Hot Topic: Freedom to Operate 101

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Freedom to Operate or “FTO” is a hot topic that we are regularly asked to write about. FTO occurs when a company is not infringing third party intellectual property (IP) rights – in other words you have freedom to operate your technology, product or service. If you do not have FTO it means you are infringing someone else’s IP.

Just how serious is FTO? In 2012 Samsung was ordered to pay Apple US$1 billion for infringing Apple’s IP and injuncted from selling its products. That’s the US I hear you say – this doesn’t happen in New Zealand! Yes it does. It’s less obvious but equally devastating.

An example is the true story of a well-known New Zealand company. Founded in the late 1990s, it developed what it believed was a world first technology. The early team were “anti-IP” (one key manager said he “didn’t believe in it”) and made no attempt to file their own IP or check if third parties in their technology space had IP. This wasn’t just careless, it doesn’t even make sense: logically, if you think your breakthrough is valuable others probably think the same thing. Consequently there’s a strong probability they are building their own IP. In fact the more valuable the technology area, the more likely others are chasing the same dream. In Silicon Valley the general rule is that there are 20 – 30 teams working on the same “break-through” at any one time.

A few years later the product was launched and sold well. A large multinational asked to incorporate the technology into its product. It was a huge opportunity. Despite engaging a major New Zealand law firm the company made its second major mistake: they indemnified the multinational for IP infringement. This compounded their first mistake because not only did management have no idea if they had FTO but the scale of the multinational’s sales massively amplified their potential liability. They were on the hook for all costs associated with any IP infringement the multinational encountered due to their (completely un-researched) IP.

Fast forward a few years: the company was performing strongly. Then an offshore company in a related technology field made contact. They politely explained that the Kiwi company was infringing the offshore company’s patents; patents which pre-dated the Kiwi team’s work and which they could have publicly searched if they had taken FTO seriously. By then it was too late. A stark offer was made: “we can acquire you (for a significant discount on your current and future value) or we will sue you out of existence. By the way we’ve mentioned the infringement to your multi-national customer. They are not very happy”.

The New Zealand press reported the acquisition as a success but in reality it was a shot gun wedding. A rising New Zealand tech star was sold for a song because it failed to realise the IP game is played very differently overseas. This is by no means the only Kiwi company (large or small) to fall foul of FTO – managers and advisors try to keep such mistakes away from peers and shareholders.

A few key points to keep in mind about FTO:

1.Ignorance is not a strategy. A “see no evil, hear no evil” approach to FTO is a major mistake. FTO is relevant to any New Zealand business with innovative products or an export orientation. Managers (and directors) can be directly liable for failing to take FTO seriously.

2. FTO is not just about patents – you can infringe any form of IP: copyright (software code, content), trademarks (brand), design rights (product designs), and confidential information (processes and information).

3. Having your own patent does not grant you FTO.

4. Be wary of advisors who focus their FTO analysis primarily on New Zealand. Your greatest FTO threat will typically come from offshore – where the largest competitors, markets, manufacturing locations and potential exits are likely to be and where lack of FTO will be most damaging.

 IP is increasingly the key asset of business. If you plan to be successful you need to understand it and that means understanding FTO.

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