Why India needs an inventor remuneration law

If the country wants its scientists – in Prime Minister Narendra Modi’s words – to “patent, produce and prosper”, it should follow in the footsteps of key jurisdictions and ensure that innovators share the gains arising from commercialisation and licensing

The Indian patent system provides an incentive for IP owners and applicants to disclose their inventions in return for exclusivity rights for a period of 20 years. In the case of service inventions, which originate from an employer-employee relationship under a work contract, ownership rights are transferred from the employee to the company. However, in most organisations – large or small – only a small fraction (less than 20%) of employees invent and file patent applications. So, while the organisation makes significant financial benefits from the intellectual property granted patent protection, are employee inventors remunerated reasonably (ie, beyond their monthly salary)?

This article explores the legal provisions adopted by various countries to create inventor rights to remuneration, thereby increasing their engagement with IP protection through patent filing and usage. Thereafter, it compares Chinese and Indian patent laws and explores the need for – and benefits of – an inventor remuneration law in India.

Inventor remuneration in key R&D locations

To address employee inventor rights, many countries have implemented regulations for inventor compensation in the past 10 to 15 years. These encourage active participation from inventors, thereby helping to improve the quantity and quality of patent filings. Remuneration can occur at various stages of the patent lifecycle, triggered by the filing, grant, commercialisation, licensing or even sale of a patent.

Similar laws have already been implemented in 14 European countries (Austria, Denmark, Finland, France, Germany, Hungary, Italy, the Netherlands, Norway, Poland, Portugal, Russia, Spain and the United Kingdom) and several Asian countries (China, Japan, Malaysia, South Korea, Sri Lanka and Vietnam). These countries have enacted regulations either through specific rules in the national patent law or a specific legislation for inventors, or through case law in landmark national court judgments (see Figure 1).

Figure 1. Overview of remuneration laws in various countries

 fig
China (2008-10) Y3,000Minimum 2% of profits from the exploitation of patent and/or 10% of the licence fee.
Germany (2009)  

Compensation = E*A*X, where:

  • E = Iinvention value calculated, for example, by making a licence analogy or an estimation of internal value to the company (quantifiable business use).
  • A = proportional factor based on role in identifying the problem solved by invention, contribution to solution of problem, and duties and position within the company.
  • X = co-inventor share.
Russia (2014)30% of average monthly salary of inventor 
  • 100% of average monthly salary of inventor for every year of use
  • 10% of licensing revenue or 15% of sale (assignment agreement value)
Japan (2016),
Korea (2013)
  • Inventor has a right to receive reasonable monetary or other economics profits
  • To judge the ‘reasonableness’ of amount, the law stresses the reasonableness of the ‘procedure taken’ between the employer and the employee in the course of setting standards and calculation of individual profits.
India
  • No specific law governing the right to remuneration of inventors
  • Company specific policies (if any) guide remuneration in India (typically at filing/grant stage, not in use/license/selling)

Germany

As per the German Employees Inventions Act 1957 (amended in October 2009), compensation must be awarded for all service inventions claimed by an employer. The act also provides for arbitration proceedings if the employer and employee disagree on the level and conditions of compensation. The arbitration board is part of the German Patent and Trademark Office.

Classification of inventions: the act classifies inventions under two categories – service inventions and free inventions. Service inventions are made either in connection with the inventor’s employment or tasks that they must perform, or based on the employer’s expertise or activities. Where inventions are not connected with employment tasks or the employer is not interested in protecting service inventions, the inventions will be considered free inventions.

Ownership of inventions: at the time of creation, the invention belongs to the employee, who should notify their employer of the same. Thereafter, the employer is deemed to claim ownership of the invention, unless it releases the invention to the employee within four months of notification.

Compensation: There are guidelines describing the ways of calculating compensation as a factor of invention value. The Directives for Assessing Compensation (issued in 1959 and amended in 1983) suggest the following formula for compensation:

E * A * X

Where:

  • E = invention value calculated, for example, by making a licence analogy or an estimation of the invention’s internal value to the company (quantifiable business use);
  • A = a proportional factor based on the inventor’s role in identifying the problem solved by the invention or their contribution to the solution of the problem, and their duties and position within the company; and
  • X = co-inventor share.

Japan

In April 2016 Japan amended the Employees’ Invention System to include a remuneration provision. As per Article 35(4) of the Japan Patent Law, “in the case of an employee invention, an employee, etc. who invented such invention has the right to receive reasonable monetary or other economic profits when his/her right to obtain a patent has been succeeded to and owned by the employer” (emphasis added). Hence, the law never limits remuneration or compensation to monetary payments. Instead, other economic profits such as stock options are permitted.

To determine the reasonableness of the amount, the law stresses on the reasonableness of the “procedure taken” between the employer and the employee in the course of setting standards and the calculation of individual profits. The amount of reasonable profit can be determined in advance as per the provisions of an agreement, employment regulation or other stipulation.

If such provisions do not exist in the employee contract or agreement, or in case of any dispute on the reasonable profit between the employee and employer, the reasonable profit is decided by the court. In one such example, in 2004 the Tokyo District Court awarded the inventor of a blue light-emitting diode (LED) Y20 billion (Tokyo District Court Decision of 30 January 2004, Hanji No 1852 p36 “Case of Blue Light Emitting Diode”).

China

Inventor remuneration and rewards were introduced by amendments to the Chinese Patent Law in 2008, together with implementing regulations in 2010. Article 16 of the Patent Law mandates payment of a reward (when a patent is granted) and reasonable remuneration (when the invention is exploited) to employee inventors for their service invention creation. Such reward and remuneration are beyond the regular salary paid to the inventor. For the reward, Rule 77 of Chapter 6 of the Implementing Regulation of Chinese Patent Law 2010 provides for a sum of Rmb3,000 ($428) to be paid within three months of grant. For remuneration, Rule 78 of the Patent Law recommends a minimum payment equivalent to 2% of profits from the exploitation (implementation) of the patent. In case of patent licensing, the remuneration is at least 10% of the licence fee.

Russia

Russia’s Patent Law (amended in June 2014) recommends compensation for inventions to be paid in three stages:

  • at the time of creation – typically 30% of the inventor’s average monthly salary;
  • based on use (paid annually for the period of use) – typically 100% of the inventor’s average monthly salary for every year of use; and
  • on licensing or sale of the patent – 10% of the licensing revenue or 15% of the sale amount (assignment agreement value).

However, these rules are not mandatory and payments can be modified or waived in the terms of the employment contract.

The situation in India

The Indian Patents Act 1970 contains no specific law governing the remuneration of inventors in case of service inventions, which often originate from tasks performed by inventors during the course of assigned work utilising company resources. Therefore, service inventions are guided by provisions of general contract law and/or company-specific policies. As such, the salary paid to the inventor is considered adequate compensation for the transfer of invention ownership rights to the employer. In some companies, inventors receive fixed monetary benefit at the time of filing and/or grant, as per company policy. However, in case of patent monetisation (commercialisation or licensing), inventors are generally left out of the share of proceeding gains.

How invention powered China’s rise

Comparing India with China provides an interesting case study. The two neighbouring nations, both developing countries with huge populations, have experienced unprecedented growth since opening their economies to the world in the 1990s. China’s economy has grown much faster though, resulting in shared prosperity and poverty reduction. According to the World Bank, poverty reduction in China has been exponential, compared to steady improvements in India (see Figure 2).

Figure 2. Poverty headcount ratio at $1.90 a day (2011 purchasing power parity)

FIGURE 2. Poverty headcount ratio at $1.90 a day (2011 purchasing power parity)

We believe that China’s investment in technological advancements and innovation has been one of the key factors behind its success. This is evident in the steady rise of China’s ranking in the Global Innovation Index (co-published by WIPO, Cornell University and INSEAD). In 2008 China ranked 37th, with India not far behind at 41st. Following an exponential growth in patent filings from 2008 onward, China had improved its ranking to 14th by 2019, whereas India had regressed to 52nd (see Figure 3).

Figure 3. Global Innovation Index Rating: India versus China

FIGURE 3. Global Innovation Index Rating: India versus China

Patent filing counts at the Indian Patent Office continue to be a matter of concern, as the number of filings has grown at a compound annual growth rate (CAGR) of a mere 3% over the past decade (from 35,218 applications in 2007-2008 to 47,854 in 2017-2018). In contrast, patent filings in China have grown rapidly over the past 10 years – so much so that China is now the highest patent filer in the world (see Figure 4).

Figure 4. National patent filing count by jurisdiction

FIGURE 4. National patent filing count by jurisdiction

The vast majority (over 90%) of patent applications are filed by domestic applicants in China. In contrast, most (over 70%) patent filings and grants in India belong to foreign institutions, suggesting that increasing the overall patent filing volume among resident or domestic entities has been a perennial challenge.

There was a sharp increase in Chinese patent filings post-2008 (see Figure 4), indicating the positive influence of inventor remuneration laws, which were introduced in 2008. In the three years prior to introduction, the number of patent filings grew at a CAGR of 17%. However, after the laws were introduced, the number of filings between 2009 and 2011 increased at a CAGR of 29%.

When and why to remunerate

At Daimler, we have seen the benefits of inventor remuneration across the company wherever there is national legislation to support it (eg, in China, Germany and Japan). In Germany, Daimler is among the top patent-filing original equipment manufacturers, which reflects strong participation from the inventor community and the company introducing several high-quality innovations in the auto sector.

It is important to select the right trigger point for remuneration in a patent lifecycle. The key stages are:

  • filing the patent application;
  • the company using the filed patent application (eg, in the product being sold or internal processes);
  • granting of the patent application; and
  • use of the granted patent (eg, commercialisation, sale or licensing).

At the patent-filing stage, it is not certain whether the application will be granted by the patent office or if the invention will be used by the company. Hence, it is better to link remuneration to the later stages (time of grant or actual use of the patented invention). Paying remuneration during the filing stage could lead to a higher number of invention disclosures, which many small organisations may find difficult to handle. However, if – depending on its IP strategy – an organisation wanted to encourage more disclosures, it could offer remuneration to employees at the filing stage through its organisational policy framework.

During the 107th Indian Science Congress, Indian Prime Minister Narendra Modi stated: “There is a need to revolutionise the landscape of India. My motto for the young scientists has been innovate, patent, produce and prosper.” Incentivising inventors through laws recognising their right to remuneration under the Indian Patent Act and Rules would be a step in the right direction. It would be worthwhile to initiate discussions among stakeholders (eg, industry players, the legal fraternity, the patent office and government authorities) on the need for such a reform and learn from the experiences of patent stakeholders in other countries.

We would offer three broad recommendations to Indian policymakers should such a discussion become a reality there. First, there needs to be an incentive mechanism for inventors if both the quantity and quality of patents generated in India are to be increased. Second, the law should recognise the right to receive remuneration for service inventions claimed and used by employers. Finally, determining when, how and how much to remunerate inventors should be established by the employer through a reasonable process.

If implemented correctly, remuneration laws have the potential to motivate Indian inventors and boost the number – as well as the quality – of patent filings, leading to innovative intellectual property that could help to establish India as a key jurisdiction for industries.

Action plan

The Indian government is keen to encourage more domestic patent filings and build a more innovative economy. The experiences of jurisdictions that have accomplished this goal suggest that India should introduce an inventor remuneration law.

  • Inventor remuneration in India is currently governed by contract law and company policies – with inventors often left out of the proceeds when a patent is commercialised.
  • Important markets for the auto industry, including Germany and Japan, have implemented inventor remuneration laws, which seemingly drive more active involvement by R&D staff.
  • The rapid growth in Chinese patent filings after the 2008 implementation of China’s remuneration law shows how rewarding innovators can benefit a developing economy.
  • Companies should focus on rewarding inventors for those patents that are selected for commercialisation, licensing out, sale, incorporated into a product or monetised in some way. This will ensure profit sharing for only high-quality and valuable patents commercialised by inventors’ employers.

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