Maximizing Business Opportunities with a Robust Freedom-to-Operate Opinion

Freedom-to-operate (FTO) means the ability and confidence to use, make, or sell a product or process without fear of infringing the intellectual property (IP) rights of others. An FTO analysis identifies and evaluates patent infringement risks (and potentially other types of intellectual property) and provides valuable information for research and technology commercialization. Many companies conduct an internal FTO analysis for the development of a new product or process, redesign of an existing operating unit, or change of manufacturing process or raw materials. Some may choose to conduct an FTO analysis only when the commercialization of a product is likely to generate a threshold amount of profit. This decision may depend on the budget, the likelihood of litigation, and the potential revenue generated by the sales of the new product or service.

Freedom-to-operate does not mean being free of litigation. Armed with a favorable FTO report or opinion, the client may still receive unwarranted harassing demands or lawsuits. FTO is both a sword and a shield. On one hand, an FTO analysis can help uncover white spaces and potential licensing opportunities and understand the marketplace of a product. On the other hand, an FTO analysis can mitigate risks of willful infringement, strategize the product price by considering indemnification obligations, and help design around blocking patents.

Willful Infringement and FTO

A claim of willful infringement requires a preponderance of the evidence proving that (1) the alleged infringer knew the patent or subjectively believed there was a high probability the patent existed and intentionally escaped learning that fact; and (2) the alleged infringer intentionally or recklessly infringed the patent. Although a formal opinion is not required, a credible legal opinion that the asserted patent is not infringed, or the patent is invalid or unenforceable can help defend against a charge of willful infringement. However, a failure to obtain such an opinion cannot be used to prove willful infringement.

While the form of an FTO opinion is not limited to a specific structure, it should cover essential facts and legal analysis to be credible and reliable. First, the opinion should explain the background of the analyses, and include a description of the product or service to be analyzed, the jurisdiction or the marketplace, and the features or rights to be examined. Second, it should briefly summarize the relevant laws and consider changes in law that may affect validity of potentially blocking IP rights, such as the frequent legal updates on patentable subject matters. Third, it should carefully identify blocking IP rights of third parties and thoroughly analyze their applicability.

Know Your Audience Before Your FTO Analysis

To properly analyze a product and offer an effective FTO analysis, counsel must first understand the audience and the purpose of this exercise. An FTO request may come from a person well educated in the method of FTO analysis or a person who rarely experiences the FTO process. The advice resulting from an FTO analysis may be in the form of an informal oral report, a written report, or a legal opinion. Understanding the level of the audience and the request scope is the first step to a successful collaboration.

For a requester that is not familiar with the FTO process, the legal counsel should point out that a product may have multiple features and each feature may be subject to a different type of intellectual property right. For example, a Coka-Cola bottle is protected by design patents, copyrights, and trade dress. If the client simply wants to check if a trademark can be used for branding, a trademark clearance report is relatively straightforward. However, if your client wants to know if it can sell a complex medical device with numerous features and functions, the effort needed to vet them is not trivial. Each feature alone, or several features in combination, may potentially infringe the IP rights of others. The manufacture, use, and marketing of a product also involves different types of infringement analysis. The more complex a product is, the more time, cost, and internal sources will be required for the FTO analysis.

With a limited budget, the IP counsel may advise the client to select the most important product or service and prioritize the resources on valuable or risky features or functions. After the features of the product or services of an FTO request are identified, the counsel should identify the relevant types of IP rights associated with the identified features and functions and obtain confirmation which of these IP rights should be covered by the analysis. The legal counsel should also confirm the type of written product, if any, that is requested. In some cases, a written work product is not needed or desired. To give an informed opinion, the legal counsel should duly consider similar products on the same level of your client’s product, similar companies in the market, the litigious propensities of your client’s competitors, and the profitability of your client’s product. The analysis should account for both business and legal risks and be cautiously worded with caveats.

How to Convey an FTO Report

If an initial search and assessment is unfavorable, this message should be conveyed verbally to limit any written record documentation of this initial finding. The client may use the knowledge and insights gained from this initial verbal report to change the design or formulation of the product.

To preserve the attorney-client privilege, the legal counsel should only address and send a written FTO opinion to a client’s key executive responsible for the product or commercialization at issue. Other recipients may include other executives with absolute need to know who may have decision-making authority over relevant activities related to the new product or process. To avoid inadvertently waiving the attorney-client privilege, the IP counsel should include confidentiality notices in the document and advise the client that this FTO opinion should not be distributed without restriction. For example, if a business partner must review the opinion as part of a due diligence investigation, a common defense agreement with the business partner is advisable.

After the written FTO opinion is delivered to the client, the IP counsel should ensure that the client understands and follows the opinion. Failure to follow the advice in the opinion may undermine the client’s later assertion of good faith reliance on the FTO opinion in litigation. To rely on an FTO opinion to avoid willful infringement in litigation, an alleged infringer must waive the attorney-client privilege and work product protection for any written or oral communication concerning the opinion. This waiver extends to both pre-suit communication concerning the opinion’s subject matter and post-suit communication on the same issue if continued willful infringement is claimed. Generally, the waiver does not include the work product produced by the IP counsel that analyzes the law, facts, or trial strategy if it reflects an attorney’s mental impression and was not given to the client. The waiver also does not include opinions concerning issues unrelated to the willfulness claim, or any privilege and work product protection enjoyed by the trial counsel if the trial counsel is not the FTO counsel.

In conclusion, a freedom-to-operate opinion does not guarantee non-infringement or that you will avoid litigation. A robust opinion can help understand competitive products in similar markets and analyze the likelihood of infringement, but the opinion should be properly conveyed to preserve attorney-client privilege.

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