FREEDOM-TO-OPERATE
The ability of a company to actually use and commercialize its own technology is referred to as Freedom-to-Operate. Rarely does a single company own all the patents related to developing and manufacturing a product.
A patent may describe a new way to manufacture DNA microarrays. If you want to start a company that will make and sell these microarrays together with compatible scanners, the following obstacles may block your freedom-to-operate:
- Large competing companies such as Motorola and Affymetrix may sue your startup, claiming that you are infringing on their patents. You may not even find out if your patent holds up in court because the cost of legal defense might bankrupt your company.
- Even if your microarray chip technology does not infringe anyone's patents, scanner technologies may be heavily patented. You could alter your business model by:
- Licensing scanner patents and commercializing a dual microarray/scanner platform.
- Engineering around current scanner patents by inventing a new scanner and commercializing a dual microarray/scanner platform.
- Forget about scanners and only sell the microarrays, making sure they are compatible with other companies' scanners.
BLOCKING PATENTS
To understand if other patents may obstruct you from operating, consider what it will take for your company to use its technology and make its product. For example, though you may have a patent on an asthma drug, the final product may be a sustained-release formulation of the drug administered using an inhaler. MIT and Alkermes may have patents that protect the sustainrelease method you intended to use. Other companies, such as 3M, could have patents covering the inhaler. You need to determine what patents cover every step of product development including:
- Patents held by direct competitors.
- Companies who will not license to you.
- Unlicensed patents held by universities or other nonprofit institutes that competitors may license and enforce against you.
Once you are certain you have identified all relevant patents, the next step is to figure out whether your startup should license, circumvent, or ignore them.
Your options are:
- Infringe on the patents and hope their owners don't sue. This is not a strong plan as your company will surely be sued once it becomes successful.
- Engineer around the patents so that you don't infringe on them. No company enjoys having its patents circumvented and your competitor(s) may sue you anyway, even if they have no real case.
- License the necessary patents from their owners. This is the most reliable method for avoiding trouble. Sometimes, several companies with similar technologies may be engaged in litigation, and it is unclear whose patents you need to license. Licensing from them all may be the most prudent but expensive course of action.
FREEDOM-TO-OPERATE STUDIES
Patent law firms and some consulting firms offer Freedom-to-Operate studies, which can be quite expensive ($10K - $150K), though a few people have quoted estimates under $5K. These studies vary in their comprehensiveness. As your company approaches the end of product development and larger investments are on the line, the costs of doing an extensive freedom-to-operate study may be justified and affordable.
Even if you had the resources to do a full study early on, knowing too much about the patent landscape may be dangerous for a startup. The entrepreneur and potential investors may become disheartened to learn about all the patents potentially blocking the company from making and selling its product. One investor pointed out that patent uncertainty should rarely be the reason to abort a startup as patent issues can often be solved one way or another. While this philosophy is not without basis, an entrepreneur probably should not embrace it too openly lest others take IP issues more seriously.
LICENSING BLOCKING PATENTS
If your company must license other technologies to have freedom-to-operate, figure out whether you can get a license and on what terms. Though exclusive licenses are valuable, they may be prohibitively expensive. Exclusivity is only useful when you want to exclude others from using a technology; non-exclusive licenses are sufficient for having freedom-to-operate. For example, all Microsoft software (which your computer most likely uses) comes with a non-exclusive license agreement. Does it matter that other companies can also use Microsoft's software? No, your only concern is that you be allowed to use it, too.
A company can investigate on its own the availabilities of blocking patents for license, getting attorneys involved for the negotiation of terms. However, if you are concerned about alerting a competing company to your activities, your attorney may discretely make the preliminary inquiry.
IF ACCUSED OF INFRINGEMENT
In an industry as saturated with patents as biotechnology, most CEOs will eventually receive a Cease and Desist (C&D) letter from a competitor accusing the company of infringing their patent(s). Some would consider it a badge of honor - a sign that the company is worth threatening. The letter may insist that you cease and desist from further infringement, agree to license the competitor's patents, or risk litigation.
Patent litigation is a sport of kings - very few can afford to sue or be sued. Typical patent infringement cases in biotech can cost upwards of $1M to prosecute and 50% of verdicts are overturned on appeal. Unless truly threatened, a larger company usually won't bother to sue a startup. A lawsuit would probably bankrupt the small company, leaving little for the victor. However, once the startup has something to lose or has partnered the technology with a larger company, litigation against the startup and/or its partner may be a legitimate threat.
By sending you a C&D letter, the competitor may be specifically targeting your company believing that you are infringing. However, if there are only general similarities between the patents, odds are that your company was just one of many targets. Some companies regularly send out letters, like shots across the bow, as a means of scaring up licensing revenues from the easily intimidated.
Although the chances of a startup being sued are small, the consequences of ignoring a Cease & Desist letter can be significant as it serves as official notification of possible infringement. If you are infringing, then the letter offers a chance to fix the problem amicably, e.g. by signing a licensing agreement or not using the competitor's invention. However, if you ignore the letter, you become liable for 'willful infringement'. Should your company lose subsequent challenge in court, your company will likely pay the competitor's legal fees and treble damages (a penalty equal to triple the actual damages incurred from the time of notification, as determined by a judge or jury).
A company receiving a C&D letter may feel compelled to contact the competitor to deny infringement. If you really want to be aggressive, you could exercise your right, upon receipt of a C&D letter, to file a Declaratory Judgment (DJ) lawsuit against your competitor (at the location/time of your choice, no matter how inconvenient for your competitor) asking a judge to decide whether infringement has occurred. To avoid the risks of being slapped with a DJ lawsuit, the competitor may word the C&D letter such that it does not actually threaten you with a lawsuit or accuse you of infringement; it may simply mention the possibility of an overlap. Such a delicately worded letter (which is not technically a C&D letter anymore) may still start the treble damages clock because it informs you of possible infringement.
Engaging the competition in a debate in or out of court will lead to huge legal bills as the attorneys go back and forth. Therefore, don't ignore a C&D letter (not even a very polite one), but also don't be too quick to start up a dialogue with your competition. Consider taking the middle ground: ignore the letter with a patent attorney's blessing. A well-written opinion from an independent patent attorney asserting the case for non-infringement can serve as a strong defense against an accusation of willful infringement. On the off chance that your company ends up in court and loses (and then again loses on appeal) your losses will most likely be limited to simple damages and your own attorney's fees.