Employee Inventions in Japan: Who Owns the Patent Rights and What Are the 'Reasonable Remuneration' Rules?

In Japan, where a significant majority of patent applications—reportedly around 97% in 2013—are filed by corporations, the legal framework governing inventions made by employees is of paramount importance. This system, known as "Shokumu Hatsumei" (employee inventions or service inventions), has unique characteristics regarding the ownership of patent rights and the compensation due to employee-inventors, particularly when compared to approaches seen in other major jurisdictions.

Defining an "Employee Invention" in Japan

The Japanese Patent Act, specifically Article 35, Paragraph 1, lays out the criteria for an invention to be classified as an "employee invention." This classification is crucial because it triggers specific legal effects concerning rights and remuneration. For an invention to qualify as an employee invention, it must satisfy three conditions:

1. Invented by an Employee or Similar Person: The invention must be made by an "employee, an officer of a juridical person, or a national or local public servant" (hereinafter collectively referred to as "employee"). The scope can extend to dispatched workers, who may be considered employees of the company to which they are dispatched for the purposes of these provisions, given the dispatching company's supervisory role.
2. Within the Employer's Scope of Business: The nature of the invention must fall within the business scope of the "employer, juridical person, or the State or local public entity" (hereinafter "employer"). This scope is not strictly limited to the business activities formally listed in the employer's articles of incorporation; it also encompasses the employer's current actual business operations and any business activities that are concretely planned.
3. Related to the Employee's Duties: The act of making the invention must be related to the employee's present or past duties performed for that employer. "Past duties" refers to responsibilities held within the same organization; it does not extend to duties performed for a previous employer. Therefore, an invention completed after an employee has left the company would typically not fall under this category, even if related to former duties. Importantly, an invention can still be deemed to relate to an employee's duties even if it was made without specific instructions from the employer, provided the invention was objectively expected in the context of the employment relationship and the employer contributed to its completion. (Osaka District Court, April 28, 1994).

Inventions made by employees that do not meet all these criteria are generally considered "free inventions" (Jiyū Hatsumei), and the rights to such inventions typically belong entirely to the employee, who is free to exploit or dispose of them.

Initial Ownership: The Inventor-Employee Principle

A fundamental aspect of the Japanese employee invention system—similar to approaches in the United States and Germany, but distinct from those in countries like the United Kingdom or France—is that the right to obtain a patent for an employee invention initially vests in the employee-inventor. This principle is maintained for several reasons, including to provide a strong incentive for employees to innovate, to create a basis for employees to negotiate fair compensation for their valuable inventions, and to support inventor mobility and potential entrepreneurship.

Employer's Rights and Assignment of Invention Rights

While the employee-inventor initially holds the right to obtain a patent, the Patent Act provides mechanisms for the employer to secure rights to the invention:

• Statutory Non-Exclusive License: If an employee obtains a patent for an employee invention, or if the employee assigns the right to obtain such a patent to a third party, the employer is automatically entitled to a non-exclusive license (statutory license or hōtei tsūjō jisshiken) to work that patented invention (Article 35(1)). This provides a baseline level of access for the employer.
• Pre-Assignment by Agreement or Work Rules: More commonly, employers seek full ownership. Article 35(2) of the Patent Act, through a reverse implication (an a contrario interpretation), validates provisions in employment contracts, work rules, or other stipulations made in advance that require employees to assign the right to obtain a patent for an employee invention to the employer. Such provisions are also valid if they state that the patent right itself, once granted to the employee, should be assigned to the employer. These stipulations can even be established through a unilateral declaration by the employer, such as through company work rules (Supreme Court, April 22, 2003). It is important to note that while such pre-assignment clauses are effective for employee inventions, they are explicitly deemed void if they attempt to cover an employee's free inventions.
  Most companies in Japan utilize these pre-assignment mechanisms. A mere non-exclusive license is often insufficient for an employer's strategic needs, as it might not allow the employer to effectively sue infringers or prevent the employee from assigning the core patent rights to a competitor.

The Employee's Entitlement to "Reasonable Remuneration"

When an employer acquires the right to obtain a patent (or the patent right itself) for an employee invention through a pre-existing agreement or stipulation, Article 35(3) of the Patent Act grants the employee-inventor the right to claim "reasonable remuneration" (sōtō no taika). This right to compensation is a cornerstone of the system, designed to balance the employer's acquisition of valuable IP with the employee's creative contribution.

The determination of "reasonable remuneration" has historically been a contentious issue, leading to significant legal reforms, particularly the 2004 amendments to Article 35.

• The Pre-2004 Landscape and the Need for Reform: Prior to the 2004 amendments, even if an employment contract or work rules specified a certain amount or method for calculating remuneration for an invention, courts could, and often did, review and overturn these agreements if the stipulated amount was deemed not "reasonable" under the prevailing interpretation of Article 35(3). This led to considerable unpredictability for employers regarding their potential financial obligations and often left employees feeling that their contributions were undervalued, sometimes resulting in litigation long after the invention was made, often after the employee had left the company.
• The 2004 Amendments: Emphasis on Procedural Reasonableness (Article 35(4)): The 2004 revision introduced a new Paragraph 4 to Article 35 (the previous Paragraph 4 became Paragraph 5). This new Article 35(4) significantly shifted the way "reasonable remuneration" is assessed when it is stipulated in a contract, work rules, or other agreement. The focus moved towards evaluating the procedural reasonableness of how the standards for calculating such remuneration were established.
  Specifically, in determining whether the stipulated remuneration is unreasonable (and thus whether the employee can claim a different amount under Article 35(3) via Article 35(5)), Article 35(4) mandates that consideration be given to:
  • The circumstances of consultations between the employer and employees (or their representatives) in establishing the standards for remuneration.
  • The circumstances of disclosure of these established standards.
  • The circumstances of hearing opinions from employees regarding the calculation of the specific remuneration amount.
    If these procedural aspects are found to have been conducted in a reasonable manner, the remuneration stipulated in the agreement is generally to be respected, and it would not be considered "unreasonable" simply because it differs from what a court might calculate substantively. This reform aimed to increase predictability and encourage employers and employees to establish fair and transparent internal systems for invention compensation.
• Substantive Calculation of Remuneration (Article 35(5)): If there is no pre-existing stipulation for remuneration, or if a stipulation exists but is deemed unreasonable because the procedural requirements of Article 35(4) were not met, then the "reasonable remuneration" is to be determined according to Article 35(5). This provision is substantively similar to the old Article 35(4) (before the 2004 amendment) and states that the amount should be decided by considering:
  • The amount of profit the employer is expected to receive from working the invention.
  • The extent of the employer's burden and contribution in relation to the invention.
  • The treatment accorded to the employee-inventor (e.g., salary, bonuses, promotions related to inventive activity).
  • Other relevant circumstances.

Scope and Calculation Nuances under Article 35(5)

• Coverage of Non-Patented Know-How or Proposals: The phrasing of Article 35(3) (right to reasonable remuneration for the assignment of the right to obtain a patent or the patent right) and Article 35(5) (considering the profit from "the invention") does not explicitly require that the invention actually be patented or even patentable. This suggests that remuneration might also be claimable for valuable know-how or technical improvement proposals that are assigned to the employer under such agreements, even if they don't result in a granted patent.
• Actual Practice of Pre-Assignment and Remuneration: Many companies have detailed employee invention regulations (shokumu hatsumei kitei). These often state that the company automatically succeeds to the rights for employee inventions upon their creation, or upon the company expressing its intent to succeed. These regulations also frequently provide for different types of compensation, such as a fixed payment upon application (shutsugan hoshōkin), another upon patent grant (tōroku hoshōkin), and success-based payments (jisseki hoshōkin) if the invention generates profit. Employees often agree to these terms as part of their employment contract.
• Calculation Formula (based on case law relevant to Article 35(5) scenarios): While there isn't a single mandated formula, courts have often approached the calculation by considering:
  Employer's Profit from the Invention × Employee's Contribution Ratio
  The "Employer's Profit" can be a complex figure, sometimes derived from actual profits, or a hypothetical royalty rate if the employer works the invention itself, or actual license fees if licensed out. The "Employee's Contribution Ratio" is typically (1 - Employer's Contribution Ratio). The employer's contribution can include R&D facilities, funding, support staff, and risk-bearing.
  A highly publicized case involving an invention related to blue light-emitting diodes (LEDs) vividly illustrated the challenges in this area. The remuneration awarded by the first instance court was exceptionally high (around 60.4 billion yen based on a 20% share of a hypothetical exclusive license profit of the employer). However, this was drastically reduced in a settlement recommended at the appellate level (the inventor's overall compensation for all his inventions was settled at around 600 million yen, with the portion attributable to the specific LED patent being much smaller). The divergence stemmed from differing views on the patent's fundamental importance, appropriate royalty rates, the impact of cross-licensing agreements the company later entered into (which reduced its actual exclusivity), and the assessment of the company's own significant contributions and risks. This case underscored the inherent unpredictability and difficulty in valuing an invention's contribution to an employer's success, especially for groundbreaking technologies.
• Inclusion of Profits from Foreign Patents: A significant Supreme Court ruling on October 17, 2006, addressed whether remuneration should account for profits an employer earns from foreign patents corresponding to the Japanese employee invention. The Court acknowledged that, legally, patent rights are territorial and governed by each country's laws (as per the Paris Convention principle of patent independence). Therefore, Article 35(3) and the old Article 35(4) (now Article 35(5)) of the Japanese Patent Act do not directly apply to the assignment of rights to obtain foreign patents.
  However, the Supreme Court found that these provisions could be analogously applied. The reasoning was that the underlying invention is a single technical creation, the employment relationship is the same, and the various national patent rights derived from it are, in a practical business sense, often treated as a unified asset. Furthermore, when employees assign their invention rights, it's usually a comprehensive assignment covering potential rights in all countries, and parties generally intend to handle the legal relationship concerning the invention in a unified manner. Thus, profits from the exploitation of corresponding foreign patents can be considered when calculating reasonable remuneration.

Statute of Limitations for Remuneration Claims

The right to claim reasonable remuneration under Article 35 is a statutory right. The statute of limitations for this claim is generally ten years, as per the default period for civil claims under the Japanese Civil Code (Articles 166(1) and 167(1)). Arguments for shorter periods (e.g., five years for commercial claims, or even shorter periods akin to wage claims) have been made but generally not accepted by courts, which have favored the longer period to protect employees, especially since these disputes often arise after employment has ended.

The clock for the statute of limitations starts running from the time the right can be exercised.

• If the employee invention regulations or contract do not specify a payment schedule for the remuneration, the starting point is typically the time of the assignment of the right to obtain the patent (or the patent right itself) to the employer.
• If, however, a payment schedule is stipulated (e.g., for performance-based remuneration paid out over time as profits accrue), the statute of limitations for each portion of the remuneration begins to run from the respective stipulated payment date for that portion, as the employee cannot exercise the right to that specific payment until that date arrives (Supreme Court, April 22, 2003). (Tokyo District Court, May 29, 2006, for periodic performance-based compensation).

Evolution and Ongoing Discussions (as of 2014)

The employee invention system, particularly the remuneration aspect, has been a dynamic area of law in Japan. The 2004 amendments aimed to bring more stability and predictability by emphasizing procedural fairness in employer-employee agreements on remuneration. If an employer establishes a remuneration system through proper consultation, disclosure, and feedback mechanisms as outlined in Article 35(4), the agreed-upon compensation is more likely to be upheld, reducing the chances of subsequent judicial re-evaluation based purely on the substantive amount.

However, even after the 2004 reforms, discussions continued regarding the fundamental structure of the system. As of late 2014 (the publication date of the reference material), there was considerable debate, with some industry voices advocating for a shift towards initial corporate ownership of employee inventions (similar to the "work-for-hire" concept for copyright in some jurisdictions, or patent ownership rules in countries like the UK and France). The arguments for this included reducing legal uncertainty over remuneration, aligning with the reality that most R&D is corporate-funded and team-based, and simplifying IP management.
Conversely, concerns were raised that such a shift might diminish employee incentives, reduce inventor mobility, and disadvantage inventors in negotiations for compensation.
The reference material indicated that a potential legislative direction being considered at that time (October 2014) was to make corporate ownership of employee inventions the default principle, while simultaneously guaranteeing employees a right to remuneration comparable to that under the existing statutory framework, and for the government to establish guidelines for employer-employee consultations on such matters. This aimed to balance the needs of industry with the protection of employee-inventor interests.

Conclusion

Japan's employee invention system presents a complex interplay of inventor rights and employer interests. While the employee-inventor is the initial owner of the invention rights, these are commonly assigned to the employer under pre-agreements. The core of the system, and a frequent point of contention, is the employee's right to "reasonable remuneration." The 2004 Patent Act amendments sought to bring greater predictability by emphasizing the importance of fair procedures in establishing remuneration standards within companies. For businesses, particularly foreign entities operating in Japan or collaborating with Japanese partners, a thorough understanding of these rules and the establishment of clear, procedurally sound internal invention policies are essential for effective IP management and to mitigate potential disputes.