By Lawrence Hoffman

 Part III – Compensating Employees for Their Inventions

Compensating employees for inventions according to the value of the invention to the company is required by statute in many countries. This is not so in the U.S. but some companies do it as a matter of policy. We will now address this topic.


As we have seen in Parts I and II, the laws of most industrialized countries provide for employer ownership of employment related inventions, or, as they are often called, service inventions. In most countries statutory schemes also exist for compensating employees for such inventions. Below, we will look at some of these schemes in detail and at some examples of how some U.S. companies provide compensation on a voluntary basis.

There are no international conventions governing employee compensation for service inventions. Consequently, employee compensation is a matter of national law. We will see considerable variation in the national legal structures themselves and in their practical application. Some particular points that stand out are:

  • Compensation may be specified as a one-time ‘reward’ payment or as ‘remuneration’ based on consideration of multiple factors. In some cases, e.g., in China, both reward and remuneration are provided for.
  • Rewards are usually stated as specific amounts while remuneration is based on consideration of a set of specified factors. These are usually stated in very general terms and are often highly subjective.
  • Contractual variations from the statutory schemes are usually permitted, in some instances, however, only if they provide benefits more generous than statutory minimums.
  • In some countries, the right to compensation can be waived. In others, waivers are not enforceable.
  • In some instances, administrative bodies are established to decide the amounts of remuneration. In other instances, the matter is left for judicial determination or for determination by the employer, subject to the requirement that the compensation be ‘reasonable’.
  • Some form of appeal is usually provided for.

Let’s look now at the laws of a few representative countries.


With respect to service inventions made in China, Article 16 of the Patent Law provides that:

The unit that is granted the patent right shall reward the inventor or designer of an employment invention-creation. After such patent is exploited, the inventor or designer shall be given a reasonable amount of remuneration according to the scope of application and the economic results.

Article 16 does little more than mandate compensation, define its two components, and specify that remuneration must be reasonable. However, local practitioners report that determination of what is ‘reasonable’ in a given situation gives rise to frequent disputes.

The Implementing Regulations help a bit, but also create an ambiguity:

Rule 76. The entity to which a patent right is granted may regulate in its legitimately enacted company rules or in the contract concluded by the entity with the inventor or the designer the way and amount in which reward and remuneration specified in Article 16 of the Patent Law are provided.

Enterprises or institutions shall grant to the inventor or the designer reward and remuneration according to relevant finance and accounting provisions of the state.

Rule 77. Where the entity to which a patent right is granted fails to agree with the inventor or the designer on, or to specify in its legitimately enacted company rules the way and amount of reward and remuneration specified in Article 16 of the Patent Law be paid, the entity shall reward to the inventor or designer within 3 months from the announcement of granting the patent. The minimum reward for one invention patent shall not be less than RMB 3000 (about 400€ or $430); and the minimum reward for one utility model or design patent shall not be less than RMB 1000.

Where an invention-creation is completed because an inventor’s or designer’s proposal was adopted by the entity to which he belongs, the entity to which a patent right is granted shall award to him a money prize on favorable terms.

Rule 78 Where the entity to which a patent right is granted fails to agree with the inventor or the designer, or to specify in its legally enacted company rules the way and amount of reward and remuneration specified in Article 16 of the Patent Law, the entity shall, after exploiting the patent for invention-creation within the term of the patent right, pay the inventor or designer remuneration at a percentage of not less than 2% each year from the profits generated from the exploitation of the invention or utility model patent, or at a percentage of not less than 0.2% from the profits gained from the exploitation of the design, or pay the inventor or creator a lump sum of remuneration by reference to the above percentages; where the entity to which a patent right is granted authorizes other entity or individual to exploit its patent, it shall reward the inventor or designer at a percentage no less than 10% from the royalty fee.

The Rules do not prohibit agreements that provide levels less than the specified minimums as long as the remuneration is ‘reasonable’. Informed local counsel should be consulted as to whether this would be practical in view of market conditions, and as to other possible incentives such as an stock ownership. Moreover, if an agreement provides only a small level of remuneration, the employee is free to argue later in litigation that the remuneration is unreasonable, e.g., as to an extraordinarily valuable invention.

In 2013, the Shanghai Higher People’s Court issued Guidelines on the Adjudication of Disputes Involving Rewards and Remunerations to Inventors or Designers of Employee Inventions-Creations in an effort to shine some light into the dark room. Under these guidelines, the remuneration may be above or below the statutory amounts and may be calculated in accordance to the average invention value in the R&D field concerned.

Further, the reward and remuneration specified in an agreement are presumed to be reasonable. Only if the amounts agreed are extremely low and obviously unreasonable (which one observer has described as ‘self-evidently irrational’), can the Court decide to disregard the agreement.

Moreover, it appears that where the agreed-on remuneration is found to be unreasonable, the minimums stated in the Regulations will not be exceeded.

Under the Chinese legal system, the Guidelines only apply to litigation in the IP court of Shanghai. Still, the Guidelines address problems inherent in the Law and Implementing Rules in a practical way and could be used as a model by other courts. To date, however, the literature does not appear to have reported that any other court has done so.


Here, too, the patent law contains provisions dealing with remuneration for service inventions:

  • 134. If there is no agreement that prescribes whether, to what extent and on what conditions the employee is entitled to remuneration for a service invention, then the matter shall be decided by the Compensation and Royalties Committee established [elsewhere under the Patent Law, and hereafter referred to as ‘the Committee’].
  • 135. In making a decision under §134, the Compensation and Royalties Committee shall also take into account the following factors:

(1) the capacity in which the employee was employed;

(2) the nature of the connection between the invention and the employee’s work;

(3) the employee’s initiative in making the invention;

(4) the possibilities of exploiting the invention and its actual exploitation;

(5) expenses reasonable under the circumstances incurred by the employee in order to secure protection for the invention in Israel.

  • 136. The Compensation and Royalties Committee is competent to reconsider a decision under §134 if, in its opinion, the circumstances which existed at the time of the decision have changed and if it was requested to reconsider it; however, the committee may order the applicant to pay costs if, in its opinion, the application was not…[justified].

The wording of §134 has given rise to several important issues which were finally addressed specifically by the Israeli Supreme Court (the Court) it its 2015 decision in Barazani v. Iscar.

Briefly, at the time of his retirement from Iscar, Barazani signed a termination agreement that included a general waiver and release provision.

Barazani later sought additional compensation for what he claimed was a service invention. Iscar invoked the waiver provision, and refused compensation.

Barazani brought the matter before the Committee, which summarily dismissed his claim. In its decision the Committee stated that if an employee waives his claims for compensation for service inventions in a manner that is valid under general principles of contract law, it does not have statutory authority to grant such employee further compensation for such inventions. The Committee further held that, a waiver did not have to be in any particular form, and could even be oral or implied from conduct of the parties.

Barazani then appealed to the Supreme Court (the Court). Sitting as the High Court of Justice, in which role it functions as a court of initial jurisdiction in certain administrative matters, it affirmed the Committee’s summary dismissal.

The Court noted that its 2012 decision in Bayer vs. Plurality Ltd. had ruled that a waiver had to be explicit, but left open the question as to whether such a waiver could ever be valid.

In Barazani, the Court held that:

  • The right to compensation can be waived;
  • The waiver need not necessarily be in any particular form and can be inferred from the circumstances;
  • If compensation is agreed upon at any level – the Committee has no jurisdiction under § 134;
  • The Committee does not have the power to revoke or alter the terms of such agreements, even under the Israeli Standard Contracts Law; and
  • Under §111 of the Patent law, the Committee has exclusive jurisdiction of matters arising under §134, and its decision is final.

The Court further pointed out that a provision merely addressing ownership of service inventions that does not specifically mention a waiver of the right to compensation will not be treated as an implied waiver. Some reference to waiver of monetary rights or, as in the present case, a general waiver and release, signed in conjunction with the termination of the employment relationship is necessary.

As comforting as Barazani may be to technology-centric Israeli employers, it needs to be noted that the Court suggested some dissatisfaction with the ruling it was compelled to make under current law. In view of what it called “a changing and dynamic world – both in terms of employment settings and the increasing technological creativity of employees” it suggested voluntary adoption by employers or legislative action of measures to assure employee compensation for service inventions.

The lesson to be learned from Barazani is simple – the Golden Rules mentioned above can only be ignored at the employer’s peril. That having been said, it is suggested that Israeli employers should note the seller’s market and consider including a clear provision for some level of employee compensation for service inventions. Some possibilities include one or more of stock options, a fixed award at the time a patent application is filed, a specified level of profit sharing resulting from commercialization of the invention, and if a third party is licensed, a stated percentage of the royalties received.

As to waiver clauses, these can be included in agreements related to termination of employment under appropriate circumstances. Standard general releases providing for waiver of additional compensation appear to be enforceable, but it is probably a good idea to be specific in reference to waiver of compensation.


As discussed in Part I, the 2009 German Act on Employee‘s Invention provides a comprehensive legal framework concerning employer ownership of ‘service inventions’. For such inventions, employee compensation is mandatory (§9). Contract provisions that modify this right to the employee’s detriment are not permitted (§22). The type and amount of compensation may be provided for in an employment agreement (§12(1), but the terms are subject to review in cases of significant inequity (§23(1) or changed circumstances (§12(6). Compensation can take the form of a lump-sum (onetime) payment or as continuing payments, though the onetime payment has obvious advantages in terms of simplicity of administration.

The amount of the compensation is governed by a series of directives of the Ministry of Labor on the principal that the economic benefit of the invention should be shared with the inventor. Three methods of calculation of compensation are provided for, namely, a License royalty analogy, a calculation of benefits to the employer, and an estimation of the value of the invention. Application of these methods can most charitably be described as ‘complex’ and this is a further motivation for employers to adopt the onetime payment approach.

Obviously, advice of experienced counsel should be sought if the rights of employees under the Act need to be addressed.


As stated in Part I, amendment to Article 35 of Japan’s patent law now provides for employer ownership of ‘employee inventions’ and compensation in the form of “reasonable money or other reasonable economical profits”. Commentators have indicated that this includes one or more of stock ownership, job promotion, and employer-financed study abroad.

Article 35(6) provides that that the Minister of Economy, Trade and Industry (METI) is to issue a Guide for determining “reasonable profit” as a reward for an employee invention. The Guide, issued in April 2016 does not establish rules or formulas for calculating reasonable profit. Instead, it establishes a general framework for an interactive process within a company on which a final determination of policy is made.

The framework is a three-step process involving consultation, e.g., with the employees, full disclosure within the company of the details of the proposed program, and a structured (not necessarily formal) hearing of the opinions of the employees. The hearing can be either before or after publication and the employer must respond ‘sincerely’ to the views expressed by employees at the hearing.

Note that the Guide does not require that the employer reach an agreement with the employees as to the details of the program and leaves the details to the discretion of the employer, subject only to the requirement that the program be ‘reasonable’.

United Kingdom:

          Sections 40 and 41 of the Patent Act address employee compensation. An important feature of §40 is that compensation is required only for inventions that are of “outstanding benefit” to the employer. For the benefit to be “outstanding”, it must be something out of the ordinary when looked at in the total context of the activities of the employer concerned and not something that one would normally expect to arise from the duties that the employee is paid for. To assess whether the benefit is outstanding, it is necessary to look at the employer’s undertaking, and ascertain the benefit to the employer taking into account the size and nature of that business and all the surrounding circumstances.

Awards are secured by application to the Intellectual Property Office or the courts.

  • 41(1) Provides that the award shall be such as will secure for the employee a fair share (having regard to all the circumstances) of the benefit which the employer has derived, or may reasonably be expected to derive, from:

(a) The invention, (b) The patent, (c) The assignment, assignation or grant of (i) The property or any right in the invention, or (ii) The property in, or any right in or under, an application for the patent, to a person connected with the employer.

  • 41(4) Provides that for employer-owned inventions, factors to be considered in determining the employee’s fair share include:

(a) The nature of the employee’s duties, his remuneration and the other advantages he derives or has derived from his employment or has derived in relation to the invention under this Act;

(b) The effort and skill which the employee has devoted to making the invention;

(c) The effort and skill which any other person has devoted to making the invention jointly with the employee concerned, and the advice and other assistance contributed by any other employee who is not a joint inventor of the invention; and

(d) The contribution made by the employer to the making, developing and working of the invention by the provision of advice, facilities and other assistance, by the provision of opportunities and by his managerial and commercial skill and activities.

Given the requirement that the invention be of outstanding value, it is not surprising that there are only limited instances in which compensation has been awarded.

United States:

The U.S. is the only major country in which compensation for employees is not mandated by law. On a voluntary basis, many companies do, however, include a compensation program in their employment agreements or Workplace Policies. Despite the absence of required compensation, the U.S. is still the leader in world-wide technical innovation.

Nevertheless, the absence of U.S. law mandating employee compensation has often been criticized as unfair to employees. The contrary view, i.e., supporting the law as it stands is presented in a 1999 article in the Harvard Journal of Law and Technology (here).

The programs that do exist vary greatly. Some provide cash bonuses keyed to one or more of disclosure, filing of patent applications, and issuance of patents. Others provide for profit sharing, stock ownership or options, alone or together with fixed rewards. The amounts range from modest or nominal to quite generous. Inventiveness is sometimes explicitly a criterion for promotion.

In some instances, the programs provide non-financial recognition instead of or in addition to financial benefits. For example, some companies honor inventors at recognition banquets.

The results of a 2003 survey by the Intellectual Property Owners Association of its members’ compensation programs may be found here.


We have seen above the wide range of statutory requirements for compensation of employees for service inventions. For the most part, these are essentially default requirements and employers have considerable latitude in structuring compensation programs. Nevertheless, all statutes impose a reasonableness requirement, and a compensation program must be prepared in collaboration with counsel familiar with the applicable law.

In the U.S., compensation programs are entirely voluntary. They should nevertheless be considered as part of an effort to structure employment agreements in ways that will help attract talented employees and encourage and reward creativity.


This article is intended only as general information and is not and should not be considered as legal advice. Advice of counsel should be obtained so that necessary agreements can be prepared to take account of specific facts and the applicable laws.


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