I was talking with a friend a few days ago. He works for a large company that acquires a lot of smaller companies in the instrumentation and diagnostics spaces. “It’s funny how all these small companies focus so much attention on their patent portfolios,” he told me, “when what we’re really interested in making sure they have freedom to operate.”
Freedom to operate is an essential, but often undervalued, part of your overall IP strategy. Why do you need to pay more attention on freedom to operate? Here are seven reasons.
1. Because if you don't have patents, you have competition, but if you don't have freedom to operate, you are out of business.
Patents give you a competitive advantage in the market. Without them, competitors will take market share and erode your gross margin. But at least you're in the market.
If a competitor has patents that block your product or service, they can get an injunction. Now you're out of the market completely.
2. Because in any diligence, the investors will be looking.
As my friend said, when his company looks at acquiring another company, it wants to know that the target has freedom to operate. This is also true in any transaction to raise capital, from venture funding to IPO. The investor’s attorneys will ask you pointed questions about potential blocking patents. It’s embarrassing to have say, “Let us get back to you on that!”
3. Because forewarned is forearmed.
If you can identify freedom-to-operate threats in advance, you can neutralize them. Here are three ways:
Once you know what the patent covers, your R&D team can get to work finding a technical work around. It's a lot less expensive to do this during product development than when your product is already on the market.
Take a license
If you can’t find a work around, you may be able to get a license under the patent. In fact, many companies build a royalty cushion into their gross margin forecasts, expecting they'll need to take a license somewhere along the way. One benefit of taking a license is that, if investors point to the patent during diligence, you can say, “We have it covered”.
Get ready for litigation
Sometimes you can’t design around and you can’t get a license. In this case, you need to have war plan. A first step is to develop arguments as to why you don’t infringe or why the patent is invalid. These arguments can serve as a launch pad in a suit for declaratory judgment or inter partes review in the Patent Trial and Appeal Board. A next step can include acquiring a portfolio of offensive patents directed against the holder of the problem patent.
4. Because hope is not a strategy.
Some people recommend turning a blind eye to competitor patents. They reason that as long as you don’t know about a patent, you won’t be liable for willful infringement, which can bring treble damages.
It’s worse to be a willful infringer than a mere infringer. But it’s best not to be an infringer at all. To avoid infringement you need to know what’s out there.
Treble damages are for patent infringers who have taken no action in spite of an “objectively high likelihood” of infringement. But you’re not reckless, so you’ll do whatever is prudent under the circumstances.
This doesn’t mean you need to do a scorched earth analysis and get a non-infringement opinion for every patent that looks a bit problematic. It does mean that you should perform the diligence that is due, and treat serious threats seriously.
5. Because you may find a Rembrandt in the attic.
Freedom-to-operate analyses are primarily defensive. But sometimes they turn up patents that can be used as offensive weapons. A favorite strategy is buy these patents or get an exclusive license. Then, you're in a position to assert the patents against competitors if it ever becomes necessary.
6. Because you might find something that will help you getting your own patents.
Freedom-to-operate analyses can turn up patents that don’t block your activities, but might be used as “prior art” to challenge your own patents. You can use this information to amend your claims to eliminate this prior art and bolster the validity of patents in your portfolio.
In any litigation, your opponent is likely to turn up such references, so you might as well know about it before they do.
7. Because it’s a lot less expensive than litigation.
If you’re sued for patent infringement, expect to spend $3 million defending yourself and to be distracted from your business for several years.
Think of freedom-to-operate analyses as an insurance policy. They won't eliminate the risk of litigation. But they mitigate the risk by allowing you to identify and deal with threats early.
How much does the policy cost? I would budget $15,000 to $30,000 for the initial analysis. This is the price of one to two well-written patent applications.
The cost is worth it. A little effort now will make the drive forward a lot smoother.