Labor and Employment Practice GroupVol. 9March 2017

Labor & Employment Law Newsletter
Amendment makes it easier for companies to own patents
INTRODUCTION
Former Nichia employee Shuji Nakamura made headlines in 2004
when the Tokyo district court ordered Nichia to pay Nakamura arecord 20 billion yen for his blue LED invention. A key question inthat case was whether Nakamura had assigned his patent rights
to Nichia. Even though Nakamura lost on this issue, the court
nevertheless found that he was entitled to fair compensation forhis breakthrough invention, which the court reasoned was half ofNichia’s profits from the blue LED.
An amendment to the Japanese Patent Act, which took effect on
April 1, 2016, seeks to minimize these kinds of disputes in two
main ways. First, it clarifies who owns the patent rights to inventions - companies or their employers - by allowing a company todirectly own those rights through implementing appropriatecompany rules. Prior to the amendment, the employee first
owned the invention, and then transferred it to the company.
Second, the amendment, read in conjunction with its explanatory
guidelines, provides guidance on how to determine fair compensation to employees.
BACKGROUND AND IMPACT
Prior to the amendment, the employee rather than the company
was legally considered the owner of the invention. In this environment, companies risked having their employees surreptitiously license inventions to third parties. This was true evenwhen the company and the employee had agreed in advancethat the patent would automatically transfer to the company(technically, the right to patent the invention, not the patent itself).
This uncertainty sometimes resulted in acrimonious and expensive disputes.
In addition to addressing these problems, the amendment allows
companies to better implement a so-called “open-closed strategy”, where some inventions are public and patented (open) whileothers remain undisclosed and unpatented (closed). On the flipside, having companies own the patent by default could stymie
employee motivation and innovation, or make it significantly
harder to attract or retain top talent. Nakamura himself was “vehemently oppose[d]” to the amendment because he feared anengineering brain drain out of Japan.

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Labor & Employment Law NewsletterVol. 9March 2017

THE AMENDMENT IN DETAIL
Prior to the amendment, companies needed toobtain patent rights over their employees’ inventions by having those rights transferred from theiremployees. Companies had to take this step because they were not allowed to directly own thepatent. Under the amendment, companies can
now directly own the patent to their employees’
inventions if they provide for such direct ownership in their company rules. Despite the change,most companies would do well to adopt a comprehensive process that makes it clear both thatthe company owns the patent, and that employees
will receive fair compensation for their inventions.
On the issue of fair compensation, the amended
Act and the clarifying guidelines strongly suggestthat the integrity of the process itself is key (forsimplicity’s sake, the amendment and the guidelines will be collectively referred to simply as the“amended Act” or the “amendment”).

Despite the change, most companies
would do well to adopt a comprehensive process that makes it clear
both that the company owns thepatent, and that employees will receive fair compensation for their inventions.
Ownership is a fairly clear-cut issue, which means
this requirement is not hard to satisfy. As noted
above, the amendment allows companies to own
the patent by default by providing appropriate internal rules and policies that clearly establish direct ownership of the patent.
The more difficult question is what constitutes faircompensation. The answer would be simpler if itwere limited solely to the amount of compensation. As noted above, however, the amendment
focuses heavily on the process that will be used todetermine fair compensation. Under the amendment, therefore, companies are required to comeup with a comprehensive approach to determine
an appropriate level of compensation. In otherwords, in most cases “fair compensation” mustbe fair both in terms of the bottom-line amountand the fairness of the process.
OVERVIEW OF THE REQUIRED PROCESSPrior to the amendment, employees were essentially entitled to monetary compensation for their 2inventions. Under the amendment, however, employers enjoy considerably more flexibility to offer
their employees not just cash, but also such benefits as stock options, opportunities to study abroad,and even certain rights to use the patent.
The required process to determine “fair compensation” includes, of course, appropriate provisions
in the company’s internal rules and policies. However, the amended Act also lists the following
factors to determine whether or not compensationis fair: (a) the opportunity for employers and theiremployees to discuss how the required company
rules will be determined; (b) sufficient disclosure
so that employees are fully aware of that process
after it’s been set; and (c) whether, and if so, towhat extent the company will allow its employees
to have input into the actual compensation they
will receive. These factors are examined in moredetail below.
ESTABLISHING THE COMPANY’S OWNERSHIP
OF THE PATENTAs discussed above, obtaining ownership of thepatent is fairly straightforward. Determining faircompensation is more complicated.
SETTING “FAIR” COMPENSATION
Unlike ownership, the issue of fair compensation
is more involved. From setting the general, company-wide standards for determining fair compensation to actually deciding the actual compensation for individual inventions, companies
would do well to follow the following steps in order to comply with the fair compensation requirements set forth in the amended Act.
A company can either come up with standards todetermine a fair level of compensation prior toanything being invented, or it can do so each time
an invention is made. Particularly in the former
case, the company needs to do the following:• Adequate discussion – When setting compensation standards for employees, the company
only needs to give employees the opportunity toprovide their input. For instance, the company
could e-mail its employees a draft of its proposal
detailing how it plans to determine the compensation for employee inventions. The company
need not contact each employee individually if

Labor & Employment Law Newsletter© Kojima Law Offices 2017

Labor & Employment Law NewsletterVol. 9the employees have an appropriate representative, such as a union representative or, in somecases, a representative from individual departments. In companies where only R&D employees
will ever be potential inventors, a representativefrom the R&D department can serve as an appropriate liaison between the R&D employees
and the company. In short, companies need togive their employees the chance to engage indiscussions with management, submit their input,
and have their questions answered. If the company follows these steps, it will then be in a position to determine “fair compensation”. If an employee tries to challenge that compensation incourt, the company will find it much easier toconvince the court that the compensation is valid.

Companies need to give their employees the chance to engage in discussions with management, submit
their input, and have their questions
answered.
• Adequate disclosure – Once the company sets
the criteria for determining fair compensation, it
then needs to make its determination available toall target employees in either electronic or hard
copy form. As with the issue of adequate discussion above, this requirement is satisfied as longas employees have the opportunity to easily access the information.

March 2017

• Opportunity to be heard – When it actuallycomes time to pay an employee fair compensation
for an invention, the company should give thatemployee the opportunity to be heard. The company may come up with a compensation proposal
and allow the employee to review and commenton it. Or the company can solicit input from employees prior to determining the compensation. It’s
important to note here that the opportunity to be“heard” does not necessarily mean the parties
need to reach an agreement. In many cases, it
may be enough that the employee has a chance toprovide their input, and that the company thoroughly explains how it made its determination.
Employers should note that all of the steps should
be properly established in order for the compensation to be considered “fair”. In some cases, adeficiency in even one of the steps could taint theentire process. For example, a failure to properly
give an employee the chance to be heard could
result in the compensation itself being consideredinadequate, even if the amount of the compensation was not especially low. With that said, however, an unusually generous amount of compensation may itself be enough to overcome a defective process. If, under the worst-case scenario, acourt finds that a company provided insufficientcompensation to one of its employees, the court
will not deprive the company of ownership. Instead, the court will order the company to pay theemployee what the court determines to be a fairlevel of compensation for the particular invention.

The contents of this publication, current at the date of publication, are for reference purposes only. They do not constitutelegal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always besought separately before taking any action based on this publication.

Labor and Employment Practice GroupPartnerCounsel/Associates

Hiromasa Ogawa

Hitomi Sakai
Norio Mitsuuchi
Nozomi Watanabe

Darcy H. Kishida *Toshihiko Nunokawa
Tatsuro Terada* Mr. Kishida is licensed to practice law in Hawaii, New York andWashington, D.C. and is admitted in Japan as a Registered ForeignLawyer (gaikokuho jimu bengoshi). He provided editorial assistance forthis newsletter.

 3Labor & Employment Law Newsletter© Kojima Law Offices 2017