As you read this article, hundreds of startups and other organizations are working on blockchain applications in such areas as energy trading, data storage trading, peer-to-peer lending, and verifying professional or other credentials.
A lot of these organizations, including tech giants and large financial institutions, are seeking patents on these applications, a rush reminiscent of the one that occurred in the 1990's and 2000's with the advent of the World Wide Web and e-commerce. What are the current prospects for this new wave of blockchain-related patent applications?
Although well over 1000 patent applications for U.S. patents have been filed for blockchain-related inventions in the last four years, less than 100 of these applications have emerged as U.S. patents. A quick survey of published applications relating to blockchain reveals that a significant number have been awaiting examination for over two years. Thus, the dearth of issued patents can, in large part, be attributed to a backlog in the United States Patent and Trademark Office ("USPTO").
There is also some evidence that blockchain-related patent applications, particularly those related to financial or other business applications, have been slowed by the obstacles to software-related inventions raised by the United States Supreme Court's landmark 2014 decision in Alice Corp. Pty. Ltd. v. CLS Bank Int'l, which caused widespread doubt about the ability to obtain and enforce computer-related invention patents and the desirability of investing resources to attempt to obtain and enforce such patents. However, recent developments in the United States Court of Appeals for the Federal Circuit ("Federal Circuit") and the USPTO suggest that such doubts may be misplaced.
Patent Trolls and the Alice Decision
Alice was the Supreme Court's response to calls from affected industries and other parties to rein in what was perceived as abuse of the patent system by patent "trolls." Patent trolls are assertion entities that are viewed as exploiting the USPTO's inability to adequately examine software-related patent applications. Such entities obtain or purchase poorly examined patents and then leverage the threat of litigation defense costs to extract settlement payments from alleged infringers.
Prior art searching during the examination of patent applications has, for the most part, relied on relatively limited databases of published documents, mostly issued patents, published patent applications, and technical papers. Prior to Alice, examiners were hindered by a general lack of published evidence about software-related patent claims, making invalidation difficult, even when such claims were of such breadth that they appeared to be blatantly unpatentable.
Due to the nature of the software industry, many commonplace techniques were never patented nor did anyone bother to describe them in a technical paper. Moreover, many software inventions tended to be computer-implemented modifications of long-used processes (e.g., certain commercial or financial processes), which were unlikely topics of patents or technical papers. Therefore, examiners were ill-equipped to put together cases of lack of novelty or obviousness against such claims, causing many dubious patents to issue.
Armed with such a patent and its statutory presumption of validity, a patent assertion entity could take advantage of the high costs of litigation to extract settlements that were arguably not justified by the value of the claims being asserted.
Based on 35 U.S.C. § 101 ("Section 101"), which defines what type of subject matter is eligible for patenting, Alice and its follow-up opinions outline streamlined techniques for the USPTO and district courts to dispose of questionable patent claims without the time and expense typically required to prove non-infringement or invalidity of a patent claim.
District courts can use the new techniques to weed out illegitimate patents in the early stages of a case, such as at summary judgment, before litigation costs can escalate, which means defendants can also wield greater leverage in settlement negotiations. Of greater or equal importance, the USPTO can use the techniques to prevent the issuance of such patents by sidestepping limitations on patent examiners' ability to locate published prior art.
The Initial Effect of Alice
There is ample evidence that Alice and the related techniques flowing from it have achieved at least some of the intended effect. After Alice, the USPTO issued new guidelines for examining computer-implemented inventions that provided examiners a template for invalidating claims under Section 101 and, armed with these guidelines, examiners have significantly slowed issuance of software-related patents, especially in the area of e-commerce.
From the time the Alice decision was handed down to August of 2017, the Federal Circuit invalidated 91 percent of the 111 patents involved in appeals, based on the lack of subject matter eligibility. District courts also invalidated a relatively large number of patents on similar grounds, often by summary judgment, and the Federal Circuit has upheld many of these decisions.
The pace of invalidation slowed somewhat in 2017, perhaps due to a reduction in the number of pre-Alice patents still subject to invalidation, but also because, inevitably, the Federal Circuit began circumscribing the application of Alice in subsequent cases. Nonetheless, Alice remained a powerful tool for efficiently disposing of computer-related invention claims, particularly in the USPTO.
And Then Came Berkheimer
In February 2018, however, in the case of Berkheimer v. HP, Inc., the Federal Circuit walked back Alice in a manner that is likely to be further reaching in effect, especially when considering the USPTO's reaction.
In Berkheimer, the Federal Circuit considered an appeal of a summary judgment of patent eligibility for claims of a patent directed to management of digital assets. The court clarified that consideration of subject matter eligibility is a question of law based on certain factual issues. This means, for example, that invalidation under Section 101 at summary judgment requires that there be no material issues of fact regarding whether a claim simply performs an abstract idea using "well understood, routine and conventional activities."
Berkheimer now makes it much more difficult to dispose of a computer-related patent at the summary judgment phase, prior to a full trial and the related higher litigation costs.
Perhaps more importantly, while Berkheimer did not necessarily apply to the manner in which the USPTO applies Alice during patent examination, the USPTO followed Berkheimer by changing its examination procedure pertaining to subject matter eligibility.
The new procedure, announced in April 2018, requires patent examiners to provide a tangible evidentiary basis for assertions that proposed patent claims merely represent abstract ideas implemented using well-known conventional techniques, thus shifting the burden further onto the examiner to prove ineligibility.
It will likely be as difficult for examiners to produce the type of evidence required under this new procedure as it was for them to produce evidence for lack of novelty and obviousness before Alice.
The Effect of Berkheimer
As a result of Berkheimer, the USPTO may soon again become more of a speed bump than a roadblock for computer-related patent applications.
Added to the likelihood that Berkheimer will make it significantly more difficult for defendants to dispose of software-related patents in a summary manner, the balance between patentees and potential defendants may have again shifted.
Therefore, it also may be time to re-evaluate any doubts you might have about the efficacy of pursuing those new blockchain or other computer-related patent applications.
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.