Innovations that arise in competitive markets with a well-developed and rapidly evolving IP space often integrate several pre-existing technologies from various scientific and engineering disciplines. For companies that operate in such an environment, protecting innovations by conducting patent due diligence and freedom-to-operate (FTO) analysis can be integral to growth and provide a competitive advantage.
Patent due diligence entails investigation into a company's innovations and patent assets with respect to the state of the target industry, with the goal of identifying risks and opportunities. Well-planned and executed patent due diligence can benefit both entrepreneurs and investors as it can uncover market gaps and potential for further innovation or product development and help them to anticipate legal issues (eg, infringement risks) before they arise.
In addition to investigating the competitive patent landscape of a company's technology and the strength of patent protection within the target industry, comprehensive patent due diligence involves identifying and understanding the nature and scope of a company's technology and related IP rights, duties and any limitations. This type of investigation can uncover potential infringement risks and reveal new patenting opportunities.
Companies should make every effort to ensure that the commercialisation of new products or services infringes no existing patents owned by third parties. Companies that fail to do so could suffer dire consequences.
To avoid legal issues, companies should perform FTO analysis (also known as a 'market clearance' analysis) before commercialising or launching a product or service. FTO analysis has three main aims:
- to understand the patent infringement risks of the potential commercialisation of a product or service;
- to understand where those risks lie (eg, with which party and in which markets and technological area); and
- to determine how to manage those risks prior to commercialisation.
FTO analysis involves two basic steps. The first is to perform a patent search to identify other patents in the same technological area as the product or service that is being commercialised. The second is to analyse 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 in which the company is considering commercialisation.
Why is FTO analysis important?
The term 'freedom to operate' can be misleading. It sounds finite and can give the impression that, once completed, there is no risk of infringing third-party patents. Unfortunately, this is seldom the case. However, FTO analysis should provide sufficient information to enable a company to reasonably understand and manage the risks associated with launching a product or service.
Accordingly, companies must carefully define the scope of the patent search strategies that are used to generate the results on which FTO analysis is based so that it includes the relevant industries, technologies and markets that are to be evaluated. This typically involves designing multiple search strategies and searching several databases to consider foreign and domestic patents and patent applications.
There are many different types of FTO analysis. The type chosen depends on:
- the company's tolerance for unknown risk;
- the company's key business goals and priorities; and
- the budget available.
Competitor-specific FTO analysis
This type of FTO analysis assesses only the patents that belong to a key competitor. It indicates whether the commercialisation of a product or service could be problematic in view of that competitor's patent rights. While competitor-specific FTO analysis provides some indication of the risk of entering the marketplace, patents not owned by that competitor may still present an infringement risk.
Feature-specific FTO analysis
This type of FTO analysis assesses only third-party patent rights that relate to a single feature or aspect of the new product or service. For example, FTO analysis for a new car engine that has self-diagnostic capabilities may focus on assessing solely third-party patents in the field of self-diagnostic engines. All other aspects of the engine (eg, the design and engine operating characteristics) would be ignored. While feature-specific FTO analysis is cost-effective, it may not identify problematic patents that cover other aspects of the product or service.
Comprehensive FTO analysis
The type of FTO analysis is the most thorough and extensive and considers all third-party patents that relate to every aspect of the product or service to be commercialised. Comprehensive FTO analysis provides the most information and thus the most assurance that no infringement issues will arise when commercialising the product or service. However, comprehensive FTO analysis can often be prohibitively expensive, in terms of both time and money.
Regardless of the FTO analysis type, companies should make some effort to understand and mitigate the risks associated with launching a product or service on the marketplace prior to commercialisation.
If FTO analysis identifies potentially problematic patents or pending patent applications, a company may wish to obtain infringement and validity opinions, depending on its due diligence goals. Infringement and validity opinions often require rigorous legal analysis, including construction of the patent claims 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 previously granted patents.
Such legal analysis may be significantly complicated where the problematic claims support both broad and narrow constructions regarding their scope. Broad claims that are considered valid can pose a risk because companies may be unable to design around them easily. Therefore, companies may have to obtain a licence from the patent owner or risk a patent infringement lawsuit.
As such, FTO analysis can prove invaluable in identifying material issues that could affect value for:
- IP-rich and sophisticated companies in commercialisation deals;
- investors (venture capitalists and private equity investors) in financing deals; and
- foreign acquirers in M&A or initial public offering deals.
Integrating FTO analysis in product development cycle
Properly conducted FTO analysis for patent due diligence and any opinion arising from it should flag issues that merit additional consideration to enable companies to make informed business decisions as to which risks are acceptable and whether to pursue potential opportunities.
In the specific business context of product development, companies should use FTO analysis to:
- proactively identify and assess potential IP infringement risks;
- develop and recommend potential design-around options and solutions where necessary; and
- identify opportunities for building a solid patent portfolio that may be leveraged in both commercial and litigation settings.
Accordingly, FTO analysis should be considered as a preliminary stage of the overall design cycle. This stage should occur as early as possible: after certain specific or desired design features or aspects have been defined with enough specificity that they can be effectively searched, but before the design is finalised so that there is still room for flexibility. In practice, the FTO analysis stage of the design process typically occurs between the ideation and prototyping stages so that companies can make design changes, if needed, before investing significantly in the design. If a particular third party or competitor is of concern, companies should consider performing a targeted search for patents owned by such third parties or competitors at an earlier stage. Carrying out periodic patent watch searches independently of the design cycle is a prudent patent risk management and mitigation practice.
Further, companies should ensure that they proactively identify all critical areas of the new design and their overall technology or product roadmap. They should also ensure that they own all of the IP rights in those areas so that they have continued freedom to innovate. For example, the objective of a manufacturer that integrates parts from suppliers into new products should be to own as much intellectual property as possible to enable it to execute its technology and product roadmap without being materially constrained or controlled by its suppliers. If left unmanaged, IP ownership issues can present substantial risks for manufacturers. Conversely, the objective of a supplier to such a manufacturer should be to exploit IP ownership opportunities by obtaining patent rights that cover not only the components that are supplied to the manufacturer, but also 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 ongoing patent due diligence strategy that involves regular patent watch searches and FTO analyses can maximise the value of a company's patents and enhance returns while minimising risks. It can also enable innovators to monitor and evaluate their position in an ever-evolving competitive landscape.
