China: FTO Analysis:Prevent And Control Patent Infringement Risk

Last Updated: 29 November 2019
Article by Yicun Hu and Jia Xu

With more and more enterprises entering foreign markets, the risk that their products infringe upon already registered patents will also increase. In order to better prevent and control related infringement risks, it has become increasingly important for these enterprises to conduct FTO analysis.

I、What is FTO?

FTO stands for Freedom to Operate, which means free implementation. The term "FTO" first appeared in western markets, referring to the free implementation of the technology of the implementer without infringing others' patent rights. Simply put, an FTO analysis is carried out to determine if a product or process will infringe the claims of issued or pending patent applications.

The content and objects of the FTO analysis are mainly valid patents (granted patents and patent applications under examination), as well as invalid existing technologies. The FTO analysis aims to prove that the technology to be implemented can be freely implemented without infringing others' patent rights.

II、Why should you conduct FTO analysis?

When enterprises sell new products in China or sell existing products abroad, they may encounter the risk of patent infringement disputes. If they are prosecuted by the patent right holder and judged by the court to have infringed upon other patent holders rights, they will often have to pay high rates of compensation. In addition, enterprises are likely to face the enforcement of bans imposed by the courts, prohibiting them from continuing to sell products that are judged to be infringing, which can have a massive impact on the enterprise. The cost of R&D and manufacturing in the early stage of the enterprise cannot be recovered in time, let alone allow for the chance to generate revenue.

Therefore, while enterprises conduct R&D and manufacturing, it is essential that they also carry out an FTO analysis to identify, prevent and avoid potential patent infringement. At present, most domestic Chinese enterprises don't have sufficient knowledge and skills related to patents, especially lacking in terms of familiarity with the laws and regulations of their target market countries, which further increases uncertainty in the process of product export sales. Therefore, in order to better identify, prevent and circumvent the risk of patent infringement, enterprises usually entrust professional agencies to conduct FTO investigations and analysis on their specific products, and these agencies are responsible for issuing corresponding FTO analysis reports. Whilst this greatly reduces the risk of any potential infringement, it also means that on the off chance any infringement is discovered and established, said infringement is less likely to be found as being malicious or intentional. The result here being that any punishment or obligation handed down will be far less severe than if the infringement was to have been found as intentional and malicious.

It should be noted that in certain circumstances, even when the enterprise have obtained the right to enforce their patent, it may not be possible to completely removed the possibility of infringing third parties' patent rights. An example of this may include an enterprise owning patents that are subordinate patents of third-party patents.  According to the provisions of China's patent law and relevant judicial interpretations, in patent infringement lawsuits, if there is no valid reason found for implementing their own patents, the defendants could be found liable for infringement.  

III、When to conduct FTO analysis?

Generally speaking, FTO analysis should be ongoing through the whole process of product development. There are several reasons for this, but mainly in the early stage of development, as the product has not been finalized and the technical characteristics of the product have not yet been determined, it is not possible to accurately compare the product with the target patents of that could be considered potential infringement risks in the FTO analysis. As such, in the early stage of product development, it is necessary to carry out a patent warning analysis early which would enable R&D personnel to be informed in advance about relevant existing technologies and risk patents. After the technical characteristics of the products are determined, the FTO analysis can be carried out with a more targeted focus and guidance when considering the implementation of the technology.

Additionally, FTO analysis could be conducted when enterprises perform certain business activities, such as overseas exhibitions, cooperative R&D, investment financing, mergers and acquisitions, and licensing or transfer, etc., which can help enterprises to prevent and control risk of products. 

IV、How to conduct FTO analysis

Several areas should be covered when conducting FTO analysis, these including but not limited to: product marketing area, product technical characteristics, patent search, patent screening, claim comparison analysis and conclusions for conducting a FTO analysis.

1、Product marketing area

As patent systems and laws vary according the country or region, it is first necessary to determine the regions and countries in which we intend to sell the product prior to conducting FTO analysis, allowing for a more targeted approach. .

2、Product technical characteristics

Generally, a product has many technical features, if an enterprise were to take all of these features into consideration when performing an analysis it would be extremely time consuming. Owing to this, enterprise generally only consider on the components or parts that are important to the product. These products tend to be new wholly designed and developed by the enterprises themselves, and usually carry with them a high risk of infringement. Technology or parts that have been purchased from a supplier are usually only a secondary consideration, as the infringement risk of these parts is relatively lower, and any potential infringement would most likely be borne by the supplier according to the contract. 

3、Patent search

An important indicator obtained through a patent search is the rate of comprehensiveness, which ensures no related patents are missed when performing the analysis. If the comprehensiveness rate does not meet the requirements, the FTO analysis will not achieve its desired result and thus cannot exclude the risk of patent infringement. When performing the FTO search, more attention should be paid to the search for claims, meanwhile the technical characteristics of claims should be confirmed in combination with the full text of the patent. In addition, two sets of independent databases or tools can be used to verify the FTO patent search results, or "back-to-back" searches by carrying out multiple searches to improve the reliability of search results.

4、Patent screening

In the patent screening process, it is necessary to eliminate patents that are obviously unrelated to the product and to identify patents more closely related to the product. A two-stage screening method is commonly used. The first stage is to preliminarily screen patents, i.e., if a patent is unlikely to result in a infringement dispute, then it can be directly deleted without be carried on through to the next stage; the second stage is to finely screen patents selected from the first stage, which are then analyzed through careful comparison with the technical features of the patent claims and that of the products to determine whether the patent is related to the product. 

5、The claims comparison analysis

When carrying out claim comparisons, infringement is judged according the notion of Literal Infringement (i.e., the same infringement) and Doctrine of Equivalents (i.e., equivalent infringement). By comparing the technical features of the product with those of the patent claims one by one to so as to judge whether they are the same or equivalent to determine, thus determining if the product falls within the protection scope of the patent claims.

6、Conclusions

When issuing the conclusions of the FTO analysis report, the main objective is to clarify the risk level between the products and the protection scope of patent rights. It is then possible, on the basis of this report, to make respective conclusions based on the different levels of infringement risk, providing a basis for enterprises when deciding which markets to enter, helping them to reduce the risk of infringement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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