Patents Aren’t Everything

Patents are top-of-mind for startups. FTOs rarely are because entrepreneurs and investors see a patent as the key to sustaining high profits on new products. To them, a patent is like a driver’s license. That vision contains a critical but straightforward error: A patent is a government-conferred right to exclude others from practicing an invention; a patent does not grant the owner the right to practice the invention. Instead of a driver’s license, a patent is more like a vehicle title—necessary for getting your car back if someone steals it, but practically useless for knowing how to drive safely.

While patents focus on the client’s invention, FTOs examine other parties’ patents on which the client’s new product might infringe. Though not a driver’s license, FTOs can be a traffic update, a weather report, and a vehicle inspection before a startup’s cross-country road trip. Startups and their counsel should understand the FTO process to decide whether, when, and how to conduct an FTO.

How FTOs Mitigate Startups’ Risks

There are millions of unexpired US patents, and every startup hitting the market with a new product risks getting sued for patent infringement. An FTO is a tool to help understand and mitigate that potentially significant risk. Defending a patent-infringement lawsuit can cost millions of dollars in attorney fees—enough to bankrupt a promising business in its infancy. A judgment of infringement is even more costly. Even a quick settlement of a semi-meritorious case may require paying up to $100,000 to the patent holder.

There is little hope of accurately measuring the risk of being sued for patent infringement for those without patent expertise. Today, most patent lawsuits are not brought by traditional businesses (i.e., companies that make money by selling goods and services). Instead, non-practicing entities (NPEs) are the most common plaintiffs. NPEs generate revenue exclusively by suing others for patent infringement. In 2019, NPEs brought 90 percent of high-tech patent cases. As NPEs do not make or sell any goods or services, startups won’t find NPEs (or their patents) by researching other products in the marketplace.

A good FTO can provide the client (and potential investors) some degree of comfort regarding the risks of such lawsuits. Patent experts can document their search methodology for locating potentially relevant patents and explain the rationale for using the particular search methodology. Based on the search results, the FTO can assess (at an appropriate level of detail) the likelihood that the client’s product will infringe on others’ patents. An FTO can also evaluate the client’s possibility of being sued, the client’s financial exposure, and the probability that an injunction would issue against the client.

How FTOs Are Performed

A good FTO starts with a clear plan. At the outset, the client must define and describe the new product to the attorney performing the FTO in as much detail as possible—especially the product’s core features unlikely to change. Identifying and articulating those features is critical to determining the risk of future patent-infringement suits.

Most FTOs take a funneling approach, starting with a broad search, then iteratively looking at fewer and fewer patents in more and more detail. Carefully crafting that initial search is critical.

A common first step is to search for patents owned by the client’s competitors. After NPEs, competitors are the ones most likely to sue the client for patent infringement. Researching those competitors’ corporate structure and history is an essential part of the search, too. For example, the client’s main competitor may use a holding company for its IP, or it might have undergone a name change a few years ago. Public patent records might not reflect the competitor’s current legal name.

Patents can also be searched by keyword, but that’s often not the best way to begin. For example, imagine a startup has developed camera software to be used with braking systems for self-driving cars. This search seems pretty specific. A search for US patents containing “autonomous,” “vehicle,” “sensor,” “brake,” “camera,” and “software” yields more than 16,000 results—definitely overinclusive. That search is also likely to be underinclusive because the words the client uses to explain her technology may not be the same words others use to describe their technology.

However, keyword searching can help when the client does not know exactly who its competitors are—not an uncommon scenario for startups. For example, the three largest holders of the 16,000+ US patents returned from the keyword search described above are Uber Technologies, Inc., GM Global Technology Operations LLC, and Baidu USA LLC. Perhaps your client didn’t have the US affiliate of Baidu, the Chinese equivalent to Google, on her radar as a potential competitor.

It can also be helpful to identify patent-related disputes involving the client’s competitors. Searching federal court dockets and proceedings before the US Patent and Trademark Office will show if the client’s competitors are: (i) asserting their patents against others, and thus might assert their patents against the client; (ii) getting sued for infringement, for example by NPEs, potentially exposing the client to NPE litigation; or (iii) challenging the validity of others’ patents—patents which the client may want to examine more closely.

With a good sense of who the client’s competitors are, who the largest holders of patents in the relevant technology space are, and the amount and type of patent-related disputes in the client’s industry, the FTO’s initial search can be constrained to focus on the highest-risk sources of litigation and their patents. The iterative process can then proceed, primarily using keyword searching. Ultimately, the FTO should conclude by identifying the patent(s) closest to the client’s new product and may also include an infringement analysis of those patents.

When Is an FTO Appropriate?

To be clear, a formal FTO is not a must-do for every startup. The risk-mitigation benefits must be weighed against the potential drawbacks:

• First, cost. FTOs can easily be in the five- to six-figure range, and where within that range depends on the breadth of searching and complexity of the technology.
• Second, the FTO may give the client actual knowledge that it infringes specific patents, which could: (a) increase the damages period if the client is later found to infringe those specific patents, and (b) potentially lead to a finding of “willful” infringement and treble damages.
• Third, the relevant technology space may be so jam-packed with patents owned by hundreds of players that undertaking an FTO—even with the best plan—is unlikely to provide meaningful risk-mitigation benefits to the client.
• Fourth, the client may not be interested in launching a product at all. The client’s business goals may be to develop the technology and license or sell the IP to a third party.

If an FTO is worthwhile, timing is key. Earlier in the product-development process is not always better. If the client does not have a clear understanding of what the new product will entail—or worse, modifies the product after the FTO is done—the FTO will cost more and be less helpful than if the FTO were done later. Too late, however, and the FTO may deliver bad news with a high degree of confidence when the product cannot be modified. If the client is open to modifying the product in light of the FTO, then somewhere in the middle of the product-development time line is ideal.

Whether, when, and at what level of detail to do an FTO will be client-specific. Only attorneys specializing in patent law should conduct an FTO. Non-attorneys should not attempt to conduct their own FTO.

Startups need to be aware of the fundamental differences between an FTO and a patent and factor both in their business plans and goals. Patents can help the client secure an exclusive place in the market, but whether it is safe to enter the market in the first place is a separate issue. With FTOs, startups can plan to take their new technologies on the road with a bit more peace of mind—or, at the very least, an understanding of the speedbumps they may face along the way.