Post by Peter Lotz, M.C.J. (NYU) Attorney, Attorney-At-Law (N.Y.) MAYRFELD LLP

How your IP stays in the company. The German law on employee inventions: a small niche with great importance for your company.

Innovative companies exist on their IP. It is only natural that this IP is born as invention in a company’s employees’ heads. However, no, in Germany these inventions are not automatically transferred to the employer. For some it’s their bread and butter, others have heard of it and still others keep neglecting it: Contrary to the works-made-for-hire doctrine you may find in a common-law country, concerning inventions, Germany has a rather specific law providing for specific mechanisms on the corporate acquisition of an employee invention: The (German) Act On Employee Inventions. You won’t find similar laws in many other jurisdictions, so it’s worth-while a look if you are an inventor in Germany or if you run a company or subsidiary in Germany where technology is being developed.

The little graph below shows clockwise the steps from the conception of an employee invention to ownership of this invention by the employer or the release of the invention to the employee’s free disposal. The idea behind this mechanism is that an employee should receive additional compensation for inventions made in the course of his/her employment. On the other hand, the employer should have a right to acquire an employee invention or to release it, if it is not of interest for the employer’s business.

Invention Circle Trans

It all starts out with an employee invention. To identify whether or not an invention qualifies as an employee invention can get tricky. Employers are wise to set out corporate policies on the definition of an employee invention and on the process of notifying, releasing and the acquisition of an employee invention (i.e., an employee invention scheme). At this point, let’s conclude that an employee invention is an invention that an employee has made in the course of his/her employment. No, it does not necessarily need to have been made at the work place. Employees can conceive employee inventions at home. However, they need to be related to an employee’s job.

Once an employee invention has been made, the German Act on Employee Inventions obligates an employee to notify his/her employer about the invention without undue delay. If you are an employee, hold on, you do not have to notify your employer on each initial idea you may conceive while in the lab. However, once you have made that inventive step, you should think about initiating communication with your employer. If you are an employer, you may want to receive certain information on the invention made so that you can make an educated decision going forward. Again, employers are wise to provide guidance by setting up an employee invention scheme.

The tricky issue with managing employee inventions is that the process required by law is rather formalistic and sets some crucial deadlines. The first deadline starts running once an employee has reported an employee invention to his/her employer: The employer now should provide the employee with a confirmation of receipt. Otherwise, the employer will be deemed to have received an employee invention notice two months from the date of communication by the employee. The date of receipt of an employee invention notification is crucial since an employer only has four months from the date of receipt of the notification to release an employee invention. On the other hand, an employer wants to avoid running into a “deemed notification” if an employee’s communication lacks crucial information on the invention made. For purposes of an informed decision on the acceptance or release of an employee invention it is crucial for an employer, and the employer needs to ensure, to receive all relevant information related to the invention. – Just one more reason for you as employer to set up a proper employee invention scheme, so that you can determine the formal requirements (e.g., scope of information to be provided) to be met by a proper invention notification. If you are an employer, on the one hand, you do not want to run into a deemed notification by receiving unspecific information on an employee invention (in the worst case during a water cooler chitchat). As we will see below, the receipt of an employee invention triggers another time sensitive decision making process that needs to be completed in a well-considered fashion. On the other hand, as an employer, you want to ensure to receive all the information you need to make an educated decision for an acceptance or release of an employee invention.

Once the employer receives a notification on an employee invention (also in the case of a deemed notification), the employer has a four months’ deadline to either accept or release the notified invention. If you as an employer miss the four months’ deadline you will be deemed to have accepted the employee’s invention.

Why would an employer want to release an employee invention? Is it not a good thing to acquire as much IP as you can? Well, it depends: if you peek ahead a little following the circle in the graph above, you will see that as a result of the acquisition of an employee invention an employer is required to obtain patent protection. At least that would be the standard course of business. Now, if you think that an employee invention does not really fit in your patent or product portfolio, why spending money on patent protection? (There may be reasons, indeed, however, elaborating on those would certainly exceed the scope of this blog post). Therefore, if you’re an employer, once you receive a notification on an employee invention, you will stick your heads together crunching the various information you received from the employee inventor to decide within the four months provided by German law, whether or not you would actually like to acquire your employee’s invention.

Once an employer acquires an employee invention, hopefully by educated and deliberate communication, however, also in the case of an acquisition by operation of law for missing the 4-months’ deadline, the joy of ownership does not come for free: the acquisition triggers two basic obligations of an employer: First, an employer is obligated to adequately compensate the employee inventor for his/her employee invention. The compensation guidelines enacted under the German Act On Employee Inventions shall assist employers when determining an adequate compensation. If you are an employer, you are well advised to seek assistance by a lawyer when trying to cope with these compensation guidelines. Again, setting up an employee invention scheme can help in establishing appropriate compensation policies. Second, an employer must seek IP protection for the acquired employee invention. There are certain exceptions to that rule (e.g., employee agreement, trade secrets), however, in general an employer is obligated to obtain IP protection for acquired employee inventions. Now, that’s quite something for missing the four months’ deadline.

Therefore, if an employer finds that an employee invention does not fit in the employer’s portfolio, during the four months’ period mentioned above, the employer can release the employee invention. This means, that the employer communicates to the employee not to acquire the notified employee invention (within the four months’ period). In this case, the employee is free to use his/her invention. He or she can obtain patent protection (at own cost) and license it to a competitor or (subject to potential non-compete arrangements) set-up their own business on the basis of their invention. If the employer finds that an employee invention fits in the company’s portfolio, the employer will notify the employee on the employer’s acceptance of the employee invention. This will trigger the employer’s compensation and (general) IP protection obligations.

You would think that all technology companies in Germany, be it foreign subsidiaries, German SMEs, or start-ups, all have neatly set up employee invention schemes set up in their companies to avoid the above risks? No, not all of them. However, all are using, and partly have been using for decades, their employees’ inventions in the course of their business. I think an employer’s risk is less an employee going entrepreneur with a released employee invention: the major risk lies in all those employees who may not have been adequately compensated for their inventions that have been acquired by operation of law – after expiration of the four months’ period, perhaps due to the lack of an employee invention scheme. That may lead to a nice top up for an employee when claiming his or her inventor’s compensation upon leaving the company. In such a case an employer may suffer from substantial financial consequences, if products developed on the basis of an employee-invention have been successful in the market since this circumstance can lead to a significant employee inventor’s compensation entitlements.

In summary, employers and employees should be aware of the procedures set-out by the German Act On Employee Inventions. It can be awkward for both, employer and employee, not to follow these procedures. While employees should be aware on the limitations on the exploitation of “own” IP created under employment, employers will be well advised to face the requirements of the Act and to set up an employee invention scheme to adequately follow-up with inventions made at the company.

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About the author Peter Lotz, M.C.J. (NYU) Attorney, Attorney-At-Law (N.Y.) MAYRFELD LLP
Peter Lotz is a partner of MAYRFELD LLP. He has been counseling for nearly 20 years domestic and foreign Fortune 500 companies as well as SMEs in connection with the cross-border developemt, acquisition, licensing and commercialization of novel technologies.
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