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Reasonable Remuneration in the Hitachi Metals Ltd Case

Tokyo District Court / Decided May 26, 2003 / Case No. Hei 14(wa)16635
(Patent Law, Section 35, Paragraph 3)

Plaintiff brought a suit before the District Court seeking the payment by Defendant (former employer) of approx. 90 million Yen(US$820,000) as remuneration the statutory assignment of an invention to the Defendant under the Patent Law, Section 35, Paragraph 3. The Court partly supported Plaintiff's claims and ordered the Defendant to pay the amount of 11,288,000 Yen(approx $102,000) as the reasonable remuneration and the interest accruing from August 6, 2002 to the date of payment.

Defendant, Hitachi Metals Ltd. is a company engaging in the research and development, manufacture and sale of magnetic components and materials (the "Company"). The company employed Plaintiff in 1970 (the "Employee"). The Employee engaged in the research and development of magnetic materials at the Company's research laboratories. In 1992, the Employee moved to Hitachi Metal Technos, a subsidiary to the Company, and he retired from the Company in 2001.
During the time the Employee worked for the Company, he invented a method of manufacturing permanent magnet materials. On behalf of the Employee, the Company filed a patent application for the method invention made by the Employee. This application was divided into three applications and they were eventually granted patents. The parties acknowledged that these three patents were based on the invention made by the Employee (the "Subject Patents.") The Company had an internal program ruling over the treatment of inventions made by its employees in general (the "employees' inventions.") The program specifically stipulated such obligations as 1) assignment by the Employee of the employees' inventions to the Company; and 2) payment of remuneration and reward of special prizes by the Company to the inventors. Under the program, such payment took place when each assignment was completed and when significant contribution of an employee's invention to the Company was recognized.
Under the Subject Patents, the Company granted a non-exclusive license to three licensees. In return, the Company received the initial payment in the total of 115,000,000 Yen(approx. $1.04M). The Company further received a sum of 8,248,637 Yen($750,000) as running royalties.
In accordance with the provisions of the internal program, the Company paid the Employee various kinds of remuneration and reward, which totaled 1,037,000 Yen($9,430).
However, the Employee was unsatisfied with this amount. After his retirement from the Company, he claimed for the additional payment of 89,749,000 Yen($815,900) by the Company as reasonable remuneration under the Patent Law, Section 35, Paragraph 3.
Issues argued, among other things, were as follows.
1) Whether the payment done under the internal program amounted to the "reasonable remuneration" provided for in Section 35-3, and
2) What amount was the "reasonable remuneration" in this case.

1) "Reasonable Remuneration" or not
Defendant argued that the payment made in accordance with the internal program has constituted reasonable remuneration under the Patent Law, Section 35-3. However, citing the Supreme Court decision in the Olympus case, the court rejected this argument.
The employees who have assigned to their employers their rights to obtain patents on employees' inventions subject to the provision of a company's internal program, may request their companies for additional payment under the provision of Section 35-3, Patent Law, when they recognize that the payment already made was in shortage of what they ought to receive thereunder. It does not matter if there are provisions in the program setting forth the amount of remuneration to be paid by the employers to the employees.

2) Amount of Reasonable Remuneration
a) History of the Subject Patents
During the prosecution of the three applications which had based on the employee's invention in this case, the Employee did not think of Samarium (Sm) as an effective rare earth metal. Instead, the Employee included in the original application Neodymium (Nd) as a representative rare earth metal. Later, engineers within the Company recognized that Samarium was the only effective rare earth metal for the invention. Thus, based on this recognition, patent engineers of the Company amended the claims and relevant descriptions in the specification so as to include or refer to Sm. The Employee was informed of such amendment and he agreed to it.
The original (parent) application received 6 oppositions after its publication. Examiner rejected the application over cited prior art. The Company appealed and the Appeal Board overturned the Examiner's rejection. In the same fashion, two applications divided from the original application received oppositions. These oppositions were not successful.

b) Product Development
In order to maintain a magnetic force, R-Fe-N powder needs to be finely grinded. However, grinded material, when exposed to the air, quickly loses its magnetic property. Since the Company was unable to address the defect of such uncertainties, the Company once decided not to pursue the development of the R-Fe-N type magnetic material.
However, the Company's recognition of Sm as a breakthrough component caused the Company to drive for commercialization. In line with this policy change, the Company decided to take a license under a third party' patent, for which the Company paid 30,448,356 Yen($277,000) as royalties.

c) Statutory Factors
The Patent Law, Section 35 sets forth as follows.
" The employee shall have the right to a reasonable remuneration when he has enabled the right to obtain a patent or the patent right with respect to an employee's invention to pass to the employer, or has given the employer an exclusive right to such invention in accordance with the contract, service regulations or other stipulations. (Paragraph 3)
" The amount of such remuneration shall be decided by reference to the profits that the employer will make from the invention and to the amount of contribution the employer made to the making of the invention." (Paragraph 4, emphasis added)

As is clear from the Paragraph 4, there are two major factors to be considered in calculation; "Profit" and "Contribution" of the employer. With regard to the profit, the Company in this case has earned, as license revenues, the amount of \123,248,637 (approx.$1.12mil.) and this would be considered the profits under Section 35, Para. 4.
Turning to the determination of the amount of contribution, the following factors, among other things, have to be taken into account. 1) The invention largely owed the Plaintiff's concept that nitrogen (N) was impregnated in a R-Fe compound, which was novel at the time when the invention was made. 2) The patents at issue cover a pioneer invention of R-Fe-N magnet but its composition for R is Sm but not Nb as initially conceived. Recognition of Sm as an essential element was achieved by patent engineers of the Company. Taking them into account, the amount of contribution would be 90% of the entire license revenue.

d) Determination of the Amount
1) Thus, the amount that Plaintiff has the right to receive is calculated as follows.
123,248,637 Yen x (1-0.9) ? 12,325,000 Yen
2) Plaintiff has already received the payment under the company's program. This payment should be deducted from the above.
12,325,000 Yen - 1,030,000 Yen - 7,000 Yen = 11,288,000 Yen

The Court's judgment on this case is not surprising. It faithfully followed the teachings of the Olympus case. In that sense, this decision does not add any substantial value to case law. However, for practitioners, the impact of this decision cannot be ignored.
First, the Plaintiff's contribution was relatively large even if the case is seemingly not strong. The court clearly mentioned in its opinion that the Plaintiff's contribution to the company's licensing revenue was not significant. One of the key compositions in his original invention turned out to be ineffective. It was patent engineers who thought of replacing an original composition with a new one. Nevertheless, the court held that the Plaintiff was entitled to receiving a 10% of the total license revenue which Defendant received.
Second, the same court determined that a 5% contribution should be appropriate in a different case wherein the Plaintiff was an inventor to one of the hundreds of licensed patents. In addition, the validity of his patent was vulnerable in view of weakness in patentability. (Tanaka v. Olympus, See the Case Reporter, AIPPI Journal, May 2003, pp 212-216) It seems that the Olympus case has established a benchmark for the determination of contribution.
Third, and most importantly, the finding of a 10% contribution in this case would be precedent for the long awaited case of Nakamura v. Nichia Chemical, in which the inventor's contribution was reportedly far larger than other cases. Now that the revenue of Defendant is reported as being several hundred million dollars, a 10% or more finding of inventor's contribution would yield an enormous amount.
In determining reasonable remuneration under Section 35, the courts will have no choices under the Olympus case as affirmed by the Supreme Court. Lawmakers are now under preparation for the overhaul of the system of employees' invention. Two approached are considered. One is a deletion of the entire provision of Section 35, leaving the matter on the contract between the company and the employee. The other is the replacement of existing Paragraphs 3 and 4 with new ones to allow an appeal to the court only when employees' inventions were treated unreasonably.
In view of emergent needs of addressing the disputes concerning the employees' inventions, the amendment of the law on employees' inventions will take place sometime in 2004, probably, before the summer.

(By Jinzo FUJINO; Published in the AIPPI Journal, January 2004, pp 68-71)

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