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Japan is not known for being a litigious country like the United States. It is a society that values harmony over conflict. As a result, there are far fewer lawsuits and litigators in Japan. But recent developments are challenging the notion that the Japanese are always a nation of reluctant litigants. One such challenge is the rise in lawsuits involving a Japanese patent law on compensation for employees’ inventions, commonly known as Article 35. Under this statute, employee-inventors are entitled to “reasonable remuneration” from their employers for the transfer of patent rights, either by assignment or exclusive license. Until recently, little attention was given to Article 35: Inventors in Japan simply accepted modest fixed or variable payments on terms set unilaterally by their employers, or received nothing at all. But over the past several years, former employees have commenced a number of Article 35 suits, challenging the amount of compensation they received. In several cases, the courts have rendered what some have characterized as shocking decisions, ordering companies to pay unprecedented sums�including, in the case of Nakamura v. Nichia Corp.in January 2004, an award of approximately $180 million to an inventor of the blue-light-emitting diode (LED). Given these large awards, not only Japanese companies should be concerned with the potential sting of Article 35, but also U.S. companies employing inventors in Japan. PROFITABLE ADDITION Article 35(3) requires payment of reasonable remuneration for the assignment or exclusive license of an employee-inventor’s patent rights. Article 35(4), as previously written, stated that the factors to be considered in determining such remuneration are the “profits” the employer will make using the invention and the “employer’s contribution” to the development of the invention. One problem with a profit-based remuneration approach is the difficulty in determining in advance the future success of an invention. Another is the difficulty in assessing other factors that influence profit, such as marketing and branding. In response to widespread criticism, the Japanese government revised Article 35, effective April 1, 2005, to clarify the factors used in determining reasonable remuneration. First, revised Article 35(4) now provides that payment of remuneration shall not be considered “unreasonable” if “consultations” have taken place between employer and employee to set “standards” for determining a reasonable remuneration and that employee “opinions” have been considered. Second, a new Article 35(5) provides that if the procedures described in revised Article 35(4) have not been met, or if the amount of remuneration is considered unreasonable, then the amount “shall be determined in light of the profit to be received by the employer from the invention, the burden borne and the contribution made by the employer and the benefit received by the employee, in relation to the invention and any other factors.” Thus, while new Article 35(5) still takes profits into account, it also considers such additional factors as the costs incurred by the employer and other indirect benefits to the employee, including pay raises and promotions. While the revisions are effective as of April 1, they are not retroactive. The pre-revision Article 35 will continue to apply to any patent right transferred up until March 31, 2005. BIG MONEY Although a reasonable-remuneration law has actually been on the books in Japan since 1921, there was little litigation until recently. The watershed event was the Supreme Court of Japan’s April 2003 decision in Tanaka v. Olympus Optical Co., which held that the courts are the appropriate forum to review the adequacy of employee-inventor remuneration and to award reasonable remuneration if necessary. In Olympus, the Supreme Court held that the courts can set reasonable remuneration if the amount that has been paid is not sufficient, taking into account the overall economic interests derived from a patented invention. The Supreme Court granted the lower courts broad discretion in determining what amounts are reasonable. Olympuswas followed in 2004 by several decisions granting awards substantially greater than the amounts originally paid, including decisions against Hitachi, Nichia, and Ajinomoto. And in August 2004, in one of the first suits brought against a U.S.-based company under Article 35, a former employee sued the Japanese subsidiary of the pharmaceutical giant Pfizer, claiming nearly $10 million as reasonable remuneration for his contributions to an invention relating to the control of dosage amounts. Other Article 35 lawsuits are pending against Canon, Toshiba, and Mitsubishi Electric. In a case receiving media attention around the globe, the Tokyo District Court in January 2004 ordered the Nichia Corp. to pay about $180 million to a former employee for his work on the blue LED invention. In January 2005, the Tokyo High Court recommended that the parties settle their dispute for an amount falling within the range of 500 million to 1.5 billion yen (about $4.8 to $14.4 million at the current exchange rate), significantly less than the lower court award. The parties reportedly reached settlement for about 600 million yen. The Tokyo High Court also in January 2004 ordered Hitachi to pay about $1.5 million to a former employee for his contributions to a patented device relating to reading disks. The case of Yonezawa v. Hitachi Ltd.is particularly significant because the court considered profits relating to non-Japanese patents in determining reasonable remuneration. About a month later, the Tokyo District Court in Naruse v. Ajinomoto Co.awarded a former employee-inventor of Ajinomoto about $1.7 million for his contributions to a production method for making the artificial sweetener aspartame. Then in April 2004, in Iwata v. Hitachi Metals Ltd., the Tokyo High Court rendered its second Article 35 decision of 2004, increasing an amount awarded by the lower court to $112,000. The growing consensus among Article 35 experts in Japan is that the courts are moving toward a range of 100 million to 200 million yen (about $960,000 to $1.9 million) as reasonable remuneration for a significant invention transferred to a large corporation. In the Ajinomotoand Hitachicases, the courts set the amount of reasonable remuneration at 190 million and 160 million yen, respectively, although the amount of profit generated from the Ajinomoto patent was determined to be almost seven times greater than the profit from the Hitachi patent. As more cases are decided in 2005, it remains to be seen whether this range becomes a de facto standard. ORDER RESTORED? Revised Article 35 is viewed as a partial solution at least to some of the problems presented by these cases. The revisions add procedural fairness as a factor to consider in determining whether an amount is unreasonable. In addition, they give greater weight to employer contributions, thus offering the courts a statutory framework in which to reduce awards. On the other hand, for many employers, revised Article 35 does not go far enough. On the issue of procedural fairness, for example, the revisions fail to create a presumption of reasonableness, instead leaving it to the courts to decide how much weight should be given to procedural fairness. The revisions also fail to define an upper limit for Article 35 awards. But most importantly, the profit-based method for determining reasonable remuneration remains generally unchanged, and courts, whose past decisions can be viewed as favoring inventors, retain the final say on Article 35 disputes. It is clear that companies that had hoped that the threat posed by Article 35 would go away will not be satisfied with the revisions. But despite the continued ambiguities and shortcomings, the emphasis on procedural fairness is a positive step toward making Article 35 manageable. Depending on the weight given by the courts to procedural fairness, revised Article 35 may provide greater predictability and fewer lawsuits. In response to the recent court decisions and the Article 35 revisions, many Japanese companies are tying remuneration more closely to income derived from patents and removing upper limits on remuneration for significant inventions. While most Japanese companies do not share information regarding these matters, Sankyo and Shin-Nippon Seitesu have announced that they have removed upper remuneration limits. And a midsize Japanese chemical company has announced a new system that pays 0.1 to 0.3 percent per year of either operating profit or licensing income to inventors of patents that contribute significantly toward such profit or income. In sum, Japanese companies are trying to minimize risks by adopting procedures that more strictly follow the spirit of Article 35. THE AMERICAN RESPONSE The increased emphasis on procedural fairness under Article 35 brings some good news for U.S. companies, which may lack administrative mechanisms or resources to monitor operating profits or licensing income solely for the purposes of paying remuneration. U.S. companies employing inventors in Japan should consider reviewing their remuneration procedures, or implementing procedures if they do not exist. As a first step, U.S. companies should examine the “Case Studies of the Procedures Under the New Employee Invention System,” published by the Japan Patent Office in August (draft) and November 2004. Through examples, the “Case Studies” indicate preferred ways of setting standards for determining remuneration, disclosing the standards, and soliciting the employee’s views in calculating reasonable remuneration. Based on the “Case Studies,” U.S. companies should consider taking the following steps: • Work closely with employees to agree upon a remuneration standard. • Make the final remuneration standard available to employees. • Give an employee-inventor an opportunity to speak when determining remuneration for a particular invention. • Preserve documents showing the steps taken to ensure that the overall process was reasonable in the event of a later dispute. For each of the four steps, the “Case Studies” provide additional details, specific examples, and various alternatives. POSSIBLE FUTURES If the number of Article 35 cases continues to rise and the courts continue to grant large awards, further revisions to Article 35 may be in order. Some commentators in Japan believe that the April 1 revisions are simply the beginning. Possible options include abolishing a statutory right to remuneration (which is unlikely) and defining more specifically what is meant by “reasonable remuneration.” Many U.S. companies are likely to favor a U.S.-type system, which provides no statutory obligation for private companies to compensate employees for their work-related inventions. At their own discretion, U.S. companies often pay a small sum for inventive activity, but mostly to encourage employees to disclose such inventions. Such awards are nominal and unrelated to company profit. Some companies may also pay inventors additional compensation based on a number of factors, the most important being the commercial value of the invention. But under the U.S. system, companies face no monetary obligations for employee inventions. It is interesting to note that in the past, a statutory system for compensating private employees’ inventive activity in the United States was considered and rejected. More than 30 years ago, after congressional hearings and debate, the Senate Judiciary Committee decided that mandated employee-inventor compensation in private industry was not desired. Such a system was opposed on various grounds, including the fear that it would create an overly competitive atmosphere within corporate research departments, resulting in researchers keeping their results a secret. It was also believed that a compensation system based on the actual financial value of an invention would be simply too complicated to administer. The Japanese may find it useful as well to examine how Germany requires employee-inventor remuneration. While the German rules are considered inflexible and bear high administrative burdens, the German system has managed to avoid big-money awards like those being issued in Japan. Companies in Germany can rely on detailed guidelines, on decisions by both an arbitration board and the courts, and on various treatises for advice in managing risks associated with their remuneration obligations. (The German statute includes a detailed arbitration clause, requiring certain disputes to be brought before an arbitration board established under the German Patent Office.) Risks are further reduced in Germany by the relatively short statute-of-limitation period applicable to remuneration disputes�three years. In contrast, the statute-of-limitation period for Japan’s Article 35 is 10 years. Given the similarities that already exist between German and Japanese laws on employee-inventor remuneration, a German-type system might be workable in Japan. THE ROAD AHEAD Japan and Germany are not unique in granting employee-inventors a statutory right to compensation. Many other European countries�including France and Great Britain�give employees such statutory rights. Many other Asian countries�including South Korea and China�also grant employees a right to remuneration. In some countries, the statutory right remains essentially dormant (as it did in Japan for many years), and employers and employees are largely unaware of it. As the news of the big awards in Japan reaches those employees, however, there is a good possibility that Article 35-like controversies will spread. Therefore, U.S. companies need to address potential risks not only in Japan, but also in other countries. Over the next year, we can expect continued development in the law concerning Article 35. The question is: Will the Japanese judiciary continue its expansive reading of the law? Or will it help define new limits? The judiciary’s proactive involvement in the recent Nichia settlement suggests that it may assist in cutting back on huge awards. But the burden remains on the Japanese courts to place reasonable restraints on a law that many believe has acquired an unreasonable and unclear application. John T. Johnson ( [email protected]) is a partner in the New York office of Fish & Richardson and co-chair of the American Intellectual Property Law Association’s IP Practice in Japan Committee. Naomi Abe Voegtli is a director at Pacific-Rim Asia/Global IP Group of SAP AG. This article originally appeared inNew York Law Journal , an ALM publication.

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