If the employer acquires the invention, the employee is entitled to compensation.
Individual agreements on the type and amount of compensation are permissible and codified in Section 12(1) ArbEG but can only be concluded after the service invention has been reported to the employer. Such agreements can be subject to later review in case of significant inequity or in case of substantial changes being essential for the assessment.
The amount of the compensation is governed by a Directive issued by the Federal Minister of Labour, which provides three methods for calculating the compensation:
License analogy (Directive N° 6-11)
Benefits to the employer (Directive N° 12)
Estimation of the value of the invention (Directive N° 13).
The compensation requires that the invention has a financial effect, with objectively determinable advantages for the employer, and a share of these benefits is allocated to the employee. Benefits relating to third parties, however, such as benefits for licensees or the assignee of the service invention, are basically irrelevant for the assessment.
When assessing the amount of compensation, a ”contribution factor” must be determined. The purpose of the contribution factor is to determine how much the employee as an individual contributed to the invention. For example, a scientist whose duties of employment are characterised mainly by research receives less compensation than someone who is not principally employed to perform research and development.
The contribution factor is based on three elements: the extent of the respective contributions of the employer and employee in defining the problem that resulted in the invention, their respective contribution in finding the inventive solution and the position and duties of the employee within the company.
The average contribution factor ranges from 15 to 25 per cent. The employee’s compensation may thus range in-between 15 to 25 per cent of a reasonable royalty. This represents only a very rough thumb rule.
Typically, the license analogy is the appropriate method if the invention can be allocated to products manufactured by the employer. A number of factors are usually taken into account:
Reference base (Directive N° 8): A reference base needs to be identified as the relevant basis for applying a reasonable royalty. (Directive N° 19). For instance, if the product (as protected by the patent) is composed of a plurality of components, German courts usually refer to those components of that product which are decisively influenced by the invention. The reference base for a patent that claims a car is not necessarily the value of the whole car. It rather depends on the influence of the invention on the car and which part or parts of the car are decisively characterised by the invention. On the other hand, if the decisive character of the invention influences the whole product (this could be the case with respect to pharmaceutical substances, where the inventive aspect is tied to an active agent) it is reasonable to refer to its whole value. If the invention influences only parts of the product, it is acceptable to take only a percentage of its value. To determine the reference value, German courts are weighing the problem solved by the patented invention and its relevance for the product concerned.
Net sales revenues: These revenues do not contain costs for packaging, discounts, value added taxes VAT and agent’s commissions.
Reasonable royalty rate: Reference can be made to license agreements that have already been concluded by the employer with third parties. In the absence of such agreement(s), industry practices must be considered.
Scaling: If the product is manufactured and sold in very high numbers, employers like to apply a sliding scale, which has a reducing effect on the compensation starting from a certain quantity. Accordingly, the royalty rate is progressively reduced depending on the turnover achieved with the product. For instance, the Appeal Court Düsseldorf applied in matter a scaling starting from a turnover which exceeded €13 Mio, i.e. for the turnover below €13 Mio, the full royalty, from €13 Mio- €25 Mio only ¾ of the royalty rate, from €25 Mio- €50Mio only ½ of the royalty rate, above €50Mio only ¼ of the royalty rate had to be paid. This is only an example. The case law gives examples where a scaling was applicable starting from even significantly lower turnovers (€1.5 Million).
Plurality of Patents: A further aspect which has decreasing effect on the royalty rate is the question whether other patents are used by the concerned product. If a plurality of patented inventions applies to a particular product, German courts consequently decrease the royalty of the different individual inventions.
Another (rarely used) method which can be taken for calculation the employee`s compensation is based on the benefit to the employer relating to the internal cost savings that the employer can achieve as a result of the invention. This method is most useful in cases where the invention consists of technical improvements that can only be realised within the company and therefore the license analogy method would not furnish a meaningful value.
The third (also rarely used) method is based on a free estimation of the value of the invention. This calculation method may be used where the value of the patent cannot be measured by a real royalty income.