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Friday, 10 August 2012

Employee Compensation Incentives for Patents (Only): Does It Make Sense?

This Kat had occasion this week to revisit the issue of employee compensation for inventions. There may no subject in IP that has yielded as many different national schemes—statutory, judicial, or other—as has this topic. Indeed, for those readers of IPKat who are not aware, Blogmeister Jeremy Phillips devoted his Ph.D. studies back in the 1970s to this topic. As with so many other IP subjects that have garnered his attention, his research was very much a pioneering effort in the field.

To be clear--the issue is not who owns the invention—the employer or employee—but rather, irrespective of how the matter of initial ownership is resolved, the separate and distinct question of the extent to which the employee is entitled to additional compensation for his invention beyond his regular salary or the like. Should there be a statutory scheme governing the issue? If so, under what conditions should the employee be entitled to compensation for his employee-related inventions in addition to his regular compensation? On what basis should the compensation be calculated? As noted, there is no single answer to these and related questions and I graciously defer to Jeremy to provide learned guidance about them.

In fact, the precise question that occupied me in this regard was not about employee compensation for patents, but a query of more general concern—why is there no parallel treatment regarding copyright and even trade marks? To the best of this Kat’s understanding, there are no statutes or judgments that have recognized a right of the creator of a work, created in the employer-employee relationship, to claim additional compensation for his work. Nor I am aware of any legal arrangement that entitles the employee who comes up with a world-beating slogan or tag line to claim compensation for his successful creative efforts.

One can simply respond that the question itself is preposterous. In this context, patents are fundamentally different from copyrights and even more so from trade marks. Patents are a patrician right and should be treated as such. The grant of a patent is an infrequent and expensive activity, whose potential value to the company, either through direct use, licensing, litigation or sale to the a third party, can be enormous. “Real men (and women) do patents.”

By contrast, copyright is the most plebian of IP rights. In today’s service-based economy, large numbers of employees are creating multiple copyright works every day. The value of any single work protected by copyright is generally low and well-nigh impossible to measure. As for the clever employee who came up with that unforgetable slogan, true, we can pinpoint the discrete slogan at issue, but the brand value of the slogan derives from the connection between that slogan and the goods or services of the company, not because of the intrinsic value of the slogan itself. No matter how creative a company’s in-house brand-creating “Mad Men” might be, talk of additional compensation in such circumstances is simply folly.

At a first glance, policy considerations would not seem to be to the contrary. The argument is that patents do the heavy lifting of innovation. To the extent that innovation becomes a matter of national concern (and indeed, where is this not the case?), it is in the national interest to take reasonable steps to optimize the use of employee incentives to invent. Creative works and catchy slogans do not rise to the level of being a material driver of innovation. As such, there is no interest in possibly imposing upon employers arrangements for providing incentives via additional compensation to the creative employee. No compelling national interest is present.

And yet—is all the foregoing necessarily true? This Kat would like to offer several reasons why the answer may not be categorically “yes”.
1. The argument can be made that the patent compensation system for employees is an artifact of the historical time in which these arrangements arose, namely the apex of the industrial age. The relevant legal framework was therefore developed within the context of a certain period, where patents were the undisputed IP king. Creative works were of no or little commercial significance.

2. However, this is not the case today, where creative works also contribute materially to innovation. At the most graphic level, our world is an increasingly digital one, and digital rights are protected first and foremost by copyright. Discriminating against creative works in favour of patents with respect to possible additional employee compensation might distort incentives for innovation and thereby work against the national innovation interest.

3. Inventions are ever more the result of collaborative efforts. Where the number of inventors increases, the underlying romantic notion of inventorship — the solitary inventor — becomes an anachronism. With this change, the ultimate justification for additional employee compensation becomes less compelling.

4. But there is a push-back here. Even if one accepts these claims, the practical problem still remains. Employee Mr Smith, and his contribution to the stock of patented inventions owned by the company, can be readily identified. The same cannot be generally said with respect to creative works, where teams collectively create the ultimate final work. It is one thing to have a single digit number of inventors contributing to an invention, but it is quite another to identify everyone who created the software code.
And so, permit this Kat to make a heretical suggestion. Perhaps all statutory and judicial attempts to impose an employee compensation system, whatever the IP right, should be abrogated. This does not preclude employers from reaching private arrangements with their employees; indeed, such contractual agreement might be critical in maintaining talented employees. In so doing, however, incentives are brought down to the private, consensual level, rather than being imposed on high.

More on Mad Men here

7 comments:

MaxDrei said...

Germany has had its ArbeitnehmerErfinderGesetz since at least the 1950's. The jurisprudence in Germany, on how much compensation an employee inventor should get will fill a library. Japan copied Germany. There is in those two countries today a worship of technological innovation. Which is the cause and which the effect; the law or the worship? Or is it just coincidence?

But how good are DE and JP today at innovation in areas of soft IP, to which the ArbErfGez does not apply? Should we ask SAP, for example?

Come to think of it, there's another area entirely, where Germany isn't getting as many medals as it used to. Why that? Can't be down to lack of encouragement and support from the athletes' employers, the German manufacturers of sports goods, can it? Perhaps it's because there isn't so much help from the State any more. Contrast South Korea.

John H said...

Maybe the answer is to abolish the patent compensation provisions but instead make access to the "Patent Box" dependent on having an adequate system of employee compensation instead. That would allow flexibility for employers to structure their compensation schemes to suit their business (subject to certain "qualifying requirements"), and would be a reasonable quid pro quo: "You want the tax breaks under the Patent Box? Well, in return you need to make sure your employees are getting fair recompense."

If the Patent Box were then extended to other rights (such as copyright in software, as has been proposed in some quarters) then the same condition could be applied.

Meldrew said...

The real problem with employee inventor compensation is the belief that the inventor has produced a fully formed money-machine that requires additional compensation beyond their salary: whereas in reality the inventor normally produces the opportunity for his employer to spend lots of money to no certain benefit.

Picking out those few inventions that make money and rewarding only the inventor, does not factor in the contribution from engineers who may have turned the inventor's cuckoo idea into workable product or the marketing people who have persuaded the consumer it is a product they want. A market success is rarely the result of one person's work.

What about proper two-way compensation?

If the employee's invention causes the employer to spend millions in developing a product only to find it is a complete failure in the market, should the inventor compensate the employer?

Similar considerations apply to droit de suite claims. If an artwork loses money on resale, should the vendor be entitled to recover the loss from the artist or their heirs? [A real issue given the propensity of modern artists to make their works from elephant dung or similar perishables].

In essence, inventor compensation and like rights are like Rachmanism, giving the inventor/author a right to a rent but with no requirement that the property is fit for purpose, and no penalties if the property collapse.

Stop all statutory employee compensation schemes and like do-gooderies. They are pointless.

Vadim P. said...

Russian employees are entitled to receive certain additional compensation for copyrighted works (Civil Code, Article 1295.2), provided that employer starts using such works. You may find the translation of the Civil Code article at http://ippro.us/ch69-art1295.php

Neil Wilkof said...

I have to run off soon but I wanted to respond to two of the Comments above:

To Max Drei--I seem to recall that the German provisions date from around 1943, but I would be grateful if a reader could confirm or deny this.

To Vadim--very interesting. How does Russian law deal with the patent situation?

Neil Wilkof

MaxDrei said...

Neil, I have been told that the provisions were enacted during the time of the 3rd Reich, so your 1943 I suspect is correct.

Anonymous said...

It seems to me that the provisions for inventors have come about as a confluence of two factors (a) the practical nature of the subject of patents and (b) inventors are relatively easily identified. Unlike copyright and trade marks, patents (and registered designs) produce something concrete, something that can be seen and touched and felt (or whose results can be seen and touched and felt). And such "things" must inevitably have a creator or creators, who can fairly readily be identified. In contrast, copyright and trade marks do not have such a direct practical import - while it is easy to see the financial importance of trade marks (e.g., Coca-Cola, Microsoft) and copyright (Jo Rowling and Harry Potter), differences can be made.

Trade marks are symbols identifying goods and services; they are not the goods and services themselves; indeed, old British law prohibited "trafficking in trade marks". A trade mark may have a single creator, but because a mark has no value until it establishes a reputation, and that can take some time, how does one put value on that? If Pemberton's Coca-Cola had bombed back in Atlanta in the latter years of the 19th century, how much would that mark have been worth? In a vaguely similar case, Jerrys Siegel and Shuster, the creators of "Superman", initially got very little out of it, and had to fight hard for more when the comics firm established the popularity of the character.

Copyright is a prohibition on copying works of literary or artistic merit. With regard to Jo Rowling, I think she has been rather well rewarded by that particular system. The creators of "Superman" eventually got some justice. But at the other end of the scale, the hundreds or thousands of programmers who devised Windows 7? Every one who contributed a line of code is part of the creation process, and there is no demarcation as to whether that line was innovative or not. Do they all merit some special compensation as a result of a successful product? Perhaps, but that would take some identifying.

To me, it all comes down to the history (or tradition if you like) of patents and inventors and the fact that inventors are relatively easily and quickly identifiable, and there are never very many of them (although I have memories of old Soviet PCT applications where, in true socialist solidarity, everyone down to the cleaning lady was mentioned as an inventor). I know many people who wish this were not so - such as German patent attorneys in industry who have to sit down every year and calculate how much to pay inventors under the German employed inventors' law (Gesetz über Arbeitnehmererfindungen). The original law was the 1936 Göring-Speer-Verordnung - and, yes, it was those two! Should it continue? I personally don't see why not, but I agree that it would be far better if employers put in place a suitable reward system for people who provided any kind of valuable IP. But then, it's a wee bit like the patent attorney exams - instead of being prepared to take the responsibility for signing people off as fit to practise, the profession would rather dump the entire responsibility on a quiz-cum-obstacle course run against the clock and marked by unfortunate volunteers, who take all the flak if it goes wrong.

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