mardi, février 08, 2011

Japan: Paying reasonable value to employee-inventors

Paying reasonable value to employee-inventors

Contributed by Nishimura & Asahi


Introduction

In January 2004 the Tokyo District Court issued a surprising decision concerning employee inventions. The lawsuit was brought by Shuji Nakamura, the inventor of blue-light-emitting diodes, against his former employer for the payment of reasonable value for his invention. The court determined that the reasonable value which Nichia Corporation, a closely held Japanese chemicals company, should paid to Nakamura for the invention's transfer was approximately ¥60 billion. The actual amount awarded was ¥20 billion, which was the amount demanded by Nakamura; at the time, it was the largest amount to have been awarded in such a case.

Around the same time, two other decisions also resulted in large awards for reasonable value. One was the Tokyo High Court's decision against Hitachi, Ltd, in which it awarded ¥170 million. The other was the Tokyo District Court's decision against Ajinomoto Co Inc, which resulted in an award of ¥200 million.

These decisions had a significant impact on this area of law, prompting many lawsuits demanding payment of reasonable value under the employee invention system. Many related issues have been vigorously argued in the meantime.

In cases where employees or ex-employees demand payment of reasonable value for their inventions, the method of calculating reasonable value is a crucial issue.

Although the debate surrounding these issues has lessened in recent years, two second-instance decisions of the IP High Court in 2009 involving the calculation of reasonable value have attracted a great deal of attention. The two judgments granted a larger amount of reasonable value compared to previous judgments, as they used a different method to calculate reasonable value.

These cases - one involving Canon Inc and the other involving Brother Industries Ltd - brought the method of calculating reasonable value back into the spotlight. This update discusses the employee invention system in Japan and reasonable value under this system.

Employee invention system

Japan has a unique employee invention system. Under the Patent Law, when an employee creates an invention in the course of performing his or her professional duties, the right to obtain a patent for the invention rests with him or her. However, the employer is automatically granted a free, non-exclusive licence to use the invention because it made contributions to it by employing the employee, providing research facilities and bearing the research and development costs. In addition, the employer is allowed to reserve succession to the right to obtain the patent or patent right (or obtain an exclusive licence under the law) regarding the invention if this is provided in the relevant employment regulations or other stipulations or contracts.

If an employer succeeds to the right from the employee-inventor (or obtains an exclusive licence), the employee-inventor can demand payment of reasonable value in return for the succession of the right (or the exclusive licence). If the amount paid to the employee is below the reasonable value, the employee can demand payment of the difference. The court decisions under considerations were handed down in lawsuits in which an employee-inventor had demanded that his or her former employer pay the difference between the reasonable value and the actual amount paid.

The employee invention system grants employers a non-exclusive licence and right to reserve succession and awards reasonable remuneration for inventions created by employee-inventors. It is designed to create incentives for employees to innovate and invent. It is also intended to incentivise employers to invest in employee inventions. Ultimately, it aims to encourage investment in research and development, and to coordinate the interests of employers and employees in order to achieve these aims.

Many companies in Japan have established employment regulations or other provisions which allow them to succeed to the right regarding an employee invention. Before the recent decisions to award significantly larger amounts, the sums paid to employee-inventors in terms of succession were relatively small. However, Japanese culture is not heavily litigious and reciprocal expectations of employee loyalty and lifelong employment remain strong. As a result, there were few lawsuits regarding reasonable value in the past.

Calculating reasonable value

The meaning of the phrase 'reasonable value' is unclear. In judicial practice, the reasonable value of an invention made by an employee-inventor is calculated using the following formula:

[employer's profit from the invention] x [degree of the employee's contribution]

The degree of the employee's contribution is basically a matter of fact finding. However, calculating the employer's profit involves more complicated legal issues.

The amount of the employer's profit is not the whole profit earned by the employer by using the invention; rather, it is limited to the profit that the employer earned by using the right and excluding third parties from using the invention. This is because employers can use the invention without succeeding to the right under the non-exclusive licence granted by the law. However, it is not easy to determine the employer's profit. There are several legal issues concerning the determination of reasonable value, most of which involve calculating the amount of the employer's profit.
The relevant issues include:

  • whether the situation after the invention was created should be taken into account when determining the amount of the employer's profit;
  • when the employer's profit should be recognised;
  • whether prosecution history should be taken into account when determining the amount of the employer's profit;
  • how to determine the employer's profit if the employer grants a cross-licence or blanket licence to third parties;
  • how to determine the employer's profit if there are grounds to invalidate the patent regarding the invention;
  • how to determine the employer's profit if the employer waives its right to obtain the patent regarding the invention;
  • whether profit which accrued outside Japan should be included in the employer's profit; and
  • how to determine the employer's profit when it grants a licence to others, but also uses the invention for itself.

In 2009 both Canon and Brother Industries dealt with the issue of how to determine the amount of employer's profit when the employer grants a licence to others, but also uses the invention for itself. As the amount of the employer's profit is limited to the profit that the employer earned by using the right and excluding third parties from using the invention, some commentators argue that there is no such profit in amounts earned by the employer using the invention for itself. The first instance decisions in both cases determined the amount of the employer's profit to be relatively small or zero, based on the existing method of calculation. However, on appeal, the IP High Court determined a higher amount, based on a new method of calculation.

Since these issues are still being discussed, it is difficult for employers to predict how much money they will be ordered to pay an employee-inventor who files a lawsuit for payment of reasonable value. There are two basic views regarding the Japanese employee invention system and the right to demand reasonable value which affect the answers to the issues.

The first view is that the employee invention system is designed to provide incentives for employees to innovate and invent, and for employers to invest in inventions.

The second view holds that the system is designed to distribute some of the profits which employers derive from employee inventions to the employees in question.

According to the first view, not all of the employer's profit should necessarily be available to distribute to employees. According to the second view, all the profit should be distributed to the employees. For instance, with respect to the issue of how to determine the amount of the employer's profit where there are grounds to invalidate a patent, the first view suggests that the employer is not necessarily required to pay the profit that it has earned from the invention because the payment of reasonable value does not result in incentives to create patentable inventions. According to the second view, employers should pay employees a part of the profits from their inventions, regardless of whether they are patentable.

Both Canon and Brother Industries are now being appealed before the Supreme Court. It is hoped that the courts - including the Supreme Court in these two cases - will provide clear answers to the issues and set out the logic of their answers regarding the calculation of reasonable value.

Comment

The uncertainty regarding the amount that a company may be ordered to pay an employee or ex-employee as reasonable value for an invention may present an obstacle for the company in considering its management strategies, and also for those intending to acquire such companies through mergers and acquisitions.

How can companies take measures to reduce the risk of lawsuits? In light of the court decisions that have granted large amounts of reasonable value and the heated debate about the employee invention system, the Patent Law provisions on the employee invention system have been revised. The revisions are designed to place greater importance on procedure and transparency regarding the determination of reasonable value in a company.

Under the revised provisions, an amount is likely be considered reasonable if the amount of consideration of transfer of an employee invention is determined in accordance with standards provided in a contract, employment regulations or other stipulations, and if the payment thereof is considered to be reasonable in light of whether:

  • adequate consultation has taken place between employer and employee to set the standards;
  • the standards have been properly disclosed; and
  • the employer has adequately heard employees' opinions regarding the standards.

Following this revision, the predictability of reasonable value for employers is more certain. It is hoped that it will also result in employees being more satisfied with the fruits of their labour. Therefore, in order to lower the risk of lawsuits and of paying substantially large sums of reasonable value, companies should establish rules on the value to be paid to employees through proper procedures and should ensure that such rules operate transparently and fairly.

Since the concept of reasonable value remains, it is possible that a company might be ordered to pay additional amounts if a payment of the value already made to the employee-inventor is deemed unreasonable.

The Supreme Court dismissed Canon's appeal in October 2010. The IP community will keep a close eye on the upcoming Supreme Court decision in Brother Industries.

For further information on this topic please contact Hitomi Iwase or Naoko Abe at Nishimura & Asahi by telephone (+81 3 5562 8500), fax (+81 3 5561 9711) or email (h_iwase@jurists.co.jp or n_abe@jurists.co.jp).

An earlier version of this update first appeared in IP Value 2011 - An international guide for the boardroom, published by IAM magazine, part of the IP Media Group. For further information please visit www.iam-magazine.com.