1. Strategies for IP Asset Management of Industries – Employees’ Inventions Recent Trends of German Employees’ Invention Law Dr. Ralph Nack, Bird & Bird, Germany

2. Outline of Presentation Germany vs. The World: The German Employees’ Invention Law as a Landmark in International IP Law Historic Background of German Employees’ Invention Law Basic concept of German Employees’ Invention Law Advantages & disadvantages of the current German system Recent Trends & Reform projects IP strategies for companies under German law IP strategies for industry-funded academic research under German Law

3. Germany vs. The World: German Employees’ Invention Law German Employees’ Invention Law is very unique. In no other country on the world such legal concept is known. No harmonized European Employees’ Invention Law, see Article 60 European Patent Convention. European harmonization projects failed so far. What is the background of this situation?

4. Historic Background of German Employees’ Invention Law Before 1943, no special employees’ invention law existed in Germany. Respective payments were subject to collective labour agreements. During World War II, the government decided to “stimulate the creation of inventions” (in particular in the arms industry) by introducing a mandatory compensation for employees’ inventions in the private and public sector. This legislation remained in force after WW II. In 1957, a new Employees’ Invention Act (EIA) came into force. This new EIA followed the basic approach of the WW II legislation, as there was no political support of restricting employees’ rights from the WW II legislation. 2001-2005: Most reform projects failed (due to objections from the labour unions). However: New provisions regarding university (academic) inventions since 2002. Consequence: Very strong position of employees in German law.

5. Basic Concept of German Employees’ Invention Law EIA only applies to “technical inventions”. Copyright protection of computer programs is not covered by the EIA. Employees do not get any special reward for “inventing” computer programs, as long as there is no patentable invention, see sec. 69d German Copyright Act. Design protection is also not covered by the EIA. Employees do not get any special reward for “inventing” new designs, as long as there is no patentable invention, see sec. 22 German Design Protection Act.

6. Basic Concept of German Employees’ Invention Law Legislative intention of EIA: “To promote the creation of technical inventions” Statutory background: Sec. 6 of the German Patent Act: “The right to a patent shall belong to the inventor or his successor in title.” Sec. 7 of the German Patent Act: “…in the proceedings before the Patent Office, the applicant shall be deemed to be entitled to request grant of a patent.” Basic approach of EIA: The “Monopoly Theory”: The employee (=inventor) transfers his exclusive right to the employer. The employee participates in the exploitation of this monopoly by the employer. All other European Employee’s Invention Laws do not follow the “Monopoly Theory” but the “Reward Theory” It is the duty of employees to develop technical improvements; outstanding contributions may be rewarded by special payments.

7. Basic Concept of German Employees’ Invention Law EIA applies to “patentable” inventions (i.e. which are new and inventive under Patent Law or Utility Model Law) Two different categories of inventions: Employment-related inventions (restricted inventions) made in course of an employment, and making of such inventions is part of the employment, or the invention is based on experiences or existing work products of the employer. Unrestricted inventions made in course of an employment, but making of such inventions is not part of the employment, and the invention is not based on experience or existing work products of the employer.

8. Basic Concept of German Employees’ Invention Law Provisions regarding employment-related inventions: The employee has to promptly report the invention to the employer in writing. The report must be explicit and detailed. Within 4 months after the receipt of an appropriate report, the employer has to declare in writing whether he wants to claim the invention for exploitation, and whether he wants to claim the invention exclusively or non- exclusively. Employee is legally barred from interfering with the employer’s rights.

9. Basic Concept of German Employees’ Invention Law Provisions regarding employment-related inventions: Effect of Exclusive Claiming of the invention: All rights on the invention are legally assigned to the employer. Employer has to file a German patent application! Employer may file foreign patent applications. If the employer does not file such applications, the employer has to offer the employee the right to file them. Employer has to pay a “reasonable remuneration”! Effect of Non-exclusive Claiming of the invention: Employer merely get a non-exclusive right to exploit the invention. Employee gets the right on the invention and may file a patent application. Employer has to pay a “reasonable remuneration” after claiming and using the invention! If the employer abandons its rights or fails to make a formal declaration within the deadline, the employment-related invention becomes a “unrestricted” invention. The employee is allowed to file patent applications and to exploit the invention to an unlimited extend.

10. Basic Concept of German Employees’ Invention Law If the employer abandons its rights or fails to make a formal declaration within the deadline, the employment-related invention becomes a “unrestricted” invention. The employee is allowed to file patent applications and to exploit the invention to an unlimited extend. Very harsh case law: If the employee fails to make an appropriate report on the invention but the employer nevertheless files a patent application on this invention, the deadline for claiming the invention may start to run on the filing date. In contrast, the declaration to claim an invention must be made explicit, i.e. implied acts like filing a patent application is not sufficient. Consequence: If the employer merely files a patent application, the invention may become “unrestricted” 4 months after the filing date, i.e. the employee owns the invention. The application/patent has to be assigned to the employee, and the employer is liable under unjust enrichment law/damages.

11. Basic Concept of German Employees’ Invention Law “Reasonable remuneration” for exclusive claiming: This is the most controversial issue in German employees’ invention law. The Ministry of Labour issued a Directive concerning the remuneration of employees’ inventions: Directive contains 43 recommendations Recommendations of the Directive are not binding If the parties cannot agree on a compensation, the case has to be submitted to the Arbitration Board at the German Patent and Trademark Office. If no agreement can be reached at the Arbitration Board, the employee may file a complaint with one of the 12 specialized district courts.

12. Basic Concept of German Employees’ Invention Law “Reasonable remuneration” for exclusive claiming: Two issues have to be considered: Analysis of the “value of the invention”. Analysis of the “contribution factor”. “Value of the invention”: All benefits of the invention have to be considered, even if they occurred before the formal report on the invention was made. If the invention is licensed to a third party, the license fees may reflect the value of the invention. If the invention is used merely within the company, the most preferred method is the “license analogy”, i.e. the determination of a hypothetical license fee based on existing licensing contracts regarding similar subject matter. (If this method does not work in a given case, the “value” will be estimated.) The decisions of the Arbitration Board are all published – a very valuable source for determining license fees in patent infringement cases!

13. Basic Concept of German Employees’ Invention Law “Reasonable remuneration” for exclusive claiming: “Contribution factor”: “How much did the employee contribute to this invention?” Detailed evaluation scheme of the Directive Contribution of professional experience of the company or existing work products and contribution of other employees with regard to the detection of the problem solved by the invention the solution of the problem. Furthermore, the professional position of the inventor is decisive (high rank = low contribution). Scale of 3-20 points representing the contribution factor.

14. Basic Concept of German Employees’ Invention Law Provisions regarding unrestricted inventions: Employee has to report unrestricted inventions to the employer, unless the invention is obviously not usable in the company. The employer may contest the declaration of the reported invention as “unrestricted” within 3 months after the receipt of the report. Before exploiting the invention, the employee has to offer the employer a non-exclusive right to use the invention.

15. Basic Concept of German Employees’ Invention Law Special provisions regarding university inventions: New provisions introduced in 2002. Before 2002: Inventions made by university professors were regarded as “unrestricted” inventions, i.e. the universities had no possibility to claim and exploit such inventions. R&D project contracts were directly made with university professors, no participation of universities. Global trend of “patent funding” of universities influenced new provisions (trend setters were UCL, YEDA, YISSUM).

16. Basic Concept of German Employees’ Invention Law Special provisions regarding university inventions: New provisions apply to all employees of a university. Free academic research as an constitutional right. Right to publish the invention: Employee has to report the invention 2 months before the intended publication. Right to keep the invention secret No obligation to report the invention, if no scientific publication is intended. Inventor has a non-exclusive right to use the invention within its research activities. If the university exploits the invention, the employee gets 30% of the gross income resulting from the exploitation.

17. Basic Concept of German Employees’ Invention Law Individual agreements modifying the statutory provisions: The statutory provisions are mandatory in general, i.e. agreements interfering with employee’s rights are void. However, individual agreements may be made concerning a specific invention after it was reported to the employer. Subject of such agreement may be the remuneration to be paid, a waiver of employer’s obligation to file patent applications in Germany, a waiver of employee’s right to file foreign patent applications, and regarding university inventions: a waiver of the right to publish/not to report the invention. The agreement has to be “fair and just”.

18. Advantages and Disadvantages of the current German System Advantages: Incentive for employees to develop and report patentable inventions. Reliable protection of employees’ rights. Social stability – no strikes or collective actions. Disadvantages: Determination of “reasonable remuneration” is a very difficult question. Very bureaucratic and cost-intensive procedure in the event of disagreements; cost of dispute frequently exceed the actual remuneration. Possibilities for multi-national companies to circumvent the system: Licensing of patents to foreign subsidiaries of the company group at very low royalty rates. Patent pooling with other companies. In these cases it is very difficult or even impossible to determine a “reasonable remuneration”. Regarding university inventions: employees’ right not to report the invention, in particular in case of co-inventorship. Collaboration agreements between universities and industry involve several problems.

19. “Magic Triangle” of Employees’ Invention Law Justice Practicability Incentive

20. Practicability of the current system? examination flow chart developed by Dr. Wolfgang Simon

21. Recent Trends & Reform Projects Reform of university invention system was successful. Reform of the main part of employees’ invention failed in the last election period. However, discussion is continuing. Industry accepts the basic proposal submitted by the German Government in the last election period. Labour Unions oppose restrictions of employees’ rights.

22. Outline of Proposed Reform Fixed schedule of remunerations: First remuneration: Employee receives 750 Euro [930 Korean Won] 2 months after the employer claimed the invention. Second remuneration: Employee receives further 2.000 Euro [2.500 Korean Won] 3,5 years after the employer started to exploit the invention, or Employee receives 500 Euro [600 Korean Won] 7,5 years after the employer claimed the invention if he filed a patent application or considers the invention as trade secret. If the employer starts to exploit the invention at a later point of time, the employee receives further 1.500 Euro, i.e. he receives 2.000 Euro in total.

23. Outline of Proposed Reform Third remuneration: If the turnover associated with the invention exceeds 5.000.000 Euro [6.200.000 Korean Won] or the profit associated with the invention exceeds 125.000 Euro [155.000 Korean Won], the employee receives a further remuneration according to the following schedule: TurnoverProfitPayment 5 Mio.125.0005.000 10 Mio.250.00010.000 20 Mio.500.00015.000 50 Mio.1,25 Mio.20.000 100 Mio.2,5 Mio.25.000 200 Mio.5 Mio.30.000 500 Mio.12,5 Mio.60.000

24. Outline of Proposed Reform Employer can claim the invention only exclusively. No obligation to file a patent application. However, the employer is obliged to pay a remuneration only if the reported invention is actually patentable; therefore, it may be necessary to eventually file a patent application in order to determine patentability. Simplified formalities of reporting and claiming of inventions: A report is deemed to be correct, if the employer does not request further information. The invention is deemed to be claimed if the employer does not declare the invention as unrestricted within 4 months after a proper report.

25. IP Strategies for Companies under German Law In order to avoid the complicated determination of a “reasonable reward” and the obligation to file patent applications, some companies introduced “incentive systems”. Individual agreement (contract) with the employee, concerning one individual invention, made after the employee reported the invention. Employee has no obligation to enter the agreement, i.e. he may also ask for the statutory remuneration.

26. IP Strategies for Companies under German Law Extensive Study on existing incentive systems carried out by the BDI/BDA Most companies seek to avoid the duty to file foreign patent applications. Companies pay 100-600 Euro to avoid this obligation; in addition, the statutory “reasonable remuneration” has to be paid. Acceptance rate: >98% Some companies seek to avoid the duty to file German and foreign patent applications. Companies pay 150-600 Euro to avoid this obligation; in addition, the statutory “reasonable remuneration” has to be paid. Acceptance rate: 98% Few companies seek to avoid the payment of the statutory “reasonable remuneration”, and the duty to file German and foreign patent applications. Companies pay 200-2000 Euro to avoid this obligation. Siemens: 700-2000 Euro, the maximum is however only paid in 1% of the cases. Acceptance rate: 97%

27. IP Strategies for Industry-funded Academic Research Projects Under the old provisions, companies were able to enter R&D contracts directly with university professors. Under the new provisions, the professors no longer own the inventions. Therefore, the contract has to be made with the university. However, the employees have the right not to report inventions made under the contract. High statutory remuneration for university professors (30% of the gross income).

28. IP Strategies for Industry-funded Academic Research Projects Possible Solution for R&D Projects: The “Hamburg” Contract Industrial sponsor pays a certain amount of money to the university. University waves its rights to claim inventions made in course of the project. Consequence: all inventions made become “unrestricted” inventions, i.e. the employees own the inventions. All employees involved in the project assign their “unrestricted” inventions to the industrial sponsor. All employees involved in the project waive their right not to report inventions made. All employees involved in the project waive their right to publish inventions made.

29. Thank you for your attention! Dr. Ralph Nack Bird & Bird ralph.nack@twobirds.com www.twobirds.com