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Compensation for Employee Inventions in Israel: How Employers Can Minimize Exposure to Potential Claims

Global innovation rankings, such as WIPO's and Bloomberg's Innovation Indices, rank Israel as one of the world's leading innovation ecosystems. Israel has been reported to have the largest number of start-ups per capita in the world (about 1 startup per ~1400 people), and is home to more than 350 R&D centers of some of the world's largest multinational corporations (many of them Fortune 500 companies), such as Microsoft, Apple, Google, IBM, Intel, Motorola and Philips. Exits of Israeli companies in 2019 totaled a record of ~$21.7 billion, and the Technology Transfer Offices (TTOs) of Israeli universities have a remarkable track record of generating more revenue from IP than any other country except the United States.

Intellectual property is a major aspect of Israel's flourishing innovation ecosystem, and often constitutes a cornerstone of various transactions, spanning from acquisition of companies to cooperation agreements and licencing deals. A critical point is that such IP is generated by individuals, who are typically employees.

In recent years, there has been a surge in the number of demands and claims made or filed against companies engaged in R&D activities in Israel, by employees and former employees alike, seeking compensation for "service inventions". A "service invention", is defined in the Patents Law, 1967 ("the Patents Law") as an invention arrived at by an employee during and in consequence of his or her service.

According to the Patents Law, ownership of a service invention generally vests with the employer. The Patents Law further stipulates, in section 134, that in the absence of an agreement determining whether, to what extent and on what conditions the employee is entitled to remuneration for a service invention, the matter will be decided by a statutory committee – the Compensation and Royalties Committee established under the Patents Law and operating at the Israel Patent Office ("the Committee").

Demands and claims for compensation often relate to inventions applied in commercial products, and the compensation sought is often based on the sales of such products.

The potential exposure of employers to claims of this nature might be significant, and could have far-reaching ramifications, inter alia in the context of Israeli companies or technology acquired by multinational corporations. It is therefore important to understand the legal framework governing employee inventions in Israel, and the possible measures that can be taken by employers to avoid or mitigate their potential exposure.

It should be noted that case law on compensation for service inventions is scarce, and no decisions were issued on the merits. Thus far, claims for compensation were either settled, withdrawn or denied in limine. Nevertheless, in a number of precedent-setting decisions issued in recent years, the Committee and the Israeli Supreme Court, sitting as the High Court of Justice (HCJ), clarified the nature of the right conferred in section 134, and the circumstances in which an agreement between the employer and employee shall be deemed to deprive the Committee of jurisdiction over the employee's claim for compensation.

First, in the Barazani v. Iscar[1] case, the Committee, and subsequently the HCJ, held that an employee's right to seek compensation for service inventions under section 134 of the Patents Law is NOT unwaivable. An employee may waive such right, and if such waiver exists, the Committee lacks jurisdiction to try the case.

Second, an employee's waiver of his/her right to seek compensation for service inventions need not necessarily be explicit. An employee may waive such right by written agreement, verbally or even by conduct. However, the Committee drew a distinction, between two categories:

The first category is that of documents that merely deal with the transfer of proprietary rights in the invention, from the employee to the employer. Examples of such documents include employment and confidentiality agreements (NDAs), in which the employee acknowledges the employer's full and exclusive right in service inventions; as well as deeds of assignment signed by the employee, which are necessary for applying for patent protection in the U.S and other countries (but not Israel). The Committee held that documents falling within this first category shall not be considered a waiver of the employee's right to seek compensation, unless the documents also contain explicit language that the employee waived his/her right to seek compensation for service inventions.

The second category of documents comprises documents that include a waiver of the employee's personal rights. Documents falling within this category may be considered a waiver of the right to compensation, even if they do not explicitly contain a waiver to such effect. In the specific circumstances of the Iscar case, the Committee held that the plaintiff – a former R&D employee of Iscar Ltd. – had indeed waived his right to seek compensation for service inventions when he signed, upon his voluntary retirement from Iscar, a general waiver and release.

Third, where an agreement exists between an employer and employee which provides for any degree of compensation, the Committee will not intervene in the content of the agreement, namely – it shall not consider whether the compensation is reasonable or adequate. The mere existence of such an agreement deprives the Committee of jurisdiction to try the case. The Committee lacks jurisdiction to revoke agreements, or alter their terms, under the Israeli Standard Contracts Law, 1982.

Fourth, in the Doe[2] case, the Committee acknowledged that collective agreements or collective arrangements which regulate the issue of compensation for service inventions, may also constitute "an agreement" for the purpose of section 134 of the Patents Law. Collective agreements/arrangements include agreements entered into between a labor organization and the employer or an employers' organization and, under certain circumstances, unilateral directives introduced by the employer.

Many R&D based companies have IP policies in place, which provide for the grant of monetary awards to employee inventors. Such awards are usually in amounts totalling up to a few hundred to a few thousand USD per invention, and are awarded in a stepwise manner (e.g. for the filing of a provisional application, for the filing of a PCT, for the grant of the patent and sometimes another for commercialization). While such policies have often been originally adopted for the purpose of incentivizing employees to invent, they can also serve as an effective measure (together with additional measures) in minimizing the company's exposure to employee claims for compensation for service inventions. This is provided that the policy is drafted, introduced, and applied correctly by the company.

Fifth, in the Levy v. Teva[3] case, the HCJ held that an employee's claim for compensation for service inventions under section 134 of the Patents Law becomes time barred seven years after the date on which the employee notifies the employer that he or she arrived at an invention (i.e., invention disclosure).

While the few decisions issued in recent years by the Committee and the HCJ provided more clarity regarding section 134, various questions remain unanswered, and specific legal advice should be sought in each case. For example, there is still no clear case law on whether an employee who was "hired to invent" may be entitled to any compensation for a service invention in excess of his salary. There is also no guidance on the form and degree of compensation that companies should expect to pay in case the Committee finds the liable to pay compensation, unlike the compensation guidelines that exist under German law, for example (would it be a lump sum ? royalties ? at what rate ? for what period (until the expiry of the patent ? what about inventions that were not patented ?)).

Nevertheless, there are several practical steps that employers may consider in order to reduce their potential exposure to employee claims for compensation. These include:

(1) having employees sign an explicit waiver of their right to seek any compensation for service inventions in excess of their salary;

(2) having employees sign a general waiver and release upon severance of employment relations; or

(3) Awarding employees specific compensation – even if limited – for service inventions, under their individual employment agreements or based on an internal policy adopted by the employer.

In addition, it would be advisable for companies engaged in R&D activities to make sure that their employees provide them with timely, orderly and detailed notices of any inventions arrived at by them during the course of their employment. In view of the HCJ's decision in Levy v. Teva, such notifications can, inter alia, serve as evidence of the date of accrual of the employee's cause of action under section 134 of the Patents Law.

Adv. Tal Band and Adv. Noam Blei represented Iscar, Teva, and Company in the cases referred to above. We will be glad to answer your questions and assist, as necessary, in matters relating to employee inventions.

[1] HCJ 4353/14 Barazani v. Iscar Ltd. (8.7.2015).

[2] Committee's decision in John Doe v. Company (3.5.2017)

[3] HCJ 8672/17 Levy v. Teva Pharmaceutical Industries Ltd. (1.12.2019).