 41(2) states that where there has been an assignment (or licence) from the employer to a person connected to the employer, the benefit of the patent to the employer is to be assessed as if that person were not connected to him.  The point under debate was: what does ‘that person’ mean?  Does it mean the actual assignee (minus its connection to the employer)?  Or does it mean a notional arms-length purchaser (unconnected to the employer)?

The hearing officer found that ‘that person’ means the actual assignee (minus its connection to the employer).  Professor Shanks appealed to the High Court.

While giving his decision, the judge, Mr. Justice Mann, disagreed with the hearing officer and decided that ‘that person’ means a notional (unconnected) arms-length purchaser.  In reaching his judgment, the judge explained that any other interpretation of section 41 could result in absurd consequences.  For example, a different interpretation may permit an employer to assign a patent to someone connected to him/her (such as his/her spouse), and who has no interest in exploiting the patent, in an attempt to evade an employee inventor compensation claim.  The judge considered it to be absurd to use such a transaction as the basis for compensating an employee.

Nakamura vs Nichia Corporation [17]

The Tokyo District Court decision in Nakamura vs Nichia Corporation case on 30.1.2004 has struck fear into the hearts of many Japanese employers of employee-inventors. The Court ordered Nichia Corporation (Nichia) to pay Shuji Nakaumura, a former employee, approximately ¥20 billion (US$200 million) in compensatory damages, many times more than the ¥20,000 Nakamura originally received from Nichia for his invention.

Nakamura is the inventor of the “Blue LED of high brightness.” Nakamura assigned the rights in respect of his invention to Nichia under company rules. He received ¥20,000 and Nichia experienced exponential growth in LED sales and profits. After leaving Nichia, Nakamura turned around and sued the company under Article 35 of the Japanese Patent Law [18] , claiming that the compensation he received was unreasonably low.

The Court based its award on two factors: i) an assumption that the applicable royalty rate would have been 20%, affording Nichia earned profits of approximately ¥120.8 billion if it had licensed the invention; and ii) a determination that the inventor’s contribution ratio was 50%. Compensation payable for the invention was thus approximately ¥60.4 billion, allowing the Court to award Nakamura the full ¥20 billion that he was claiming under the action.

Conclusion

There are a number of practical considerations arising out of the judgments discussed above. Some of them are:

Likely increase in the numbers of claims for compensation.

The increased risk of successful compensation claims and the potential amount of compensation that may be awarded:

May adversely impact cost analyses conducted prior to engaging in research and development projects; collaboration projects and acquisitions

May discourage employees from working together effectively and sharing the results of research as “to some extent the fact that an employee makes an invention can be a consequence of his being assigned a routine task at the right time” and employees may not wish to prejudice any potential claim that they may have; and

will not necessarily be defeated by paying employees the appropriate industry rates relevant to the nature of the work and the employees receiving other benefits or advantages as a result of the patent or invention or both as these factors affect the amount of compensation payable.

It is clear, however, that a high threshold of ‘outstanding benefit’ remains.

The decision in Shanks v. Unilever could leave employers in a worse position if they assign or license a patent relating to an employee’s invention to a connected business or individual – such as a subsidiary, parent company, associate or even spouse. In such cases, the amount of compensation due to the employee may now be based on the market price of the patent. [19]

The decision potentially leaves the way open for Professor Shanks to increase the value of any compensation due to him.  Although Unilever plc licensed the patent to a number of third parties, earning an estimated £23 million as a result, it also accepted that a reasonable licensing deal to an arms-length purchaser would have yielded in the order of US$1billion in royalties.  Given Mr Justice Mann’s decision, this huge jump in the potential market price of the patent could significantly increase the amount of compensation which may be awarded.

The judges’ decision can be regarded as a positive outcome for inventors who may be considering a claim for compensation now or in the future.

It also closes a potential loop-hole which employers previously may have been able to exploit in order to evade or minimize the value of employee inventor compensation claims.

This decision also seems effectively to impose an obligation on connected assignees to fully exploit the assigned patent. Otherwise, an employee compensation claim could conceivably leave the connected entities out of pocket.

The Nakamura case will likely have a considerable impact on both current and future employee invention suits in Japan, even though the special circumstances existing in Nakamura may have played a significant role in the Court’s award of such huge damages. Such special circumstances included: i) the subject invention being so remarkable that the inventor has been considered by many worthy of a Nobel Prize; ii) the achievement of the invention whilst working in a particularly disadvantageous research environment; and iii) the transformation of Nichia from a small, local company into the world’s largest LED manufacturer whose sales increased have increased ten-fold in as many years, almost all as a result of the success of Nakamura’s invention.

Nakamura comes at an important time, with more and more lawsuits being brought against employers by employee-inventors claiming huge amounts of compensation under Article 35 of the Japanese Patent Law.

The legislative intent behind Article 35 is ostensibly to strike a fair balance between the interests of the employer and the employee. In reality, however, the amount of compensation paid for employee inventions has tended to be determined unilaterally by the employer, usually meaning small sums for inventors. Now, in the face of increasing litigation and adverse court rulings, many employers are reviewing and taking steps to redress the setting of compensation for employee inventions.

Further, the Cabinet recently approved Japanese Patent Office (JPO) proposed amendments to Article 35. Through the proposed amendments, the JPO proposes to retain an employee’s right to reasonable compensation, but that such right shall give rise to damages only where the compensation paid is found unreasonable after taking into consideration the methodology of relevant computation and the manner of negotiations between the employer and employee. While the proposed amendments would make it more difficult for employee-inventors to receive compensatory damages on the sole ground that the paid compensation simply was not sufficient, a remedy would remain where unequal bargaining resulted in relatively low compensation, which would both reduce the flood of litigation under Article 35 and protect the rights of employee-inventors.