Employee’s Right to Remuneration for Service Inventions: The Bayer -v- Plurality Judgment and its Implications on Employment Contracts

The Supreme Court in Dr. Bayer v Plurality Ltd¹ allowed the appeal of an employee who signed an agreement that provided for the employee’s waiver of his right to remuneration for service inventions, holding that notwithstanding such express contractual waiver, the employee is entitled to submit a claim to the Compensation and Royalties Committee under the Patents Law to determine the employee’s entitlement to remuneration. Although the Plurality judgment does not rule that an agreement containing a waiver of remuneration is invalid, it leaves open the possibility — already raised in the Actelis² matter, cited with approval by the Supreme Court — for such a ruling of invalidity in the future. The emerging judicial approach to an employee’s right to remuneration, while not yet reflected in binding decisions, makes it advisable for innovation-oriented companies to revisit the relevant clauses in their employment agreements and potentially reconsider their IP incentive policies. 

Remuneration for Service Inventions under the Statute

Under the Israeli Patents Law, 5727 – 1967 (the “Law”), service inventions — made by employees during and in consequence of their employment — belong to the employer unless there is a different agreement in this regard.³ Section 134 of the Law also provides for the employee’s right to remuneration for service inventions in those cases where “there is no agreement that prescribes whether, to what extent, and on what conditions the employee is entitled to remuneration for a service invention”⁴ — in such cases the entitlement to remuneration and its amount is determined by the Compensation and Royalties Committee (the “Committee”) under Section 134.⁵

The Committee in Actelis Opines on the Right to Remuneration

In a thought-provoking decision in the Actelis matter in 2010,⁶ the Committee raised the question of whether an employee may waive the right to remuneration under Section 134, opining that Section 134 is capable of two conflicting interpretations. According to the first interpretation, the right to remuneration may be contractually waived.⁷ According to the second interpretation, the right to remuneration is an inalienable right that, similarly to rights deriving from labor law, cannot be waived.⁸

In the specific case that came up for discussion in Actelis, the Committee held that the language of the agreement between the parties⁹ made it unnecessary to rule on this aspect of the interpretation of Section 134, as the contractual clause was limited to the employee’s assignment to the employer of all proprietary rights and did not at all address the right to remuneration, which, accordingly, was not waived.¹⁰ Thus, the question of which of the two interpretations is the correct one was not decided in that case.

Because the issue of enforceability of a waiver was ultimately not necessary for the resolution of the dispute in the Actelis matter, the comments of the Committee do not constitute a legally binding decision. However, legal formalities aside, such comments usually tend to cause changes in the day-to-day practice of potentially affected entities. Accordingly, in the wake of Actelis, it became the general practice for companies in the technology sector¹¹ to explicitly address the waiver of the right to remuneration in employment agreements.

An agreement that contained such express waiver of the employee’s right to remuneration for inventions recently came up for review before the Supreme Court in the matter of Plurality. However, and although the Supreme Court in Plurality reiterated the Actelis opinion that Section 134 is amenable to the two conflicting interpretations, the question of the preferred interpretation and the question of enforceability of a waiver of an employee’s right to remuneration were again not conclusively resolved.

The Supreme Court in Plurality Reaffirms the Concern Raised by Actelis

In the Plurality decision handed down on August 1, 2012, the Supreme Court tangentially addressed the issue of the employee’s right to remuneration and the validity of a contractual waiver.

Dr. Bayer is one of the founders of Plurality Ltd., an Israeli semiconductor company responsible for developing the HyperCore technology (the “Company”). After the Company entered into liquidation, Dr. Bayer requested leave from the liquidation court¹² to initiate the proceedings before the Compensation and Royalties Committee to determine his right to remuneration for his service invention under Section 134. Dr. Bayer sought such leave, notwithstanding the fact that his agreement with the Company clearly stated that he will not be entitled to such remuneration.¹³ The liquidation court briefly dismissed the request on the grounds that the agreement between the Company and the applicant expressly denied Dr. Bayer the possibility of obtaining remuneration that he was seeking. Dr. Bayer then appealed to the Supreme Court.

The Supreme Court allowed Dr. Bayer’s appeal. It held that the liquidation court erred in making an unreasoned ruling on the scope, interpretation, and effect of the agreement, as well as on the proper jurisdiction to address the issues of service inventions. The Supreme Court did not agree with the liquidation court’s implied conclusion that the Committee had no jurisdiction to entertain the applicant’s claims in light of the contractual provision that on the face of it denied remuneration for service inventions.

Citing Actelis with approval, the Supreme Court held that in light of the possible interpretation of Section 134 as providing for an employee’s inalienable right to compensation, the Committee has jurisdiction — possibly exclusive jurisdiction — to entertain the claim of an employee whose contract with the employer denied his right to compensation. 

The Court further held that such contractual provision would not negate the Committee’s jurisdiction to entertain the claim or the possibility that the employee may have a claim regarding his right to remuneration, concluding that the liquidation court erred in not allowing Dr. Bayer to bring his claim before the Committee.¹⁴ Accordingly, the liquidation court’s refusal was reversed on appeal.¹⁵

Conclusions

While already the dictum in Actelis has prompted concern regarding the validity of contractual waivers of employees’ right to remuneration for service inventions, it should be borne in mind that neither the Committee in Actelis nor the Supreme Court in Plurality ruled that such waiver is invalid. The current state of the law, after the Actelis and Plurality decisions, is that an express waiver of the right to remuneration for service inventions does not bar, a priori, the employee’s right to initiate proceedings before the Committee.

The Plurality decision, as well as the previous Actelis one, should not be interpreted to mean that a contractual waiver is invalid and the right of remuneration exists. And, indeed, those decisions do not rule out the possibility that the Committee will eventually dismiss such a case, whether in limine or on the merits.

It thus remains to be seen how such complete waiver of compensation, as was the focus of the dispute in the Plurality matter, will be viewed in a substantive review before the Committee.

Implications of the Plurality judgment

It is clear from the reviewed case law that other than addressing the question of rights in an employee’s invention,16 it would be preferable for any employment agreement to also expressly address the employee’s remuneration, or waiver thereof, for such inventions. In addition, it may be wise to devise a company-wide compensation policy for service inventions (which may, for example, be in monetary form or in the form of the grant of extra stock options) and make reference thereto in employment contracts.

Furthermore, having regard to the lack of any clear-cut invalidation of contractual waivers of remuneration in the current law, there appears to be no reason to alter the practice, in companies where such practice exists, of including in employee contracts express waivers of remuneration.

In light of the tendency emerging in the reviewed case law to call into question the validity of contractual waivers of remuneration, it may be prudent to include in employee agreements an additional clause providing that, should the waiver of remuneration be held invalid, the incentive payments (if any) payable by the company to employees for inventions and improvements will constitute

sole compensation due to employees in respect of service inventions. Such clauses may make it more difficult to challenge an overall arrangement that stipulates that the employee is not entitled to additional remuneration other than the remuneration awarded pursuant to the company’s policy.17

Finally, the contractual provisions regarding employees’ compensation should also be part of the checklist in any IP due diligence review — although this is more of a concern in an investment in or acquisition of a company and less so where company’s IP assets, but not the company itself, are being acquired.

Conclusions for the Practice

• Employment agreements should preferably expressly address both the ownership of employee’s inventions and remuneration for them.
• There appears at present to be no reason to discontinue the practice of including express waivers of an employee’s remuneration for inventions in employee agreements.
• Clauses that stipulate an arrangement for the eventuality of a ruling that the right for remuneration may not be waived should preferably be added to employment agreements.
• It may be advisable to reevaluate the IP development incentive policy and to consider making reference thereto in employment agreements.
• With respect to existing employment agreements, revision in light of the above points should be considered.
• IP due diligence should include a review of the relevant clauses of the target company’s employment agreements and its IP policy.

¹ LCA 3564/12 Dr. Bayer v Plurality Ltd (in liquidation) et al [2012] (“Plurality“).
² Actelis Networks v Ilani, Application to determine remuneration for service invention [2010] (“Actelis“).
³ Service inventions are defined and addressed in Section 132(a) of the Law:

“An invention by an employee, arrived at in consequence of his service and during the period of his service, (hereafter: “service invention”) shall, in the absence of an agreement to the contrary between him and his employer, become the employer’s property […].”

⁴ Section 134 of the Law reads:

” If there is no agreement that prescribes whether, to what extent, and on what conditions the employee is entitled to remuneration for a service invention, then the matter shall be decided by the Compensation and Royalties Committee established under Chapter Six.”

 ⁵ The Committee is a tribunal operating at the Israeli Patent Office, chaired by a retired Supreme Court judge and further comprising the Registrar of Patents and a university professor.
⁶ Reviewed in our Newsletter of March 2010.
⁷ According to such interpretation, faced with an agreement comprising such waiver, the Committee will not award remuneration to the employee notwithstanding the contractual waiver.
⁸ According to such interpretation, the Committee may rule that a waiver contained in such an agreement is invalid and award remuneration to the employee.
⁹ Cited in the decision as follows: 

“2…I hereby undertake as follows: …
2.3 All Proprietary rights, intellectual property rights, rights of development and commercialization shall be vested solely with the Company, unrestricted and unreserved.
3. I hereby assign and transfer in full all rights I have and will have to any invention and development which the Company will be developing during my employment with the Company, and I undertake to sign and enter any document, authorization and assignment required to effect the registration of all intellectual property rights in the name of, or at the order of, the Company”.

¹⁰ Which the Committee held was a personal obligation rather than proprietary.
¹¹ Such companies that had previously failed to address the issue.
¹² When a company enters liquidation, initiating any contentious proceedings against it requires special leave of the liquidation court.
¹³ According to the judgment of the Supreme Court, the agreement stated that Dr. Bayer will not be entitled to any payment or remuneration or royalties for the invention other than the amounts to which he is entitled pursuant to the agreement between Dr. Bayer and the Company. From the text of the judgment it is not clear what the agreement actually provided and whether it was an employment agreement or a different agreement.
¹⁴ As the Supreme Court explained, such threshold jurisdictional questions should properly be decided not by the liquidation court, but rather by the court or tribunal that has the jurisdiction to adjudicate the main litigation (in the case at hand, the Committee).
¹⁵ However, because the Company had additional arguments against the requested leave to initiate proceedings before the Committee, which the liquidation court did not hear in its first decision, the Supreme Court remanded the case to the liquidation court, with instructions to hear the parties’ detailed arguments and issue a reasoned decision.
¹⁶ Which, if considered to be service inventions, are usually owned by the employer under Section 132 of the Patents Law.
¹⁷ If in the future the right for remuneration pursuant to Section 134 should be held to be inalienable and incapable of waiver.