Why freedom to operate is essential for startups
Freedom to operate or FTO may not be the first thing you think of when developing a new product or service – but it is a crucial step that should not be ignored, especially for startup companies and those seeking external funding.
The risks that come from failing to conduct a thorough freedom-to-operate search include costly legal battles, ruined relationships with customers and business partners and the loss of an otherwise promising product. The rewards of doing so in the early stages of your product discovery are security, improved funding opportunities and commercial success.
So, what is freedom to operate, why do you need it, and how do you do it effectively?
What is freedom to operate?
Establishing freedom to operate essentially means ensuring that your products and services do not infringe anyone else's Intellectual Property (IP) rights. It is the first step you should take before attempting any marketing. While IP rights include trademarks, utility models and design rights, freedom-to-operate searches mainly concern patents.
Patents are infringed whenever someone carries out any commercial activity that falls within the patent's claims, i.e., its scope of protection. That means the onus is on you to ensure your products and services do not violate other parties' patent rights.
A freedom-to-operate search will therefore establish such information as which relevant IP rights exist and potentially have bearing on your product, the breadth of their protection, where they are valid and for how long, who owns them and any pending legal disputes. It may also recommend any action you should take in response to the findings. The nature of the freedom-to-operate search will depend on the technology involved and the jurisdiction(s) you are doing business in since not all patents are protected in every jurisdiction. Considering that there were more than 3.25 million patent applications worldwide in 2020, and the total number of patents in force was estimated to be nearly 16 million (according to the World Intellectual Property Organization), you can begin to see the scale of the task involved.
When doing a freedom-to-operate search, it is essential to consider all aspects of your development and manufacturing processes. Even if your commercial product does not infringe any patents, the manufacturing process might. If you operate in an agile environment, where operations are constantly being adjusted, you need to pay particular attention to whether changes could lead to potential infringement problems.
Why do freedom-to-operate searches?
No business, especially a startup, needs expensive and unpredictable legal action – but that is precisely what could result if you fail to do a freedom-to-operate search. At best, an upheld accusation of patent infringement could lead to paying royalties and lawyers' fees and losing the trust of potential suppliers, customers or partners. At worst, you could end up paying damages as well as legal costs and incurring severe business disruption due to discovery and court time. In some jurisdictions, notably the United States, damages awards can be increased where the infringement was "willful," in other words, where the infringer was aware of the IP rights.
But there are also positive reasons to carry out freedom-to-operate searches. One is to assure your employees and contractors that you take IP rights seriously and do not want to risk being sued for infringement. Another reason is to instill confidence in investors: They will be more likely to support your business if they know you have conducted a thorough freedom-to-operate search. For startups that depend on external funding, this can be crucial.
Finally, if you have insurance that covers IP infringement claims, there is likely to be a requirement that you do a freedom-to-operate search before launching a product. Not doing so could invalidate the insurance.
How do you do a freedom-to-operate search?
You probably already monitor your competitors' activities, so you might think you have a good idea of their inventions; you might even have investigated what patents they have registered. Be that as it may, a full freedom-to-operate search needs to go much further than that.
For a start, it is necessary to look at both granted and pending patents and study the databases in different national and regional patent offices. An understanding of the nuances of the patent registration system helps here.
You need to review a patent's expiry date and whether it is still in force – many granted patents are allowed to lapse before their 20-year term ends, while others are revoked following litigation. It is also vital to examine the claims of granted patents as they may provide broader protection than indicated by the products available on the market. And not all patents are available in English, so there will be a need for translation in at least some cases.
It is also essential to look beyond your immediate competitors. Many high-tech companies carry out research that has applications across various fields and file patent applications accordingly. This means they can secure royalties from companies in completely unrelated sectors. A good freedom-to-operate search will identify such patents based on technology classification and keywords.
You have probably realized by this stage that establishing freedom to operate is too great and far-reaching a task to attempt without expert help. Patent attorneys with specialisms in the particular technology or sector you are working in will be best placed to identify IP rights that you could potentially infringe and advise on what to do next.
After the freedom-to-operate search
If you are lucky, and the search comes back clear, you can press ahead with your product launch, armed with an encouraging letter from a patent attorney to show potential customers and investors.
However, in many cases, the search will identify one or more IP rights that you may be infringing. When this happens, you have several options:
- Re-engineer your product so that it does not infringe the IP rights. So-called "inventing around" may be possible in some cases, depending on the breadth of a patent's claims. But if you follow this route, you will require solid legal advice as you might need to do another freedom-to-operate search for the new product features you are developing.
- Purchase a license. This is probably the most common response. You negotiate with the patent proprietor a fair price to use the patented technology based on sales volume or another agreed metric. Like all the best deals, this can be a win-win: The patent owner earns a reward for their innovation, and you get the green light to enter the market. Alternatively, if you have valid IP rights that cover the patent proprietor's products, you can negotiate a cross-license agreement that gives you both freedom to operate.
- Purchase the patent. If it is not commercially valuable to the proprietor, they may be willing to sell the patent rights for an appropriate fee. However, if you go down this route, you will need to consider what you are prepared to pay and ensure you are securing all the rights necessary to gain freedom to operate.
- Invalidate the patent. Suppose you strongly believe that the patent right is invalid, for example, because there was prior art or it includes subject matter that is not patentable. In that case, and for most jurisdictions, you can bring a court action to revoke it. However, such cases are complex, expensive and time-consuming – and not something that most investors welcome.
Beyond freedom to operate
All being well, your search will put you in a position where you can successfully go to market without fear of running into legal problems. If the examination indicates that there are no prior patents out there, you could then consider how to protect the innovative aspects of your product or service.
You could do this by keeping the innovation secret – taking whatever security steps are necessary – but such trade secrets do not protect against independent development. Alternatively, you could publish it, for example, in a recognized journal. Doing this means giving up any exclusive rights while preventing other parties from securing IP rights to the invention. Finally, you could file your own patent application, provided all the relevant criteria are met. This option not only ensures your commercial position but might also enable you to negotiate licensing deals or other favorable arrangements with other companies.
Whatever route you choose, you are in a much stronger position to obtain funding and achieve commercial success if you have given your freedom to operate its due attention. At Dennemeyer, we have more than 55 years of experience in monitoring and protecting IP rights. Our experts have the skills and knowledge to assist you through every stage of a comprehensive freedom-to-operate search. With a global network of offices and partners, we are always in a position to achieve optimal results for our clients. Get in touch with us today to secure your rights and your place in the market.
The opening of the Unified Patent Court (UPC) on June 1, 2023, raises questions about potential changes to existing licensing regimes.