Patent Pending

The nine months ending in January 2004 was an astonishing period for Japanese patent lawyers. A once-quiet corner in the Japanese legal system seemed to go haywire during that time, and intellectual property lawyers and their corporate clients worldwide are still trying to figure out the ramifications.

Beginning in April 2003, Japanese courts awarded research employees thousands and then millions of dollars for discoveries that once earned them the proverbial pat on the back. Then in January 2004 came the most spectacular case of all. The Tokyo High Court ordered Nichia Corp. to pay former researcher Shuji Nakamura nearly $200 million for inventing the gallium nitride-based blue-light-emitting diode (LED).

These were "stunning and surprising" rulings, says Karl F. Jorda, a professor at the Franklin Pierce Law Center, Concord, N.H. Here was a country where, until recently, employees "wouldn't dare" challenge their employers because of the lifetime employment system and the strong sense of loyalty it bred between employee and employer.

That culture changed with the large-scale layoffs that hit Japan during its decade of economic stagnation. The court decisions forced Japanese firms to reassess their compensation policies for inventive employees. It has led many foreign firms that conduct research or register patent inventions in Japan to ask if they must reassess their employee compensation policies.

The court decisions have also spurred firms worldwide to review their treatment of inventor employees. And, lawyers say, the decisions have forced some companies to consider doing research in countries in which the law does not leave them liable to large awards to employee inventors.

About 10 years ago, Japanese lawyers and their clients discovered an obscure section in Japan's patent law known as Article 35 that requires "appropriate remuneration" to inventors for patents assigned to their employers. Enacted many decades earlier, no one paid it much attention, and Japanese researchers accepted the token awards granted them by their employers.

But in 1995, Shunpei Tanaka, the inventor of a pickup device used on video players, sued his former employer, Olympus Optical, for $7.7 million. According to Omori & Yaguchi, the law firm that represented him, Olympus had granted Tanaka only $1,740 for a patent he thought was much more valuable. The Japanese Supreme Court eventually valued his discovery at $415,000. In April 2003, the court decided that 5% of that value, or $20,000, was due to Tanaka.

After this first case, many others followed in which the inventor employee received increasingly higher court-mandated awards. A former Hitachi Metals employee received a $100,000 award; an Ajinomoto employee received $1 million for the invention of an artificial sweetener; and a former Hitachi employee received a $1.5 million award. The nearly $200 million award to blue LED inventor Nakamura was the biggest of all.

But Nichia appealed the award to Nakamura, arguing that the court's formula for compensating the inventor was excessive. At the urging of the Tokyo High Court, Nakamura grudgingly agreed to an out-of-court settlement in January 2005 that brought the award down to $8 million.

He wasn't the only one disappointed. Japanese firms wanted a court decision so that they might have some way to gauge their liability to inventive employees, says Charles E. Miller, a patent attorney at Dickstein Shapiro Morin & Oshinsky. "The outer limits of Article 35's reach have yet to be defined," Miller says.

FOR ONE THING, non-Japanese employers of inventive employees in Japan may be liable for more than token payouts to employees who make especially valuable discoveries. In addition, "an employee in the U.S. could bring suit against his employer if the employer obtains a Japanese patent based on the employee's invention," Miller says.

At least one U.S. employer is already involved in a Japanese patent suit. In July 2004, the former head of a Pfizer drug laboratory in Japan filed a $9 million suit for a patented discovery he made that allows easy division of hypertension tablets for dosage adjustment.

Revisions to Article 35 passed by the Japanese legislature last year encourage employers to negotiate with inventive employees to seek an agreeable compensation formula, points out Linda O. Smiddy, a professor at Vermont Law School, South Royalton. The law, which goes into effect on April 1, is not retroactive, however, and the negotiations won't affect ongoing disputes. Lawyers contacted by C&EN say they expect disputes under old Article 35 to go on for another 20 years.

TO ADJUST to the new Article 35, Japan's top drug company, Takeda Pharmaceutical, negotiated rules with employees that remove the ceiling for payments they can receive for significant discoveries. Previously, researchers could receive $270,000 per year for five years.

Japanese chemical firm Asahi Kasei will put a new scheme in place when the law takes effect. In an e-mail to C&EN, Yoshio Hayashi, general manager for intellectual property, writes that Asahi Kasei will adopt a system that also has "no maximum on the amount that may be awarded for employee inventions."

In addition, Hayashi writes, the firm will try to head off legal disputes with employees by setting up a "venue for observations, requests, and complaints by all employees relating to research and development." He adds that "the Asahi Group has no intention of moving its research overseas as a means of avoiding any requirements or provisions of Article 35," but will consider overseas R&D "independent of domestic considerations."

When research employees are hired in the U.S., they sign contracts assigning all their rights to inventions conceived at work to their employers. These contracts are covered under state law "and as a practical matter deprive employees of rights to their inventions," says David Schnapf, an intellectual property lawyer with the law firm of Sheppard Mullin Richter & Hampton.

Michael Walker, chief intellectual property counsel for DuPont, says, "Employees who join the company sign an employment agreement that requires them to assign to DuPont rights to inventions they make during their employment."

Successful inventors at large U.S. firms do have some leverage. They can negotiate for stock options and bonuses, points out Arthur Dresner, who practices intellectual property law at the firm Reed Smith. Inventors rarely get a percentage of sales or license fees. "U.S. corporations don't want to focus on an individual employee's work," he explains. "They want a researcher to be a team player."

Inventive employees always have the option of leaving their employer and starting their own firm. But that is a risky proposition, Dresner says. Some former employers become clients and take licenses from researchers who worked for them.

Jorda of Franklin Pierce says that when he worked at Ciba-Geigy (now Novartis), the firm's view was that inventors deserve no special compensation. Especially prolific inventors received promotions, but generally the firm believed that the salary it paid its inventive personnel was sufficient.

"I disagreed with the company's position," notes Jorda, who was Ciba's chief patent counsel in the U.S. for 26 years. "Without an inventive concept, managers would have nothing to manage, and companies would have nothing to sell." Some U.S. firms actually do make sizable awards to employees whose discoveries result in significant sales and profits, he says, but it is very unusual for firms to do so in the pharmaceutical and chemical industries.

Jorda points out that Germany and certain other European countries have laws on the books that require special awards for particularly inventive employees. Germany allows inventive employees to apply for special compensation based on the value of the invention multiplied by the portion of the invention's value attributed to the employee--usually between 10 and 25%.

Law professor Thomas G. Field Jr., also at Franklin Pierce, argues that Germany's compensation law may look like it is beneficial to inventors, "but it is really not. Why do inventors get all the rights in Germany, but they come to the U.S. to work and make money?"

The answer, Field says, is that salaries and stock options for scientists employed at U.S. corporations are higher than elsewhere. As long as state laws prohibit employers from applying restrictive noncompete clauses against former employees, U.S. inventors will continue to have leverage, Field says.

Ultimately, Field maintains, rules like Japan's Article 35 and Germany's intellectual property formula unnecessarily complicate patent issues. "How do you compensate inventors for trade secrets?" he asks. And how are others, without whom a product would never make it to market, to get their share of the profits?

Japan's Article 35 doesn't answer these questions. But it has opened up a can of worms both for Japanese and other firms that depend on intellectual property to gain a competitive edge.