Cumulative and year-based scaling in employee invention law
If an employee develops a new invention as part of an employment relationship, the question regularly arises as to how he or she should be compensated for it. In practice, this problem is often solved using the so-called license analogy. However, this method is based on a complicated formula that aims to take into account the interests of both the employee and the employer. In particular, the calculation of the scaling of the turnover according to the invention in favor of the employer causes considerable difficulties. The following article therefore provides an overview of the calculation of this scale in employee invention law and explains the difference between the so-called cumulative scale and the annual scale. At the same time, we place these abstract terms in the context of employee invention law in order to make this complex subject matter easier to understand.
Calculation of the employee’s compensation using the license analogy
In accordance with Directive No. 39 (Guidelines for the remuneration of employee inventions in the private sector dated 20.07.1959), employee inventor compensation is usually determined according to the so-called license analogy.
This works as follows: If there is no direct agreement on the amount of compensation between the employee and the employer, it is estimated how much an independent third party would pay as a license fee for the use of the invention. It is assumed that the employer and the employee would have concluded a fictitious license agreement under normal market conditions. This fictitious license rate then serves as the basis for the employee’s compensation.
The following formula is used to calculate the license analogy:
V = E(U x L) x M x A x R
The invention value (E) in particular, which is made up of the invention-related turnover (U) and an industry-specific license rate (L), is often the focus of legal disputes. For the cumulative or annual scale, the turnover based on the invention is initially relevant: U terms the part of the company’s turnover that is directly attributable to the use of the invention made by the employee. It is usually determined by a request for information from the inventor. This request can already be asserted in arbitration proceedings. However, it takes on a central position in the process at the latest in a step-by-step action before the regional court.
Scaling of the turnover attributable to the invention
Once the turnover relating to the invention has been determined, the employer can often claim the so-called ” scaling of compensation”. This is based on the following consideration: Is the company’s turnover really only attributable to the specific invention? Or are other factors on the part of the company also decisive for the high turnover? The scaling or adjustment is therefore intended to prevent the employer from having to pay the inventor an unreasonably high invention royalty. This is the case if the financial success was not primarily generated by the invention, but by factors within the employer’s sphere of influence. However, this only becomes decisive above a certain level of turnover. More on this later. First, we will look at the prerequisites that must be met for the employer to be allowed to make a corresponding adjustment in employee invention law.
Calculation of the cumulative scaling adjustment
If the employer can prove that the requirements are met, the further procedure is usually based on Guideline No. 11 (Guidelines for the compensation of employee inventions in the private sector dated July 20, 1959).
As a rule, the so-called cumulative scaling adjustment method is applied. In principle, however, the employer and employee can also agree on a different calculation method. However, it should be noted that the method of calculation can vary considerably: With a so-called annualized scaling adjustment, the turnover relevant to compensation is usually many times higher than with the cumulative calculation method.
The calculation according to the cumulative scale is not entirely straightforward. The method that probably complies with Directive No. 11 is as follows: There is no scaling up to a turnover of EUR 3 million. The turnover is taken into account at 100%. If the turnover exceeds this limit, the part of the turnover that exceeds EUR 3 million is multiplied by a corresponding factor. The amount of this factor is determined by Guideline No. 11. Since this guideline from the last century still uses DM, the Arbitration Board of the German Trade Mark and Patent Office (DPMA) has meanwhile adjusted the scale to the euro values (Arb.Erf. 64/20). For example, if the turnover relevant to the invention is EUR 5 million, a factor of 0.9 is applied.
Since the turnover in this example exceeds the limit of EUR 3 million by EUR 2 million, this excess amount is multiplied by 0.9. The (adjusted) surplus is now EUR 1.8 million. This adjustment is then added to the EUR 3 million recognized at 100%. With a turnover of EUR 5 million, the adjusted turnover is therefore EUR 4.8 million.
For clarification:
Scaled turnover = EUR 3 million + (EUR 2 million x 0.9)
= EUR 4.8 million
The higher the turnover, the higher the multiplication factor: if a company has achieved a turnover of EUR 10 million with an invention in the first year, the turnover to be recognized is reduced to EUR 8.8 million. The calculation is as follows:
Scaled turnover = EUR 3 million + (EUR 2 million x 0.9) + (EUR 5 million + 0.8)
= EUR 8.8 million
The above refers to turnover within one year. But how does the scaled turnover change over several years of use? If sales of EUR 10 million are generated again in year of use 2, the sales from year of use 1 and year of use 2 are added together for the purpose of adjustment. The starting amount is therefore EUR 20 million. The reduced turnover is calculated again according to the calculation explained above and amounts to EUR 15.8 million in this example. The turnover determined for year of use 1 is now deducted from this (i.e. EUR 8.8 million), leaving a relevant turnover of EUR 7.0 million for year 2 of use:
[EUR 3 million + (EUR 2 million x 0.9) + (EUR 5 million + 0.8) + (EUR 10 million + 0.7)] – EUR 8.8 million
= EUR 7 million
In year of use three, the actual sales generated in years of use 1, 2 and 3 are added together, the scaling is determined and the adjusted years 1 and 2 are deducted, leaving relevant sales of EUR 6 million. This procedure is repeated for each subsequent year of use.
Calculation of the annual scaling
The calculation of cumulative scaling illustrated above ensures that turnover is not only taken into account on an annual basis, but also cumulatively for the entire area. In contrast, with year-based scaling adjustment, each year is assessed separately on the basis of the turnover achieved in the same year. This means that with a constant turnover of EUR 10 million per year, an adjusted turnover of EUR 8.8 million must always be applied.
Over the years, this method therefore adds up to the detriment of the employer. For this reason, annual scaling in employee invention law is often only agreed if it is foreseeable that an invention will not be used permanently, but only for a limited period of time. If, contrary to expectations, the invention is used indefinitely, this may justify a change to the agreement pursuant to Sec. 12 para. 6 ArbErfG (Arb.Erf. 04/19).
Conclusion: Scaling adjustment in employee invention law
The correct calculation of the scaling adjustment in employee invention law is of great importance for both employers and employee inventors. The choice of the appropriate method of scaling adjustment is also decisive for the amount of the employee invention compensation. Take into account the period in which the company will use the invention profitably. In case of doubt, it is advisable for the employer to choose the so-called cumulative scaling.
The attorneys at LLP Law|Patent will be happy to answer any further questions you may have. Please feel free to contact our law firm in Munich.
Patricia Lotz | Rechtsanwältin (Lawyer)
Ms. Lotz focuses mainly on court proceedings. For over fourteen years, she has primarily represented industrial clients and SMEs in the IT and technology sector. She is also experienced in private construction law, employment law, commercial administrative law in disputes with trade offices amongst others and in the special case of “company audits and pseudo self-employment” in social law on behalf of companies.
Her primary goal is to avoid legal disputes wherever possible. However, if this is not possible or reasonable, she develops a suitable litigation strategy with her clients based on her many years of experience throughout Germany before civil, labor, administrative and social courts. Ms. Lotz also provides legal advice on employee invention law and foreign trade law, particularly on the export of dual-use goods.
