Balance of claims
Since 1870, employee inventions have been controversially discussed in Germany. According to the „labor law theory“, employee inventions as work results should exclusively belong to the employer. The „patent law theory“ sees the rights of employees to their inventions as part of the inventor’s personal right. This conflict was resolved for the first time in the so-called „Reichstarifvertrag für die akademisch gebildeten Angestellten der chemischen Industrie vom 27. Januar 1920“, which is still sometimes – albeit wrongly – regarded as the origin of all German legislation on the subject.
In fact, however, the model of employee invention law goes back to the „Ordinance on the Treatment of Inventions by Followers“ of 1943. In order to obtain „miracle weapons“ that would turn the tide of the war (after all), the interests of employees and employers were equilibrated in a way that is still considered balanced from a legal point of view, despite the purpose of the ordinance, which is dubious from today’s point of view: employees are recognized as inventors, and in return employers must be informed about all inventions of their employees and are granted exclusive access to service inventions. Employee inventors are adequately remunerated for claimed service inventions.
Clash of principles
Employers, however, usually dispute the balance of the regulations. The argument here is that the inventor is already remunerated for his inventions through his salary and that the inventor’s compensation ultimately represents an additional payment for a service that has already been remunerated.
However, this argument does not go far enough: it is true that, from the point of view of labor law, a service invention is a work result and the employer is entitled to these results. However, according to the Patent Act, the invention belongs to the inventor alone. Thus, two legal principles collide here, which must be weighed against each other. It turns out that the Patent Act takes precedence. This is because the wording of Section 6 of the Patent Act, according to which the inventor is entitled to the right to the invention, builds a bridge to property, the protection of which has constitutional status under Article 14(1) of the German Constitution. In order to give the employer the opportunity to profit from the fruits of his employees‘ labor, a further legal instrument is required, namely the Employee Invention Act („EIA“), which, with its obligation under § 5 EIA to report inventions to the employer and to offer them for assignment, contains a blanket provision for the expropriation of intellectual property within the meaning of § 14(3) sentence 1 GG. Conversely, however, this requires compensation in accordance with § 14(3) sentence 2 GG – the so-called inventor’s remuneration.
The Employee Invention Act and the associated obligations of the employer to pay appropriate compensation for the use of an adopted service invention are therefore wrongly criticized. The fact is that without this legal provision, all rights to service inventions would remain with the inventors and employers would have to acquire licenses in each individual case, which would certainly be much more time-consuming and, above all, more expensive.
It should also be noted that the EIA does not represent a specifically German „peculiarity“, but that the rights of inventors are regulated worldwide, albeit very differently. Whereas in countries with Anglo-Saxon jurisdiction (e.g. Great Britain, USA, Canada or Australia) inventors can hardly make any claims, elsewhere there are (compensation) regulations which in part go far beyond what is typical in Germany, namely both in Europe (e.g. France, Spain, Italy as well as the Scandinavian countries) but also in Japan, Korea and above all China.
Limited scope of regulation
The area regulated by the EIA is clearly defined: the relationship between the employee-inventor and his employer. This means that only service inventions can be the subject of the EIA. Free inventions which an inventor makes in a completely different field and which, according to an objective assessment, cannot have any significance for his employer because he is active in a completely different business field, are therefore not covered by the EIA. However, these account for less than 1% of all inventions in Germany.
Since this is repeatedly misunderstood, it should be pointed out that the term „free invention“ is not linked to either the place or the time at which the invention was made. Thus, a service invention can also be made during free time and, conversely, a free invention can be made during working hours.
The EIA continues to apply only to inventors who, as employees, are subject to the Works Constitution Act. Inventions made by members of executive bodies who are not dependent on employees – such as managing directors – are therefore not covered by this unless this has been contractually agreed.
Lot of a duties for employers
Even if the EIA, as explained, is the basis for an employer to have access to the inventions of his employees at all, this should not obscure the fact that the EIA is an employee protection law. This is clearly shown by the fact that the obligations of the employee-inventor are limited to notification and cooperation, whereas after the transfer of the rights to an invention to the employer, the latter is obliged to take a number of measures, namely:
- Registration of an industrial property right in Germany (§ 13 EIA);
- Release of the rights taken over for countries in which protection is not desired (Sec. 14 EIA);
- Offering of property rights for takeover before dropping (Sec. 16 EIA);
- remuneration of property rights, in particular in the case of own use or licensing (Sec. 9 EIA); and
- Duty to provide information (Section 15 EIA).
Until the „small amendment“ of the EIA in October 2009, it was added that the employer had exactly 4 months after notification of an invention to claim it in writing. If such a claim was not made or was made too late, the invention automatically reverted to the inventor. With effect from October 1, 2009, this provision was replaced by a regulation according to which the transfer of rights automatically takes place 4 months after notification, unless the employer actively objects within this period.
The idea of protecting the employee-inventor is expressed particularly clearly in Sec. 22 EIA: according to this, all regulations with which the provisions of the EIA are waived across the board are fundamentally inadmissible if they conflict with the interests of the employee.
This is a dangerous stumbling block: in the past, it was very common for employment contracts to include a blanket claim for all future inventions. Such clauses were considered by the BGH to be fundamentally against the interests of the inventor and therefore void. After no individual claim had been made in these cases, all inventions concerned were released. As a consequence, the employer became a patent infringer due to the lack of its own right to exploit the invention and had to see to obtaining a right of use via a license agreement with the now „free“ inventor. Even though this danger has been averted by the amendment, there are still many old cases pending before the courts involving claims worth millions.
How remuneration is calculated
The obligation to pay remuneration is laid down in Section 9 EIA and begins on the day of the transfer of rights, i.e. the claim. It relates predominantly to property rights used by the company itself or by third parties, whereby the inventor is granted an „appropriate share“. This is calculated on the basis of the so-called „Remuneration Guidelines”, a collection of regulations dating back to 1959, but which is still relevant, except for the practical examples mentioned there.
In principle, the remuneration is calculated according to the same rules as those applied to licenses. The value of the invention is taken as a basis – usually the net sales achieved – which is then given a license factor. In order to take account of the fact that the employee inventor is not a „free“ inventor, the value is multiplied by a so-called „personal share factor“, which depends on the type of task solved, the employer’s contribution and the inventor’s position in the company. This factor can be between 1 and 100 and is 13 to 18 % in 99 % of all cases. This representation is of course abbreviated, since, for example, somewhat different calculation rules apply in the case of licensing or the sale of intellectual property rights. Even for unused (blocking) patents, a lump-sum payment (of a few 100 euros) must be made annually after a defined term.
Settlement must be made annually on a post-calculation basis. Beforehand, a calculation method must be contractually agreed with the inventors. This concerns the question of the license factor to be applied, but above all the percentage participation of all inventors in the invention as well as the calculation of the personal share factor, which can often become very emotional. In addition, it must be agreed that the value of the invention is graduated, i.e. that a steadily decreasing share is included in the remuneration calculation as sales increase, since other factors such as price, service, quality, etc. become more important for the success of the product over time.
Disputes mainly concern the amount of remuneration and – decreasingly – the question whether an invention has become free for lack of timely claim. The „Arbitration Board under the Law on Employees‘ Inventions“ at the DPMA is responsible for disputes between employers and inventors. The Arbitration Board is not responsible for disputes with inventors who have resigned and whose resignation dates back more than 6 months. In the event of a dispute, it is mandatory for the employer and the employee to appeal to the Arbitration Board, unless both parties have excluded this. It draws up a settlement proposal; the procedure is free of charge for both sides. Only if the settlement proposal is not accepted by one side is the way to the district court open; inventor disputes outside the employment relationship, on the other hand, end up directly there. It should be noted that the civil courts generally take a more employee-friendly approach to the calculation of compensation.
Interest and statute of limitations
As a rule, interest must be paid on late payments, typically 5 percentage points above the ECB interest rate. In this way, the amount to be paid can easily double once. Although the Federal Court of Justice (BGH) recently ruled that this regulation was no longer up-to-date and therefore null and void in another context, it remains to be seen whether the ruling is transferable.
In principle, claims for employee inventor compensation are also subject to the short limitation period of 3 years under the German Civil Code. However, this only applies if the inventor should have filed his claims under the circumstances. Whether and from what point in time this was the case depends on the individual case. Thus, under certain circumstances, a claim relating to the payment of remuneration over a period of 10 years may well not be time-barred. The financial risk for a company is correspondingly high.
EIA – A compliance case
The EIA and the associated guidelines constitute laws. Therefore, a company is not free to comply with the regulations or not. Instead, the law must be applied. A management board member who at least accepts a disregard of these regulations is ultimately liable to prosecution. Violations of the EIA do not constitute a criminal offense and are not subject to criminal prosecution, but if an inventor sues his employer and the employer is accused of having simply ignored the provisions of the EIA, high damages can be expected. These can run into the millions and, for example, trigger profit warnings for listed companies. For these reasons alone, compliance with the EIA should therefore also be a concern of every company’s legal department.
It is therefore more than advisable to take careful account of the obligations arising from the EIA, even if this involves administrative effort and additional costs. The alternative is considerable business risks and significantly higher costs in litigation proceedings.
The expense can be significantly reduced by flat-rate regulations, as long as these are agreed individually with all inventors involved after notification of the invention. It is recommended, for example, that the obligations arising from Sections 13, 14 and 16 EIA be purchased for a lump sum of, for example, EUR 900. This amount is considered reasonable by the Arbitration Board and is usually attractive enough for all inventors to agree to it. The agreement of all inventors should be sought in order to avoid having to conduct two processes for one invention in the end.
It is also advisable to evaluate the inventions at an appropriate time to determine whether they should be finally remunerated by a lump-sum payment or whether annual sales-related remuneration is actually preferable. Experience has shown that 75% of all inventions can be settled in this way at an early stage with amounts between EUR 1,000 and 5,000. The administrative effort for the examination and calculation of the remuneration for the remaining – usually most important – property rights then becomes manageable through such regulations.