CASRIP Newsletter - Fall 1996, Volume 3, Issue 3
Ownership of Employees' Inventions
by Dr. Heinz Goddar
Principles and Historical Background
While in many - if not most - other countries, worldwide as well as in Europe, employers and employees can determine by an employment contract whether inventions made by the employee in the course of his or her employment become the property of the employer (in most instances even without any considerable remuneration to the employee), the legal situation in Germany is totally different. German Law, particularly the so-called "Law relating to Inventions made by Employees", (hereinafter referred to as "The Law") unequivocably states that inventions made by employees belon g first and foremost to the employee, and that only by a special act and for a special remuneration can it become the property of the employer.
To understand this, it is necessary to understand the historical background. In 1936, the German Patent Law introduced the principle that the right and title to an invention belongs first and foremost to the inventor. Until then, one had assumed that i nventions could be created by legal entities themselves, such as in the case where different departments or divisions consisting of many individuals contributed to the invention. However, the laws at that time did not specify how the property of the inve ntion was transferred from the employee to the employer.
In 1942, the famous "G”ring-Speer-Verordnung" (law) was issued. The purpose of the Goering-Speer-Verordnung was to encourage inventors not only to make inventions, but also to notify the employer of such inventions as soon as possibl e, so that the employing company could make use of the inventions, possibly in a manner beneficial to the interest of the German Government in winning the war. In order to stimulate the interest of the inventors, the principle of a specific remuneration for inventions made by employees was introduced.
Based on the principles of the G”ring-Speer-Verordnung in, 1957 a more detailed and sophisticated Act was issued, namely The Law discussed above. The Law retained the principles outlined in the G”ring-Speer-Verordnung as its foundation, i.e. initial pr ivate ownership of an invention made by an employee with the respective employee, transfer of the property to the employer by an act of specific, individual assignment, and specific remuneration to the inventor.
2. Employees' Inventions
The Law concerns inventions made by employees. Accordingly, one has to determine 1) what is an invention within the meaning of The Law; 2) what is an employee; and finally, 3) what kind of inventions made by employees are subject to the provisions of Th e Law.
2.1. Definition of Invention
Inventions within the meaning of The Law are defined as technical inventions which in principle can be protected under German Law by either a patent or a utility model. Thus, The Law does not apply to other creations by employees whi ch may be protected by design, copyright etc. Consequently, with respect to copyright or design creations, an employee and employer can agree in advance through an employment contract that the rights to all such creations made by the employee during the course of his or her employment belong to the employer, without any specific act or remuneration. As previously mentioned in Section 1, such agreements cannot be made with respect to technical inventions protectable by either patent or utility model.
2.2. Definition of Employee
The Law only applies to inventions which are made by employees. Employees are persons employed by an employer within the meaning of German Labour Law and jurisdiction. Although it is beyond the scope of this paper to positively define the term employee under German Law, it is important to point out that not all persons in an employer-like position and not all representatives of legal entities, such as managing directors of companies, are considered employees under German law. The Law does not apply to inventions made by such persons. Consequently, the company and the managing director can agree, at the time the managing director is appointed, that inventions made by the managing director belong to the company with factual effect from the time of thei r creation. Even the remuneration question can be fully anticipated by agreeing that no specific remuneration should be paid.
Also, if the employment is not subject to German Law, particularly in instances where either the employee or the employer is not of German nationality and residence, the employment contract can employ the legal provisions of the respective foreign countr y with respect to inventions made by the employee. In the case of carefully drafted employment contracts applying to instances of foreign-related employment, the consequences of The Law, which foreign companies often do not consider as specifically advan tageous, can be circumvented.
2.3. Service Inventions and Free Inventions
Not all inventions made by employees are subject to The Law. Rather The Law makes a distinction between so-called service inventions, namely inventions which are regulated by The Law, and free inventions.
Service inventions are those which originate from either the regular work of the employee while working in a company under an employment contract, e.g. when a chemist working in research and development of a pharmaceutical company invents a new pharmaceu tical, or which are essentially based on the experiences of the company. All other inventions are free inventions, e.g. in a case when the aforementioned research chemist of the pharmaceutical company invents a new musical instrument. It does not matte r, however, whether the aforementioned research chemist makes the invention during his or her working hours in the company or while staying at home during the weekend, as long as the aforementioned conditions, namely either originating from the work of th e inventor or essentially based on the experiences of the company, are fulfilled.
When discussing "inventions" in the following section in connection with The Law, "service inventions" are meant, if not otherwise stated.
3. Obligations of Employees after Invention
Whenever an employee has made an invention, certain duties to the employer must be fulfilled, depending on the character of the invention.
In the case of service inventions, the employee has a duty to immmediately and completely notify the employer in writing of any invention made by him/her. At that time, the invention is still the property of the employee, and notification to the employe r does not change the title in the invention. The notification must be complete. That is, it must provide the employer such information as: the state of the art on which the invention is based, the problem which is solved by the invention, the solution proposed by the invention, the contribution from the internal knowledge of the company to the creation of the invention, and the contribution of possible co-inventors.
In the case of free inventions, or of inventions which the inventor believes are free inventions, the employee has to provide the employer with enough information to enable the employer to determine whether the respective invention is a free or service i nvention. However, such information is not necessary if it is obvious that the invention is of no interest to the employer (e.g. the music instrument mentioned above).
4. Acquisition of Ownership by Employers
After receipt of written notification from the employee regarding a service invention, or information regarding a free invention in accordance with Section 3 above, the employer has two months to object to the notification because of incompleteness - for instance when the employer cannot determine, in the case of several co-inventors, the personal contributions - in percentages - of each inventor. Additionally, the employer has three months, with respect to information relating to a free invention, to o bject to the character of the invention as being "free" and to have it considered as service invention.
If the employer, within the aforementioned term of three months, does not object to the declaration of the inventor that the respective invention is a free invention, the employer no longer has any possibility to gain ownership of the invention. Subsequ ently, the employee can dispose of it freely, e.g. sell it to third parties, etc.
If the employer gives a declaration of incompleteness to the inventor, in the case of notification of a service invention, the employer has no further requirement other than to wait until a completed notification of the invention is made by the respectiv e employee. Upon resubmission of a completed notification, the aforementioned term of two months for objecting to incompleteness begins again, giving the employer another opportunity to object to the completeness of the invention should the new, revised notification not yet being complete.
If, within the aforementioned two month term, the employer does not notify the employee, in the case of a service invention of any incompleteness of the notification of the invention, the four month term applies retroactively from the date of receipt of the notification of invention or its last completion. A four month term begins during which the employer has the possibility of obtaining certain rights in the invention (or to lose them completely).
During the aforementioned binding four month term the employer may declare an unrestricted claim of the invention to the employee. This unilateral act of the employer transfers ownership of the invention to the employer, and from that moment onward, the invention no longer belongs to the employee.
Usually, most service inventions are handled in this manner, because the unrestricted claim is the only way the employer can obtain full ownership of an invention and prevent granting the inventor any right to independently make use of the invention.
Another method often used by employers when they believe that an invention is not important enough for the company to be unrestrictedly claimed, is for the employer to declare a limited claim to the invention. A limited claim has the effect of leaving o wnership of the invention, as well as the right to protect the invention (e.g. by a patent application at the employee's own cost and in his/her own name) with the employee. Furthermore, the employee is entitled to make use of the invention by licensing it out to third parties,etc. In such cases however, the employer, by its limited claiming of the invention, has the right to non-exclusively use the invention in the future should the employer decide that such use would benefit the employer's company. T he advantage of such limited claiming is, as far as the employer is concerned, that no costs for patent protection etc. are borne by the employer. The disadvantage is that the employer, because of lack of full ownership of the invention, cannot prevent t hird parties, like competitors, from using the invention, should its employee decide to license, sell or otherwise transfer such rights.
Finally, if the employer does not act within the above mentioned four month term, the invention becomes free. This has the same effect as when the employer within the four month term explicitly declares to the employee that the invention is free. Such a released invention, whether by explicit declaration or de facto, remains the sole property of the employee. Thus, the employee can sell or license out the invention, and the employer has no remaining rights in the invention. Obviously, employers will only allow this to occur in cases where it is absolutely certain that either the invention is not patentable at all, or the invention is completely useless to the employer.
It should be noted in this regard that the employer cannot avoid making the choice between unrestricted claiming, limited claiming, and factual or explicit release by stating to the employee that it does not consider the invention patentable. In such a case, the employer runs the risk of release, as previously discussed.
5. Obligations of Employer after Acquisition of Ownership
5.1. Protection of Invention
After acquiring full ownership of an employee's invention, the employer has a duty to immediately file a patent or utility model application in Germany. According to recent case law, such an application in Germany may be replaced by a European patent ap plication designating Germany or by a Patent Cooperation Treaty (PCT) application designating Germany either directly or via the European Patent Convention (EPC). The employer is obliged to inform the inventor of any details of such application and to ke ep the inventor informed of their status.
Well before the end of the priority year, according to the Paris Convention, the employer is obliged to inform the inventor in which countries the employer wishes to file foreign applications. This gives the inventor the opportunity to file, at the inve ntor's own cost and in the inventor's own name, foreign applications within the priority term. In such cases, the employer is entitled, while simultaneously giving the respective information to the employee, to retain a right to non-exclusively use the i nvention in such foreign countries where the inventor may file a patent application in his or her own name. Only in instances where the inventor can prove that the non-exclusive right of use retained by his or her employer would be an undue burden and pr event the inventor from satisfactorily using the invention in the respective foreign country (e.g. by licensing) can the employee force the employer to renounce the retained right.
Before abandoning any domestic or foreign application or patent for the invention, the employer must give the inventor the possibility of taking over the application and/or patent, by assignment, for further prosecution in the inventor's own name. In su ch cases, the employer may retain a right of non-exclusive use, with similar provisions, to those discussed in relation to foreign applications, except where the retained right of non-exclusive use of the employer is considered an undue burden on the empl oyee.
In cases where the employer does not wish to file a patent application for an invention unrestrictedly claimed, the employer may, at its sole discretion, the decide to keep the respective invention a company secret. The employer must notify the employee in such a case. The decision of the employer is only possible, however, if the employer declares that it does not deny the patentability of the subject matter involved at the time it notifies the inventor that the invention is considered a company secr et. The consequence of such action is that remuneration is required to be paid as if the invention had been protected by a patent.
If the employer wishes to keep the invention a company secret, but does not consider it patentable, the employer may ask the Arbitration Committee for Employees' Inventions at the German Patent Office for an opinion (discussed further in Section 6) as to whether the respective invention is patentable. In such instances, the Arbitration Committee examines the invention in a secretive manner (i.e. without publication etc.), to determine its patentability. If in such an instance, the Arbitration Committee concludes that the invention is not patentable, and the employee does not object to that opinion, the employer is entitled to keep the invention a company-secret without paying the remuneration otherwise required for patentable inventions. Consequently, depending on the rules of remuneration for non-patentable proposals within the respective company, the invention remains the property of the employer for very little or even no remuneration.
It should be duly noted that all of the above obligations the employer has after acquisition of ownership of an invention, as well as the remuneration provisions to be discussed in the following section, may be modified and even renounced by an individua l agreement between the employee and the employer made after the employer is notified of the specific invention. The binding provisions of The Law are only applicable in an "absolute" manner (i.e. they cannot be modified by agreement until the employer i s notified of the specific invention).
5.2. Remuneration for Inventions
After acquiring ownership of an invention by unrestricted claiming, in addition to protecting it or considering it in principle as protectable and handling it as a company secret, the employer has the duty to pay a specific remuneration to the employee f or the invention. As expressed in The Law, the policy reason for this is that the inventor is entitled to justified participation in the specific advantages the employer receives from the invention.
5.2.1. Methods of Determining Remuneration
Principally, The Law provides three methods for calculating remuneration.
The first method consists of the so-called license analogy, in which the inventor gets a certain percentage of a reasonable royalty, based on the net sales made by the employer, which the employer would have received from a third party under a license. This method is by far the one most used in Germany and is discussed in more detail in Section 5.2.2.
The second method is where the employee gets a certain percentage of the internal cost savings which the employer achieves by using the invention within the company. This method is commonly used when an invention is related to a certain manufacturing pr ocess which does not modify the products eventually sold by the employer, but relates to improvements inside the company.
Finally, the third method is a free estimation of the value of the invention, in which the inventor has the right to participate. Such method is used, for example, in cases of cross-licensing without real royalty income or purchase price income to the em ployer.
The first step in determining an appropriate remuneration is always to find the value of the invention, either by license analogy, based on internal advantages or savings, or by free estimation. Then a personal percentage for the respective inventor may be determined. Such percentage is the so-called "share factor," meaning that, for example, a research chemist who is actually paid to make inventions gets very little remuneration, practically nothing, while a person not being paid to invent (e.g. an or dinary worker in a chemical factory) who makes an invention, will receive nearly as much remuneration (e.g. royatly) as an independent third party providing such an invention to the employer.
5.2.2. License Analogy in Practice
The aforementioned principles shall be discussed further in relation to license analogy.
The first step in such an instance is to determine the reasonable royalty in the respective field of industry. A typical example would be found in the machine industry, where reasonable royalty rates of 4%, based on net sales, are not uncommon.
In the second step, the personal share factor of the inventor is determined. This share factor does not mean the personal percentage of ownership of an invention for a certain inventor where there are co-inventors. In such a case the considerations of this paragraph must be fully concentrated on the personal percentage of the respective inventor. Rather, what is meant is that even in the case where there is a sole inventor, in view of the fact that this inventor is an employee, he/she will not get the full remuneration a third party licensor would usually receive from the employer.
The aforementioned share factor is determined by taking into consideration three sub-factors, namely: a) the contribution of the company/employer in creating the problem to be solved by the invention; b) the contribution of the company/employer in creat ing the solution to the problem; and c) the position and duties of the employee in relation to the company/employer. According to the rules attached to The Law, these three sub-factors usually lead, in the case of a chief chemist in a research department , to a share factor of 10%, which means that the employee gets 10% of the aforementioned reasonable royalty of 4% (i.e. 0.4% of the net turnover of the employer).
The turnover achieved by the employer before applying the share-factor-reduced royalty rate is progressively devaluated in the case of high turnovers. The effect is that beyond a turnover of 3,000,000 DM, a reduction of 10 % takes place, with further re ductions increasing the effect, until beyond 100,000,000 DM turnover the royalty is reduced by 80%. In other words, the inventor for turnovers beyond 100,000,000 DM in this example, no longer receives a remuneration of 0.4%, rather only of 0.032% of the employer's turnover.
It should be noted that the turnover-based decrease takes into consideration not the annual, but the accumulated turnover achieved, beginning with the use of the invention by the employer.
It should be stressed that after notification of an invention, an individual agreement between the employer and the employee can fully renounce any remuneration to the employee. It should be noted however, that up to six months after termination of any employment agreement, the employee has the opportunity to object to any remuneration agreement he concluded earlier as being considerably unjustified. Such circumstances will be assumed by courts in instances where remuneration was renoucned when a rather considerable remuneration to the employee would have been required. Accordingly, it is recommended that agreements are made in good faith and are justified so as not to bear the risk of revision later on, when disputes between an employer and an employe e are likely to arise (e.g. after termination of the employment agreement). It should be stressed that the right of later revising any remuneration agreement is provided for in The Law and cannot be renounced by either the employee or the employer.
6. Resolution of Disputes
The Law provides a unique method for resolving disputes between an employee and an employer in the case of inventions made by employees.
Furthermore, there exists at the German Patent Office a so-called Arbitration Committee consisting of a legal judge-like member as chairman and two members with technical experience. The technical members are examiners at the Patent Office chosen for th e specific subject matter in question.
Whenever an employee and an employer, during a pending employment agreement, have a dispute in relation to claims based on The Law, they are obligated, prior to going to court, to present the claims to the Arbitration Committee. The Arbitration Committe e then makes a proposal (in most instances, concerning a justified remuneration). If the parties do not object to that proposal within one month of notification, the proposal becomes binding. Otherwise, the proposal is null and void, and the parties may go to court.
Additionally, after termination of an employment agreement, the parties may still go to the Arbitration Committee, but are not bound to do so. They may instead go to court directly.
The Arbitration Committee also plays an important role in determining whether certain inventions to be considered by the employer as company secrets are patentable, as discussed in Section 5.
7. The European Future
The provisions of The Law discussed above are unique to Germany, at least for the time being. Most European countries are however, during the harmonization of, among other provisions, social and labour law provisions in Europe, harmonizing their laws, r esulting in provisions similar to those currently found in Germany.
It is difficult to foresee the final outcome of these harmonization efforts. However, in view of the fact, that the provisions of The Law in Germany are considered valuable assets not only by trade unions, but also by the Government, it is difficult to imagine that such rules will be completely abandoned. Given the present status of discussions between various member countries of the European Union, it is expected that a middle ground will be found by Germany, relinquishing the necessity of an individ ual acquisition act by an employer to gain ownership of an invention, namely by unrestricted claiming, in which instance already by employment agreement a provision could be made that employee inventions automatically belong to the employer. Other countr ies, which do not have such provisions already (e.g. Austria), will likely accept the binding German rule of specific remuneration for inventions, following the suggestions of The Law discussed above.
 The Verordnung was named after Hermann G”ring and Albert Speer, two ministers of the German Government responsible for increasing the output by German industry of materials important for World War II.
 A utility model, as used in this paper, may be considered a kind of a patent (for small inventions).