[co-author: Guangping Zhang]

In recent years, companies involved in intellectual property rights infringement disputes abound in China. Some have been accused of infringement and have been punished with high compensation and issued with enforceable injunctions, some have paid high patent royalties, and some have been forced to terminate their IPO road, bringing huge pressure to the operation of companies. How to effectively prevent risks in intellectual property rights has become a common issue for many companies. FTO investigations will be covered in this article as an effective means of preventing IP risks.

What is FTO investigation?

FTO (Freedom To Operate), refers to the free use and development of the implementer’s technology under the condition that the technology is not infringing the patent rights of others. FTO investigation refers to the investigation into whether the to-be-implemented technology may infringe the patent rights of others. It aims to screen the patent barriers that may be encountered, identify the risk of infringement, and ensure that the technology can be freely implemented in a certain country or region.

What is the purpose of the FTO investigation?

1. To avoid punitive damages that may result from an intentional infringement

In the judicial adjudication regarding intellectual property right cases in China, the courts make a judgment on the amount of compensation based on factors such as the nature and circumstances of the infringer’s infringement. In the patent infringement case of GREE v. AUX, for example, the Higher People’s Court of Guangdong Province held that AUX ignored the laws and effective judgments and used the same technical solution to infringe the same patent right again, which is with obvious subjective intention. Based on a comprehensive consideration, the level of infringement compensation should be increased, in order to manifest the deterrent to those who commit serious infringement acts. The CNY 40 million (approximately USD 6.1 million) claimed by GREE for compensation did not exceed the reasonable limit and thus the court supported GREE’s claim.

Of course, the court may also make a judgment with lower amount when determining the amount of damage because the infringing party does not constitute intentional infringement.

With a professional risk assessment on intellectual property rights, companies can confidently, skillfully and selectively put new products into the target market.

2. To reduce the risks of encountering competitors or “NPE” patent litigation in the IPO process of a company

In recent years, companies in China seeking an IPO have been frequently sued by competitors during the listing review stage for their main business products infringing intellectual property rights of their competitors. Patent litigation has become not only a significant factor affecting the normal listing of IPO companies, but also an important means for competitors to suppress IPO companies. Some companies’ IPO process has been affected because of patent battles, and some had to terminate their listing applications because of patent litigation, rendering countless early efforts futile.

Analyzing the intellectual property risks for the proposed IPO companies in advance, formulating tailored strategies for intellectual property risks, or disposing of potential risks in advance can help the proposed IPO companies resolve the intellectual property issues in the IPO review process and support them to successfully pass the process.

3. To assist R&D personnel to obtain the necessary licensing situation of the intellectual property rights for the development of products, so as to improve the freedom of product development and operation

When a company plans to develop and launch a new product, facing the “patent jungle”, it is necessary to seek its “free use” at an early stage, which is a necessary means of “risk control”.

Through the FTO investigation, it is possible to evaluate the direction of product R&D in advance, design a well-planned patent circumvention strategy, reduce the loss of competitive resources after the product/technology enters the market, reduce the risk of expensive costs in patent litigation, and reduce the risk of patent infringement when entering a specific country for exhibition or sale.

In addition, FTO must also be conducted before corporate mergers and acquisitions and patent licensing.

When should the FTO investigation be conducted?

As an important means of patent risk management and control, FTO investigations actually span the whole process of product R&D, launching, exhibition, import/export trade and so on. Of course, at different stages, the purpose of FTO investigation is not always the same. The earlier the FTO investigation is conducted, the more options and initiatives the company will be able to take. In order to enable companies to find out as soon as possible whether the technology or product they want to implement has the risk of infringing on the prior intellectual property rights of others, it is crucial to choose the proper time to start the FTO investigation in all aspects of the company’s product R&D and operation.

For example, in the early stage of product R&D, understanding the patent portfolio of competitors through FTO will help to timely design the product to avoid infringement and reduce the risk of litigation.

In the listing process, FTO investigations are mainly used to effectively deal with the risks of litigation initiated by competitors.

In addition, when purchasing a company’s technology or equity, an FTO investigation is usually conducted against the company’s technology, aiming to assess whether the technology may infringe the intellectual property rights of a third party.

How to conduct FTO investigation?

1. Clarify the needs, jointly set up a composite investigation team to complement each other

To conduct an FTO investigation, it is usually necessary to build a three-in-one investigation team with the R&D personnel of the company, the in-house intellectual property counsel and the patent attorneys or attorneys-at-law of a law firm, so that they can give full play to their respective advantages and make the investigation more targeted through the close cooperation of the three parties, and to ensure the high-quality completion of the FTO investigation.

2. Optimize the survey object and carry out risk assessment in a more targeted manner

The analysis of patent infringement risk mainly includes the identification of investigation objects, patent search, patent screening, technology comparison, risk assessment and risk prevention and control.

The professional investigation team needs to conduct in-depth communication with the R&D personnel of the company to optimize the technical decomposition and search elements of the investigation target, and on this basis, formulate a suitable search strategy for the target investigation jurisdiction, so as to unearth patents with high relevance.

3. The conclusion of the investigation results should be objective and accurate, and a targeted countermeasure strategy should be provided if necessary

The FTO legal opinion should provide professional legal opinions based on detailed data and objective risk determinations. However, it should be noted that the FTO investigation is not the same as the judicial judgment of the court after all, and the legal opinion of the investigation is not an absolute conclusion.

The patent infringement comparison opinion not only compares and analyzes the technical features of the target product under investigation with each technical feature recorded in the patent claims involved, but also involves reasonable interpretation of the claims, so as to obtain a detailed and professional legal opinion.

The possibility of the occurrence risk of patent infringement needs to be evaluated from three dimensions: the threat degree of the risk patents, the risk degree of patent litigation in the industry, and the litigation strength of risk patent holders. In general, the likelihood of patent infringement litigation is affected by the degree of threat posed by risk patents, the frequency of patent litigation in the industry, whether the risk patent holder has prior patent litigation experience, and the intensity of the proposed IPO company's competitive relationship with the patent holder.

If, after assessment, there is indeed a greater risk of infringement, the company can elaborate solutions to the circumventive design or alternative scheme of the product according to the scope of protection of the patent claims involved in the case.

In addition, if it is revealed that infringement risk in the target product is highly likely, in addition to providing conclusions, it is also recommended to analyze the stability of high-risk patents, especially in the circumstance that the cost of circumvention design is high and it is not easy to achieve. This step is crucial for laying a good foundation for subsequent invalidation action.

Conclusion

Spending a little money on mine-sweeping (FTO investigation) is better than spending a lot on war (litigation).

Intellectual property risk is like the sword of Damocles hanging over head, which is a serious concern that companies must deal with in the business operation. Only by checking intellectual property risks in advance, formulating targeted prevention and control strategies for intellectual property risks, or disposing of potential risks in advance to prevent problems before they occur can companies achieve stability and long-term success in the fierce market competition.