United States: Podcast: Blockchain Intellectual Property Considerations For Innovators And Investors

In this podcast, intellectual property litigation partner Leslie Spencer and associate Marta Belcher address such topics as:

  • Can blockchain technology be patented if it leverages existing open source code?
  • With the tension between free open source software and patenting that software, what are the different approaches to protecting blockchain innovation?
  • Are there patent non-assertion pledges specific to blockchain technology?
  • What future patent licensing arrangements might there be for blockchain technology?
  • Should companies prepare now for the threat of blockchain patent litigation?

Transcript:

Marta Belcher: Hello, and thank you for joining us today on this Ropes & Gray podcast. I'm Marta Belcher, an IP litigation associate based in our Silicon Valley office, and joining me is Leslie Spencer, an IP litigation partner, also based in our Silicon Valley office. In this podcast, we're going to discuss issues related to patenting blockchain technologies. We'll cover procuring and enforcing blockchain patents, defensive patent licensing strategies for blockchain innovators, patent pledges and patent pools. So I'd like to start, Leslie, by noting that blockchain patenting has become quite substantial, and for those companies that are seeking to patent blockchain technology, what are some things that they should take into consideration?

Leslie Spencer: Well, first of all, there is some uncertainty as to the patent eligibility of software inventions, in light of the Alice decision. Blockchain technology generally involves the improvement of the functioning of a computer, so that should pass muster under the Alice standard, but we have no specific guidance from the U.S. Patent Office yet on blockchain patent applications. And financial firms in particular that are patenting in this space need to be mindful that the use of business and financial terms in their patent applications are likely to invite Alice-based patent eligibility rejections. Of course, to the extent that a blockchain invention requires specialized hardware or incorporates some combination of hardware and software elements, it's great to recite those elements in the patent claims, as that will tend to bolster patent eligibility. Blockchain innovators also must demonstrate the novelty and non-obviousness of their inventions to obtain a patent. The Nakamoto white papers on the Bitcoin blockchain and all of the publicly available open source blockchain software will present prior art challenges in this space. The Hyperledger and Ethereum open source projects are particular examples of prior art that will have to be considered.

Marta Belcher: So, that raises an interesting question. Can blockchain technology be patented if it leverages existing open source code?

Leslie Spencer: Well, sure. Patenting an invention that uses open source is possible, where new features or functions are improving the underlying open source code, and of course otherwise meet patentability standards. However, if that open source software is subject to an open source license itself, then the terms of that license are going to impact your decision whether to patent. For example, open source licenses sometimes preclude patenting improvements to the open source code. They may require any improvement to be freely distributed, or may even force any granted patent to be freely licensed to third parties. So, it's very important to determine whether your blockchain invention uses open source code, and if so, which open source license is implicated. Examples are the GPL (the General Public License), the Affero GPL, AGPL, the BSD (which is the Berkeley Software Distribution license) – all of those have different restrictions with respect to IP, and so knowing which OS license is implicated and its restrictions on patenting and copyrights will be key.

Marta Belcher: So for software that is distributed under an open source license, can that be patented?

Leslie Spencer: Well, yes, it can. The decision to distribute software as open source may, however, limit whether the patent owner can exploit its own patent rights as fully as ordinarily would be the case. For example, the patent owner may not be able to assert its patents against certain entities based on the way they use, modify or redistribute the open source software. And also, there may be commercial reasons for patenting inventions, but also wanting to make related software components available as open source. In doing so, there's an ability to create and foster an ecosystem. For example, for a set of standards or protocol related to blockchain, they may help to develop and bolster the commercialization of a particular set of blockchain use cases. That's one reason that you may choose to both patent elements of a blockchain project, but also keep elements of it open source.

Marta Belcher: So, there is some tension between the ethos of free open source software and patenting that software. How might this tension manifest in different approaches to protecting blockchain innovation?

Leslie Spencer: Well, what we've seen is that startups and established firms that may both be seeking patent protection, and for many of the same reasons such as attracting investment or building a defensive patent portfolio or even monetizing their investment through licensing, may have different approaches to just how much remains open source versus patented. Engineers in startups tend to have more influence and demand a greater share of their projects remain open source. That will have some influence on just how much remains or is made available to be patented, as well. So, we look at companies like Coinbase and Blockstream, which have made public pledges to use their patents purely for defensive purposes. Generally speaking, a patent pledge is a public commitment that a company makes to licenses, patents, subject to certain conditions. The Coinbase and Blockstream pledges are examples of unilateral pledges, similar to what Twitter did with its "Innovator's Patent Agreement" (IPA). There, Twitter committed to its employee inventors that it will not make offensive use of any patent without the inventor's permission.

Pledges can also be multilateral – by that, we mean companies opt into a network of other companies that make the same pledge. For example, a pledge not to offensively assert their patents against any other member of the network that has made the same commitment. One example of this sort of multilateral pledge is the Defensive Patent License (DPL). There, the companies opt into a network where each promises not to sue any other company in the network for patent infringement. That group, however, only has a few members at this time. Another example is the License on Transfer Network (LOT). There, the participants agree to license their patents to any other member of the network, but only at the time that the patents are transferred to a non-member third party. Otherwise, there are very few restrictions on how the members can use their patents. We also see patent pledges that are specific to a particular technology. An example of that is the Open Invention Network (OIN). That group has acquired hundreds of patents that it will license for free to any company that promises not to assert its own patents against Linux technology.

Marta Belcher: Are any of these patent pledges specific to blockchain technology?

Leslie Spencer: Well, yes. We referred to the pledges made by Coinbase and Blockstream – there, they're using their patents purely for defensive purposes, and those relate to blockchain technology. Also I mentioned the Open Invention Network – the CEO of that group has stated that they're thinking about acquiring blockchain-related patents, to add to its portfolio, so that they would also protect blockchain technology in addition to Linux technology. There's also a new arrangement that we've become aware of called the Blockchain Defensive Patent License (BDPL). It's quite different than the sort of pledges that we've been talking about up to now. Their claim is to prevent "the dreaded majority attack on any distributed ledger." And really, the focus there is preventing some sort of consortium coming together to monopolize mining resources, and in particular with respect to the Bitcoin blockchain. So, this is really not a defensive patent pledge in the sense that we've been talking about it now. That said, they do make reference to a commitment with respect to patents – they say that they will "penalize any licensee from attacking the patents licensed to any other BDPL user." It's not entirely clear how that will be implemented, and we'll look to see how things develop in that particular patent arrangement.

Marta Belcher: What other types of patent licensing arrangements might we see for blockchain technology in the future?

Leslie Spencer: Well, certainly a common one in other industries, a patent pool, where members agree to cross-license to each other, patents related to a particular technology. Generally speaking, that's an arrangement whereby multiple patent owners determine which patents are most essential to a particular new technology and make agreements on how those will be licensed. Patent pools are most effective where they include many, if not all of the patents that are going to be essential for that new technology, of course avoid unlawful anti-competitive effects, and allow the licensees to commercialize the new technology with some form of exclusivity, so that there's a benefit to being a part of the pool. Creating a patent pool in the blockchain technology space will present a number of challenges. First, there's a real absence right now of industry standards, and that will make it more difficult to determine what are standard essential patents and to get agreement among a group on that. There's also a diverse set of industries implementing blockchain projects now, and therefore will make it more difficult to not only determine what are standard essential patents, but what would constitute the FRAND rate – the "Fair, Reasonable, and Non-Discriminatory" licensing terms that are required for patent pool. And then there's also the issue we spoke of before, about the prevalence of open source blockchain code. That may place some limits on the value of what would be licensed in any patent pool arrangement, and therefore be a disincentive for joining the pool. At this point, we're really just seeing the tip of the iceberg in terms of what is being patented in blockchain technology, and it's probably too early to predict who will be the major patent holders in this technology, or what will be the patents that are essential to facilitating freedom to operate and fostering innovation in this field. So as a result, it's probably too early to know when we'll start to see the formation, or if we'll see the formation of patent pools in blockchain technology.

Marta Belcher: While there are relatively few granted patents related to blockchain technology at this time, should companies be preparing now for the threat of blockchain patent litigation?

Leslie Spencer: As we've discussed, we're still in the very early stages of commercializing blockchain technology, so at this point, the threat of litigation does not appear imminent. However, there are real advantages to being a first mover in this space. As with all nascent technology, there's a potential to secure patents with broad claims scope, as prior art is less available and less well understood by the Patent Office. Enforcement of patents with broad scope obviously creates a greater litigation risk and something that must be considered in the space. Also, we may see non-practicing entities start to acquire patents from failed startups or from other entities that are seeking to monetize their early investments in blockchain innovation. So companies now should be developing a position to prepare themselves to mitigate any litigation risk. One of the most effective tools for that is a strong defensive patent position – either a defensive patent portfolio or some of the defensive patent licensing strategies that we've discussed. And certainly, companies can gain some competitive advantage by directing their R&D efforts with the eye towards patenting blockchain fundamentals, and blocking out their competitors. Also, it would be important to understand the challenges of enforcing blockchain patents in the space. Blockchain technology is by its nature decentralized and networked, therefore, it may be challenging to identify any single party who is infringing every element of a patent claim. That's a challenge for someone attempting to enforce a patent, so that's good news if you're on the defendant end of a lawsuit, but not great news if you'd like to enforce your own patents – but certainly, a consideration that companies should have in mind. Also, elements of blockchain technology can be implemented across various countries, and elements can be beyond the reach of U.S. patent law for that reason. These challenges for enforcing blockchain patents must be considered, whether you're a blockchain innovator looking to protect yourself from litigation or seeking to enforce your own patent portfolio. In the end, companies wishing to commercialize blockchain technology will benefit most from the reduced transaction costs and litigation and risk mitigation that's associated with the defensive patent licensing arrangements or patent pools that we've discussed today.

Marta Belcher: Thank you, Leslie. For more information, please visit our website at www.ropesgray.com. please stay tuned for future podcasts from Ropes & Gray's IP litigation practice. And of course, if we can help you navigate any of these challenges, please don't hesitate to get in touch. Thanks for listening.

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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