The Question of Freedom to Operate
Potential investors often ask entrepreneurs, “Do you have freedom to operate?” This is a gotcha intellectual property question that can quickly reveal how conversant the entrepreneur is about the arcane world of patents and IP. Let’s unpack a few essential ideas on this topic.
First, “freedom to operate” is a term that refers to the presence or absence of relevant patents to the particular space a company is operating in. To understand “freedom to operate,” you must first understand what an issued patent does. An issued patent provides the owner of that patent with a “monopoly” or, specifically, the right to prevent another party from making, using, or selling the patented invention. Essentially, the patent defines a patentable invention and includes specific claims that legally outline exactly what the patent covers and what it does not.
Crazy as it might sound to the uninitiated, having patent(s) does NOT give the patent owner the right to make, use, or sell their invention(s). It only provides the right to prevent someone else from doing so. Theoretically, if you patented one part of your product yet someone else had patented another part of your product, that other party could assert that you were infringing on their patent and they could legally force you to not make, use, or sell your product. This is the essence of “freedom to operate,” which means that no one else has a patent that would PREVENT you from making, using, or selling your product.
The huge challenge with the freedom-to-operate question is that it is a bit like trying to prove a negative. Declaring that you have freedom to operate is essentially saying that no one anywhere has a patent that has claims that your product infringes upon. If there are one or more patents that your product DOES infringe on, then it is illegal for you to make or sell your product until you redesign it such that it does not infringe on the other patent.
Practically, it is impossible to say with absolute certainty that you have freedom to operate, because definitively reviewing every active, valid U.S. patent is an overwhelming amount of work (there are on the order of 3.5 million active, valid U.S. patents!). This is why it is challenging to even get a semi-cost-effective “freedom to operate” opinion from an intellectual property attorney. Where do you draw the line on the scope of review of active, valid patents?
When investors ask, what you can truthfully say is something along the lines of, “we have reviewed the patents in our [name] space, and we do not believe our product infringes on any of the patents we are aware of.” Remember, when you make such a statement, you need to have actually done a reasonable review and had someone skilled in the art of making whatever it is that you are making who can understand what has been disclosed in the various issued patents and assess whether the claims of each of those patents describe your product. You should also be aware that there may be patent applications from one of your competitors, say, that are making their way through the patent prosecution process and may ultimately be issued, which you may infringe. It is absolutely worthwhile to review the patent landscape during your product development process and design your product so that it does not infringe on others’ patents. This way you don’t get over-invested in one design and then discover that you cannot legally even make, use, or sell your design because it is infringing someone else’s patent. Also, when you file your own patent, you will need to provide the patent office with a list of any relevant patents you are aware of, so it makes sense to be strategic and thoughtful rather than boiling the ocean.
Furthermore, if you are raising money from venture investors for your high-potential startup and the investors think there is some risk that you have close competitors who might have issued patents that would impair your freedom to operate, you can expect that part of due diligence will be an intellectual property review. Essentially, the prospective investors will hire their favorite intellectual property firm to review (under NDA) your issued and pending patents as well as your competitors’ issued and published patents to assess the strengths of your patent portfolio and identify freedom to operate risks. The good thing about this process is that the investors are responsible for deciding how extensively they want the attorneys to dig in (a question of time and money). The bad news is that if they make an investment, you will usually be asked to reimburse them for the legal fees they paid for that intellectual property review. Since that is the case and you are hoping to raise money (otherwise, why would you be talking to investors anyway?), it is in your best interest to be clear, forthcoming, and helpful to ensure that the intellectual property review goes as smoothly and quickly as possible. Also, if you have a patent portfolio in development, you should probably engage your patent attorney to talk to the investors’ patent attorney so that communication between intellectual property experts is as crisp and clean as possible.
A final word to the wise, a dead giveaway to investors that you do not understand intellectual property is if you say, “I have a patent/patent application, therefore, I have freedom to operate.” That is never true – and demonstrates quickly that you don’t know what you are doing in the IP space.
