If your business is built on technology of any kind, being called out for infringing an existing patent held by another company could easily see your investment in research and development wasted. But while technology is central to most patent disputes, it’s not just technology companies that are at risk of infringing patents in the ever more competitive scramble to be innovative.
Every business, but especially those in their early stages, must be aware of the patent landscape in their chosen market – what patents are held by who, and what do they prevent you from doing? It is also worth evaluating how your business is structured to handle these issues when they arise, and whether your product or service is dependent on a single point of failure.
These insights should be the cornerstone of your ‘defensive’ IP strategy (your efforts to ensure you don’t infringe anyone else’s rights, as opposed to the work you do to protect your own innovation), as infringing these third-party patents could expose you to significant financial risk if the holder decides to enforce their rights.
Understanding patent risk
Don’t fall into the trap of thinking that only big, established companies need to worry about patent risk – that couldn’t be further from the truth. Startups can in fact be especially susceptible, as they may be more reliant on patented technology from third parties or may not have the resources to conduct exhaustive due diligence on their own.
At the worst end of the spectrum, a single patent infringement lawsuit can cost the perpetrator millions. In one high-profile recent case, in 2013, Nintendo was ordered to pay Tomita Technologies International more than $30 million in damages relating to a 3D imaging technology patent that it was ruled to have wilfully infringed in the design of its 3DS handheld games console.
Nintendo dismissed the claims, but the court ruled in Tomita’s favour. For every 3DS sold until the decision was reversed in 2016, Nintendo had to pay Tomita $9.80. However, most disputes don’t often make it to court and settle, as companies, particularly start-ups, simply cannot afford to defend themselves.
That said, according to PatentFreedom.com, more than 11,000 companies – ranging from Fortune 500 to venture-backed startups – have been accused of patent infringement at least once by a Non-Practicing Entity (NPE) over the past decade. And today, around 60 per cent of companies affected by NPE litigation are businesses with annual revenues of less than £70 million.
Without a strong patent strategy, businesses are susceptible to patent risk, which is why entrepreneurs need to understand not only how to identify the patent risk they face, but also how to mitigate it, and should proactively make patent risk mitigation integral to their overall strategic planning.
Determining a business’s freedom to operate
Freedom to operate (FTO) is a vital consideration for startups and growing businesses. It is essential to ensure that existing patents permit you the freedom to carry out business as intended in your target markets. And investors will want to ensure that any target for funding has the required FTO before parting with their cash. Determining FTO can, however, be notoriously challenging.
There is no single database to consult; instead multiple, carefully-defined searches must be made, and the results scrutinised one-by-one, if you want to be confident of compiling a truly comprehensive profile of your patent risk and freedom to operate. To add to the complexity, this exercise needs to be carried out on a country-by-country basis, which can cause costs to soar if clearance is sought in multiple territories – which it should be if you are planning international expansion at any point.
The involved nature of these searches might make FTO checking seem too daunting, too expensive, too time-consuming, and too likely to distract from the other priorities of a fast-growing business. But while turning a blind eye might seem like an attractive option in the short-term, it could prove ruinous in the long run if you find yourself burdened with court action that is not only financially costly but also damaging to your corporate reputation, or if slapdash due diligence causes a potential investor to ask difficult questions that could see them walk away from the vital investment your early-stage business needs (or even just reduce the amount they are willing to invest).
A comprehensive FTO analysis involves three steps – the identification, quantification, and mitigation of risks. However, the best place to start when looking to determine a business’s FTO is not with a costly FTO exercise, but with an evaluation of the potential levels of patent risk.
The advantages of a patent risk evaluation
A Patent Risk Evaluation (PRE) can help determine the level of patent risk your business faces before beginning comprehensive FTO analysis. The best IP experts understand that there is no one-size-fits-all model when it comes to patent risk. Therefore, you should take every opportunity to speak to an expert to discuss your business goals and why you feel you need to evaluate potential patent risk and understand how to mitigate it.
Through a PRE, businesses can ensure that experts will be able to identify any specific patent issues that might affect them, including supplementary protection certificates (SPCs), non-practicing entities (NPEs) (otherwise known as ‘patent trolls’), and standards essential patents (SEPs).
As a young company, it’s especially important to understand why identifying potential points of weakness, and opportunity, is critical to success. PRE is the fundamental step in developing a robust, practical blueprint for both IP protection and commercial strategy.
For instance, if a company is looking to develop its offering and start exploring third-party collaborations, a PRE can provide a presentable report that will enable the company to demonstrate to potential investors and third parties that they are prepared and have considered any possible issues.
Patent risk can cast a dark shadow over companies looking to innovate, prosper, and succeed. Luckily, the risk, like others affecting a business, can be mitigated. To ensure success and avoid paying out a large sum of cash in the long run, entrepreneurs and business owners must take a proactive approach to understanding and mitigating patent risk.
Peter Arrowsmith is patent attorney and partner at Gill Jennings & Every.
Further reading on patent risk
