Japan: Pitfalls of Failing to "Reasonably" Compensate Employee Inventors

Excerpt from Global Intellectual Property Asset Management Report (published by WorldTrade Executive) by Calvin Griffith, Michiru Takahashi, and Nobutaka Komiyama (Jones Day)

Foreign corporations with R&D facilities in Japan need to be thoroughly familiar with Article 35 of the Japan Patent Law and with the internal procedures and rules that should be followed to minimize the risks of a lawsuit from a disgruntled employee inventor.

The United States is generally considered a more litigious country than Japan, where customs traditionally favor a less confrontational approach to dispute resolution. But there is one exception—employee invention lawsuits. A recent series of lawsuits filed by aggrieved employee inventors against their employer companies, demanding “reasonable remuneration” for the employees’ inventions, has brought attention to this unique area of Japanese patent law—and raised concern in the business community. Japanese companies were shocked to find themselves facing the possibility of paying seven-figure sums in compensation for employee inventions, having expected that the compensation provided in the ordinary employment contract or internal employment regulations would be accepted by courts as reasonable. This stunning development in Japanese courts is based on Japan’s unique employee invention system under Article 35 of the Japan Patent Law, and foreign companies doing business in Japan, especially those with R&D facilities there, should be familiar with the provisions of Article 35 and the case law applying it.

Origin of the Fuss—
Article 35 and the Olympus Case

Japan has a unique employee invention system under Article 35 of the Patent Law. That article provides a number of important rights for employee inventors.

First, if an employee makes an invention that, by the nature of the invention, falls within the scope of the business of his employer and was achieved by acts within the employee’s duties for the employer (an “employee invention”), the right to obtain a patent on the invention originally belongs to the employee (Article 35, Paragraph 1). This is different from the practice in countries such as the United Kingdom and France, where the right to obtain patents for employee inventions originally belongs to the employer.

An employer, however, may enter into a contract with an employee or establish internal employment regulations providing in advance that the right to obtain a patent for any employee invention shall be assigned to the employer, or that an exclusive license for any employee invention shall be granted to the employer (established construction deriving from Article 35, Paragraph 2).

If an employer acquires the right to obtain patents for employee inventions from an employee, the employer must pay a reasonable remuneration to the employee (Article 35, Paragraph 3).
Prior to the Olympus case, Japanese companies believed that if they unilaterally established internal employee invention rules that set an amount of remuneration in exchange for the assignment of inventions from employees, such amount would be duly respected by Japanese courts as valid and binding. The amount of remuneration provided in those employment regulations was usually not high, frequently around just a few hundred dollars. The Olympus case changed the landscape.

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