intellectual protection tops intervention

20 October 2001

Rob Deans

In his policy address to LegCo last week the Chief Executive Tung Chee-hwa proposed a package to boost government funds for small and medium enterprises (SMEs) by HK$1.9 billion.

This is significantly more than the HK$1.3 billion which the Small-and-Medium-Sized Enterprises Committee (SMEC) had called for. However, the LegCo representative for the IT sector, Sin Chung-kai, has reportedly criticised the proposal as not being sufficiently directed to the IT sector. Mr Sin has specifically called for the government to allocate a third of the proposed new funds to help SMEs develop e-business.

Are Mr Sin's calls justified? Is there any special case for SMEs in the IT sector to receive greater funding than traditional businesses?

To some degree, the answers to these questions are a matter of politics, as the extent to which IT companies should be funded by government is dependent on the government's plans to develop Hong Kong into an IT centre for Asia. However, politics aside, do SMEs in the IT sector require greater funding than their traditional counterparts?

Many of Hong Kong's IT SMEs are reliant on developing new technologies or adapting existing technologies for new markets. This can take years of research and development which in most cases have to be budgeted and paid for before the business has any reliable income stream. This is an obvious strain on SMEs, and government funding is undoubtedly an essential requirement for many SMEs in the IT sector, particularly given the current downturn in investor confidence.

It should also not be overlooked that IT companies need to invest not only the development of their technologies, but also in their protection. Where would Microsoft be now if it had failed to protect its original DOS product and its subsequent Windows operating systems? In short, years of research and development costs can be wasted if the result is a product which is either unprotected or unprotectable.

Developed software and many other intangible IT products have traditionally been protected by copyright which in many cases will subsist automatically upon creation. In such circumstances, the most important issue for SMEs has usually been to ensure that it (as opposed to any individual which it commissioned to write the software) owns the copyright.

However, in the last couple of years a trend has developed (particularly in the US) for businesses to patent IT products which they have developed. The resulting monopoly protection provided by a patent can significantly increase the market value of the product, even in cases where the product would in any event enjoy copyright protection.

The patenting of software and other intangible IT products as 'business methods' is controversial and has resulted in litigation (most famously in respect of Amazon's 'one-click' Internet shopping patent and Priceline's reverse auction e-commerce patent). Such patents often require detailed, specialised drafting to prepare which can lead to significant costs. Also, depending on the number of countries in which patent protection is sought, the fees of the Patent Registries where the applications are filed can add up to a significant sum.

Funding is already available to assist many SMEs in applying for patent protection through a grant of up to HK$100,000 available from the Hong Kong Government's Innovation and Technology Commission (subject to certain eligibility criteria being met). However, even when funding is in place, many SMEs are unable to claim patent protection as a result of a decision to disclose details of the product before a patent application has been filed. Any pre-disclosure of a new product (even on a very small scale, to a few people) can put the product into the public domain and render it unpatentable.

In order to avoid the disaster of rendering a potentially extremely valuable product worthless by way of premature disclosure it is essential that the developer ensures that any person to whom he provides details of the product (including, in particular, any potential investor) signs a confidentiality agreement (commonly known as a non-disclosure agreement or NDA) before that person is provided with details of the product. As with most legal agreements, NDAs vary in style, length and quality. However, in most cases a straightforward document which is only a couple of pages long will be sufficient.

In the scheme of things, an investment in an NDA is very small, but it can mean the difference between a successful business built on a product in which the business owns monopoly rights, or a business which has failed due to an inability to recoup investment costs in a product which it has failed adequately to protect.

First published in the South China Morning Post Newspaper on 20/10/01.