Shanghai High People’s Court provides clarity on legality of rewarding and remunerating inventors

Enforcement smallOn June 25th 2013, the Shanghai High People’s Court’s Guidelines for Hearing Disputes over Rewards and Remunerations for the Inventors or Designers of Service Inventions (hereafter, inter-changeably, the “Shanghai Court Guidelines” and “guidelines”) were posted online. The guidelines provide some useful clarity, especially for businesses operating in Shanghai, as to the legality surrounding inventor remuneration and reward agreements.

For years now, businesses have expressed concern over ambiguity in Chinese law surrounding inventor remuneration. For example, the European Union Chamber of Commerce in China expressed concern over the system in their IPR Working Group’s 2011/2012 Position Paper. Most recently, industry groups have expressed serious concern over the Regulations on Service Inventions (Draft) (hereafter the “Draft Remuneration Regulation”) released by the State Intellectual Property Office (SIPO) on November 12th 2012. The Draft Regulation, which appears to still be making its way through the legislative revision process, may unnecessarily deter innovation investments in China given, among other concerns, its’ Article 19.2 might limit the flexibility of businesses to establish their own company policy for creating incentives for invention that do not necessarily follow the exact (minimum) threshold for remuneration stipulated in the Draft Remuneration Regulation.

The Shanghai Court Guidelines allow businesses useful flexibility in their inventor remuneration and rewarding schemes, including by ensuring the flexibility thought to exist in the law prior to issuance of the Draft Remuneration Regulation. A non-exhaustive list of key provisions in the guidelines includes:

  • Businesses can set forth remuneration and reward policy – via consultation and subsequent agreement with inventors and designers of service inventions, or via otherwise lawfully created rules and systems within the company. In the absence of such agreement, rewards and remunerations shall be determined according to the Rules for Implementation of the Patent Law.
  • Rewards and remuneration can be given in diversified forms (e.g., stock options, salary increases, paid leave, etc.).
  • Remuneration and reward agreements should be crafted and otherwise in compliance with the Contract Law and Labour Contract Law.
  • Under “normal circumstances,” agreements on remuneration and rewards are “presumed to be reasonable” under the law. However, if the “agreed amount” of rewards and remuneration is “extremely low and obviously unreasonable” the relevant people’s court should decide a reasonable amount of reward/remuneration based on the “specific circumstances of the case at hand.”
  • The agreement amount of rewards and remuneration may be higher or lower than the statutory minimum standards; statutory minimum standards shall directly be applicable in the absence of relevant agreements; and agreements shall be made if the rewards and remunerations are to exceed the statutory minimum thresholds.
  • The obligation to remunerate or reward inventors depends on the employment relationship between relevant parties, right of patent application, and ownership of patent rights.  Rules governing royalties and other exploitation of patents depend on the same factors.
  • Limitation for disputes over rewards and remunerations for inventors or designers of service inventions shall be two years from the time when an inventor or designer knows or should have known that its rights have been infringed upon. Courts should not uphold the claims of an inventor or designer of a service invention for expenses incurred in a dispute over reward or remuneration.

The Shanghai Court Guidelines are generally very positive for foreign innovators. They provide needed flexibility for employers to negotiate and otherwise establish a company policy for rewarding/remunerating service inventors on their own terms rather than having to follow the rigid stipulations for such proposed in the Draft Remuneration Regulation. And, outside of the issues outlined above, the guidelines provide important clarifications on contract research, dispatched workers and the responsibility of the patent courts, among other issues. Still, the guidelines do leave some ambiguity, for example in their discussion of “normal circumstances” and “reasonableness” (in Article 6) where they refer back to ensuring remuneration and reward agreements comply with the concept of “reasonableness” set out in Article 16 of the Patent Law — a concept that has long been somewhat ambiguous in itself.

Hopefully, other courts will adopt the guidelines of the Shanghai High People’s Court, which is often viewed as an opinion leader in China. This would be a positive step towards improving the business environment for companies investing in innovation across the country.

The author is a China-based IP and innovation policy analyst.

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