Appropriate compensation for employee inventions

Would you like to learn what constitutes appropriate compensation for an employee invention? Then you've come to the right place. In this guide, we'll inform you, as an employee, about the financial aspects of an employee invention. In particular, you'll learn:

• which employee inventions are fundamentally to be distinguished,
• which procedures must be followed by the employer and employee in the case of an employee invention,
• how the value of an employee invention can be measured and
• which methods exist for determining value.

After reading this article, you'll definitely be a little wiser regarding appropriate compensation for an employee invention. If you still have any questions, please feel free to contact us.

Distinction – Normal and free employee inventions

When we talk about employee inventions, the legal definition is not yet sufficiently clear. Even though the "Employee Inventions Act" is concerned, the law addresses different topics that must be separated.

The Employee Inventions Act (ArbNEerfG) First, it distinguishes between bound inventions (service inventions) and free inventions. Bound inventions are, according to Section 4 paragraph 2 ArbNEerfG Inventions made during the term of the employment relationship. These are characterized by the fact that they

• arise from the employee’s activity in the company or
• are based to a significant extent on the experience or work of the company.

All other inventions are free inventions. They are subject to the restrictions of Sections 18 and 19 ArbNEerfGif they were made during the term of the employment relationship.

Important: When the law speaks of inventions, it only refers to inventions that are capable of being patented or registered as a utility model (§ 2 ArbNEerfG).

Technical improvement suggestions

Inventions are to be distinguished from technical improvement proposals. These are proposals for other technical innovations that are not eligible for patent or utility model protection (§ 3 ArbNEerfG). This case is also discussed in § 20 ArbNEerfG taken into account.

Procedure to be followed for an employee invention

The Employee Inventions Act regulates in detail the rights and obligations of employees and employers in the case of an employee invention.

Employee’s duties: The employee is obligated to report the service invention immediately in writing. They must make it clear that this is a service invention. The report must include the following:

• the technical task
• the solution to the problem
• the creation of the service invention
• Records, if available and necessary for understanding the invention

In addition, the employee should disclose any official instructions given, the experience or work of the company used, and the nature and extent of their participation.

Employer’s obligations: The employer can claim the service invention by declaring it to the employee. If the employer does not release the service invention within four months, it is deemed to have been claimed (Section 6 (2) ArbNEerfG).

Otherwise, the employer can release the service invention by declaration in text form (Section 8 sentence 1 ArbNEerfG).

Important: The legal consequence of claiming the invention is that the valuable rights to the work-related invention are transferred to the employer. In return, the employee is entitled to appropriate compensation – more on that shortly.

Basics of appropriate remuneration for employee inventions

First, the basics: The Federal Ministry of Labor and Social Affairs has issued guidelines for the remuneration of employee inventions in private employment. This document provides a basis for calculating appropriate remuneration within the meaning of Section 9 of the Employee Inventions Act. This guideline is not legally binding, but it does provide important guidance for determining appropriate remuneration, which is why courts refer to it.

For appropriate remuneration for an employee invention, Section 9 para. 2 ArbNErfG in particular

• the economic exploitation of the service invention
• the position of the employee in the company
• the company's share in the creation of the invention

decisive.

First, the economic value of the service invention is determined (so-called “Inventive value"). A deduction is then made because it is an invention that was made in the course of the company's activities or is at least based on company experience or work. For this purpose, the invention is classified according to differentiated characteristics of the so-called "Proportion factor“, whose value points have a percentage equivalent.

The appropriate remuneration can be expressed in the following formula:

Remuneration = Invention value * Share factor

Inventive value of an employee invention

There are various methods to determine the value of an invention:

(1) License analogy method

(2) Method of identifiable operational benefit

(3) Estimation of the value of the invention

Which method is potentially used depends on the circumstances of the individual case.

License analogy method

The license analogy method is the primary method used by the Federal Court of Justice to determine the value of the invention. Using the license analogy, the value of the invention is determined as follows:

“What consideration for the transfer of the invention would reasonable parties have agreed upon if the service invention were a free invention transferred to the employer for exclusive use?”
Higher Regional Court of Düsseldorf, judgment of 4 March 2004 – I-2 U 123/97

So, as the name suggests, it's about the hypothetical license costs for exclusive use. The license rate is expressed as a percentage, as a monetary amount per unit/weight, and is related, for example, to sales. The value of the invention is then the reference value multiplied by the license rate.

The Guidelines for the Remuneration of Employee Inventions refer to individual industries as a guideline for determining the royalty rate. The following royalty rates (based on turnover) are listed, among others:

• Electrical industry: 1/2 – 5 percent
• Machinery and tool industry: 1/3 – 10 percent
• Chemical industry: 2 – 5 percent
• Pharmaceutical industry: 2 – 10 percent

However, the directive provides for reductions in cases of particularly high turnover.

The analogy of licensing is particularly useful when the industry in question is familiar with licensing rates or purchase prices for similar products or processes.

The formula for determining the invention value using the license analogy method is as follows:

Invention value = reference value x license rate in percent

Method of measurable operational benefit

The Determination of the invention value according to the identifiable operational benefit is primarily used when the invention results in savings, e.g., by reducing the cost of the starting material or labor, energy, or maintenance costs. This method can also be used for inventions that improve the company's operations, as well as for products, machines, or devices used purely within the company. This also applies to internal processes, provided the associated revenue does not provide a sufficient basis for valuation.

The measurable operational benefit is the Difference between costs and revenues caused by useA cost-benefit comparison is made based on business principles. The principles for pricing public contracts must be applied. However, imputed interest, individual risks, operating profits, and imputed entrepreneurial wages must be taken into account.

Overall, the method of assessing measurable operational benefits is somewhat imprecise. The associated benefits are often not easy to determine, and the calculation of the benefits is difficult to verify.

Estimation of the invention value

An estimate of the invention's value is only subsidiary to the methods of license analogy and measurable business benefit. It can only be used if the invention's value cannot be determined using either method, or if determining it using the aforementioned methods would require disproportionate effort.

Appropriate remuneration for employee inventions – share factor

The share factor is necessary because it must be taken into account that the employee invention is not a free invention. Rather, the employee's professional activity contributed significantly to the invention. Therefore, a deduction from the invention value is required, which is effected by the share factor.

The share factor is determined based on the following criteria:

• Position of the task (a)
• Solution to task (b)
• Duties and position of the employee in the company (c)

For each of these three points there are Evaluation criteria, for the so-called Value numbers The values are assigned percentage values according to the following table:

a+b+c	=	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	(20)
A	=	2	4	7	10	13	15	18	21	25	32	39	47	55	63	72	81	90	(100)

You can clearly see from this table that a high value number means a higher percentage share in the invention's value. Now we'd like to briefly discuss the above criteria for the share factor in more detail:

Position of the task

In principle, the more initiative an employee has shown in setting the task and the greater their involvement, the greater their contribution to the creation of the service invention. The directive defines six case groups for this purpose.

For example, if the company has given the employee a task and specified the solution method used, their initiative and contribution are relatively low. This means they only receive a score of 1. If, on the other hand, the employee has set themselves a task outside their area of responsibility, their initiative was high—they receive a score of 6. And we know: the higher the score, the greater the contribution to the employee invention.

Solution to the task

This section asks how the solution to the problem was arrived at. The following aspects are taken into account:

• The solution is found with the help of the considerations familiar to the inventor in his professional life;
• it is found on the basis of operational work or knowledge;
• the company supports the inventor with technical aids.

If all of these criteria are met, the employee receives a score of 1. If none of these criteria are met, the score is 6. And if the criteria are partially met, an appropriate score between 1 and 6 is assigned. The principle should be clear, right?

Duties and position of the employee in the company

The employee's position within the company and their responsibilities naturally influence employee inventions significantly. Insights into the creation and development of the works council, as well as expectations regarding the employee's position, can lower the value figures. The more an employee can be expected to contribute to the company's technical development, the lower their contribution should be.

Accordingly, the directive divides employees into different groups. Employees without significant prior training for the work they perform in the company receive a score of 8 if they invent something. At the other end of the scale are heads of development departments, heads of the entire research department, and technical managers. These only receive a score of 1 or 2, simply because inventions are inherent in their work and position.

Formula – Reasonable compensation for employee inventions

We have seen that two factors are crucial for determining appropriate compensation for an employee invention: the invention value and the share factor. To determine appropriate compensation, these two factors simply need to be mathematically related to each other:

Remuneration = invention value x share factor in percent

For the analogous license method, the formula must also consider the reference value and the license rate. It is as follows:

Remuneration = Reference value (sales, production) x license rate in percent x share factor in percent

The remuneration can be based on the entire term of the respective intellectual property right or on a specific period of time. The formula must then be modified accordingly.

Payment of appropriate compensation for employee inventions

It is not uncommon for the compensation to be determined retrospectively, with subsequent payment to the employee. In such cases, however, it may be appropriate to make appropriate advance payments for the employee's invention.

The Directive points out that payment may sometimes be appropriate as a lump sum or several fixed sums. For patents, an average term of one-third of the total term, i.e., six years, is used to determine the appropriate one-time remuneration.

Relevant time for employee inventions

In principle, the calculation of appropriate remuneration for employee inventions is relevant time the period for which the respective intellectual property right exists. Exceptionally, remuneration may also be paid beyond the term of the respective intellectual property right if the preferential position conferred by a patent continues beyond the expiration of the intellectual property right.

Conclusion on remuneration for employee inventions

As you can see, determining appropriate compensation for an employee invention isn't so easy in individual cases. It depends largely on the specific circumstances of the case, which largely determine the appropriate calculation method. Here are the key points for you:

• A distinction is made between restricted and free inventions. In the case of restricted inventions, the employee's professional activity had a significant influence on the creation of the invention.
• In the case of an employee invention, there are certain procedural requirements imposed on both employers and employees. The employee has reporting obligations to the employer, and the employer has the option of claiming an employee invention—or not.
• The appropriate remuneration for an employee invention always results from the inventive value of the invention as well as the share factor, which represents a deduction for its creation in a professional context.
• Different calculation principles can be applied to determine the value of an invention, depending on the specific invention. Common methods include the license analogy, the measurable business benefit, and estimation.
• The share factor is determined by the position of the task, the solution to the task as well as the tasks and position of the employee in the company
• The remuneration can be expressed in the following formula: Remuneration = Invention value x share factor in percent
• The method of payment for an employee invention also depends on the specific case. Possible options include ongoing individual payments for specific periods or a lump sum payment to compensate for the employee invention.