1. Update on Article 35 of the Japan Patent Law Yoshi Inaba TMI Associates AIPLA Pre-Meeting, January 28, 2004 La Quinta Resort & Club

2. Recent Subcommittee Activities  October 2003 -- Patent System Subcommittee published a Draft Report on the Employee Invention System.  November 24, 2003 – Received AIPLA Comments on the Draft Report.  December 2003 -- Public comments on the Draft report were gathered.  December 2003 – Patent System Subcommittee published the finalized Report on the Employee Invention System (nearly identical to the October Draft Report).

3. Goal of the Employee Invention System  Balancing the Employer-Employee Interests  Employee (i.e., inventor)  Employer (e.g., an employer, a legal entity or a state or local public entity)  Promoting active R&D investment by Employer   rewarding Employee for inventive activity

4. Current Legal Mechanism for Balancing the Employer- Employee Interests  Grant of statutory non-exclusive license to Employer (Article 35 Section 1)  Validity of advanced transfer of patent to Employer in case of employee inventions (Article 35 Section 2)  Award of reasonable remuneration to Employee for transfer of employee invention (Article 35 Section 3)  Consideration of Employer contribution to the invention and profit related thereto (Article 35 Section 4)

5. Employee Invention Systems Worldwide Country Patent primarily vests to: Royalty-free use of patent by Employer? When employee invention is transferred: Japan Employee (inventor) Yes Reasonable remuneration required. United States InventorYes No statutory remuneration. GermanyEmployeeNo Clear guideline on reasonable remuneration provided. UK, France, Russia, Italy EmployerYes Employee may demand reasonable remuneration.

6. Major Problems with the Current Article 35  1) Unmanageable risks involved with R&D investments by Employer:  Article 35 Section 3 “reasonable remuneration” is a mandatory provision which overrides the “remuneration” prescribed by company regulations or paid by Employer. See Olympus Supreme Court decision.  The calculation of reasonable remuneration under Article 35 Section 4 is too vague.  2) Remuneration amount is unilaterally determined by Employer, and Employee often feels it is unfair.

7. Article 35 Section 1. Statutory non-exclusive license  No change proposed.  Employer directly or indirectly contributes to creation of employee invention (R&D planning, funding, facility, etc.).  Small and medium companies often do not provide for advance transfer of patent via agreement or company regulations.

8. Article 35 Section 2. Advanced transfer  No change proposed.  Advanced transfer of rights relating to employee inventions identify the ownership of invention and will enable Employer to swiftly commercialize the invention.

9. Article 35 Section 3. Reasonable remuneration  Proposed Changes:  If the determination of “remuneration” for assigning rights has not been unreasonable in consideration of the difference in the positions of Employer and Employee, the decided remuneration should be respected.  If such determination is unreasonable, Employee’s right to demand “reasonable remuneration” should be recognized.  In making the determination of unreasonableness, it is important to show deference to the independent agreement by Employer and Employee, and the steps taken in deciding the “remuneration” should be evaluated with heavy emphasis.

10. Article 35 Section 3. Reasonable remuneration  Specific Approach:  As a general rule, the “remuneration” should be that which is determined by “voluntary decision” of Employer and Employee.

11. Article 35 Section 3. Reasonable remuneration  Specific Approach (cont’d):  The determination of whether the remuneration was voluntarily decided by both parties should be determined by to what extent the will of Employee is reflected in the overall process of determination of “remuneration,” and emphasis will be placed on substantive procedure taken in the decision process.  E.g., contract, company rules, or other regulations between Employer and Employee.

12. Article 35 Section 3. Reasonable remuneration  Specific Approach:  If no “remuneration” was decided in advance, or a decision of unreasonable remuneration was made due to imbalance of power between Employer and Employee, Employee should still be allowed to demand “reasonable remuneration” as under the current system.

13. Article 35 Section 3. Reasonable remuneration  Specific Approach:  Determination of reasonableness of remuneration should be made based on:  1) reasonableness of the procedure taken to decide the “reasonable remuneration.”  e.g., If the regulation provides for a standard for determining “remuneration,” does it take into account the will of Employee? How is the standard disclosed to each Employee?  2) how the “remuneration” was decided.  e.g., Was the explanation of the decision given to Employee, and to what extent? Was Employee provided with an opportunity to object to the decision?

14. Article 35 Section 3. Reasonable remuneration  Specific Approach (cont’d):  Japan Patent Office should provide examples of unreasonable decisions of remuneration.

15. Article 35 Section 3. Reasonable remuneration  Specific Approach:  The exact method of discussions or negotiations between Employer and Employee should not be excessively regulated by law or regulations, and the decision of remuneration should be flexibly made by each Employer and Employee.  Examples:  Post-invention transfer should be allowed.  Regulation for advanced transfer and standard for calculation of remuneration may only require majority vote of the Employees.

16. Article 35 Section 3. Reasonable remuneration  Specific Approach:  Employer should preferably publicly disclose the standard for deciding the remuneration to guarantee reasonableness of the remuneration.

17. Article 35 Section 4. Calculation of reasonable remuneration  Objective:  Bases for calculation of reasonable remuneration should be clearly defined.

18. Article 35 Section 4. Calculation of reasonable remuneration  Specific Approaches:  Employer’s contributions to the patent after invention by Employee should be considered in calculating the reasonable remuneration.  E.g., patent application process, post-invention development to reduce the invention to practice, business expense in using the invention, advertising and sales activities, license negotiations, R&D activities for peripheral inventions, etc.  Employee may already be heavily compensated for his inventive activity via salary or promotions.

19. Scope of Article 35. Foreign Patents related to Employee Invention  The Article will not regulate the transfer of foreign patent rights related to employee invention, or the remuneration thereof.  The patent systems differ in each country, and legal and administrative hurdles exist.  Civil Law and other contract jurisprudence already provides a mechanism for domestically transferring patent rights in foreign countries.

20. Scope of Article 35. Shortened Statute of Limitations will not be provided  Rationale:  Civil Law Article 167 already defines statute of limitations for general claims (i.e., 10 years).  Loss of evidence over time would in any case make establishing the case difficult.  Doctrine of laches provides basis for statute of limitations.

21. Questions posed by AIPLA in the Nov. 24, 2003 letter to Patent System Subcommittee  The official answers must await future case decisions.  However, I will offer my opinions for your consideration.

22. Q. Does Article 35 apply to any company operating in Japan, e.g., a subsidiary of a foreign corporation? A. Probably yes. Assuming the invention was made in Japan, by virtue of the principle of territoriality and in view of the intent of the Labor Standards Law (to protect the rights of employees working in Japan), Article 35 should apply not only to Japanese entity employers but each and every employer located in Japan.

23. Q. Does Article 35 apply to any individual who makes an invention in Japan, e.g., a foreign national only in Japan temporarily on a consultancy?  A. Depends on whether the individual in question is deemed an “Employee” under Article 35.  No decision directly on this issue exists now.  Related opinion (re Copyright Law Article 15 Section 1):  RGB Adventure case, Supreme Court, Hei. 13 (Rec’d) No. 216.  Held that the determination of whether an individual is deemed to be “one that is engaging in the business of a corporation, etc.” is made based on whether the individual provides services under the corporation’s control and supervision, and whether the compensation paid by the corporation to the individual is a remuneration for his services rendered by looking to the mode of employment, existence of control and supervision, amount of remuneration, method of payment, etc.

24. Q. Does Article 35 apply to a Japanese national who makes an invention in Europe and patents it in Japan?  A. Probably not. Article 35 generally applies to inventions made in Japan only. (The nationality of the inventor is irrelevant to the issue of where the invention was made.)

25. Q. Does it apply to European inventor who makes an invention in Europe and patents it in Japan?  A. Probably not. Generally, inventions made outside of Japan will not be subjected to Article 35.

26. ~ The End ~  Thank you!