Prudent Financial Institutions Backing Tech-based SMEs Should Consider a Freedom-to-Operate Study

Financial institutions with a business interest to invest in foreign technology companies or SMEs (small and medium-sized enterprises) that are relying on US sales to drive revenue are encouraged to do their homework prior to doubling down on such SMEs. Although the savvy SME may have one or more patents under its belt, owning patents does not necessarily provide the appropriate safeguards for investors.

It would be prudent for such financial institutions to perform a 'freedom to operate' (FTO) study. The FTO study entails an analysis of the product/service being used, sold, and/or manufactured by the SME in the US and determining whether such product/service might infringe a US patent. Here's the issue: If a product imported into the US is found to infringe a US patent, the product could be prevented from entering into the US by an exclusion order from the US International Trade Commission (ITC). An exclusion order through the ITC could have a tremendous negative economic impact on an SME relying on the US market for revenue or growth.

For example, a France-based investment banking firm seeking to invest in its local SME tech community to boost the French technology economy should understand whether a key revenue driver for the SME is from sales into the US. If so, the FTO study would be a crucial step in determining the risk exposure to the investment banking firm.

Once the FTO is performed, an informed decision can be made by the financial institution regarding potential business risks of investing in an SME which relies on exporting products/services into the United States. If the FTO results in minimal exposure to patent infringement, the financial institution will have greater confidence in business success and this may lead to greater investment in that SME. Whereas, an FTO study resulting in highlighting potential problematic patents in the US, would allow for the financial institution to tailor its investment based on the increased infringement risk (e.g., reduce investment or investment strategy contingent on US sales, etc.). Alternatively, the financial institution may require the SME to seek a license to the strategic patent(s) or require a change of course from the current product roadmap being implemented by the SME to avoid infringement down the road.