CHANG TSI
Insights
Service inventions are a core driver of technological innovation and progress within enterprises. However, the issues of ownership and distribution of benefits have always represented a delicate yet crucial balance between enterprises and inventors. Although the Patent Law of the People’s Republic of China and the Law on Promoting the Transformation of Scientific and Technological Achievements expressly grant inventors of service inventions the right to “receive rewards and remuneration,” in practice, determining the “reasonableness” of the amount, and designing a rewards and remuneration system that is both incentive-based and operationally feasible, remains a practical challenge faced by many enterprises.
This article focuses on the hot topics and difficult issues surrounding rewards and remuneration for service inventions in practice.
Article 15, Paragraph 1 of the Patent Law provides:
“The entity granted a patent shall reward the inventor or designer of a service invention-creation; after the invention-creation patent is implemented, based on the scope of its application and the economic benefits obtained, the entity shall pay the inventor or designer reasonable remuneration.”
Accordingly, the entity obligated to pay service invention rewards and remuneration should be the entity that has been granted the patent right. In practice, however, it is often the case that the entity granted the patent right differs from the inventor’s employing entity. For example, some multinational corporations centralize global intellectual property management by applying for patents for the service inventions of Chinese subsidiaries in the name of the parent company or another group company. In such circumstances, if an employer refuses to pay service invention remuneration on the grounds that it is not the patentee and has not derived benefits from the patent, this would undoubtedly harm the inventor’s lawful rights and run counter to the legislative intent of the rewards and remuneration system — namely, to encourage innovation by personnel within the entity and promote technological progress. Therefore, in judicial practice, courts often do not rigidly adhere to the formal requirement of “the entity granted the patent” and instead determine that the inventor’s employing entity is the payment obligor for service invention rewards.
In judicial practice, courts have often prioritized the substantive relationship between the inventor and the employing entity over the formal requirement that the payment obligor be “the entity granted the patent right.” For instance, in Chen v. Coca-Cola Beverage Co., Ltd. (Hu 73 Minchu (2018) No. 499), the Shanghai Intellectual Property Court held that an employer could still be liable for service invention remuneration even if it was neither the patentee nor the direct implementer of the patent. In that case, Chen, an employee of Coca-Cola Beverage Co., Ltd., had completed a design patent for the packaging bottle of Minute Maid Pulpy Orange and sought payment of rewards and remuneration. Although the defendant argued that, under Coca-Cola’s internal arrangements, all invention-creations were assigned to another company without consideration and that it had not directly implemented the patent, the Court found that the defendant had transferred the patent application right without cost, that affiliated companies implemented the patent using concentrate purchased from the defendant, and that the defendant derived indirect economic benefits from such implementation. The Court emphasized that the legislative intent of the Patent Law is to guarantee inventors appropriate labor remuneration, which should not be undermined by internal corporate arrangements within multinational groups.
Similarly, in Zhang v. Goubuli Food Co., Ltd. (Zuigaofa Minzhizhong (2021) No. 1172), the Supreme People’s Court determined that an entity may be obligated to pay remuneration even where it does not formally fall within the statutory definition of a payment obligor. It was found that Goubuli Food Co., Ltd. had, in practice, applied the patent and obtained economic benefits, while the patent itself was under its control and had been secured by its controlling shareholder, Goubuli Group Co., Ltd. The Court held that the inventor’s right to request payment of rewards and remuneration for a service invention should not be prejudiced by the employer’s disposition of the patent application right or patent right.
The principle governing the payment of rewards and remuneration for service inventions is “agreement takes priority, statute applies in the absence of agreement.” That is, if the employer and the inventor have agreed — via contract or internal policies — on the amount, calculation method, form, and timing of payment, this agreement should be respected and take precedence, reflecting the parties’ autonomy of will.
Where there is no agreement between the inventor and the employer, the employer must pay rewards and remuneration in accordance with the statutory standards and timelines prescribed by law.
Where there are relevant agreements between the employer and the inventor, in the event of disputes over remuneration and rewards for service inventions, it is worthwhile to further evaluate and discuss both the legality and the reasonableness of such agreements:
(1) Legality of the Agreed Procedures
In accordance with Article 4 of the Labour Contract Law of the People’s Republic of China (“Labour Contract Law”), an employer, when formulating rules, regulations or major matters that directly concern the vital interests of employees, shall undergo discussions by the employees’ congress or all employees, put forward proposals and opinions, and determine them through equal consultation with the trade union or employee representatives.
According to Article 50(1) of the Interpretation I of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Labour Dispute Cases, rules and regulations formulated by an employer through democratic procedures under Article 4 of the Labour Contract Law, where they do not contravene laws, administrative regulations or policy provisions and have been disclosed to employees, may be used as the basis for determining the rights and obligations of both parties.
As the relevant reward and remuneration systems for service inventions concern the vital interests of employees, whether the internal system documents are formulated and implemented through the legally prescribed democratic procedures, and whether they have been disclosed to the employees as required by law, will be important factors in determining whether the system is lawful and valid, and whether it can serve as the basis for issuing rewards and remuneration for service inventions.
(2) Reasonableness of the Agreed Standards
The agreed standards may deviate from the statutory standards. Where the agreed standards exceed the statutory standards, they are naturally encouraged by law and welcomed by employees. However, if the agreed or internally stipulated reward and remuneration standards are lower than statutory standards, would such agreements or internal provisions thereby be invalid?
In judicial practice, agreements whereby the employer and the inventor/designer agree to reward/remuneration amounts lower than statutory standards do not necessarily result in invalidity. According to the Guidelines for the Trial of Disputes over Rewards and Remuneration for Service Inventions issued by the Shanghai High People’s Court, generally, agreements made by an enterprise based on its own nature (including but not limited to industry R&D characteristics, patent application purposes, patent implementation characteristics, etc.) regarding service invention reward and remuneration standards shall be presumed reasonable; the enterprise’s right to autonomy in business operations and the principle of party autonomy should be respected. As long as they are agreed upon following the statutory procedures, the relevant reward/remuneration system for service inventions is deemed reasonable.
Where the agreed reward amount is extremely low and clearly unreasonable, the court will determine a reasonable reward standard based on the specific circumstances.
According to Article 47 of the Patent Law, a patent right that has been declared invalid shall be deemed to have never existed. The decision declaring the patent right invalid shall have no retroactive effect on judgments or mediation statements of patent infringement rendered and enforced by the people’s court before the declaration of invalidity, decisions on patent infringement disputes that have been performed or enforced, as well as patent licensing contracts and patent transfer contracts that have been performed. However, if the patentee, in bad faith, causes losses to another person, compensation shall be made. Where the non-return of patent infringement damages, patent royalties, or patent transfer fees under the preceding provision clearly violates the principle of fairness, full or partial return shall be made.
Once a patent has been declared invalid, it is deemed never to have existed, and the inventor loses the basis for claiming rewards and remuneration for the service invention from the employer. However, where the patent owner had already obtained benefits through licensing or transfer of the patent before invalidation, this falls under the exceptions provided in Article 47, and the inventor remains entitled to require the employer to pay remuneration from benefits obtained prior to invalidation.
In the case of Wu Mei v. Sichuan Ruineng Silicon Materials Co., Ltd. (Chuan 01 Minchu (2017) No. 1053), the Chengdu Intermediate People’s Court expressly held that the disputed patent technology had been actually implemented before invalidation, and the resulting economic benefits should be allocated to Wu Mei. Although Article 47(1) of the Patent Law states that “a patent right declared invalid shall be deemed to have never existed,” Article 47(2) further provides that the preceding clause shall have no retroactive effect on patent infringement judgments, licensing contracts, etc., that have already been performed.
This indicates that the law, while reaffirming the principle that invalidity applies ab initio, also stresses the need to respect the factual implementation of a patent prior to invalidation. Since patents are always subject to the risk of invalidation applications after grant, denying factual pre-invalidation implementation merely because of subsequent invalidation would be detrimental to the stability of normal patent transactions and would discourage the enthusiasm of inventors.
The right to claim rewards and remuneration for service inventions constitutes a creditor’s right and is subject to limitation periods. Under the Civil Code, the general limitation period for civil claims is three years, starting from the date when the right holder knows or should have known that their right was infringed and who the obligor is.
The starting point of the limitation period for disputes over rewards and remuneration for service inventions may be discussed as follows:
1. If there is a valid agreement between the employer and the inventor regarding rewards and remuneration for service inventions, the starting date shall be the expiry date of the agreed payment period.
2. If there is no valid agreement, we distinguish between rewards and remuneration:
(1) Rewards: If the employer fails to pay the reward to the inventor/designer within the period prescribed by the Implementing Regulations of the Patent Law, i.e., within three months from the date of publication of the patent right, it shall be presumed that the inventor knows or should know of the infringement of their right, and the limitation shall start from the expiry of that three-month period.
(2) Remuneration: As discussed above, under the Civil Code, the limitation period starts from the date when the right holder knows or should have known that their right was infringed and who the obligor is. In the case of Dongguan Yixin Magnetic Disk Co., Ltd. v. Zeng Yongfu (Zuigaofa Zhiminzhong (2019) No. 230), the Supreme People’s Court held that the limitation period for claims for remuneration for service inventions starts when the employer who has been granted a patent right is obliged to pay remuneration and the inventor/designer knows or should know they are entitled to such remuneration. Remuneration for service inventions depends on the implementation and use of the invention results. Implementation may take various forms, including use of the patent in the employer’s own products, licensing the patent to others, or transferring it to third parties. In practice, the starting point of the limitation period must be determined comprehensively based on the employer’s method of implementing the patent, revenue model, and other specific circumstances.
For enterprises, establishing a clear, operable reward and remuneration system for service inventions that balances rights and incentives is key to avoiding legal risks and stimulating innovation. Enterprises should focus on improving IP management systems in the following aspects:
1. Improve internal systems: Formulate clear and reasonable reward/remuneration standards through democratic procedures to ensure the effective application of the “agreement priority” principle.
2. Strengthen process management: Especially during intra-group ownership transfers, clarify payment obligations and maintain records of patent implementation revenues to address disputes over payment obligations and remuneration after patent invalidation.
3. Fulfil proactive notification and payment obligations: This is both a manifestation of respect for inventors’ rights and an important means of effectively managing risks related to limitation periods for litigation.
