- Company sought to partner with a US distributor
- Deal included indemnity for US distributor for any IP claims, materially increasing the company’s liability
- Competitor in the US threatened to sue for IP infringement
- Company forced to sell at a third of its value
An award-winning hardware company engaged EverEdge to assess if it had “freedom to operate” in a new market among a forest of competitors.
With intense competition, businesses quickly run into “freedom to operate” risks as rivals attempt to sue for patent infringement, brand conflicts, copyright theft, confidential information and generally start fights about other intangible assets.
In this situation, the company hadn’t organised its intangible assets, nor taken the necessary time to understand the intangible assets of its competitors. It had already received investment from a handful of venture capital firms, but these also had failed to look at the client’s freedom to operate before putting money behind the company’s expansion plans.
Since 2010, litigation of IP infringements has drastically increased. These lawsuits regularly result in damages valued in the hundreds of millions of dollars, widespread product recalls and even product seizure. Theft of IP can also be a criminal offence in some jurisdictions.
The company had signed a deal with a US business, the terms of which stated that the US partner would be indemnified for all IP infringement claims, should they occur in the future. After review, the company was advised that these terms enormously amplified its liability and that it must be absolutely sure there were no potential problems.
The client’s weak freedom to operate was eventually exposed by a US competitor which opened proceedings against the client for IP breaches. The competitor issued an ultimatum that the client could either sell the company at a heavily reduced price or risk being sued into oblivion.
The client chose to sell for a third of its market value which resulted in a $100 million loss to its investors.
If you think you have a great idea, someone else is probably working on the same idea and the more successful you are, the more likely you are to be sued. Seeking professional advice and doing your research upfront to determine if you have freedom to operate is a vital step in any commercialisation journey. Doing it right – and doing it early – can save you millions of dollars in potential litigation or other legal damages in the long-run.
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