According to the research by a U.S. consultancy firm, technology companies that own more patents have delivered much better returns to their shareholders. It is vital for companies to spend their R&D budget wisely and to patent the fruits of their investments in R&D.   What should a fund manager look at when he / she is considering whether a technology company is worth investing in? Of course it goes without saying that integrity and quality of management are of paramount importance. But apart from that, how could the fund manager determine whether a technology company would have a bright future and that its earnings will keep on rising, bringing good returns to the shareholders?   Is the R&D money spent wisely?   The conventional wisdom is to look at the R&D expenses of the company. A high level of R&D expenditure relative to the company's revenue implies that the company is willing to invest in the future. However, nowadays if an investor still adheres to such convention, he is not likely to be rewarded by his investment. Why? The answer is simple. The key question is not how much money is spent on R&D but whether the money is spent wisely. How, then, could one know whether them R&D money is spent wisely?   R&D and its relation to Patents   The answer is given by examining the “patents portfolio” of the subject company. The rationale is easy to understand. If R&D money is wisely spent, it should result in patents being granted to the company. The more patents granted, the more effective is the company's investment in R&D. If R&D does not result in patent grants, it is doubtful whether the money is wisely spent.   Of course not all patents are of equal value. Some patents have little commercial value but some patents can bring in great wealth to the owner. To further refine the research method, the fund manager needs to examine whether the patents granted to the company are “good quality” patents. Generally, a patent is of good quality if it is frequently cited in other patent applications (as those other patent applicants wish to eschew or improve on it) or if it cites a relatively large number of patents (as the inventor wishes its patent to improve on many patents).   Exceptional Return on Investment in Patents   The above is the idea behind a stock portfolio selection method invented by a U.S. consultancy company CHI Research, a firm that focuses on studying the intellectual property of companies. CHI itself patented its stock portfolio selection method in U.S. Patent No. US 6,175,824 B1. According to the research of CHI, a portfolio of technology companies selected on the basis of good quality patents held by those companies, such as Microsoft Corporation and Intel Corporation far out-performed the S&P Index and the Nasdaq, as shown in the figure below.   Basic Knowledge of Patent Law and Practice is vital   Many Hong Kong and Chinese companies are still at the beginning stage of utilizing the worldwide patent system in their research and business strategies. The lack of awareness in the value of patents and t he basic knowledge about the law and practice of patent application and protection could cost a company dearly.

IMPORTANT: Without knowledge of the background/facts of the individual matter, we do not intend for the above summary to deal with every important topic or to cover every aspect of the topics with which it deals.  Such summary is for general information purposes only and is not intended to provide legal advice.

For enquiries: Please contact members of our Intellectual Property Practice Group:

Ludwig Ng Senior Partner, Head of Intellectual Property & Technology Practice Group +(852) 2107 0315 ludwig.ng@onc.hk

Derek Lau Associate +(852) 2107 0329 derek.lau@onc.hk

Published by ONC Lawyers © 2005