Innovations that arise in competitive markets with a well-developed and rapidly evolving intellectual property space often integrate several pre-existing technologies from various scientific and engineering disciplines. If your company operates in such an environment, protecting your innovations by conducting patent due diligence and a ‘Freedom to Operate’ (FTO) analysis can be integral to growth and can provide a true competitive advantage when properly managed.
Patent due diligence can be broadly defined as an investigation into a company’s innovations and patent assets with respect to the state of the target industry, with a goal of identifying risks and opportunities. Well-planned and executed patent due diligence can be beneficial to both entrepreneurs and investors as it can uncover market gaps and potential for further innovation or product development and help anticipate legal issues, such as risks of infringement before they arise.
In addition to understanding the competitive patent landscape for your company’s technology and the strength of patent protection within your target industry, comprehensive patent due diligence includes identifying and understanding the nature and scope of your company’s technology and related intellectual property rights, duties, and any limitations. This type of investigation of the patent landscape can uncover potential infringement risks and reveal new patenting opportunities you may want to consider.
Table of Contents
- What is a ‘Freedom to Operate’ analysis?
- Why a ‘Freedom to Operate’ patent search is important
- Types of Freedom to Operate Analyses
- Assessment of potential risks
- Integrating FTO analysis into the product development cycle
When developing a new product or service, every effort should be made to ensure that the commercialization of that product or service does not infringe any existing patents owned by third parties. Companies failing to do so could suffer dire consequences.
To avoid any legal issues, it is prudent and reasonable for many companies to perform a Freedom to Operate (FTO) or “market clearance” analysis before you commercialize or launch the product or service. The main purpose of an FTO analysis is threefold:
- to understand what patent infringement risks exist with the potential commercialization of a product or service;
- to understand where those risks lie (e.g. in whose hands, in what market(s) and in what technology area); and
- to determine how to manage those risks prior to commercialization.
At its most basic level, an FTO analysis involves two major steps. The first is to perform a patent search to identify others’ patents in the same technology area as the product or service being commercialized. The second is to analyze those patents to determine whether the product or service falls within the scope of the patent claims. These steps should be conducted in each target market you are considering for commercialization.
The term Freedom to Operate can be misleading. It sounds very finite and can sometimes give the impression that there is absolutely no risk of infringing any third party patents once the analysis has been performed. Unfortunately, this is seldom the case. However, an FTO analysis should seek to provide sufficient information to allow the risks associated with launching a product or service into the marketplace to be reasonably understood and managed.
Accordingly, the scope of the patent search strategies that will be used to generate the results upon which the FTO analysis will be based must be carefully defined to include the relevant industries, technologies and markets to be proactively identified and evaluated. In practice, this typically involves designing multiple search strategies and searching multiple databases to consider foreign and domestic patents and patent applications.
There are many different types of FTO analyses, and the type performed can vary depending on a company’s tolerance for unknown risk, key business goals and priorities and budget.
Competitor-specific FTO Analysis
A first common type of FTO analysis focuses only on assessing the patents belonging to a key competitor. In such a case, the search would only reveal those patents belonging to that competitor, and the analysis would simply provide an indication as to whether the commercialization of the product or service could be problematic in view of the patent rights of that competitor. While this type of FTO provides some indication of the risk of entering the marketplace, there is still the possibility that patent rights held by someone other than that competitor could present a problem from an infringement perspective.
Feature-specific FTO Analysis
A second common type of FTO analysis focuses only on assessing third party patent rights relating to a single feature or aspect of a new product or service. For example, in the case of a new car engine that has self-diagnostic capabilities, the FTO analysis could focus solely on assessing third party patents in the field of self-diagnostic engines. All the other aspects of the engine (for example, the design and operating characteristics of the engine) would be ignored. This type of FTO would provide an indication of any potentially problematic patents relating to that single technological aspect of the new product. While cost effective, this type of FTO is limited and there could still be patents covering other aspects of the engine that would not be identified that could be problematic.
Comprehensive FTO Analysis
The most thorough and extensive type of FTO analysis involves considering ALL third party patents relating to every aspect of a product or service to be commercialized. This comprehensive type of FTO analysis would provide the most information, and thus the most assurance that there will be no infringement issues when commercializing the product or service. However, a comprehensive FTO analysis can often be prohibitively expensive both in terms of time and financial resources required for investment.
Regardless of the type of FTO analysis that is performed, some effort should be made by the company to understand and mitigate the risks associated with entering the marketplace with a product or service prior to commercialization.
If potentially problematic patents or pending patent applications are identified through the FTO analysis, depending on the goals of the due diligence, further investigative activities may involve obtaining infringement and validity opinions. Infringement and validity opinions often require a rigorous legal analysis, including construction of the claims of the patent within the legal framework, to determine whether the company’s product or service falls within the scope of the construed claims or whether the problematic claims may be invalidated in view of the prior art or previous granted patents. Such a legal analysis may be significantly complicated in cases where the problematic claims support both broad and narrow construction regarding their scope. Broad claims that are considered valid can pose a risk because they may not be easily designed around, requiring competitors to obtain a license from the patent owner, or risk a patent infringement lawsuit.
As such, FTO analyses can prove invaluable in identifying material issues that could impact value for IP-rich and sophisticated companies in commercialization deals, for investors (VCs and Private Equity) in financing deals, and for foreign acquirers in M&A / IPO deals.
A properly conducted FTO analysis for patent due diligence and any opinion arising from it should flag issues that merit additional consideration to enable informed business decisions to be made as to which risks are acceptable and which are not, and whether to pursue potential opportunities.
In the specific business context of product development, FTO analyses can and should be used to proactively identify and assess potential IP infringement risks, develop and recommend potential design-around options and solutions where necessary, as well as identify opportunities for building a solid patent portfolio that may be leveraged in both commercial and litigation settings.
Accordingly, an FTO analysis should be considered as a preliminary stage of the overall design cycle. This stage should occur as early as possible in the design cycle once certain specific or desired features/aspects of a design have been defined with some specificity so that they can be effectively searched, but before the design is finalized so there is still room for flexibility in the design. In practice, this means that the FTO analysis stage of the design process typically occurs between the ideation and prototyping stages so that design changes, if needed, can be made before significant investment in a given design. Furthermore, if there is a particular third party or competitor that is of concern, then a targeted search for patents owned by such third parties or competitors should be considered at an earlier stage. Periodic patent watch searches, independent of the design cycle, also constitute prudent patent risk management and mitigation practices.
Another key component to mitigating risk during product development is ensuring that all critical areas of the new design and the company’s overall technology/product roadmap are proactively identified, and that the company owns all of the intellectual property rights in those areas, so that the company has the continued freedom to innovate. For example, if your company is a manufacturer that integrates parts from suppliers into new products, the objective would be to own as much of the intellectual property possible to allow the manufacturer to execute its technology/product roadmap without being materially constrained or controlled by its suppliers. Otherwise, if left unmanaged IP ownership issues can present substantial risks for manufacturers. On the other hand, if your company is a supplier to such a manufacturer, the objective would be to exploit IP ownership opportunities by obtaining patent rights that cover not only components that will be supplied to the manufacturer, but also on the integration of such components into the manufacturer’s products at the next stage of the value chain.
Patents are one of the most valuable assets for innovation-driven companies. A well-planned and on-going patent due diligence strategy, involving regular patent watch searches and FTO analyses can maximize the value of your patents and enhance returns while minimizing risks, and enable innovators to monitor and evaluate their position in an ever-evolving competitive landscape.
For further information please contact a member of our Patents team.
The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.