How to Create Employee Invention Rules: Ownership of Rights and Determining the "Reasonable Benefit"

Hello, I'm Noriaki Asato, Representative Attorney at Legal Agent.

At a company engaged in research and development, when preparing a patent application for the core technology of a product, the employee invention rules are something you will want to check alongside the application documents. Even if the company bears the development costs and an employee created the technology during working hours, that alone does not necessarily mean that the right to obtain a patent belongs to the company.

The central questions are who the inventor is, whether the company has a basis for acquiring rights to the invention, and what benefit is to be given to the inventor. The mere fact that the application was filed in the company's name does not explain the basis on which the rights passed from the employee to the company. At companies planning joint research or fundraising, discrepancies between the rules and actual practice may come to the surface when the other party asks to confirm the rights.

When creating employee invention rules, the ownership of rights by the company and the treatment of inventors need to be considered together. In my view, it is important first to confirm the scope permitted by law and then to decide, within that scope, who is covered, the criteria for benefits and the day-to-day procedures.

The Scope of Inventions That Can Be Vested in the Company

Article 35, paragraph 1 of the Patent Act (Japanese) defines an employee invention as an invention that by its nature falls within the scope of the company's business and that was made through acts falling within the present or past duties of the employee or other covered person. "Employees, etc." in that Article includes officers of a corporation.

Both a connection to the scope of the company's business and a connection to the person's duties are required. Whether working hours or company facilities were used is also checked as a relevant circumstance and judged together with the content of the work the person was in charge of. Even an invention conceived on a day off may qualify as an employee invention depending on its relationship to the development work the person was responsible for.

Paragraph 2 of the same Article renders void any provision that, in advance, causes the company to acquire the right to obtain a patent for inventions other than employee inventions. A clause stating that "all inventions made during employment belong to the company" has the problem of capturing even inventions that are not employee inventions. The rules should define the scope of covered inventions with this limit in mind.

The inventor must also be identified. An inventor is a natural person who was substantively involved in the creation of the technical idea. Even for managers of a research team or persons who approve budgets, check their specific involvement in the technical creation. For those in charge of experiments or data organization, the question is whether they merely assisted with instructed tasks or added technical ingenuity of their own. Look at the development records to see who was involved in conceiving and giving concrete form to the solution to which technical problem.

Provisions Vesting Rights in the Company from the Time They Arise

Article 35, paragraph 3 of the Patent Act provides that where a contract, employment regulations or other stipulation provides in advance that the company shall acquire the right to obtain a patent, the right belongs to the company from the time it arises. Employee invention rules can also serve as a basis for ownership of rights as such an "other stipulation."

When adopting this mechanism, provide in advance, in a form that is effective for the persons to whom it applies, that the company acquires the right to obtain a patent for employee inventions from the time it arises. Statements of administrative allocation such as "the company handles patent applications" or "the company manages intellectual property" do not make clear to whom the rights are meant to belong. If current contracts or work rules contain different ownership clauses, check consistency with that wording as well.

Even without an advance ownership provision, the company can later take an assignment of the rights. Article 33, paragraph 1 of the Patent Act permits the transfer of the right to obtain a patent. However, merely putting new rules in place for an invention that has already been completed does not retroactively vest the rights in the company from the time they arose. Check whether the rights were succeeded to under existing contracts, and if this has not been dealt with, consider an assignment agreement or similar.

If an employee or the employee's successor obtains a patent for an employee invention, the company is granted a non-exclusive license under Article 35, paragraph 1 of that Act. However, being able to work the invention itself is different from the company being able, as patentee, to assign the rights to a third party or to set up exclusive arrangements for their use. In my view, a company planning a licensing business or a sale of its technology should not end its confirmation of ownership of rights simply because it has a non-exclusive license.

The "Reasonable Benefit" Received by Inventors and Its Relationship with Procedures

Where the company acquires the right to obtain a patent for an employee invention, among other cases, Article 35, paragraph 4 of the Patent Act gives the employee or other covered person the right to receive a "reasonable monetary or other economic benefit." Where original ownership by the company is provided for, a mechanism for giving this benefit must also be established.

Non-monetary benefits are also recognized, but they must have economic value. The guidelines under paragraph 6 of that Article published by the Japan Patent Office (Japanese) (Ministry of Economy, Trade and Industry Public Notice No. 131 of April 22, 2016, pages 28–29) give as examples opportunities to study abroad at the company's expense, stock options, and promotions or advancements accompanied by improved monetary treatment. On the other hand, a certificate of commendation that merely expresses honor is not included. Care is also needed in treating promotion through ordinary performance evaluations as is as a benefit for an employee invention. In addition to what was given, check whether the treatment was given because of the employee invention.

Where the rules set criteria for the benefit, paragraph 5 of that Article provides that giving the benefit under those criteria must not be unreasonable, taking into account the status of consultations in formulating the criteria, disclosure of the criteria as determined, hearing of opinions when determining individual benefits, and so on. In addition to the stated amounts, check the process by which they were determined and the procedures at the time of application.

Consultation means discussion with the employees or other covered persons to whom the criteria apply, or their representatives. According to pages 5 and 11–12 of the guidelines, written communications, email and group discussions are also covered. Where consultation is conducted through representatives, the question is whether they legitimately represent the employees concerned. If the company selects the head of the engineering department and merely explains the criteria to that person, this does not necessarily amount to consultation with all employees.

Disclosure means putting the criteria in a state where they can be viewed by anyone who wishes to see them. Individual hearing of opinions includes the opportunity to ask questions about, or object to, the decision. The labor law procedures for creating work rules and the assessment of unreasonableness under the Patent Act need to be checked separately.

Where there is no provision on the benefit, or where giving the benefit under the provision is found to be unreasonable, paragraph 7 of that Article provides that its content is determined by taking into account the benefit the company should receive, the company's burden and contribution, the treatment of the employee or other covered person, and so on. In my view, it is important to actually carry out the consultation and other procedures and to be able to explain their history and the decisions made.

From Creating the Rules to Applying Them to Individual Inventions

In light of the above, before inserting your company name into a template of rules, you need to confirm the situations in which inventions arise at your company. The necessary contracts differ depending on whether development is carried out only by in-house researchers or whether officers, contractors and university researchers also participate. Rights cannot be acquired from outside inventors such as contractors solely through rules intended for your own employees.

Confirming Covered Persons and Existing Inventions

Ask the development department about ongoing research themes, participants, inventions already completed and whether applications have been filed. The HR and legal departments compare these against employment contracts signed at hiring, the current work rules and joint research agreements. Proceed separately with the ownership clauses that will apply to future inventions from the effective date of the rules and the work of confirming the succession of rights to existing inventions.

Where the right to obtain a patent for a joint invention is jointly owned, Article 33, paragraph 3 of the Patent Act requires the consent of the other co-owners to assign a share. Whether the matter can be settled simply by receiving an assignment document from your own employee should be checked together with the joint research agreement and the rights of the other inventors.

Benefit Criteria and Records of Consultation

The benefit criteria should state the timing of grants, the content of monetary and other benefits, the evaluation method, allocation among joint inventors and so on. One possible approach is to combine fixed awards at the time of filing and registration with awards linked to working of the invention or license income. Page 9 of the guidelines also does not treat a method based on expected benefits or the setting of a cap as immediately unreasonable in itself.

Choose a method based on how your company uses its technology and whether it can continue to collect the materials needed for evaluation. If licensing to joint development partners is central, decide how royalties will be tracked; if the invention is used as part of your own products, decide how the contribution of the invention will be evaluated. If difficult points of calculation are dealt with by a single sentence leaving them to the company's discretion, employees will find it hard to understand the results of payments.

Present draft criteria, provide opportunities for explanation and questions, and keep records of the opinions received, the company's responses and the reasons for revising the draft. After the decision, make known where the criteria can be viewed and explain their application to new employees as well. Keeping the draft used for consultation, the explanatory materials, the participants and the date of disclosure together with the text of the rules allows the actual procedures to be confirmed later.

Invention Reports and Handling After Departure

In invention reports, record not only the content of the technology but also the history leading to its completion, the persons involved and their contributions, and any plans for disclosure outside the company. The company confirms whether the invention qualifies as an employee invention, the basis for acquiring the rights and the policy of filing or keeping it secret, and then proceeds to determine and notify the benefit. For inventions the company decides not to file, it is also necessary to set out how they will be evaluated under the rules, based on the rights the company acquired and the actual state of their use.

When notifying an individual benefit, show the criteria applied and the reasons for the evaluation, and provide a contact point for questions and objections. At a small company, one possible approach is for the person in charge to hear opinions individually and respond. Choose a method suited to the size of the company, and make it a procedure in which questions actually arrive and are answered.

It is also necessary to deal with departed employees' rights to receive reasonable benefits that have already arisen. Set out whether benefits will continue to be granted according to results after departure or whether they will be evaluated and granted in a lump sum at the time of departure or similar, and confirm contact details and payment methods. Page 33 of the guidelines recognizes both continued grants after departure and lump-sum grants at registration or departure, and also presents a method of hearing opinions at the time of departure.

If the ownership clauses, benefit criteria and records for each invention are in place, it becomes easier to answer inquiries from joint research partners and investors with supporting grounds. When reviewing your rules, why not start by tracing the materials for your most recent invention, from the invention report to the acquisition of rights and the notification of the benefit, to find where procedures are missing?