Just rewards

One of the 2007 China Top Ten Intellectual Property Rights (IPR) events unveiled recently was the 4 million mark for the total number of patent applications received by China's State Intellectual Property Office (SIPO). This is indeed a remarkable achievement, considering the fact that China's whole patent system wasn't established until 1985, and it took about 15 years to reach the first million applications.

Service inventions have more value

But a more telling statistic than the total volume is the steady increase over the years of applications for the so called "service inventions". These are inventions made by individuals executing the tasks of their employers or using employers' resources. In 2002, service inventions accounted for about 40 percent of the patent applications filed. By the first quarter of 2008, it has increased to 51 percent.

In China's short patent history, most inventions have been made by individuals at their own expense, thus they are called "non-service inventions". Even today, there are an estimated 200,000 individuals toiling on non-service inventions. Unfortunately, most of the non-service inventions, even after obtaining patents, have rarely generated any real social or commercial value. Lack of channels for exploration is certainly one reason, but many of these patents have inherently low quality and value to begin with, due to the limited knowledge and resources of a lone inventor.

Service inventions are often initiated and supported by entities - companies, universities and research institutions. Compared to lone wolves, entities are in a much better position to create meaningful innovations. First of all, they have better incentives. Companies are driven by the need to develop new products and technologies to stay competitive; universities and research institutes are constantly in search of new discoveries for their research projects.

Entities are also better equipped with resources and management systems to file and pursue patents. As the result, service inventions tend to have a better chance of commercial success. As China is determined to build an innovative society, it is crucial to improve the quality of patented inventions and effectively realize their industrial and commercial values. The paradigmatic shift towards more service inventions is a good start.

Entities are required to provide reward and remuneration to employee inventors

One of the key issues concerning service inventions is the proper compensation to the employed inventor. In China, by law the filing right and ownership of a service invention patent rest with the entity. But the law also requires the entity to provide a reward and remuneration to the inventor. Under the current Patent Law, an employer shall give reward to an employee inventor for a service invention patent that is granted. Upon the exploitation of the patent, the employer shall further pay the inventor a reasonable remuneration based on the extent of application and the economic benefits yielded.

There are rules and regulations setting forth a series of minimum requirements for the reward and remuneration. For example, a State-owned entity shall award inventors a bonus of no less than 2,000 yuan; shall remunerate inventors for no less than 2 percent of the after-tax profit from the exploitation of a service invention patent; and shall share with inventors no less than 10 percent of the after-tax royalty income derived from licensing the patent. Although the general requirement for reward and remuneration is mandatory to all entities in China, these detailed rules are mandatory only for the state-owned entities, while other entities may implement them by reference.

Execution of the reward and remuneration faces many practical issues

As the number of service invention patents increase in China, the issue of how to properly provide the mandatory reward and remuneration to inventors has become a significant issues to the entities . Many practical issues need to be considered so the entity implements a fair, economically sound and legal compensation to the inventors. For example, how to allocate compensations amongst multiple inventors of the same patent? How to determine one patent's value in a technology generated by using multiple patents? When should the compensation be made? How to minimize the litigation risk associated with allegations of unfair compensation?

Most of the advanced innovations are the fruit of collaborative efforts by many individuals working together, and the resulting inventions often have multiple joint inventors. Moreover, some inventions are the result of collaborations by people from two or more different entities. In some cases, one patent resulting from a big project may have dozens of inventors from different companies and/or universities. In these situations, it would be a challenging task to allocate a meaningful portion of company's profits, without significantly hurting its bottom line, and spread them equitably amongst all the inventors. Managing such compensation plan could be demanding and costly, especially if the remuneration is payable after the patent has been exploited or when inventors leave the company.

Advanced technologies also involve many innovative aspects, thus multiple patents. It could be rather difficult, if not impossible, to calculate the proportional value of one patent related to the technology or product being exploited. Moreover, the financial burden of remunerating every single inventor of every single patent associated with the subject product could be unbearable to a company, or at least makes little economic sense, even if the actual share given to that individual inventor is kept minimal.

The timing of compensation could also be problematic. Right now the law only requires a reward at the time the patent is granted, and remuneration at the time the patent is actually exploited. But both these events could take years to happen after the invention is made and application filed, not to mention that many inventions will never become patents, and much less be exploited. In a way, such an unpredictable, back-end compensation system may not serve the purpose of providing incentives to innovate. At the same time, it adds uncertainty and risks to company's business operation. All these practical uncertainties and complexities could increase company's exposure to more litigation by employed inventors who think they are unfairly compensated according to the law. Overall they create inefficiencies to the society in its pursuit to innovations.

Changes are on the way, as China is amending its Patent Law to better foster market-driven innovations. Under the new law, the entity will likely gain more flexibility as to how to structure and execute its own compensation systems. Hopefully the new law and rules provide more clarity and certainty to the legal requirements, which would nurture a win-win environment for service inventions-creations, wherein the inventors get fairly compensated for their contributions, the companies maximize the economic values of the inventions and the society benefits from the increased innovations.

The author is an IP of counsel at the international law firm Jones Day's Beijing office. The views expressed are his own

(China Daily 05/12/2008 page9)