Employee Inventions in Japan: Who Owns the Rights, and What Compensation Is Due?

In today's innovation-driven economy, a significant portion of technological advancements arises from the research and development efforts within corporations, carried out by their employees. The question of who owns these employee-generated inventions and how inventors should be compensated is a critical aspect of intellectual property law and employment relations. Japan, with its robust patent system, has a specific legal framework to address "employee inventions" (職務発明 - shokumu hatsumei), primarily governed by Article 35 of the Japanese Patent Act. This article aims to provide a comprehensive overview of this framework, exploring how employee inventions are defined, the allocation of rights between employer and employee, and the crucial issue of the employee's entitlement to reasonable remuneration.

Defining an "Employee Invention" (職務発明 - shokumu hatsumei)

Under Article 35, Paragraph 1, of the Japanese Patent Act, an invention qualifies as an "employee invention" if it meets two primary conditions:

1. Nature of the Invention: The invention, by its nature, must fall within the scope of the employer's business. This is generally interpreted broadly to include not only the current business activities of the employer but also areas into which the employer might reasonably expand.
2. Act(s) of Inventing: The act or acts leading to the completion of the invention must fall within the present or past duties of the employee performed for that employer.

The determination of whether an invention meets these criteria, particularly the "duties of the employee" aspect, can be fact-intensive:

• Express Instructions: If an employee creates an invention based on specific instructions or research assignments from the employer, it typically qualifies as an employee invention.
• Implied Duties: Even without explicit instructions, if an employee's role inherently involves research, development, or inventive activities (e.g., an engineer in an R&D department, a research manager), inventions made within their field of responsibility are generally considered employee inventions. The Supreme Court on December 13, 1968 (in the "Lime Nitrogen Manufacturing Furnace" case), affirmed that a technical director, by virtue of their position, has an implied duty to strive for technical improvements.
• Unrelated Duties and Independent Effort: Conversely, if an employee's duties are entirely unrelated to technical development (e.g., a sales-only role in a company with no manufacturing R&D), and the invention is made outside of work hours, without using company resources, and is unrelated to the employer’s business, it is unlikely to be classified as an employee invention (e.g., Tokyo High Court, May 6, 1969, "Bathtub" case).
• Inventions Made Against Instructions but Using Company Resources: A notable and somewhat exceptional situation was addressed by the Tokyo District Court on September 19, 2002 (the "Blue LED Intermediate Judgment"). In this case, an employee in an R&D role who made a groundbreaking invention (related to blue LEDs) by continuing research using company facilities and during work hours, even though a superior had instructed him to cease that specific line of research due to perceived low prospects, was still found to have made an employee invention. The court likely considered it inequitable for the employee to claim full personal ownership of an invention developed using the employer's resources, even under such circumstances. The defiance of instructions, however, could be a factor in determining the level of subsequent compensation.
• Inventions Completed Post-Employment: Generally, an invention conceived and completed after the termination of employment is not considered an employee invention of the former employer, even if it relates to the employee's past duties. This is to avoid unduly restricting an individual's future innovative capacity. However, if the invention was substantively completed before the employee left the company, it can still qualify as an employee invention, even if the patent application is filed post-termination. Contractual clauses attempting to assign rights to all future inventions made after employment might be deemed invalid under Article 35(2) if they are considered an unfair restraint.

Allocation of Rights Pertaining to Employee Inventions

A key difference from some other jurisdictions, like the U.S. where "work for hire" principles or employment agreements often lead to automatic employer ownership of inventions, is Japan's starting point:

• Default Ownership by Employee: The right to obtain a patent for an employee invention originally belongs to the employee-inventor(s).
• Employer's Statutory Non-Exclusive License (Article 35(1)): Upon the creation of an employee invention, the employer automatically obtains a statutory, royalty-free, non-exclusive license to work that patented invention. This right arises by operation of law, regardless of any agreement. This license also allows the employer to have the invention worked by a subcontractor, provided the employer directs and controls the subcontractor and receives all resulting products. Products sold by the employer under this statutory license are also subject to the doctrine of patent exhaustion.
• Contractual Assignment of Rights to Employer (事前承継 - jizen shōkei): While the default is employee ownership, Article 35(2) of the Patent Act, by reverse implication, permits employers to provide in advance, through an employment contract, work rules (often called "invention regulations" - 発明規程, hatsumei kitei), or other agreements, for the assignment of the right to obtain a patent (or the patent itself if already obtained by the employee) from the employee to the employer for employee inventions. Article 35(2) voids any provision that assigns rights for inventions other than employee inventions (e.g., purely personal inventions unrelated to work).

The Employee's Right to "Reasonable Remuneration" (相当の対価 - sōtō no taika)

If an employer acquires the right to obtain a patent or the patent itself for an employee invention through such a pre-existing agreement, Article 35(3) (in the pre-2015 Patent Act structure, which the provided source material refers to; now Article 35(4) after subsequent amendments) grants the employee-inventor a statutory right to receive "reasonable remuneration" (or "reasonable payment" - 相当な支払, sōtō na shiharai, a term also used). This right to compensation is a cornerstone of the Japanese employee invention system.

Accrual of the Right to Remuneration

• The right to remuneration arises when the employer succeeds to the right to obtain a patent for the employee invention. It is not strictly necessary for a patent application to be filed or for a patent to be granted. For example, if an employer acquires the right to an employee invention but decides to maintain it as a trade secret rather than patenting it, the employee is still entitled to reasonable remuneration because the employer has effectively acquired the right that would have allowed patenting.
• While the invention must meet the basic definition of an "invention" under Article 2(1), courts have generally held that it does not need to satisfy all patentability requirements (e.g., novelty, inventive step) for the right to remuneration to arise. However, if the invention clearly lacks patentability (e.g., possesses obvious grounds for invalidity), this may significantly impact the amount of remuneration. An employer who has benefited from an invention (even if just through exclusive know-how or by asserting a patent of questionable validity) may be somewhat estopped from arguing its complete lack of patentable merit to entirely avoid remuneration. The Tokyo District Court decision of April 18, 2007 (the "Brother Industries" case) suggested a "limited consideration theory" (限定参酌説 - gentei sanshaku-setsu), where an invalidity ground is primarily considered in calculating the amount of remuneration if that ground was known to competitors and thus negated any de facto exclusivity the employer might have enjoyed.

Determining "Reasonable Remuneration"

The calculation of "reasonable remuneration" has been a frequent subject of litigation and legislative attention.

1. When Invention Regulations Specify Remuneration:
The Supreme Court, in its landmark decision on April 22, 2003 (the Olympus Optical Co., Ltd. case, Heisei 13 (ju) No. 1256), held that even if an employment agreement or invention regulation specifies an amount or method for calculating remuneration, if that agreed-upon remuneration is found to be "unreasonable" when compared to the value of the invention and other factors, the employee can claim the shortfall from what a court deems reasonable.

This decision led to considerable debate and concerns among employers about unpredictability. In response, the Patent Act was amended in 2004, introducing provisions (then Article 35(4), now primarily reflected in Article 35(5) following 2015 reforms) to provide a "safe harbor." These provisions state that remuneration paid according to standards set forth in an agreement or work rules shall not be considered unreasonable if the process of establishing those standards is itself deemed reasonable. The reasonableness of the process is assessed by considering factors such as:

• The situation of consultations (協議の状況 - kyōgi no jōkyō) between the employer and employees (or their representatives) in formulating the remuneration standards.
• The situation of disclosure (開示の状況 - kaiji no jōkyō) of the formulated standards to the employees.
• The situation of hearing opinions (意見の聴取の状況 - iken no chōshu no jōkyō) from employee-inventors regarding the calculation of remuneration for their specific inventions based on those standards.

The "consultation" generally refers to discussions on the overall framework and standards for remuneration, while "hearing opinions" pertains to the application of those standards to a particular invention by the specific inventor(s) involved. If these procedural fairness elements are satisfied, the remuneration determined by the employer's internal regulations is more likely to be upheld as reasonable.

2. When No (or Unreasonable) Agreement on Remuneration Exists:
If there is no provision for remuneration in an agreement, or if the existing provisions are deemed unreasonable (e.g., because the procedural fairness requirements above were not met, or the amount is grossly inadequate), then Article 35(5) (then Article 35(4), and previously Article 35(3) before that) provides that the amount of reasonable remuneration shall be determined by considering:

• (a) The amount of profit the employer is to receive from the invention (使用者等が受けるべき利益の額 - shiyōsha-tō ga ukerubeki rieki no gaku).
• (b) The employer's burdens and contributions in relation to the invention, the treatment of the employee-inventor, and other circumstances (その他の事情 - sono ta no jijō).

Calculating "Employer's Profits":
This is often the most contentious part. Courts generally look at the actual economic benefits the employer derived or is expected to derive from the invention, considering post-assignment developments.

• If Licensed to Third Parties: The royalty income received or receivable by the employer from licensing the invention to third parties is a primary component. This is often calculated based on the licensee's sales and an appropriate royalty rate. For complex arrangements like blanket cross-licenses, courts have developed methodologies to apportion a value to the specific employee invention, for instance, by considering the value of the invention relative to the entire licensed portfolio (e.g., Tokyo High Court, January 29, 2004, "Hitachi" case).
• If Worked by the Employer (Self-Working): When the employer exploits the invention themselves, the "profit" is not the entire operating profit from the product line. Since the employer already has a statutory non-exclusive license (Article 35(1)), the additional benefit from owning the patent (as opposed to just having that license) is the ability to exclude competitors. Therefore, the relevant profit is often considered the excess profit gained due to this exclusivity.
  A common judicial approach (超過売上高方式 - chōka uriage-daka hōshiki) involves estimating what portion of the employer's sales revenue is attributable to the patented invention's exclusivity (e.g., by assuming that without the patent, competitors would have taken a certain market share, perhaps 1/2 or 1/3 of sales) and then applying a suitable notional royalty rate to this "excess sales" figure. The landmark Tokyo District Court decision of January 30, 2004 (the "Blue LED Final Judgment") famously used such an approach. Profits from the employer's working of the invention even before patent grant (but typically after patent application publication, when some exclusionary effect might be felt via a compensation right) may also be considered.
  If an employer insufficiently works an invention or abandons a patent, remuneration might still be calculated based on a hypothetical reasonable working, but only in limited circumstances, such as if the employer's actions were primarily intended to reduce their remuneration liability. Profits from products that constitute indirect infringement of the employee invention can also be factored in.

Considering "Employer's Contribution" and "Other Circumstances":
The calculated employer's profit is then typically reduced by an "employer's contribution" percentage. This accounts for the employer's investments in R&D infrastructure, funding, personnel, risk-bearing in development and commercialization, marketing efforts, patent prosecution costs, and ongoing patent maintenance. This contribution can be substantial, often in the range of 90-98%, meaning the employee's share of the employer's profit might be in the 2-10% range, unless the employee's individual creativity or perseverance was exceptionally high and the employer's direct input into the specific invention was relatively lower.
"Other circumstances" can include any special bonuses, promotions, or other favorable treatment (beyond regular salary and standard benefits) that the employee received specifically on account of the invention.

Statute of Limitations for Remuneration Claims

• Accrual (Starting Point): The limitation period generally begins to run from the time the employer succeeds to the right to obtain a patent. If a patent application is filed by the employer, this is often considered the point of succession. However, if the employment agreement or work rules specify a particular time for payment (e.g., upon patent registration, or upon commencement of commercial working), the Supreme Court in the Olympus case indicated that the limitation period starts from that contractually specified payment time.
• Period: The prevailing view in Japanese courts is that the claim for reasonable remuneration is a statutory right, subject to the general civil claim limitation period of 10 years (Article 167(1) of the Civil Code), rather than the shorter 5-year period for commercial claims (under the Commercial Code).

Special Issues: Joint Inventions and Foreign Patent Rights

Joint Employee Inventions (共同発明の取扱い - kyōdō hatsumei no toriatsukai)

When multiple employees jointly create an invention, they co-own the right to obtain a patent. If they are all employees of the same employer, that employer typically acquires a statutory non-exclusive license and can arrange for the assignment of all shares. Remuneration is then usually apportioned among the co-inventors based on their respective contributions.

More complex issues arise if the joint inventors are employees of different companies (e.g., in a collaborative research project):

• Statutory License for Each Employer: Each employer generally obtains a statutory non-exclusive license (Article 35(1)) with respect to their own employee's contribution, and this does not typically require the consent of the other co-owning inventors or their employers (unlike the general rule for licensing jointly owned patents under Article 73(3)).
• Assignment of Invention Rights: If each employer has an agreement to acquire their respective employee's share of the right to obtain a patent, this assignment of a share in a co-owned right generally requires the consent of the other co-owners (i.e., the other employee-inventors or their employers if they too have acquired rights) under Article 33(3) of the Patent Act. Furthermore, a patent application for a jointly owned invention must be filed jointly by all co-owners (Article 38). These requirements can create practical difficulties if the co-owning entities do not fully cooperate, potentially hindering one employer's ability to unilaterally secure full rights or file a patent application.

Application of Japanese Employee Invention Rules to Foreign Patent Rights

A significant question is whether Japan's Article 35, particularly its provisions on reasonable remuneration, applies to the assignment of rights for patents obtained in foreign countries for an invention made by an employee subject to a Japanese employment relationship.

The Supreme Court of Japan addressed this in a decision on October 17, 2006 (the "Hitachi" case, Heisei 17 (ju) No. 789). The Court, finding an implied choice of Japanese law to govern the employment relationship, held that the provisions of Japan's Article 35 concerning reasonable remuneration could be analogously applied to the transfer of rights for foreign patents derived from the employee invention. This landmark decision signals a preference for a unified approach, where the law governing the employment relationship (if Japanese law is chosen or applicable) dictates the terms of remuneration for employee inventions globally, rather than a strictly territorial approach where each country's own employee invention laws would apply to patents filed in that specific country. This approach aims to provide predictability and consistency for both employers and employees in international R&D contexts.

Comparison with U.S. Employee Invention Principles

The Japanese system for employee inventions presents notable contrasts with common U.S. practices:

• Default Ownership: In the U.S., for inventions made by employees within the scope of their employment, particularly when an employment agreement includes an assignment clause (which is very common), the rights often either vest directly with the employer or are assigned to the employer. The concept of the invention right "originally belonging to the employee" as a default is less pronounced. The "shop right" doctrine in the U.S. may grant an employer a non-exclusive license in certain situations even without an express assignment agreement, but its scope and application differ from Japan's automatic statutory license.
• Compensation for Invention: While U.S. employment agreements may provide for bonuses or other recognition for inventions, there is no general statutory right to "reasonable remuneration" for assigned inventions that can be judicially reassessed in the way Article 35 allows in Japan if an agreed amount is deemed unreasonable. Compensation is largely a matter of contract, beyond regular salary and benefits.
• Procedural Fairness for Remuneration Standards: Japan's Article 35 places considerable emphasis on procedural fairness (consultation, disclosure of standards, hearing employee opinions) in setting remuneration policies. If these procedures are followed, the employer's predetermined remuneration scheme is more likely to be upheld. This level of statutory procedural oversight for invention remuneration schemes is not a general feature of U.S. federal patent law.

Conclusion

Japan's employee invention system, codified in Article 35 of its Patent Act, represents a carefully constructed balance. It seeks to encourage corporate investment in R&D by granting employers certain rights (like a statutory non-exclusive license and the ability to secure assignment of inventions through agreements) while simultaneously protecting and incentivizing employee-inventors through a statutory right to reasonable remuneration for assigned inventions. The definition of an employee invention, the rules governing the transfer of rights, and especially the complex and evolving jurisprudence surrounding the calculation of "reasonable remuneration" and the procedural requirements for setting remuneration standards, all demand careful attention from businesses with research and development activities in Japan. Effectively navigating this framework requires well-drafted employment agreements and invention regulations that are not only compliant with the letter of the law but also embrace its spirit of fairness and mutual benefit.