Employee Inventions in Japan

Amendment of Article 35 of the Patent Law

In January 2004, the Tokyo District Court awarded inventor Shuji Nakamura JP¥20 billion (approx. US$ 180 million) as a reasonable remuneration for his employee invention under Article 35 of the Patent Law, which drew nationwide attention in Japan because of the stunning amount of the remuneration*.  Encouraged by this phenomenal decision, there has been no end of people beating a path to the court’s door for the chance of landing an attractive remuneration for their employee inventions.  Most recently, a former employee of Pfizer Japan Inc. filed a lawsuit with the Tokyo District Court demanding JP¥1 billion from the pharmaceutical company in remuneration for his employee invention.
*More details are given in our previous circular covering this topic.

Art. 35 of the Patent Law provides that the employer shall award the employee a “reasonable remuneration” for the assignment of ownership or granting the exclusive license on the patent right to the employee invention and the amount of the remuneration must be determined by taking into consideration the profit gained by the employer who has obtained the exclusivity in the market and the contribution of the employer to the inventive activity of the employee.  This provision was first introduced when the existing Patent Law was enacted in 1959.  While this provision was in place in favor of inventive employees, they would typically flinch from asserting their rights to try to grab a bountiful remuneration at the expense of going at odds with their employer in the traditional Japanese employment relationship ingrained with lifelong employment. Japanese workers would invariably strive to keep lasting employment until retirement age.  They would keep their needs and desires to the modest minimum as they toiled away for years to see their projects bear fruit and would revel in the prospects of getting on the fast track to a career success as they watched their inventions enrich their company. They were quite content with the traditional pattern of life employment and progressive promotion in exchange for dedication and loyalty and getting a relatively small remuneration.  Now, the tide has turned.  Industry leaders have succumbed to the fast-sinking economy and had to abandon the time-honored life employment, leaving the employees languishing under the threat of losing their jobs and promotion opportunities.  Dim prospects have turned many employees ambitious for remuneration.  More and more inventive-minded employees are determined to quit being slaves to companies for a pittance and to go down the litigious road to reap the fruit of their labor.  They want "reasonable remuneration."

They are buoyed up with brighter hopes as the district court made subsequent rulings on the Nakamura case.  The Tokyo District Court has in another case ruled that Masayoshi Naruse, a former employee of Ajinomoto Corporation is entitled to be awarded around US$ 1.75 million as a reasonable remuneration for his invention during his employment at the company.  Japanese industry, understandably, is unhappy with the stream of startling decisions thrown at them.  Apparently, the decisions put other Japanese companies at risk as well because in all probability many of them would face increasing lawsuits from their employees scrambling to profit from king-size claims for remuneration.  The industry, therefore, applied very strong pressure on the Patent Office to eviscerate Art. 35 to allow them to avert elephantine risks.  The Patent Office, considering the possible harmful consequences of this situation, decided to amend the Art. 35 of the Patent Law and sent a draft to the Japanese Diet.

Under these circumstances, the Diet passed an amendment to the Art. 35 of the Patent Law to revise the provisions of the employee invention systems and the new provisions shall apply to the “remuneration” relating to succession of the right to obtain a patent or patent right or granting of exclusive license made on or after April 1, 2005.  The new Art. 35 provides:

One of the most significant points in the new provision is that it allows the employers to award their employees quite flexibly in accordance with an employment contract or the like providing for the terms and conditions of remuneration including payment scheme and schedule.  The only requirement would be the employees’ acceptance of such terms and conditions through “Due Process” of negotiation in this respect (new paragraph 4).  The due process includes a good consultation between the employers and the employees in setting the payment scheme and schedule of remuneration, thorough disclosure of the employment contract and etc., and hearings from the employees in calculating and deciding the actual amount of the remuneration.  If these were met, the remuneration would not be considered as unreasonable simply because of the fact that the amount of remuneration paid to the employee seems quite disproportionate to the employer’s profit gained from the employee invention like in the most court precedents.  Indeed, almost all the large Japanese companies did have their employees sign an employment contract or the like containing a clause providing for a relatively small amount of remuneration for the employee invention, though they might not have well agreed to it.  Knowing or not knowing the situation, the court has been ruling that the employment contract does not trump the inventor’s right to reasonable remuneration for his employee invention under the existing Art. 35 of the Patent Law because it only provides that the amount of reasonable remuneration shall be decided by reference to the profits that the employer will make from the invention and to the amount of contribution the employer made to the making of the invention.  In the new law, this provision has been amended to justify the employment contract if it has only been made with a good mutual agreement between the employer and employee.  Then, the payment in accordance with such agreed contract would be deemed as reasonable if the employer has well discussed with the employee the actual amount to be paid to him on a case-by-case basis*.
*The Japan Patent Office explains that if it is proved by the employer that it had faithfully and extensively discussed the actual amount of remuneration with the employee by showing him the related facts, the remuneration paid by the employer would not be considered as unreasonable even if the employee did not eventually agree to the amount per se.

In summary, the new law allows the employers to award their employees quite flexibly.  For instance, the remuneration may be paid in lump sum and the schedule of payment may or may not reflect the actual profit gained by the employer from the employee invention.  The most important factor in judging the reasonability of the remuneration is the Due Process as above. 

Regarding the details of the Due Process, the Japan Patent Office is preparing a case study thereof.  The draft of the case study can be downloaded from http://www.jpo.go.jp/iken_e/200408_newep.htm.

We hope the above information helps you to understand the new employee invention system in Japan.