Mitigating risk arising from employee-created IP assets

Employee-created intellectual property (IP) assets play an important role in the development of every technology business as well as IP portfolio. Russian domestic laws have specific regulations and legal treatment for such assets. Awareness and compliance with the related regulations and practice enables businesses to decrease the risks associated with the loss or challenge of IP rights. This article highlights the main principles around the protection of employee-created copyrighted works and patented subject matter in Russia.

Employee-created copyrighted works

Employee-created copyrighted works are intangible assets created by employees during the course of their employment duties.

The main rule is that the exclusive rights to an employee-created copyrighted work belong to the employer, unless otherwise provided in the employment agreement or another contract. In circumstances where the exclusive rights belong to the employee, the employer has a right to a non-exclusive and royalty-based license.

The above default provision of the law does not mean that the underlying agreements should not contain any terms and conditions regarding ownership of IP rights. Exact wording and conditions relating to IP ownership are highly recommended.

Article 1295(2) of the Russian Civil Code provides that the exclusive rights to copyrighted works may return to the respective employees. This is the case when, within three years from the date when the employee has submitted the copyrighted work to the employer, the employer fails:

• to start using the copyrighted work;
• to assign the exclusive rights to the copyrighted work to another person;
• to inform the employee about keeping the copyrighted work secret.

In circumstances where the employer does one of the above within the said term, the employee has the right to claim compensation. The amount, conditions and payment procedure concerning such compensation will be agreed by the employer and the employee by way of a contract. In circumstances where there is no agreement, the matter will be resolved by the court.

It is therefore advisable, in order to avoid disputes, to enter immediately into the relevant agreement with the employee regarding the issue of compensation. It should be noted, that under Russian law, compensation for the employee-created copyrighted work shall not be a part of the employee’s salary and should be provided in addition to it.

Employee-created patented subject matter

Employee-created patented subject matter encompasses inventions, utility models or industrial designs developed by employees during the course of their employment duties or under assignments (instructions) issued by their employers.

By default provision of the law, the exclusive rights to employee-created patented subject matter belong to the employer, unless otherwise provided in the employment agreement or other contract.

The employee is obliged to notify the employer in writing of the developed patentable invention, utility model or industrial design, and then the employer has four months to make one of the following decisions:

• to file for a patent application at the Russian PTO;
• to assign the right to file a patent application to another person;
• to inform the employee about keeping the patentable solution secret.

In case of failure to comply with the mentioned term, the right to file a patent application is returned to the employee. In this case, the employer has a right to a nonexclusive and royalty-based license to use the patented subject matter for its own production facilities.

Furthermore, Russian law provides that an employee has the right to compensation if the employer:

• obtains a patent;
• makes a decision to keep the invention, utility model and industrial design secret and informs the employee accordingly;
• assigns the right to file a patent application to another person;
• fails to obtain a patent due to reasons contingent on the employee.

In circumstances where the employer and employee do not have a compensation agreement, the matter will be resolved by the court.

Importantly, if the employee creates an invention, utility model or industrial design while using financial, technical or other material means supplied by the employer, but not in connection with employment duties or the employer’s specific instructions, the right to file a patent application belongs to the employee. In this case, the employer is allowed at its own discretion to claim:

• a non-exclusive and royalty-free license for its own purposes; or
• a reimbursement of expenses incurred due to the development of such patentable subject matter.

Case law and court practice

Federal state enterprise SHCHELKOVO BIOCOMBINAT (SCHBK) is the largest domestic enterprise specializing in the production and supply of biotechnologies and veterinary drugs. SCHBK also carries out scientific research and development activities in the fields of veterinary science, medicine and biotechnology.

In 2007-2012, SCHBK entered into several license agreements with the Institute of Biotechnology of Veterinary Medicine, JSC (IBVM) for the use of inventions under RU patents nos. 2300562, 2300563, 2332233, which were issued in the name of the IBVM. Subsequently, the Russian IP Court (IPC) found that when entering into license agreements and then extending their term, the former SCHBK general director acted “contrary to the interests of the enterprise and at his own discretion”. In this regard, SCHBK was forced to pay the contracted license fees to the IBVM for a long period of time.

After the dismissal of the former general director, an internal audit was carried out at the enterprise, and it was established that many employees of SCHBK had taken part in the creation of technical solutions forming patented inventions constituting the subject matter of the concluded license agreements. Based on these facts, the new corporate management of SCHBK decided to stop immediately any payment of license fees to the IBVM under license agreements by planning their subsequent termination. At the same time, at the end of 2015 and beginning of 2016, the IBVM filed a number of claims against SCHBK (case refs: A40-222303/2015, A40-18984/2016) for the collection of debts, i.e. non-paid license fees, contractual penalties, as well as default interest coming to a total amount of RUR 520,000,000.

Since the second lawsuit filed by the IBVM against SCHBK in Moscow Commercial Court (case ref: A40-18984/2016) was identical in terms of its subject matter and legal grounds, and was de facto aimed at putting some additional pressure on the state enterprise, the case was dismissed by the court. The proceedings in the Court of Appeals regarding the first lawsuit (case ref: A40-222303/2015) filed by the IBVM against SCHBK for the debt amounting to about RUR 180 million (and contractual penalty amounting to about RUR 80 million) were suspended due to filing and consideration of a series of claims in front of the IPC (case refs: IPC-219/2016, IPC-289/2016, IPC-292/2016) for invalidation of patents that were the subject matter of litigious license agreements and for establishment of SCHBK as the legal patent owner (co-patent owner).

SCHBK’s position in these particular three court actions was based on the fact that all patented and subsequently licensed inventions were created:

• by the employees of SCHBK as part of their direct employment duties;
• at the facilities of SCHBK; and
• with the use of material and technical resources as well as the equipment of SCHBK.

This meant that the patented inventions should have been considered as employee inventions under the applicable law, and, therefore, patents for inventions had to be initially issued with the indication of SCHBK as the valid patent owner (co-patent owner). Importantly, as factual circumstances later demonstrated, the respective authors-employees of SCHBK did not properly notify their corporate management (employer) about the facts of creation of patentable subject matter.

As a result of the proceedings (case refs: IPC-219/2016, IPC-289/2016, IPC-292/2016) aimed at the invalidation of litigious patents, the IPC satisfied the claims of SCHBK in full scope. Subsequently, the IPC Presidium dismissed the statements of appeals filed by the IBVM. This scenario, in turn, allowed SCHBK to prevail in the major (commercial) dispute over the recovery of funds under the corresponding patent license agreements, as the invalidation of the licensed patents had automatically terminated the litigious license agreements and released the licensee (SCHBK) from the obligation to pay license fees to the licensor (IBVM).

At the end of the day, SCHBK was recognized as the legal owner (co-owner) of the litigious patent rights, and the claims of IBVM brought against SCHBK – for more than RUR 500,000,000 – were finally and fully rejected.

Practical tips and recommendations

From a practical perspective, first of all, it is advisable to conduct IP due diligence to ensure compliance with the above-described regulations. In addition, it is recommended that businesses develop and effectuate an internal IP policy – along with the provisions covering the aspects of employee-created IP – in order to level out or mitigate the associated risks. Also, it would be wise and efficient to have the proper and valid documents (templates) in place to be generated in the course of employee-created IP workflow (e.g. employment agreements with special IP ownership provisions, employee-notifications on employee-created IP, employeecompensation agreements). Finally, it is essential to monitor the situation from time to time and be ready to enforce exclusive IP rights, if necessary.