Law360, New York (October 24, 2013, 12:22 PM ET) — Technology startup companies often face unique challenges related to getting their businesses up and running, and may have to overcome those challenges using limited resources. Increasingly, due to the importance of intellectual property in the marketplace, they may be faced with assessing the IP landscape of potential products to avoid costly IP disputes.
These assessments are referred to as freedom-to-operate investigations, and can provide startups with assurances that there are no proverbial icebergs that could sink their ships. An FTO investigation may have a significant impact on a startup’s success or failure in obtaining funding, finding partners or being acquired, and understanding the various facets of FTO investigations will empower their leaders to get the best value in that investigation.
Technology startups exist in virtually every sector of the marketplace. While their core technologies vary, most share certain characteristics. One shared characteristic, at least in the nascent stages, is limited resources. This stems from having limited access to funding, making it difficult to cover not only present operating costs, but also future operating costs necessary for providing enough bandwidth for their businesses to ramp up and take off. Limited access to funding is a core challenge that successful startups must face and overcome.
Another shared characteristic is that startups often focus their efforts on new technology areas. That newness may provide a key competitive advantage. However, investors, partners and buyers may associate that newness with risk. Failing to address that risk may make finding investors, partners, and buyers difficult. Proactively mitigating that risk may help entice them.
One powerful weapon for mitigating risk is the FTO investigation. An FTO investigation is a process that can help identify third-party IP, e.g., patents that may hinder or block the ability to develop, market and sell products. An FTO investigation may also provide a framework or guide for ensuring that products ultimately overcome any potential IP barriers.
Confronted with competing time and financial priorities, however, some technology startups may overlook the importance and value of conducting an FTO investigation. For many, capital is often limited and any expenditure not deemed essential to getting a product to market can seem unnecessary or may be delayed. For example, a startup usually has a limited budget from which to cover operating costs. Simultaneously, time is also a limited commodity, and focusing on getting their product to market may leave little time to spend on any other tasks, especially those tasks perceived as potentially slowing down the race to market.
In addition, FTO investigations may be portrayed as “one-size-fits-all” deals, and may be seen as too large of an undertaking now, but possibly something they may grow into later. In view of these competing constraints, some startups may believe that they cannot afford to perform an FTO investigation. Some startups, therefore, may hold off on performing, and eventually fail to execute an FTO investigation. Others may fail to fully comprehend the implications of not assessing the intellectual property landscape, and still others may believe, rightly or wrongly, that they already have an adequate view of the IP landscape.
Why then should technology startups conduct FTO investigations? FTO investigations may ensure that a seller’s product or service is not blocked by a third party’s intellectual property, e.g., a patent. Knowledge of any blocking IP is particularly relevant to highly cost-sensitive start-ups, which may be centered on developing a single product or service, compared with larger or more established companies, which may have numerous, and often, diverse products and services, and various revenue streams.
Thus, a problematic patent could derail the foundation and any potential growth of the startup’s business, and identifying such a problematic patent early in the developmental process could avoid major investments in, e.g., costly tooling or other manufacturing processes. Furthermore, identifying any problematic third-party patents could allow for the adjusting of products to overcome or design around those patents. An FTO investigation also may reveal areas in which the startup could focus development and seek IP protection.
In addition, an FTO investigation that does not reveal any blocking IP, or actions taken by the startup to avoid identified blocking IP, may lower the risk of being accused of infringement, so more time, effort and funds can be spent on growth. This lower risk also may attract potential investors, and make the startup a better acquisition target for potential buyers. Generally, most investors will seek to limit any potential patent infringement litigation costs and thus, conducting an FTO investigation may help attract larger investments at both earlier and later stages of the startup life cycle.
Similarly, an FTO investigation may be leveraged for better terms of sale from buyers. In view of recent changes to U.S. Securities and Exchange Commission solicitation rules that ease restrictions on a startup’s ability to advertise for fundraising to potential investors, competition among startups for the attention of investors and buyers may become more fierce. Obtaining clearance over third-party IP to make and sell a product can be one way a startup can distinguish itself relative to its peers.
Many options are available for reducing the cost and time associated with performing FTO investigations. By instituting these cost- and time-saving measures, startups can reduce the burdens associated with obtaining FTO investigations, while obtaining their benefits. An important way to control cost and time is to control the number of patents being analyzed during FTO investigations. This can be achieved by tailoring the scope of an FTO investigation to the specific needs of a particular startup. A critical step in this process is to gain an understanding of the startup’s technology, competition and business. Some important questions to ask at the onset of an FTO investigation are:
- Where are the potential geographic markets for the startup product?
- What are the key product components and/or method steps to focus on?
- Who are the competitors?
- Are there any entities that may own patents in the technology area, whether they are practicing them or not?
- Is there a history of litigation in the technology area?
Information useful in answering these and other questions can be found by the startup prior to initiating the FTO investigation, and may be available on publicly available databases. To the extent a startup may have its own patents or pending patent applications, or have knowledge of patents and applications from entities in the startup’s technology area, information gleaned from the patent prosecution process, such as references cited during prosecution, assignee information, inventor information, class/subclass data, etc., also may be useful for tailoring the scope of an FTO investigation to reduce costs and time.
Technology startups may gain more value for the money spent by conducting FTO investigations sooner rather than later. By doing so, they can identify potential problem patents before making significant investments (e.g., before design freezes or investments in tooling or manufacturing equipment) in their final commercial products and, if necessary, make design changes to their products to avoid infringing those problem patents, or seek licenses from third-party IP holders.
Addressing these issues up front can encourage investment during earlier rounds of funding, and having more resources available up front can help startups develop better products earlier on, making it easier to obtain funding in later rounds where the competition between startups is more intense and the amounts at stake are greater.
When facing competing obligations, technology startups may think short-term and place FTO investigations lower on their lists of priorities. Doing so could, however, lead to problems in the near future as they may find it more difficult to obtain funding from potential investors, and may find it more difficult to court potential buyers. Startups that make FTO investigations a higher priority may find a bigger pool of willing investors, partners and buyers, bringing them into a virtuous cycle of development, investment, and ultimately success.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.