Remuneration of an employee invention in second source license agreement

A Second source license agreement influences the employee inventor remuneration in Germany. For the calculation of the remuneration of an employee invention, the invention values of customary license agreements are to be derived from these agreements.

Second source license agreement influences inventor remuneration

A second source license agreement is widely used in the supply industry. Such a second-source license agreement enables manufacturers to purchase inventive components from other suppliers as well. For the calculation of the remuneration of an employee invention, the invention values of customary license agreements are to be derived from these agreements.

For a patentable employee invention confers a monopoly right on the employer (§ 9, 33 German PatG). If he uses such an employee invention, he makes use of this monopoly right. An employer must therefore compensate his employee and employee inventor for what he would have to pay a freelance inventor for the use of the monopoly-protected technical apprenticeship, determined using the licence analogy.

If, however, an invention is used to manufacture products distributed on the market, the net sales which the parties to the licence would have based on a normal and customary licence agreement must first be determined in order to determine the value of the invention. This was described in detail in a decision of the Arbitration Board of the DPMA.

Amount of remuneration entitlement

The amount of the remuneration claim is determined in accordance with § 9.2 ArbnEG (German law for employee’s inventions (in German: Arbeitnehmererfindungsgesetz (ArbnEG)) – in addition to the position of the employee inventor in the company and the company’s share in the creation of the employee’s invention – by the economic exploitability of the employee’s invention. This includes the licensing, sale and actual use of the patented service invention in one’s own business, as in the present case. The Arbitration Board also points out that the correct technical and economic reference value depends to a large extent on the influence of monopoly-protected technology on the product.

According to the case-law of the Federal Court of Justice, the technical-economic (functional) unit must be linked to the invention, which is still significantly influenced by the invention or its functions are significantly influenced (Federal Court of Justice of 17.11.2009 – Ref.: X ZR 137/07 – Türinnenverstärkung). The typical scope for calculation on the respective product market is therefore also reflected in the license rate framework customary on the respective product market: product lines with relatively low margins, such as the automotive supply sector, have a relatively low license rate framework, while product lines with relatively high margins, such as medical technology, have a much higher license rate framework.

Graduation is appropriate for high revenues

If an inventor participates for example in the market success of an important automotive supplier, he also participates in sales shares that are not only attributable to the invention but also to the company’s reputation for quality and its sales and service network. Since this is the case, the differentiation of the license rate puts the value of the invention in a reasonable proportion to the significance of the invention for the turnover, the Arbitration Board decided. The BGH (decision of 4.10.1988 – Ref.: X ZR 71/86 – Vinyl chloride) had rightly made it clear that the question of staggering high turnover was a question of the appropriateness of remuneration within the meaning of § 9.1 ArbnEG and that Directive No. 11 was not a binding provision but an aid.

Reverse ratio of license charge to remaining profits

In concluding a second-source licence agreement, the Arbitration Board argued that the licensor must be interested in compensating lost profits as far as possible by skimming off the profits accruing to the competitor also entitled to supply. Consequently, licence fees agreed in second-source licence agreements will normally be significantly higher than those agreed in „normal“ licence agreements. The principle of experience applies – albeit with reservations – that the maximum burden with license rates is usually 20 – 25 % of the EBIT margin (OLG Düsseldorf of 9 October 2014 – Ref.: I-2 U 15/13). Consequently, a second-source licence agreement would be more likely to have the inverse ratio of licence burden and remaining profits than a market-standard licence agreement, i.e. a ratio of 3:1 to 4:1.

License rates from a second-source license agreement must be adjusted

The Arbitration Board of DPMA therefore proposed to assume a factor of 4:1 in order to also do justice to the question of staggering. In order to infer from a second-source license agreement a license agreement customary in the market, license rates from second-source license agreements must be corrected to a ratio of 3:1 to 4:1, the Arbitration Board formulated as an unofficial guiding principle for the calculation of the remuneration of a German employee invention.

Do you need counsel in questions of Employee Invention?

Our attorneys possess extensive expertise in the field of employees’ inventions, enabling us to provide counsel to both, the company and the employee, regarding all questions in relation to the Law on Employees’ Inventions.