Lump-sum compensation and rights purchase for employee inventions

Dr. Ralph Pennekamp

Over 80,000 inventions were filed for patents or utility models in Germany in 2014. 80-90% of these are based on inventions by employees. The Employee Invention Act grants them a claim to "reasonable compensation." However, calculating this compensation is complex and generally involves significant administrative effort for companies. Reducing this effort through the creation of an efficient and simultaneously innovation-promoting compensation system is therefore an important tool for companies to increase their competitiveness.

1. The Regulations of the Employee Invention Act (ArbNErfG)

The purpose of the ArbNErfG is to achieve a fair balance between the legal principle of attributing work results to the employer and the patent law inventor principle. The employer has the choice to either utilize or release a service invention reported by their employee (§ 6 ArbNErfG). If they choose to utilize it, a series of obligations arise.

The most significant obligation is that of the employer to pay reasonable compensation (§ 9 ArbNErfG). The calculation of the amount of compensation is complex and is only marginally simplified by the compensation guidelines issued for this purpose (see § 11 ArbNErfG). The simplified formula is:
V (payable compensation) = E (invention value) x A (share factor).

The share factor is derived from the employee's position within the company and is relatively easy to determine. In practice, the greater challenge lies in determining the invention value. This value should reflect the proportionate economic value that the use of the invention has for the employer. Typically, this involves determining the revenues or other benefits (e.g., license income) generated by the protected products. The administrative effort of this utilization assessment is further increased because the compensation is generally "ongoing," i.e., calculated and paid annually.

In addition, the employer has several other obligations that increase administrative effort:
• The obligation to register the service invention for patent or utility model protection domestically (§ 13 ArbNErfG).
• The obligation to register abroad or to provide a corresponding release of the service invention for the foreign country not claimed by the employer (§ 14 ArbNErfG), as well as
• Notification and offer obligations before abandoning or not pursuing patent rights (§ 16 ArbNErfG).

2. Desire for Simplification and Legal Limits

Due to the described administrative effort, employers desire a simplified handling and compensation process for employee inventions. Many consider replacing the legal obligations and the difficult-to-determine inventor compensation with a one-time lump sum payment as ideal. This is common in many countries, such as the USA. The quick, timely conclusion of the compensation process should also benefit employee inventors, as they are compensated earlier and not only after the often years-later start of the invention's use.

However, legal limits govern the design of invention compensation systems. Agreements that deviate to the disadvantage of the employee inventor from statutory provisions are inadmissible if made before the invention is reported (§ 22 ArbNErfG). Accordingly, such arrangements cannot be agreed upon in advance, e.g., in employment contracts. Agreements after the invention has been reported are generally possible, but must not be "unreasonably unfair" (§ 23 ArbNErfG). This is the case if the amount owed under law or guidelines is reduced by more than 50%. In such cases, the employer is obliged to make a back payment up to a reasonable amount if the employee inventor asserts this claim within six months after the termination of the employment relationship. Finally, an adjustment of the compensation can also be demanded if the circumstances relevant to the determination of the compensation change significantly afterward (§ 12 para. 6 ArbNErfG).

3. Proposed Solutions

In practice, various models exist for simplified handling of employee inventions. These either involve the purchase of rights, lump-sum payments, or a combination of both.

A first, widespread model does not regulate the inventor's compensation itself but limits itself to purchasing the statutory employer obligations regarding the registration of rights domestically and abroad, as well as any notification and offer obligations (§§ 13, 14, 16 ArbNErfG). This can often significantly reduce administrative effort. It should be noted that the purchase amounts are no longer based on fixed, industry-standard figures as before. Instead, the relevant arbitration board for employee inventions considers whether the purchase amounts are appropriate on a case-by-case basis (§ 23 ArbNErfG, decision of July 18, 2012, ArbErf 030/10).

Other models involve the payment of one-time or staggered lump-sum payments, which are completely detached from the invention's value. While these models avoid complicated calculations for inventor compensation, they carry the risk that the lump sums paid may be considered "unreasonably unfair" by the employee inventor (§ 23 ArbNErfG). The costs incurred in such cases for fulfilling any information and accounting claims of the employee and possible (arbitration) legal disputes can quickly outweigh the benefits of lump-sum payments.

To reduce these risks, preferred models provide for one-time or staggered lump-sum payments based on the invention's specific value. This can be achieved, for example, by using estimates of projected revenue and the expected useful life of the invention. To increase the effectiveness of such regulations, it can and should be agreed that the lump-sum payment is not final but will be reviewed internally at certain intervals for appropriateness. A combination with the rights purchase models described above is also possible to further simplify handling.

The choice among different models always requires balancing the desire for maximum simplicity against the need for legal certainty. Generally, the more a compensation system deviates from the statutory compensation guidelines of the ArbNErfG, the greater the risk that a compensation agreement could be deemed unreasonable and thus challengeable.

4. Outlook and Recommendations

The reduction of administrative effort is a goal of modern inventor compensation or incentive systems. Another equally important goal should be to promote the innovative potential of employees through targeted incentives, thereby increasing the company's overall innovation capacity. In addition to creating efficient and easy-to-handle regulations, a compensation model should, if possible, be designed so that timely, appropriately staged payments serve as immediate rewards for the employee inventor, acting as an incentive and motivation for further innovations.

Dr. Ralph Pennekamp is a Senior Associate at the international law firm Bird & Bird in Düsseldorf.
He specializes in patent law and industrial property rights.