ZTE Corporation (ZTE) began to file patent applications in 1996 and has obtained 52,000 domestic and international patent assets reserves to date, 16,000 of which have actually been patented. In this regard, ZTE has taken a leading position in the global communications industry.

Employment inventions are an important part of ZTE's IP assets, each year the company invests over 10 million yuan in innovation incentives for employees. To encourage innovation, the company has put in place a sound IP application process and a series of internal regulations, such as IP Rewards. In addition, the company has shifted from previous simple one-time rewards on the basis of patent applications to a system of more comprehensive coverage. In other words, the employee innovators, who contribute to each cycle of patent values from application, granting, transferring, and licensing, will be given incentives and rewards, thereby greatly stimulating employees’ enthusiasm in innovation and patent applications. The Employment Invention Regulation (Regulation), dedicated to mobilizing innovation initiatives of employee innovators and enterprises, has put forward a number of constructive provisions. However, some provisions of the Regulation are worth discussing from the perspective of either the innovative practices of enterprises or the legislative intent of balancing the interests between innovators and enterprises.

I. Whether technical know-how is eligible for protection as an object of employment inventions?

According to Article 4 of the Regulation, for the purpose of the Regulation, inventions refer to intellectual achievements that are accomplished within the territory of China, and are protectable as a patent right, new plant variety right, exclusive right of integrated circuit layout design, or technical know-how.

Technical know-how does not have a clear definition in various laws. Article 10 of the Anti-Unfair Competition Law of China provides that trade secrets mentioned in this Article refer to any technological or business operation information which is unknown to the public, can bring about economic benefits to the obligee, and has practical utility, about which the obligee has adopted measures to maintain its privacy. The abovementioned technical information can be equated to technical know-how. In determining whether a certain technology constitutes technical know-how, the criterion first goes to its nature of being secret, which is the essential characteristic of technical know-how. A patent, however, is just the opposite. The different attributes demand different measures in management.

The Regulation has stated detailed systems in respect to invention reporting, rewarding and remuneration. Articles 10 to 16 clearly lay down various matters, such as reports, time and contents of reporting, different reporting procedures for employment inventions and non-employment inventions, and the compulsory requirements for written opinions. Article 24 provides that where an employer decides to protect employment inventions as technical know-how, it shall pay reasonable compensation to innovators based on the contribution of such technical know-how to its economic benefits and by reference to the provisions of this Chapter on invention patents. Although Article 10 states that the employer may have, “other stipulations or agreements with the innovator,” the provision is not applicable to the special attributes of technical know-how. If the technical know-how is covered in the Regulation, it will not only bring about huge expenses and burden on the enterprises, but will also lead to frequent disputes due to operational difficulty. Firstly, the technical know-how, huge in number, is internally confidential information of the enterprise, and has large quantities of technical information and test data which don’t constitute technical solutions. Secondly, it is difficult to estimate the economic benefits of the technical know-how, making it difficult to operate and implement rewards and remuneration in practice.

It is certain that to some enterprises the technical know-how is more important than patents. For example, the technical transfer and licensing by enterprises not only relates to IP, but also relates to a more valuable technical know-how. Therefore, the innovator who has contributed to the technical know-how should be rewarded, but it is not appropriate to make it compulsory, and the enterprises may guarantee the rewards by establishing internal rules and regulations.

II. Whether the reporting system is applicable in internal management of enterprises?

Article 10 of the Regulation provides that unless otherwise stipulated by the employer or agreed with the employer, an innovator who has completed an invention related to the employer’s business shall report such invention to the employer within two months after the invention is completed. Articles 10 to 16 detail the invention reporting system, including reports, time and contents of reporting, different procedures for employment inventions and non-employment inventions and the rigid requirements for written opinions.

The authors hold that management of employment inventions and technical know-how has been part of the internal management of each enterprise in line with its objective circumstances and accumulative experiences, thus it is unsuitable for a uniform and mandatory application.

Firstly, a large enterprise can have several thousand patent applications each year regardless of the large quantities of incalculable technical know-how. If the system of reporting and replying in writing is carried out for each invention, it will be an enormous burden for the management of the enterprise and remain factually unworkable. If an innovator reports each invention, either employment invention or non-employment invention, to the enterprise, it will greatly increase the management workload of the enterprise. As a matter of fact, it is not necessary for an employment invention to be reported separately, the innovator is only required to submit the finished employment inventions to the employer. The innovator is only required to report an invention to the employer when the innovator deems the invention to be a non-employment invention, a similar approach has been adopted by Article 8 of Taiwan Patent Act. In addition, “the employer shall give a written reply within two months after receiving the report.” The two-month period is too short for an enterprise, particularly those like ZTE with a large number of patent applications. It is also unreasonable to require a written reply in the current electronic office working environment, and thus the electronic ways of communication should be allowed.

Secondly, Chapter 3 of the Regulation sets forth some time limits, for example, where the employer fails to give a reply within the aforementioned time limit, it shall be deemed to have agreed to the claim of the innovator. It is difficult for the enterprise to satisfy all of the requirements, which will lead to tremendous time and manpower costs to fulfill the actual operation. In addition, the time limit for the reporting in Article 10 is also unreasonable. After completing an invention, the innovator shall promptly report the same within a reasonable time to the employer, because a delay in reporting may cause loss of novelty of the invention, which is not conducive to the application and timely implementation of the patent. Therefore, if the reporting period is cut short, it will have a positive effect on the innovator and the employer regardless of whether the patent application will be filed.

Thirdly, Article 15 of the Regulation provides that where an employer proposes to terminate the application procedures for the IP right for an employment invention or waives the IP right thereof, the employer shall inform the inventor one month in advance. The innovator may, in consultation with the employer, obtain the right to apply or the IP right for the said employment invention, and the employer shall actively assist in the right transfer procedures. After the innovator gratuitously obtains relevant rights in accordance with the provisions of the previous paragraph, the employer shall have the right to implement the said employment invention or its IP right free of charge. The employer, as the patent applicant or the patentee of the employment invention, has full right to dispose of its patent rights or patent application rights and will fully consider all matters as to whether to terminate or waive its IP rights. If the employer is required to notify the innovator one month in advance and consult the innovator, it will cause unnecessary expenses and efforts.

In fact, ZTE has put in place a sound internal procedure and system in respect of IP applications and maintenance, which goes in line with its operational reality and is a result of years of practice.

III. Whether compulsory provisions of rewards and remuneration for the innovators are reasonable?

Article 10 of the Regulation provides that where an employer has obtained the IP right for an employment invention, it shall give rewards to the innovator in a timely manner. Where the employer transfers, or licenses others to implement or independently implements the employment invention whose IP right has been obtained, it shall duly give reasonable remuneration to the innovator based on the economic benefits achieved by the said invention and the innovator’s contributions. Articles 17 to 27 have provisions over rewards, remuneration and compensation, and conditions, standards, ways of payment and terms thereof.

The employer may grant the innovator a reasonable amount of remuneration based on the economic benefits achieved by the said invention and the innovator’s contributions. However, it is rather complex and difficult to evaluate the aforesaid factors in practice, and it is not conducive to factual implementation either. It will make implementation rather difficult in practice if specific proportions and amounts are set, it will also lead to quite a number of controversies and disputes over methods and procedures of calculation and amount. As a result, the employer will find it hard to carry on with employment inventions, ultimately seriously dampening the employer’s enthusiasm in patent applications and protection.

For a company with a large number of patent applications, it will impose a heavy burden on costs and expenses if it is obliged to listen to the employee innovators in respect of each patent application, and it will be unfavorable for a uniform standard. Therefore, if the employer has established specific rules and regulations, the employer will only be required to listen to the innovator in the drafting of the rules and regulations instead of having to listen for each specific case. In case of special circumstances, an agreement may be reached between the employer and the innovator.

In practice, it is unfeasible for, “the employer to notify the innovator of gains of its IP rights,” and the practice may affect the normal production and business operations of the employer.

Firstly, as for special industries like computing, information technology and electronic communications, each product may use many patents, making it difficult to assess the economic value of each patent; therefore, it is unrealistic to calculate the economic benefits for each patent obtained.

Secondly, the information regarding the employer transferring and licensing patents is a trade secret; therefore, this provision may result in the abuse of information by the innovator, which will be detrimental to the normal business operations of the employer. In this regard, the employer and the innovator may reach an agreement to guarantee the innovator’s right to access the information and ensure the normal business operations of the employer.

Finally, it is impossible for the employer to notify the innovator of the economic benefits of each patent which the employer has implemented, transferred and licensed at its discretion. Some of the enterprises are listed, and the advance disclosure of the aforesaid information may result in regulatory violations.

IV. Whether the provision over the principle of priority is reasonable?

Article 18 (2) of the Regulation provides that any agreement or provision that cancels the rights innovators may enjoy in accordance to the Regulation or that imposes unreasonable conditions on the innovators’ entitlement to or exercise of the aforesaid rights shall be invalid.

Firstly, both the Regulation and the Implementing Rules for China Patent Law have provided the principle of priority, which is in line with the actual management and operation of enterprises.

Secondly, “unreasonable conditions” in this paragraph are not clearly stated. As a result of the ambiguous conditions, enterprises will find it difficult to understand and implement, which may easily lead to disputes.

In summary, ZTE, an enterprise with independent innovation capabilities, expects the Regulation to balance the interests of the employer and the employee innovator during the final review, in a bid to better promote innovation. In the meantime, ZTE will also follow the spirit of the Regulation to protect innovation, continue to protect the rights and interests of employee innovators, and make every effort to enhance independent innovation capabilities.

(Translated by Wang Hongjun)