Dealing with employee-generated IP in Malaysia
Malaysia is currently striving towards maintaining a knowledge-based economy where there is emphasis on the utilization of intellectual capital to drive innovation and growth in the provision of goods and services in the market. In a knowledge-based economy, individuals with the suitable skills and technical expertise can play an important role in creating intellectual property (IP) assets for the companies that employ them. At the same time, a company will usually seek to retain ownership of IP assets created by its employees in order to gain the exclusive right to exploit the IP assets for its own benefit.
Who owns the IP rights?
Ownership of IP rights such as patent, copyright and industrial design in Malaysia vests initially on the person who had created the subject IP such as the author (for copyright and industrial design) and inventor (for patent).
However, the IP ownership rights do not rest permanently with its creator in the context of employer-employee relationship, contract of service or apprenticeship.
The default legal position in Malaysia based on the provisions of key IP legislation [i.e. Patents Act 1983 (“PA 1983”), Copyright Act 1987 (“CA 1987”) and Industrial Designs Act 1996 (“IDA 1996”)] is that the ownership rights to IP created by an employee is deemed to be transferred to the employer or the person who had commissioned the creation of the said IP, in the absence of any contractual terms between parties which restrict such transfer.
This means that an employer would generally become the final owner of works and inventions created by its employee in the course of employment unless there are agreed contractual terms which state the contrary.
Confidential Information and Invention Assignment Agreement
It is a common practice for multinational corporations and other entities that engage heavily in research and development activities (such as universities) to make it mandatory for a potential employee to sign a Confidential Information and Invention Assignment Agreement (“CIIAA”) before commencing employment with them. This is done to secure the employer’s ownership rights to any IP asset created by the said potential employee during the course of employment.
The CIIAA generally provides, amongst others, that the employee is agreeable to assign all ownership rights to all forms of IP created by him/her during the course of employment to the employer. At first glance, the CIIAA may appear to be a non-essential supplementary agreement considering the existing provisions in key IP legislation which are favorable towards employers in Malaysia. Nevertheless, the CIIAA can still be used as an instrument to ensure that the employer’s ownership rights over IP assets generated by its employees is also protected under contract, in addition to the employer’s existing statutory rights in Malaysia.
There are some important pointers which employers should note before entering into a CIIAA with an employee based in Malaysia.
Equitable remuneration
Most companies will regard salary as a sufficient form of remuneration to employees for the time and effort that they expend in creating IP assets in the course of employment.
It is possible that from time to time, an IP asset created by an employee can turn out to be a game changer in an industry or become extremely profitable to the company. The employee who is responsible for the creation of the aforesaid valuable IP asset may attempt to claim for extra remuneration from his/her employer based on the perceived value of the IP asset in the market.
The CA 1987 and IDA 1996 do not require equitable remuneration to be paid by an employer to an employee for the original work/industrial design created in the course of employment.
However, the PA 1983 contains provisions which can enable an employee to claim for equitable remuneration for patentable inventions made by him/her during the course of employment. Section 20 PA 1983 recognizes that an employer is entitled to be the owner of a patent for an invention made by an employee during the course of employment, but this is subject to the payment of equitable remuneration to the inventor under certain circumstances. There are 2 circumstances prescribed by Section 20 PA 1983 where equitable remuneration can be claimed by an employee who is the inventor of an IP asset owned by the employer:
(i) In a situation where a patentable invention is made by the employee during the performance of a contract of employment, the employee is entitled to equitable remuneration if the said invention acquires an economic value much greater than the parties could reasonably have foreseen at the time of concluding the contract of employment or for the execution of work. The Court has the discretion to fix a suitable amount of equitable remuneration in the absence of agreement between the parties[1]; and
(ii) In a situation where an employee (whose contract of employment does not require him to engage in any inventive activity) makes an invention in the field of activities of his employer using data or means placed at his disposal by his employer, the employee is entitled to equitable remuneration which may be fixed by the Court taking into account his emoluments, the economic value of the invention and any benefit derived from it by the employer, in the absence of an agreement between parties[2].
It is pertinent to note that Section 20(3) PA 1983 does not permit the inventor’s right to equitable remuneration under both circumstances mentioned above to be restricted by contract. As such, any provision in a CIIAA which prevents equitable remuneration to be paid to an employee in relation to patentable inventions made by him/her during the course of employment is arguably void or unenforceable by virtue of Section 20(3) PA 1983.
In view of the foregoing, an employer may wish to consider the inclusion of relevant provisions pertaining to equitable remuneration into the CIIAA where the counterparty is an employee based in Malaysia. This enables the employer to have some form of control in deciding the amount of equitable remuneration to be paid instead of relying entirely on the Court’s discretion to do so, where the outcome could turn out to be unfavorable to the employer.
Non-compete clause
A non-compete clause is a common feature which can be found in a CIIAA. The aim of such clause is to prevent an employee from joining a competitor or setting up a business which rivals his/her employer in the same industry.
An employee who has spent a considerable time in employment with a company would have gained significant insider knowledge and proprietary information in relation to his/her employer’s business operations. The employer would therefore find it crucial to take steps to ensure that its former employees who possess such insider knowledge and proprietary information are legally prevented from starting a similar business in the same industry or joining its competitors.
Employers should note that a non-compete clause that takes effect post-employment is unenforceable in Malaysia by virtue of Section 28 of the Contracts Act 1950 (“CA 1950”) which states that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is void. Although the employer may not be able to stop an ex-employee from competing with it in the same industry or from joining a competitor, the ex-employee must still comply with the confidentiality obligations as stipulated in the CIIAA in the post-employment period.
As for non-compete clause that operate during the course of employment, there are existing jurisprudence and case law in Malaysia which arguably support the position that it is valid and does not contravene Section 28 CA 1950.
Conclusion
In the absence of any written agreement, the employer certainly has the upper hand in asserting ownership rights over IP assets that are generated by its employees in Malaysia due to existing statutory provisions. With that being said, it would still be beneficial to the employer and employee to enter into a CIIAA as it can provide clarity on the scope of rights and obligations possessed by either party in relation to IP assets that are created in the course of employment in Malaysia. The employee can also use the opportunity to negotiate for equitable remuneration provisions to be inserted into a CIIAA for his/her role in the creation of valuable IP assets for the employer. A well-drafted CIIAA can be utilized to incentivize employees by way of equitable remuneration and to encourage them to innovate and create new IP assets for their employers without feeling shortchanged while assuring employers that their proprietary interest in the IP assets are secured.
If you have any questions or require additional information, please contact Stanley Lee Wai Jin or the partner you usually deal with at Zaid Ibrahim & Co.
This article is for general information only and is not a substitute for legal advice.
[1] Section 20(1) PA 1983
[2] Section 20(2) PA 1983