Why is Freedom To Operate In the Technology and IP Space So Important
Freedom to Operate (FTO) is a phrase that will be familiar to anyone working in the technology and IP space, but what does it mean and why is it important. Here we discuss some of the issues around patent FTO studies
What is Freedom to Operate?
Most companies are aware of the benefits of having their products protected by patents. Having freedom to operate is less recognized and less understood. So, what is freedom to operate and why is it valuable? In essence, freedom to operate usually comes in the form of an opinion from a patent attorney which indicates whether a specific product or process can be commercialized without stepping on the patent rights of third parties. It is prepared by conducting searches of patent databases to identify patents or patent applications that have claims which would be infringed by the subject product or process. These documents are analyzed by a patent attorney, who will provide an opinion as to the risk of the subject product or process infringing the claims. An FTO study will generally provide a good indication of whether a product can be launched and in what countries and provides confidence to a business that investments in new products is not wasted and will not end up in litigation. Apart from these obvious outcomes, FTO studies can also identify competitors active in the same technical area, identify new technologies, and in some cases inform the development process to steer the proposed product or process away from a patented technology.
What is the difference between an FTO opinion and a patentability opinion?
We get asked this question many times and there is a general misunderstanding around the distinction between the two. In essence, an FTO opinion provides advice on whether a new product can be put on the market without serious risk of infringing third-party patent rights, and a patentability opinion relates to advice on whether a new product or process is patentable. Although there is some overlap between the two exercises, they address fundamentally different questions and the answer to one does not inform the answer to the other. For example, it is possible to get a positive patentability opinion for a new product but not be able to make or sell the product because of a patent infringement risk, and vice versa. To understand the distinction between the two, it is important to recognize that patents are fundamentally negative rights that allow the patent owner to prevent a third party from using the invention, as opposed to giving the patent owner the right to use the invention themselves.
When Should FTO studies be performed?
There is no hard and fast rule for this, but the simple answer is that they should be performed as soon as possible, and certainly, before significant sums of money are committed to development of a new product or process. The risk associated with not performing an FTO study is that money is wasted developing a product that cannot be launched or, worse still, is launched and then must be taken off the market because of threatened or actual litigation, with consequent legal fees, and reputational and monetary damages. We recommend that FTO studies are performed initially at an early stage of development before significant investment has been made, and again later in the development process before the point of no return has been reached. The initial FTO would help identify any obvious patent infringement issues and inform the direction of development, whereas the later FTO would provide a more comprehensive FTO risk assessment on a country-by-country basis.
Risk Analysis prior to FTO
As FTO studies can be expensive and complex, it is possible to partially assess patent infringement risk before patent searches are performed. For example, the risk of patent infringement associated with the development of a medical device or item of telecommunications hardware or software would be higher than compared with a food product or household care product. Another warning sign would be if your company operates in a highly competitive market with regular patent confrontations, or if a competitor appears to have a monopoly on a particular type of product. If your product or process is based on a known product/process that has been on the market for over 20 years, with only minor modifications, this would indicate that the risk of a patent confrontation would be low. In all cases, it is prudent to take advice from a patent attorney before deciding that an FTO is not necessary.
Buying a company and associated IP assets is usually preceded by a period of due diligence including assessing the status and validity of the patent rights. It is advisable in any such exercise to include an FTO assessment to determine if the processes and products can be commercialized without risk of patent infringement. If the products have already been on the market for several years in specific countries without any patent confrontation, this would be an indication that the risk of patent infringement in those countries may be acceptable low. For processing technology, and for products that have not been commercialized, this caveat does not apply and FTO’s should be performed as part of due diligence.
FTO and Start-Up Companies
It is good practice for a technology start-up company to have an idea of the patent landscape for their technology. Patent search companies provide landscape patent searches that provide an idea of the main patent players in a specific technical field, what geographies the patents cover, and the different technical solutions being pursued. These searches are not FTO searches, but they should uncover any obvious patent roadblocks that a start-up company should be aware of early on. In addition, patent office search reports although not aimed at infringement risk can be useful way of identifying potentially problematical patent rights. The question of FTO often first arises during early investment rounds with investors looking for comfort as regards the question of FTO, and sometimes even earlier because of requests from State funding bodies. Having an informed position on FTO at this stage, even based on very preliminary searches, is useful in negotiations with investors. Performing full FTO studies will usually be necessary during later rounds of investment and may be performed and funded by the investors themselves. An initial FTO analysis performed at an early stage of development would incur costs of €3000 to €5000, with later more detailed and focused FTO opinions incurring costs of €5000 to €10,000 and upwards.