Authored by Linda J. Thayer
Most companies now understand the value of applying for patents on inventions before launching a product. Obtaining patents on your inventions adds value to the bottom line by increasing your intangible assets, giving your company bragging rights and, importantly, enhancing your company's power in the marketplace by providing it with the right to stop others from making or using your invention without permission.
Equally important, although less obvious or glamorous, are the benefits that come with product clearance, also called "freedom to operate" (FTO) or "right to use" opinions.
FTO analysis involves identifying and analyzing the patents of others that may subject your company to patent-infringement liability. By performing FTO analysis before developing and launching a new product or before acquiring a new company, your company can limit the risk of future litigation and avoid unnecessary expense. FTO analysis done early in the cycle of product development affords companies the opportunity either to modify the design and avoid infringement before reaching the point of no return, or to take a license.
As a side benefit, FTO studies can identify opportunities for patenting or further development. Similarly, performing FTO analysis as part of due diligence may allow you to steer clear of an opportunity fraught with the danger of litigation.
FTO analysis begins with an assessment of the product or service. Which components are new and/or clearly visible to the public, and therefore more likely to bring scrutiny? Are any of them subject to existing licenses? Are any components developed by others or under agreements that may include indemnification clauses? Will the product or service vary from country to country? Concurrently, a clearance search is performed for unexpired patents and published applications that may claim the various components. Finally, an experienced patent attorney should evaluate the information and provide an opinion on the risks of going forward with the product, service, or acquisition.
It is important to understand that FTO analysis can never guarantee that your company will not be sued. The patents and applications identified will depend on the quality of the search, and the degree of relevance of each patent or application will be subject to interpretation. Some applications by others may be on file but unpublished at the time of the search and therefore not considered as part of the study.
Since FTO studies can be time-consuming and costly, most companies choose when and where to perform FTO analysis to minimize risk and maximize value. What factors should drive the decision?
As a first step, a company should consider the product or service being launched or acquired in terms of its value to the company. What is the existing or projected revenue? Is this a high-profit item or low-margin product?
Products with high margin or high volume are most likely to lead to high damage awards if a patent-infringement case goes to trial. Therefore it will often be worth it to take the extra step and clear the product before proceeding. Products in this category include, for example, televisions or cell phones. If a company has limited dollars to spend for clearance, products can at least be initially ranked in terms of value.
Products or services requiring a significant investment relative to the company's total R&D budget should receive higher and earlier priority, so that FTO results may be used to minimize costs or allow time for designing around any identified patents. For products requiring less investment, FTO analysis may be deferred until nearer to the end of the project, but it should still be performed before release.
The danger of waiting until the product is fully developed lies in a simple fact: By then the business units will be champing at the bit to release the product, and an early release may result in litigation that was avoidable.
Today, we have access to many search tools that can determine if a particular product class is highly litigated. For example, a Lex Machina search for litigations over the last 10 years shows that, after pharmaceutical drugs, the next most active areas involve computers, cell phones, and communications, including data handling via the Internet. In their own but a related category are products or services using data security or encryption. Not far behind are consumer electronics, such as televisions and video games.
What is notable from this search is the significantly smaller number of litigations involving household goods and toys. Litigations involving household appliances do occur, but they are far less frequent.
This kind of information can help a company make an informed decision about obtaining an FTO.
Your company's own developers and technical people will likely be a good source of information. Ask the relevant business units to identify entities they believe may be highly motivated to keep the proposed new product off the market, and ask your technical people which competitors' products most closely resemble the one you plan to offer. It is quite common in the marketplace for development groups to get inspiration from a chief competitor.
Also, scrutinize any patents or publications by academic institutions known to do research in the field.
A company marketing and selling its own "private label" products—that is, products manufactured under contract by others for sale by the company under its own brand—will be the one sued, especially if it is perceived to have the deeper pockets or if it is based in the United States (providing jurisdiction).
While the company can, and should, require indemnification clauses in supplier agreements, indemnification may not provide enough protection. Foreign companies eager for the company's business may be quick to agree to an indemnification clause while underestimating or not fully appreciating the risks of patent infringement, since many technologies patented in the United States are not patented in some foreign countries and the risk of damages in other countries is much lower.
When the time comes, your company may have limited success enforcing an indemnification clause against the foreign entity beyond the reach of the U.S. courts. As a result your company may be ultimately responsible for the infringement damages.
If the company will go ahead despite the results, FTO analysis may not be cost effective. This means the company should be comfortable with the risk of litigation and the possibility it will need to marshal sufficient resources to defend itself. Patent litigations costs, at least in the United States and Europe, can be significant—legal costs and damages for infringement can run as high as several hundred thousand up to hundreds of millions of dollars. With that in mind, this strategy rarely seems prudent.
FTO analysis can play a valuable role in an IP strategy. It allows a company to identify, minimize, and manage risk while frequently, at the same time, identifying areas where patent coverage is thin or absent and therefore present opportunities.
The only real downside to regular FTO analysis on all products is the cost. Since few companies have an unlimited budget for legal fees, most companies consider their level of FTO analysis on new products and acquisitions in light of their budget and risk tolerance. An experienced patent attorney should be able to assist in developing a policy that is right for your company.
Originally printed in Today's General Counsel. 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.
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