Can you patent blockchain?

Zachary Silbersher

Bitcoin is through the roof, and cryptocurrency technologies are drawing significant investment. Yet, regardless of whether bitcoin is a bubble, the long-term story remains that blockchain is slated to be the next potential big disruptive technology. Like any disruptive technology, those thinking ahead, including startups and established institutions, know that acquiring a portfolio of patents on blockchain features or uses could pay enormous dividends years from now. But the Supreme Court’s harrowing precedent in 2014, Alice v. CLS Bank, which has already doomed so many software patents, may create a formidable obstacle to acquiring blockchain patents.

Blockchain was first proposed by the pseudonymous Satoshi Nakamoto in the context of bitcoin, but its standardized distributed ledger technology is being touted as a means of revolutionizing industries ranging from land-title management, inter-bank payments, email, art-authentication and many more. In the patent space, Erich Spangenberg recently announced a new venture, Ipwe, with the mission of “[a]pplying blockchain, artificial intelligence and predictive analytics to improve patents, the industry and the asset class.”

Corporate America, and banks in particular, are trying to patent blockhain technologies.  Bank of America has applied for more than 20 patents related blockchain technology, as far back as 2014. Those patent applications have recently published, thus making them public. Bank of America’s foray into the blockchain patent space raises many concerns for the numerous startups crowding into this technology:  Can the bank really patent this stuff? Will that mean no one else can do blockchain without paying a license to Bank of America?

Since the 1970’s, Alice and Bob have held court as the notorious archetypes in the field of cryptography and complex computational transactions. For years, they have aided in the explanation of complicated network transactions, and in 2008, they were called upon in Satoshi Nakamoto’s paper that established the groundwork for blockchain. Alice’s and Bob’s notoriety has recently resurfaced in the scores of articles explaining blockchain to experts and laymen alike.

Yet, in the world of patents, a different Alice looms large. She has become a worthy contender who must be taken seriously in the development of an IP strategy for any blockchain startup. In June 2014, the United States Supreme Court issued a case titled, Alice Corp. v. CLS Bank, which has significantly changed the patent landscape. 

The case nominally addressed the eligibility for business methods to be patentable.  In particular, the case involved a patent directed to automating the traditional use of an escrow in the context of payment between two counterparties. The Supreme Court struck down the patent, holding it involved nothing more than taking the age-old idea of an escrow agent, and applying it on a general purpose computer

While the Supreme Court’s opinion in the Alice case was paradigm-shifting, more important has been the case’s application by district courts throughout the country in the wake of the Alice decision. District courts pounced upon Alice to begin invalidating scores of patents that just a few years ago would have survived litigation. Suddenly, any patent that smacked of software or is applied on general purpose computers is suddenly susceptible to invalidation under Alice. 

There are at least two cases from the United States Court of Appeals for the Federal Circuit (the authoritative appellate court for patent cases) that have provided guidance on which patents fall into Alice’s trap and which do not. In Ultramercial v. Hulu, the patent was directed a process of offering copyrighted material on a webpage in exchange for viewing a selected advertisement. The Court held that the patent was directed to the abstract idea of showing advertisements before delivering free content (or using advertisements as a form of currency). The patent was held invalid.

In another case, DDR Holdings v. Hotels.com, the patents were directed to creating composite web pages that combined visual elements of a host (such as the look and feel of the page) with content from a merchant (product information from a third-party). The court held that the patents were not directed to an abstract idea simply implemented on a computer, but instead solved a technological problem that made computers function better. In this case, the patents were held to be valid.

The Court in DDR stated, “These claims stand apart because they do not merely recite the performance of some business practice known from the pre-Internet world along with the requirement to perform it on the Internet. Instead, the claimed solution is necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.”

The difference between Ultramercial and DDR is thus important for prospective blockchain patent-holders. In the wake of Alice, software patents that merely take an old idea and “apply it on a computer” or “apply it through the internet” will not be eligible. By contrast, patents that improve the technological functioning or processes of a computer itself will be eligible. (Numerous additional cases have issued from the Federal Circuit, purporting to further clarify the scope of Alice, but the principle distinction between Ultramercial and DDR remains one of the most important ones.)

Blockchain patents must be mindful of falling on the right line between Ultramercial and DDR. Nobody will be inventing blockchain anymore, but rather improving upon it. Most blockchain patents will likely focus upon improving blockchain’s efficiency or security. Assuming they are properly drafted, these patents could safely fall within the DDR camp because they are “rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.”

More risky may be patents that take the existing blockchain technology and come up with a new use for it. These patents are less likely to solve precise problems arising in the realm of blockchain technology. In this case, careful patent drafting that is mindful of the pitfalls of Alice, Ultramercial and DDR, will be necessary to secure patents that will actually be useful down the road when the patents need to be put to work.

So what about the Bank of America patents. One patent claim published in one of Bank of America’s blockchain patents reads as follows:

1. A system comprising:

a memory operable to store a customer account associated with a customer; and

a processor communicatively coupled to the memory, the memory including executable instructions that upon execution cause the system to:

communicate with an electronic payment service, the electronic payment service providing a virtual account associated with the customer;

determine that the customer initiated a request for a financial transaction, the financial transaction configured to transfer an amount of currency from the virtual account to a destination;

validate the financial transaction based at least upon data received from the electronic payment service;

determine the customer account is associated with the virtual account based at least upon data received from the electronic payment service;

determine a quantity of cryptocurrency equivalent to the amount of currency, the quantity of cryptocurrency associated with the customer account; and

transfer the quantity of cryptocurrency to the electronic payment service.

While this claim may appear to be very detailed, it may fall on the wrong side of Alice, DDR and Ultramercial. Specifically, it describes a system for processing a payment using general purpose computer equipment, where the only purported difference from the billions of electronics transfers occurring before this patent is that it is directed to a “cryptocurrency” transaction. Arguably, this patent would potentially preclude all cryptocurrency transactions without a license, and it arguably does not solve a specific problem arising within the context of blockchain technology.

Indeed, the Patent Office has twice rejected all pending claims under § 101 as ineligible under Alice. The Examiner asserted that all claims are directed to the abstract idea of transferring currencies in a manner that relates to a “fundamental economic principle” without significantly more. BOA has responded with an argument under DDR Holdings, arguing that, “the claims at issue here are necessarily rooted in computer network technology because they address a problem that only arises in the realm of information security in a computer network, which is necessarily rooted in computer network technology.” BOA has cited additional caselaw, including the recent McRo decision, as a basis for allowing its patents over Alice, but those arguments have not yet prevails.

It remains to be seen whether BOA will succeed in acquiring a healthy portfolio of blockchain patents. But the back and forth with the Patent Office to date illustrates how difficult, and formidable, a task it has proven to be get past Alice.