DEEP TECH STARTUPS AND FREEDOM TO OPERATE
Deep tech startups, often born out of scientific progress, focus on challenging technological breakthroughs. More than other startups, their differentiation is founded on the result of research and development that must imperatively yield a highly valuable intellectual property as the basis for their sustainable business.
Their research and development cycle is long, generally requiring more funding to reward their team of highly skilled experts before reaching the commercialization of the technology, either as a product or as a technology license. If the venture is a product venture, additional time is necessary to develop manufacturing processes that must also be protected to maintain a visibility for the longest period possible.
In deep technology, where patenting is essential, commercialization may be blocked by a competitor holding patents in the field, that would be infringed by the developed technology. For this reason, the intellectual property team, internal and external, starts working in parallel with the R&D team, long before there is any product design at work, until the intellectual property so developed becomes patentable. Such rapport is essential in all deep tech startups. Prior art is thoroughly assessed and competitive landscape in the domain closely analyzed and monitored on an on-going basis. The goal is to have the IP rights to the technology granted when launching the product.
It is paramount for startups, at an early stage, to seek and secure their “freedom to operate” (FTO), to ensure that ultimately the commercial use of their new product or process does not infringe the IP rights of third parties.
An FTO analysis is different than a patent search. A patent search gives you a reasonable appreciation about patent applications and what to do to be granted a patent at least on some claims contained in the document. A patent does not grant the right to market and sell a product. It grants the right to prevent others from marketing and selling the same product. An FTO is a document that expresses the legal opinion of a patent attorney about any infringement of a product or process on other patents. It does not preclude you to obtain patents on the product, but the likelihood of your ability to market your product, arguing of its patent, is nil.
Unlike patent searches, an FTO search focuses only on active patents, and not on prior art or non-patent literature (NPL). It also focuses on countries and regions. Obviously, the scope of the FTO mirrors the geographical markets where the startup plans to manufacture, and market the product or process. If for instance, you are attempting to develop a product in a niche of the robotics space, for the European, Brazilian, Chinese, Japanese, Korean and U.S. markets and it is found that another company owns a patent valid in Europe and the USA alone, you would have the freedom to operate in other markets, as a competitor to the company holding the patent for the two regions, if you would decide to pursue on that path.
Startup investors are keen on ordering early on an FTO. It allows them to assess the whole landscape of patents in the field, understand who owns broad patents and whether there is still a way around for the startup to develop a product without infringing on any existing third-party patent. It is a little bit like walking on a mined terrain when a soldier would have full knowledge of the mine locations, therefore giving him the ability to trace a safe path to cross the field. It is a risk management tool, allowing to evaluate an infringement liability, in a certain territory, at a certain time.
Though freedom to operate cannot be 100% guaranteed, what matters is to mitigate as much as possible the risks and save substantial resources. For products with a large R and D investment, the venture avoids a waste of money. Finding that competitors with granted patents will sue against your infringement if you go ahead with a product launch is the kiss of death of your startup. An FTO analysis acts like an insurance, preventing technology developers to spend a lot of money later. Cases where an FTO is strongly recommended:
- When your future product complexity involves the integration of other products and/or technologies leading your startup to seek out licenses from third parties to complete the marketable product.
- When your product is being launched into new, international markets.
- When you plan to enter a new space, and seek to understand the patented landscape, and how the ecosystem is structured, leaving, or not, room for an initiative that does not infringe on existing IP rights.
- When one or more investors request an FTO opinion for the sake of their security.
The FTO analysis outcome typically leads to delineate some opportunities:
- Territoriality: a protected technology in market A maybe in the public domain in markets B and C, giving your startup the right to commercialize its product in B and C.
- Protection lifecycle. Though patents are issued for a period of 20 years, more than half are maintained throughout the total cycle. In most cases they have become irrelevant due to the emergence of competing technologies making them obsolete. However, in the case of deep tech, with typically long product lifecycle, there may be some value in introducing a product with similarities. Beware however, as some patent offices may reinstate lapsed patents against the payment of unpaid accrued fees, if the holder understands the potential from your product entering the market to harm its expansion.
- Lack of claims in existing patent(s) that let your company file for some aspects of an invention that does not infringe on the existing patent(s).
- Patent Invalidity: a further analysis, called invalidity opinion, evaluates the validity of the patent that is in the way of your endeavor. The goal is to find a way to “kill” that patent with invalidity proceedings. Such proceedings must come with the highest standard of objectivity and a thorough knowledge of the claims of the patent, the industry developments, and generally what all other existing IP in the field provide to justify such an opinion. The patent under consideration might be too broad or too limited, or other patents and/or prior art make it invalid. By rule, a patent is always presumed valid. Hence the convincing evidence to the contrary must be a strong expert argumentation, unlike what a legal counsel of a company would provide with a view to bring its client to a win. An invalidity opinion costs more than a conventional FTO, considering the extent of the investigation. In addition, in case of an invalidity litigation, one can expect a long and protracted legal battle, which may not be in the best interest of a startup management to spend time and resources on.
There is one instance where an FTO may not be adequate in providing all information relevant to its object. It is when a pending patent application has been filed. Patent applications are not publicly available, therefore if they later yield new patents, there is always a possibility that your product in development will infringe.
What options does a startup have if an FTO analysis detects existing patent(s) barring your product to enter the market without infringing on these patent rights? If the startup founders and managers consider the market critical to their survival, they can reduce their ambition and envisage one of the following steps:
- Offer to buy the patent. This can be possible in the rare cases when the patent holder has not exploited the technology commercially. This may happen when the patent covers a side aspect of a core technology, for which the patent holder extended the protected landscape, but really did not proceed with using it.
- License the patent. Companies with no industrial infrastructure who have developed technologies and dedicated resources to maintain the protection of their intellectual property are often seeking businesses that have complementary resources. i.e. industrial and sales capabilities, in order to monetize their IP by licensing their patent. We suggest caution in treading that path. As these patents are typically covering a product, but rarely describe the manufacturing process and stages to build it, a startup willing to license the patent should negotiate hard for the terms and conditions, as it brings to the party a missing element fundamental to take the technology to the market.
- Propose a cross-license agreement. If the patent holder is not a direct competitor and if the technology developed on both sides, though apparently similar, can improve on the offering of each party, this works out well. This means the startup will have the freedom to operate, though not on an exclusive basis.
- Join a patent pool with a few companies. This has occurred characteristically when many companies realize it is in their interest to create an industry standard using several patents.
- Design around, or workaround. In cases when the patent holder has not developed a whole patent thicket with a succession of interlocking patents, it is often advised to circumvent the patent with a new design achieving the same function.
If your startup is holding valuable patents, it is important to enforce them and keep competitors at bay. As your interest is to legally prevent the FTO of your competitors, who are lured by the scale and profitability of the new space your technology and product have defined, you have to constantly watch vigilantly for potential infringement and act accordingly by sending cease-and-desist letters and proactively filing lawsuits.
For the record only, as it is not suited to deep technology with significant breakthrough, an alternative strategy is “defensive disclosure”. By disclosing, in a well-recognized technical publication, information, such as drawings, descriptions of products or methods, that is otherwise patentable, such disclosure prevents any patent application based on the same novelty. It is a way to preempt competitors to protect any corresponding IP. The information disclosed enters the public domain and becomes de facto prior art.
Last, one must appreciate that an FTO report bears a significant cost, especially when compared with a patent search. The work takes longer, involves international lawyers who will not sign on the report until they are convinced of its accuracy. After all, their reputation and the reputation of their firm are at stake. Hence, the decision to seek an FTO opinion is often dependent upon the potential of the commercial opportunity, and the will to understand how extensively a startup can move to broadly draw its technology landscape.
The cost of not performing an FTO, though, can be much higher ultimately, as patent litigation never comes cheap.