May 31, 2013
By M. Andrew Holtman, Ph.D.
Authored by M. Andrew Holtman, Seth R. Ogden, and Scott J. Popma
Crowdfunding is rapidly being adapted as a tool to raise capital from a large number of small investors. A number of crowdfunded projects have already crossed the million-dollar threshold, and this trend will likely accelerate after the U.S. Securities and Exchange Commission implements the Jumpstart Our Business Startups Act, which clears the way for equity-based crowdfunding.1
But to engage the network of potential consumers and supporters, companies have had to publicize substantial information about their projects, including technical details of the products, the fundraising goal, and the fundraising period's closing date.2 Similar requirements will likely be required for equity-based crowdfunding.3
Competitors can use this information to evaluate the proposed products, determine whether their intellectual property is being infringed, assess potential damages, and prepare to file a lawsuit at the optimal time.4 These disclosures, combined with the ensuing elevation of successfully funded crowdfunders' profiles, make crowdfunders a target for future patent litigation.
Though crowdfunding unquestionably provides a small business venture with new and greater access to capital, it fails to address another crucial barrier to product commercialization—IP owned by competitors. A competitor's patent portfolio may block market entry and threaten current and future profits, even with appealing product design and flawless execution of a crowdfunded offering. In fact, the more successful the offering, the more likely a competitor will pursue litigation to prevent further product commercialization and disgorge any profits already realized. Thus, companies contemplating a product launch via crowdfunding would be well served to examine the freedom to operate (FTO) in their product area of interest before launching fundraising efforts.
Failure to perform a comprehensive FTO analysis before a crowdfund offering cannot only derail a project, but also could result in a damages assessment well beyond the capital earned during the offering. This danger is illustrated by a recent suit against Formlabs Inc.
Founded by a small group of graduates from the Massachusetts Institute of Technology, Formlabs sought to build an inexpensive 3D printer, turning to crowdfunding to raise capital. After being descried by several heavily trafficked tech blogs, Formlabs raised almost $3,000,000 in less than a month, obligating it to ship 1,028 3D printers to its backers.5 But just three weeks later, 3D Systems Inc. brought suit seeking to enjoin Formlabs from filling those preorders and payment of unspecified monetary damages.6
An FTO analysis, at its heart, serves as a risk-management tool by identifying third-party IP that may threaten a new product launch. Typically, patents represent the most significant IP hurdle a company may face, so this article focuses on analyzing the patent landscape. But a fuller FTO analysis should also examine other types of IP, including copyrights, trademarks, and trade dress.
An FTO analysis generally follows a three-step process:
Because a patent grant extends for a defined time period, the FTO analysis should be thought of as an iterative process to be performed early and regularly updated.
Finally, because the value of an FTO analysis depends on proper, thorough legal and technical execution, companies should consider seeking proper assistance.
To ensure a comprehensive analysis, a company must know where to focus its search. Thus, a company must first dissect its product into its component parts.
For example, a bicycle, in its most rudimentary form, has at least six component parts: a frame, a seat, wheels, a steering mechanism, pedals, and a chain connected from the pedals to the rear wheel. Of course, many bicycles are far more complex. Some have more than one gear, which necessitates multiple chain-rings, a chain stay, and front and rear derailleurs. Further, even the rudimentary bicycle can have its parts subdivided into their individual hardware components (e.g., a wheel consists of a rim, hub, tube, and tire). Obviously, a search incorporating all of a bicycle's parts would be excessively time-consuming and costly. To keep it manageable, the company should focus on the components it anticipates to be novel or inventive.
Patents cover both tangible inventions and methods and processes, meaning that third-party patents could block the ability to sell a product that contains a component produced by a patented process. Consequently, for each component identified during the deconstruction, the company should identify any methods or processes used to create that component, again focusing on those methods and processes anticipated to be novel or inventive.
Second, the company conducts a patent search, also known as a prior art search, for each of the components and associated methods/processes identified during product deconstruction.7 A company could outsource this to one of the many services that specialize in prior art searching, or, alternatively, those with a strong relevant technological background may be able to do some of the initial research using public patent databases available on the internet.8
When choosing where and how broadly to search, two key attributes of patents must be considered. One, patents are temporal in nature, with old rights expiring and new rights being granted regularly. As mentioned above, an FTO analysis is an iterative process that must be consistently repeated and updated. Moreover, determining a patent's expiration date may require going beyond the filing date on the face of the patent.9 Two, patents are territorial, not global. Thus, a company need only search for patents issued where the product will be made, used, or sold. However, foreign patent databases may provide information useful for identifying competitors who may have applied for patents in the jurisdiction of interest.
Once the proper databases have been identified, most searches begin with a keyword query. However, if a specific competitor has already been identified, a search could be done to retrieve all patents assigned to a specific competitor.
For all patents of interest, the relevant art cited within should be retrieved, reviewed, and catalogued. Because patent applicants have a duty of disclosure, the patent document should reference most relevant prior art documents. For particularly relevant results, the company should perform a secondary search for references that cited to the reference of interest.
Third, the company should determine the likelihood that the product or methods infringe the third-party patents identified during the search. This determination can begin by ascertaining the scope of the patent claims, which define patent coverage. Subsequently, the company utilizes the information regarding claim scope to categorize the level of risk associated with a product launch.
Though a patent specification may contain a broad description of a technology, the patent claims define the exclusive right granted by a patent. The claims, loosely analogous to the “metes and bounds” of real-estate deeds, provide a qualitative description of an invention's limits. Certain rules govern the art of claim interpretation,10 but during litigation, the court, not the parties, determines the boundaries of patent coverage.Ideally, the claim scope determination should be used to categorize the relevant patents based on likelihood of infringement. This can be done in a number of ways, but the focus should be on identifying three main categories:
A current, thorough FTO analysis allows a company to prepare for a successful product launch by minimizing the risk of infringement of third-party patents. If potentially troublesome patents are identified, several approaches may be appropriate depending on how the infringement risk has been categorized.
Business-oriented approaches include:
Alternatively, a company can pursue research-and-development options:
Finally, legal options can also help mitigate infringement risk.
As famous inventor and statesman Benjamin Franklin said, "By failing to prepare, you are preparing to fail." Likewise, risk of infringement can be mitigated only if identified before a product launch.
A reasoned FTO analysis embodies the preparation needed for success, allowing a company to more confidently proceed with a crowdfunded offering and avoid the situation experienced by Formlabs. Moreover, disclosure regarding that FTO analysis can engender the interest of potential investors by demonstrating both the business acumen of the company seeking funding and the viability of product commercialization.
Endnotes
1 See, e.g., http://www.kickstarter.com/help/stats (indicating that five technology projects successfully raised over one million dollars, including the Pebble E-Paper watch and Ouya video game console).
2 See, e.g., http://www.kickstarter.com/help/guidelines (providing specific disclosure guidelines for design and hardware products).
3 Regulations currently being drafted by the SEC are required to include provisions setting out disclosure requirements for companies looking to use registered Internet-funding portals. Danielle Douglas & Steven Overly, As regulators set rules for equity-based crowdfunding, investors prepare for its impact, The Washington Post (May 20, 2012), http://www.washingtonpost.com/as-regulators-setrules-for-equity-based-crowdfunding-investors-prepare-for-itsimpact/2012/05/18/gIQAFwmVdU_story.html.
4 Due to legal costs, bringing suit usually only becomes worthwhile when the dollar amount at issue crosses a certain threshold. Required disclosures remove the guesswork by providing potential plaintiffs with vital information, such as how much money a competitor has raised, what its product will look like, and the anticipated shipment date of the products.
5 http://www.kickstarter.com/projects/formlabs/form-1-an-affordable-professional-3d-printer.
6 Complaint for Injunctive Relief and Damages, 3D Systems Inc. v. Formlabs Inc., No. 12-cv-03323-TLW (D.S.C. Nov. 20, 2012).
7 For a company looking to determine novelty of its own idea or validity of a competitor's patent, a prior art search should also be done for non-patent publications.
8See, e.g., U.S. Patent and Trademark Office, http://portal.uspto.gov; European Patent Office; Google Patents, http://www.google.com/patents; Cambia Patent Lens.
9 The patent may claim "priority" to another previously filed application, even one filed in a foreign jurisdiction, resulting in an earlier effective filing date, or the patent term may be adjusted due to the filing of a "terminal disclaimer" or a "patent-term extension."
10 See, e.g., Renishaw PLC v. Marposs Societa Per Azioni, 158 F.3d 1243, 1249, 48 U.S.P.Q.2d 1117, 1121 (Fed. Cir. 1998) ("Absent a special and particular definition created by the patent applicant, terms in a claim are to be given their ordinary and accustomed meaning.").
Reproduced with permission from BNA’s Patent, Trademark & Copyright Journal, Vol. 86, No. 262, 05/31/2013. Copyright © 2013 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
Conference
4th Annual Passport to Proficiency on the Essentials of Hatch-Waxman and BPCIA
October 8-24, 2024
Virtual
Hybrid Conference
2024 Patent Law Institute: Critical Issues & Best Practices
September 30 - October 1, 2024
New York
Federal Circuit IP Blog
August 16, 2024
Due to international data regulations, we’ve updated our privacy policy. Click here to read our privacy policy in full.
We use cookies on this website to provide you with the best user experience. By accepting cookies, you agree to our use of cookies. Please note that if you opt not to accept or if you disable cookies, the “Your Finnegan” feature on this website will be disabled as well. For more information on how we use cookies, please see our Privacy Policy.
Finnegan is thrilled to announce the launch of our new blog, Ad Law Buzz, devoted solely to breaking news, developments, trends, and analysis in advertising law.