A Potential Trap for the Unwary: Inventor/Creator Remuneration and Reward Under the Third Amendment

By Max Lin and James F. Ewing, Foley & Lardner LLP

Under both the current Chinese Patent Law and the Third Amendment to the Patent Law — which will take effect on October 1, 2009 — the entity that is granted a patent right shall award to the inventor/creator of a service invention-creation made for hire a reward and, upon exploitation of the patented service invention-creation, must award to the inventor/creator a reasonable remuneration based on the extent of exploitation and application and the economic benefits yielded (Article 16).

The Implementing Regulations of the Patent Law of the People’s Republic of China (Current Rules) set forth the detailed standard of the rewards and remunerations to inventors/creators in Chapter VI. New implementing regulations have not been finalized and are currently subject to public comment (Draft Rules). As under the Current Rules, the standard for inventor/creator reward and remuneration is obligatory for Chinese state-owned entities, but it is optional for other entities in China. The Draft Rules extend the applicable scope of the standard to all Chinese entities, including wholly owned foreign entities (WOFE) or joint ventures (JV) established by foreign investors in China. At the same time, the Draft Rules raise the standard of the reward and remuneration as follows:

Reward:

• Invention: not less than 3,000 RMB (approximately $441)
• Utility model and design: not less than 1,000 RMB (approximately $147)

Remuneration:

• Invention and utility model: not less than two percent of the profits after the taxation earned from exploitation of the invention or utility model
• Design: not less than 0.2 percent of the profits after the taxation earned from exploitation of the design

The entity must pay the reward to the inventor/creator within three months from the date of the announcement of the grant of the patent right. The remuneration must be paid each year during the life of the patent. Alternatively, the entity may, by making reference to the applicable percentage, award a one-time, lump-sum payment to the inventor/creator as remuneration. If the entity licenses or transfers the patent (i.e., invention, utility model, and design), it must draw from not less than 10 percent of the license fees or transfer fees after taxation and reward it to the inventor/creator as remuneration. If the entity makes a capital contribution in the form of a patent right, it must pay to the investor as remuneration not less than 10 percent of the value of the equity stake in the company in which the patent right was contributed as a capital contribution.

Considering that entities and employees are free to negotiate regarding reward and remuneration, the Draft Rules provide that if the reward and remuneration have been agreed to in a labor contract between the entity and the employee, or have been stipulated in the entity’s labor policies or guidelines, such agreement or policy shall prevail. Otherwise, the above standard will be applied. Moreover, the Draft Rules broaden the forms of reward and remuneration. The entity can pay the rewards or remuneration in cash or in non-cash form such as stock. The Draft Rules further stipulate that the reward and remuneration can be inherited by an heir if the inventor/creator dies.

Foreign investors should be attentive to the legislative update to the Draft as the Draft Rules propose to extend the applicable scope of the standard for inventor/creator reward and remuneration to all Chinese entities, including a WOFE or JV established by foreign investors in China. Such expansion may pose a trap for the unwary, in which an obligation for reward and remuneration to an inventor/creator may be implemented where previously there was no obligation.