Japanese Patent Law Favors Employed Inventors (Journal)

Abstract
[Shuji Nakamura] left Nichia in 1999 and filed his first lawsuit claiming ownership to the patent. In September 2002, the Japanese courts held that there was a pre-existing agreement between Nichia and the inventor that he would transfer his patent rights to any inventions to the company. However, the court held that Nakamura was still eligible for a reward under Article 35. Nakamura filed suit again, this time seeking "reasonable" compensation for his transfer of patent rights.

Full Text
Copyright American Institute of Chemical Engineers May 2005
Many American companies have subsidiaries in countries whose patent laws favor employed inventors. The recent ending to a long-running dispute between Nichia Corp., a closely held Japanese chemical company, and a former employee, Shuji Nakamura, dramatically illustrates a major difference between U.S. and other national patent law systems with regard to employed inventors.
In January 2005, Nichia settled its dispute with Shuji Nakamura over a patent for blue light-emitting diodes, the last of the three LED types necessary to enable the creation of all other colors in display panels, green and red LEDs having been discovered years earlier. Nakamura was originally awarded 20 billion yen ($190 million) by the Tokyo District Court in January 2004. The final settlement of 843 million yen ($8 million), which was mediated by the Tokyo High Court, is the largest ever in Japan as compensation for an invention by a corporate employee. Nakamura initially received a 20,000 yen bonus (less than $200) from Nichia when the firm filed for a patent in 1990.
In the U.S., an inventor's corporate salary is considered fair compensation for any inventions created during a term of employment. Many companies offer a nominal bonus as an incentive.
In Japan, companies have also awarded nominal bonuses for patents obtained during employment. However, the Japanese courts have ruled that Patent Law Article 35 voids any provision in an employment agreement if the compensation originally given is later deemed "unreasonable" in light of the profits obtained by the employer.
When Nichia filed for a patent, it claimed that it had no clear-cut provisions in its employment agreements regarding ownership of patent rights. In the eight years following the device's commercialization, Nichia's annual sales revenues rose from just over $190 million to more than $760 million, of which about 60% was attributed to blue LED products.
Nakamura left Nichia in 1999 and filed his first lawsuit claiming ownership to the patent. In September 2002, the Japanese courts held that there was a pre-existing agreement between Nichia and the inventor that he would transfer his patent rights to any inventions to the company. However, the court held that Nakamura was still eligible for a reward under Article 35. Nakamura filed suit again, this time seeking "reasonable" compensation for his transfer of patent rights. The inventor won this round of litigation and was awarded 20 billion yen, a ruling that Nichia subsequently appealed. Because of the high costs associated with maintaining the appeal, Nakamura settled the case.
Japanese companies have since lobbied the legislature to modify Japan's patent law so that the amount of reasonable remuneration is calculated based on agreements between companies and individual employees rather than on court decisions or court-imposed formulae. Amendments to Article 35 are currently under consideration and are expected to become effective in April 2005; however, they maintain the "reasonable remuneration" standard, thereby forcing companies to handle this issue with continued uncertainty.
American patent law differs greatly from the law in Japan and other countries with inventor compensation laws. Employers are not required to give employee-inventors fair compensation for the value of their inventions beyond their salary. Generally, state common law governs how inventors are compensated.
Absent an agreement, employers own the inventive output of employees who are hired to invent. If a non-R&D employee invents something closely related to the employee's duties or uses the firm's resources, the firm and employee share rights to the invention. If the employee invents something unrelated to his or her duties or without the employer's resources, the employee typically owns the invention outright. Employers can generally acquire ownership rights to inventions made under the latter two scenarios through pre-invention assignment agreements.
Eight states (CA, DE, IL, KS, MN, NC, UT and WA) have enacted "Freedom to Create" statutes. These laws preclude enforcement of any provision in an employment contract that purports to give an employer ownership of an invention that was developed entirely on the employee's own time, using none of the employer's resources.
When an employee resides abroad, however, U.S. patent law may not apply. Thus, American companies with overseas subsidiaries should take steps to prevent foreign employee-inventor disputes.
First, they should create clear rules regarding patent ownership and a system to provide for fair remuneration for inventions created by their employees. New employees should be given these rules and asked to sign an acknowledgment stating that they are aware of the rules and waive any rights to ownership to any invention that is related to the company's business and/or developed on company time using company resources
Firms should make an honest effort to fairly evaluate an invention's worth and compensate employees accordingly, documenting how the assessment was performed. This will help prevent future disputes and demonstrate good faith if a dispute should arise.