Different industries approach patent risk in different—often opposite—ways. What should practitioners from one industry do when evaluating risk mitigation practices from another?
What happens when technology convergence fundamentally changes your patent risk profile? What do you do when your customer demands broad intellectual property (IP) indemnification and your supplier provides almost none? Industries that clear patents as a standard practice are integrating technology from industries that specifically do not clear patents. If this sounds like a potential train wreck, well, it is.
We recently completed a survey of 16 companies’ activities with respect to freedom to operate. In that study, we found substantially divergent patent risk mitigation strategies. For example, as you would expect in the chemical industry, companies did full patent clearance searches of their new molecules and processes—they wanted freedom to operate. That means they searched in all their major markets for any patents they might infringe prior to releasing new products. In contrast, high technology companies did no clearance search prior to product launch, but they adopted other techniques for reducing their overall risk—they wanted freedom of action.
For professionals in each Industry, their respective risk mitigation strategy makes sense. But how can it be that in one industry people review and clear patents and in another they do not? The answer lies in the specific patent risks faced in each industry, and we will explore some of those risks.
However, the big challenges come when two industries collide. This occurs in converging industries such as autonomous vehicles and the Internet of Things (IoT). Converging industries integrate new high technology into existing established technologies. For example, we have a client that produces heavy industrial equipment and is bringing electric vehicle and self-driving technologies to their equipment. Another client in construction materials is adding wireless technology to enable their products to become internet addressable IoT devices.
Each industry comes at patent risk in different ways. So, what should practitioners from one industry do when evaluating risk mitigation practices from the other industry? We’ll explore some of the challenges and define a path forward.
Let’s get some definitions in place before we move on to the specific strategy issues.
Freedom to Operate means testing, prior to launching a product, whether any feature will infringe anyone else’s patents. Typically, people will do patent clearance searches in their specific technology area in the major markets and countries where they are likely to produce, sell, or use their products. The process usually involves evaluating the risk posed by a few hundred patents. Industries that operate using FTO include biotechnology, chemicals, and consumer goods. The end result is a decision to (1) avoid including a third-party patented feature by excluding the feature or designing around it, or (2) take on the risk of infringement.
Freedom of Action means having enough patents or enough cross-licenses such that you have the ability to launch products and are comfortable with the risk of patent infringement. There is an implicit recognition that you cannot clear all the patents for your products; your products necessarily infringe thousands or hundreds of thousands of patents. Your aim here is to either have enough patents to ensure that others will infringe enough of your patents that they will not try to sue you or that you have cross-licensed enough of the patent holders to reduce the risk sufficiently to move forward. Freedom of action is common in industries where there are hundreds of thousands of patents per product. For example, a typical smartphone may use a quarter million to over a million patents, not all of which are owned, controlled, or licensed by the smartphone manufacturer.
The important distinction here is that, in one industry, your goal is to clear patent infringement while in the other your goal is to get comfortable enough with your patent infringement risk. As you can imagine, intellectual property professionals who are used to freedom to operate strategy can have difficulty adapting to freedom of action strategy, and vice versa. To make this even clearer, imagine that you always know that your products do not infringe and now you are entering a technology space knowing that your products do infringe. It is unsettling. Similarly, if you are used to freedom of action, you have no processes for clearing patents, and you now are faced with searching for all the patents in your space, reviewing them, and determining whether you infringe. You also have to explain to your executive team why patent clearance is now important when it was not before, and there needs to be a budget for it.
The figure below shows that companies operate on a spectrum of clearance (from no clearances to worldwide clearance processes).
What Strategies Make Sense?
Let’s look at specific actions taken in freedom to operate versus freedom of action.
Freedom to Operate: The strategy here is to ensure that in your key markets you evaluate the patents that may impact specific features of your product. The goal is to optimize your patent review spending while managing the inclusion or exclusion of specific features your design teams may want to include and understanding that product definitions/product feature sets may change over the product development process. Often, bringing a new product to market is capital intensive and late changes because of IP problems would be very costly, so you want to identify and eliminate potential infringement early. The process usually looks like this:
- What features are going to be in your new product? In many companies, this is handled as part of the stage gate process for product development and launch.
- Searching for all the patents in your key markets that relate to the features of the new product.
- Analyzing all the patents that you just found and determining whether the patents impact the specific features.
- Providing feedback to the design team on the risk of infringement. Often the patent analysis is included as part of a product development stage gate process so that patent risk is included in product feature selection.
Freedom of Action: Here, there are a number of strategies that people employ. The most basic strategy is to have enough patents in your technology fields such that competitors will not feel confident in bringing a suit against you. The analogy used is mutually assured destruction (but can often be more complicated). A minimum number of patents might be 1,000 to 50,000 depending on your specific risk profile. Additional strategies can be added. For example, companies will pursue cross-licenses, broader indemnification clauses from their suppliers, and employing defensive aggregators such as LOT Network or Unified Patents. Importantly, at no point does the strategy involve clearing every patent risk for a product because clearance simply cannot be achieved.
So now we have the fundamental problem faced by those in converging industries: for part of your product, you must clear all the patents, and in another part, you know you will not clear all your patents.
When Worlds Collide, Indemnification Gets Tricky
When combining both freedom of action and freedom to operate strategies, challenges show up in places not just related to direct patent infringement, but also in your indemnifications from your suppliers and the IP representations and warranties you provide customers.
Imagine you are in an industry where it is common to give broad IP representations and warranties. Your liability might be uncapped. One way you mitigate risk is you perform freedom to operate analysis on your products. Now you are integrating high-technology solutions in your product. Your new high-technology supplier knows that clearing their products is impossible and so will only give limited IP representations and warranties. You are stuck; your customers want broad indemnification and your suppliers will not provide it. Your customers do not understand why you would now want to restrict your liability, because they are used to you providing unlimited liability. Your new suppliers are adamant that they never give indemnification; they expect you to have developed a freedom of action plan and that your risk mitigation through that is sufficient for you to produce products.
You are squeezed in the middle between limited indemnification and full indemnification. So, what do you do?
Not surprisingly, this is going to be complicated. You now have to adapt to strategies from both domains.
- Develop and budget for the risk mitigation strategy from the “other” industry. Add risk mitigation processes from the industry where you are incorporating their technology. Either add patent search and evaluation or freedom of action patent activities to your plans.
- Educate your executives, suppliers, and customers about the challenges.
- Your business sponsors have a single view of patent risk (either freedom to operate or freedom of action); spend the time to educate the business sponsors that they are in a new world and that the risks are different.
- Educate your suppliers that your customers have different risk expectations and you will need more visibility into their patent risk mitigation.
- Help your customers better understand the risk landscape and that the new technology means new ways of managing risk.
- Consider splitting the risk up so that the different technology components of your products are covered by different indemnifications.
- Price the risk into your deals. Offer greater indemnification at a higher price. If your customer desires unlimited liability, then offer it at an increased price (or a discount with limited liability).
- Patent litigation insurance. RPX and other insurance companies now offer patent litigation insurance. For converging industries, this may be a viable solution.
- Your non-practicing entity (NPE) risk is different; adopt different practices. Freedom of action companies regularly use defensive aggregators, cross-licensing and other solutions for lowering their overall NPE risk.
- Get ready for litigation. You are likely to have a higher chance of litigation when converging. With the clash of different strategies, you should expect your litigation risk to go up.
Freedom to operate and freedom of action are two different strategies for mitigating patent risk that collide in converging industries. The good news is that there is a path forward by combining strategies from both. Educating your executives, customers, and suppliers is critical to your success.