How Does Japanese Law Govern Employee Inventions (Service Inventions - Article 35) and the Respective Rights of Employees and Employers?

In Japan's innovation-driven economy, a significant portion of patentable inventions arises from the efforts of employees working within corporations or research institutions. The Japanese Patent Act, specifically in Article 35, provides a detailed legal framework governing these employee inventions (職務発明 - shokumu hatsumei), also known as service inventions. This framework aims to strike a delicate balance: fairly rewarding employee inventors for their creative contributions while also recognizing the substantial investment, resources, and risk undertaken by employers in fostering an environment conducive to innovation.

Understanding Article 35 is crucial for both employers and employees in Japan, as it dictates the default ownership of inventions, the mechanisms by which employers can acquire rights, and the corresponding obligation to provide reasonable remuneration to the inventor. Disputes related to employee inventions often arise in several contexts: as a defense in patent infringement lawsuits (where an employer asserts a right to use an invention created by a former employee), in actions to determine the rightful ownership or transfer of patent rights, and, most frequently, in claims by employees for adequate compensation for inventions assigned to their employers.

What Constitutes an "Employee Invention" (Shokumu Hatsumei)?

Article 35(1) defines an employee invention as an invention which, by its nature, falls within the scope of the business of the employer and was achieved by an act or acts which fall within the present or past duties of the employee with that employer. This definition encompasses inventions made not only by regular employees (従業者 - jūgyōsha) but also by officers of a juridical person or public servants.

Three core criteria must be met:

1. Inventor Status: The individual must be an employee (or equivalent as defined).
2. Within Employer's Business Scope (使用者等の業務範囲 - shiyōsha-tō no gyōmu han'i): The invention must relate to the employer's existing or reasonably anticipated business activities. This aspect is typically interpreted broadly and is rarely the primary point of contention.
3. Within Employee's Duties (従業者等の現在又は過去の職務 - jūgyōsha-tō no genzai matawa kako no shokumu): The act(s) leading to the invention must fall within the employee's job responsibilities, either present or past. This is often the most heavily scrutinized element.

Determining "Within the Scope of Duties":

• Explicit Instructions: If an invention is made pursuant to specific instructions or an assignment from the employer, it clearly falls within the employee's duties (e.g., Osaka District Court, May 18, 1979, concerning a continuous kneading machine).
• Implicit or General Duties: Even without direct orders, if an employee's position inherently involves research, development, or inventive activity (e.g., a scientist in an R&D department, a lead engineer), inventions made in their area of responsibility are generally considered employee inventions. The Supreme Court, on December 13, 1968 (Minshu Vol. 22, No. 13, p. 2972), recognized that a technical director responsible for production improvement had an implicit duty to invent in that area.
• Use of Employer's Resources and Time: Significant use of the employer's facilities, equipment, materials, funding, or working time to develop an invention is a strong indicator that the inventive activity was related to the employee's duties, even if the specific line of research was discouraged. The highly publicized "Blue LED" case (Tokyo District Court, September 19, 2002, Hanrei Jihō No. 1802, p. 30 – intermediate judgment) involved an invention made by an employee who was instructed by his supervisor to cease that particular research due to perceived low chances of success. However, because the employee continued the research using company facilities and resources and his general role was R&D, the court found it to be an employee invention. The rationale appeared to be that it would be inequitable for the employee to solely benefit from an invention developed with company resources, even against specific orders, particularly when the employer bore the underlying risk and cost of those resources.
• Inventions Outside Duties and Business Scope: If an employee in a clearly non-technical role (e.g., a sales representative in a company with no manufacturing or R&D) creates an invention entirely unrelated to their duties and the employer's business, using their own time and resources, it is unlikely to be deemed an employee invention (e.g., Tokyo High Court, May 6, 1969, concerning a bathtub invented by an employee of a sales company).
• Timing – Inventions Completed Post-Resignation: An invention is generally not considered an employee invention of a former employer if it is conceived and reduced to practice after the employee has terminated their employment. The critical factor is the time of completion of the invention. If an invention is fully conceived and completed during the term of employment, it qualifies as an employee invention even if the patent application is filed after the employee has left the company. Agreements purporting to assign rights to inventions made after termination are often viewed skeptically and may be unenforceable if they unduly restrict the employee's future inventive activities, potentially conflicting with the policy of Article 35(2) which invalidates pre-agreements to assign non-employee inventions.

Allocation of Rights for Employee Inventions

The Japanese Patent Act sets out a default position for ownership and then provides mechanisms for employers to acquire greater rights.

1. Default: Invention Belongs to the Employee (Inventor Principle)

Mirroring the general principle that the right to obtain a patent initially belongs to the inventor, an employee invention also initially belongs to the employee who created it.

2. Employer's Statutory Non-Exclusive License (Article 35(1))

Even if the patent rights remain with the employee, if an invention qualifies as an "employee invention" under Article 35(1), the employer automatically obtains a statutory, royalty-free, non-exclusive license (法定通常実施権 - hōtei tsūjō jisshi-ken) to work that patented invention.

• Purpose: This provision acknowledges the employer's contribution (e.g., providing salary, resources, facilities) to the environment in which the invention was made and ensures the employer can use the invention in its own business without needing a separate license from the employee-patentee.
• Scope: This license allows the employer to work the invention themselves. This can include contracting out the manufacturing to a third party (subcontractor), provided the employer maintains control over the manufacturing process and the manufactured products are for the employer's business (rather than the subcontractor's independent commercialization).
• Exhaustion: Products legitimately manufactured and sold by the employer under this statutory non-exclusive license are generally subject to the doctrine of patent exhaustion. This means subsequent purchasers can typically use and resell those specific items without further infringing the employee's patent (e.g., Nagoya District Court, November 29, 1993, concerning a multi-story car park structure).

3. Employer's Acquisition of Patent Rights or an Exclusive License

Most employers seek more comprehensive rights than just a non-exclusive license. Article 35 allows employers to acquire the full rights to an employee invention – either the right to obtain a patent, the patent right itself, or an exclusive license – through pre-existing arrangements.

• Mechanism: This acquisition is typically achieved through:
  • A specific contractual agreement with the employee concerning the invention.
  • Work regulations (勤務規則等 - kinmu kisoku tō) or other company rules (e.g., an invention handling policy) that stipulate the transfer of such rights to the employer. Such internal regulations are very common in Japanese companies.
• Two Modes of Employer Acquisition (Following 2015 Amendments):
  • Assignment/Succession (承継 - shōkei) to the Employer (Art. 35(2) & (4) logic): Historically, and still permissibly, work regulations could stipulate that the employee assigns the right to obtain a patent (or the patent itself) to the employer. The employer might have a "call option" to decide whether to take up the assignment for a particular invention.
  • Original Vesting in the Employer (原始的帰属 - genshiteki kizoku) (Art. 35(3)): A significant change introduced by the 2015 amendments to Article 35 allows work regulations or contracts to provide that the right to obtain a patent for an employee invention originally vests in the employer from the moment the invention is made. This means the right never resides with the employee; it accrues directly to the employer.
    • Advantages of Original Vesting: This mode was introduced to address several practical difficulties:
      1. Simplifies Co-Inventions with Other Entities: If employees from Company A and Company B jointly create an invention, and both companies have original vesting policies, each company directly and immediately obtains its respective share of the right to obtain the patent. This avoids the complexities under the assignment model where an employee assigning their share of the right to obtain a patent would have needed the consent of their co-inventor(s) (Article 33(3) of the Patent Act).
      2. Mitigates "Double Assignment" Risks: Under the assignment model, if an employee invented something and then purported to assign the right to a third party before assigning it to their employer (or before the employer exercised its option), a priority dispute could arise, potentially depending on who filed a patent application first (Article 34(1)). With original vesting, the right accrues to the employer immediately upon invention, so any subsequent purported assignment by the employee to a third party would be an assignment of something they no longer own.
• Employer's Choice: Employers can choose in their internal regulations whether to adopt an original vesting system or an assignment-based system (or a hybrid). Original vesting offers greater certainty for the employer but may trigger the obligation to provide reasonable remuneration for all inventions falling under the policy, whereas an assignment system allows the employer to selectively acquire rights and pay remuneration only for those chosen.

Employee's Right to "Reasonable Remuneration" (相当の利益 - sōtō no rieki)

When an employer acquires the right to obtain a patent, the patent right itself, or an exclusive license for an employee invention through a contract, work regulations, or similar stipulation (either by assignment or by original vesting), Article 35(4) grants the employee inventor a statutory right to receive "reasonable remuneration" (相当の利益 - sōtō no rieki).

Prior to the 2015 amendments, the term used was "reasonable payment" or "reasonable consideration" (相当の対価 - sōtō no taika). The change to "reasonable profit/benefit" was intended to clarify that the remuneration can take forms other than direct monetary payment, such as stock options, study opportunities abroad, promotions with salary increases, etc.

When Does the Right to Remuneration Arise?

The right generally arises when the employer acquires the right to the invention (i.e., upon assignment or, if by original vesting, upon completion of the invention). It is not strictly contingent on the employer actually filing a patent application or the patent being granted. For example, if an employer decides to keep an employee invention as a trade secret but still derives commercial benefit from it, an obligation to provide reasonable remuneration can still arise. However, the actual patentability of the invention (its novelty, inventive step, etc.), even if not patented, can significantly influence the amount of remuneration deemed reasonable.

Determining "Reasonable Remuneration": The Core of Many Disputes

This is often the most contentious aspect of the employee invention system. The landmark Supreme Court decision of April 22, 2003 (Minshu Vol. 57, No. 4, p. 477, the "Olympus Optical" case or 「オリンパス光学工業」事件), held that even if work regulations specified an amount of remuneration, courts could review whether that amount was "reasonable" and award additional sums if it was found insufficient. This decision led to a wave of litigation and prompted legislative reforms.

The Post-2004/2015 Framework for Assessing Reasonableness (Art. 35(5) and (7)):

The 2004 and 2015 amendments aimed to provide greater predictability and deference to employer-employee agreements on remuneration, provided certain procedural safeguards are met.

• Remuneration Based on Pre-Established Standards (Art. 35(5)): If a contract, work regulations, or other stipulation provides for the payment of reasonable remuneration, then the payment of remuneration in accordance with such provisions shall not be considered unreasonable if the procedures followed in establishing those provisions were themselves reasonable. Article 35(5) lists factors to consider in assessing the reasonableness of these procedures:
  • (a) Consultation (協議の状況 - kyōgi no jōkyō): The state of consultations held between the employer and employee representatives (or employees generally) regarding the formulation of the standards for determining remuneration.
  • (b) Disclosure (開示の状況 - kaiji no jōkyō): The state of disclosure of the formulated standards to the employees.
  • (c) Hearing of Opinions (意見の聴取の状況 - iken no chōshu no jōkyō): The state of opportunities for the employee inventor(s) to express their opinions regarding the calculation of the remuneration amount for their specific invention.
• The "Guidelines" (指針 - shishin) (Art. 35(6)): The Minister of Economy, Trade and Industry is authorized to establish (and has established) non-binding guidelines to assist employers and employees in implementing these procedural requirements. These guidelines emphasize that if the procedural elements (consultation, disclosure, opinion hearing) are deemed to have been properly conducted, the remuneration determined by the employer's internal system is generally to be respected by courts as not being "unreasonable." The threshold for a court to find such procedurally fair remuneration "unreasonable" is intended to be high.
• Determination by Court if No (or Unreasonable) Provisions (Art. 35(7)): If there are no provisions for remuneration, or if the established provisions (or the process of their formulation or application) are deemed "unreasonable" by a court despite the procedural safeguards, the court will determine the amount of reasonable remuneration. In doing so, it must consider:
  • (i) The amount of profit that the employer is to receive from working the invention (使用者等が受けるべき利益の額 - shiyōsha-tō ga ukeru beki rieki no gaku).
  • (ii) The extent of any burden borne or contribution made by the employer in connection with the invention (e.g., R&D investment, facilities, risk).
  • (iii) The treatment afforded to the employee inventor (e.g., salary level, bonuses, promotions, other non-monetary benefits such as study opportunities or stock options specifically related to the invention).

Calculating the "Profit the Employer is to Receive":

This is a complex factual determination.

• Third-Party Licensing: If the employer licenses the patent to third parties, the royalty income received from those licenses is a direct measure of the employer's profit attributable to the patent. For broad cross-licensing agreements involving many patents, apportioning the value attributable to a single employee invention can be difficult. The Tokyo High Court decision of January 29, 2004 (Hanrei Jihō No. 1848, p. 25, the "Hitachi" case or 「日立製作所」事件) discussed methods for such apportionment, sometimes using the hypothetical royalty the licensee would have paid for the specific invention as a proxy.
• Employer's Own Working (Self-Implementation): This is more challenging because the employer already has a royalty-free non-exclusive license under Article 35(1). The "profit" for acquiring the patent itself (or the right to it) is the additional benefit derived from the ability to exclude competitors. Courts often use an "excess profit" or "hypothetical royalty" approach. One common method involves:
  1. Estimating the employer's total sales or profits from products embodying the invention.
  2. Attributing a certain portion of these sales/profits to the exclusivity granted by the patent (e.g., by estimating what sales might have been lost to competitors if the employer did not have the patent – sometimes judicially estimated at, for instance, 1/2 or 1/3 of total sales in the "Blue LED" final remuneration judgment by the Tokyo District Court on January 30, 2004, Hanrei Jihō No. 1852, p. 36).
  3. Applying a notional royalty rate to this "excess sales/profit" figure.
     The profits considered can sometimes include those earned even before patent grant, for example, if the invention was kept as a trade secret or if the employer benefited from the exclusivity provided by a published patent application (which can deter competitors).
• Employer's Non-Working or Abandonment of the Patent: Generally, an employer is not required to pay remuneration based on hypothetical profits if they choose not to work the invention or decide to abandon the patent (e.g., to save maintenance fees). However, if such a decision is found to have been made in bad faith, primarily to avoid paying reasonable remuneration to the employee, a court might consider what profits could have been made. (See Tokyo District Court, April 18, 2007, 2005 (Wa) 11007, the "Brother Industries" case or 「ブラザー工業」事件).

Employer's Contribution and Employee's Treatment:

The employer's contribution – including R&D investment, provision of facilities and support staff, assumption of business risks, and efforts in patent prosecution and commercialization – is a significant factor that typically reduces the portion of the "employer's profit" that is ultimately awarded to the employee as reasonable remuneration. The employee's overall compensation, including salary, bonuses, and any specific invention-related rewards or favorable treatment (promotions, study opportunities), is also taken into account. In typical corporate R&D settings, courts have often attributed a very high percentage (e.g., 90-98%) of the success to the employer's overall contribution, resulting in the employee's share of the calculated "employer's profit" being in the range of 2-10%. A higher share for the employee might be awarded in exceptional circumstances where the employee's individual inventive insight was extraordinarily dominant or was achieved despite lack of employer support.

Statute of Limitations for Remuneration Claims:

Claims for reasonable remuneration are subject to a statute of limitations. The period generally begins to run when the right to remuneration arises (e.g., upon assignment of the invention right to the employer, or at a contractually stipulated payment date, as per the "Olympus Optical" Supreme Court case). Under the amended Civil Code (effective April 1, 2020), the general limitation period for contractual claims is 5 years from the time the creditor becomes aware that the right can be exercised, or 10 years from the time the right can be exercised, whichever is earlier.

Handling of Joint Employee Inventions

If multiple employees jointly create an invention, they are co-inventors, and the right to obtain a patent is co-owned by them. The reasonable remuneration due from the employer is typically apportioned among the co-inventor employees based on their respective contributions to the inventive concept. If all co-inventors work for the same employer, and that employer acquires all their shares (e.g., through original vesting or assignment under work regulations), the employer becomes the sole owner.

If co-inventors are from different employers (e.g., in a collaborative research project), each employer typically acquires the rights from their own respective employees. Each employer would then have a statutory non-exclusive license (Art. 35(1)) to the whole invention. If they both have original vesting policies, they would become co-owners of the right to obtain the patent. If it's an assignment model, an employee would need their co-inventor's consent to assign their share to their employer (Art. 33(3)), a complexity that the original vesting model helps avoid.

Application to Foreign Patent Rights

A significant question is whether Article 35, particularly its provisions on reasonable remuneration, applies to an employee's rights in foreign patents derived from an invention made under a Japanese employment relationship. The Supreme Court decision of October 17, 2006 (Minshu Vol. 60, No. 8, p. 2853, another "Hitachi" case or 「日立製作所」事件) addressed this. The Court held that where the employment contract and the circumstances surrounding the invention are primarily governed by Japanese law (e.g., through an explicit or implicit choice of Japanese law), the principles of Japanese Patent Act Article 35 regarding an employee's right to reasonable remuneration for the assignment of the right to obtain a patent can be analogously applied to the assignment of rights to obtain patents in foreign countries for that same invention. This decision favors a unified approach to compensating an employee for a globally patented invention stemming from a Japanese employment context, rather than requiring a separate analysis under the laws of each country where patent rights are secured.

Conclusion

Article 35 of the Japanese Patent Act creates a comprehensive, albeit complex, regime for governing inventions made by employees. It balances the inventor's inherent right to their creation with the employer's significant contributions and need to commercialize innovations. Key features include the employer's default non-exclusive license, mechanisms for employers to acquire full patent rights (increasingly through "original vesting" provisions in work regulations), and the employee's corresponding indefeasible right to "reasonable remuneration." The determination of what constitutes "reasonable remuneration," especially in light of the procedural fairness requirements for establishing internal company standards and the methods for calculating the employer's benefit, remains a critical and evolving area of Japanese intellectual property law, heavily influenced by case law and ministerial guidelines.