By Ira Schaefer & Ted Mlynar,

Ira Schaefer and Ted Mlynar are partners in the intellectual property practice at Hogan Lovells in New York City. They advise on patent and other intellectual property issues relating to blockchain and cryptocurrency technologies.

With so much blockchain technology publicly disclosed already, many are wondering, “How can we get a patent on a blockchain system now?”

In a previous article, we explored whether Satoshi Nakamoto could have patented bitcoin and whether such a patent would have survived an eligibility challenge.

But regardless of whether a viable bitcoin patent exists, both Nakamoto’s 2008 article describing the bitcoin system and the bitcoin network in operation since 2009 qualify as “prior art” against any new attempt to patent a blockchain system.

There are a few legal and practical hurdles facing the aspiring blockchain patentee.

Alice in Wonderland

The Supreme Court’s ‘Alice’ decision addresses the statutory categories of potentially patent-eligible subject matter articulated in 35 USC §101:

“[A]ny new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” – Alice Corporation vs CLS Bank International (2014).

Being quite the patent buzzkill, Alice notes that there are long-standing exceptions to those broad categories. “Abstract ideas,” in particular, are not patentable. And, according to Alice, in the patent Wonderland, there are exceptions to the exceptions.

We shall explain.

First, when is an idea so “abstract” that it is an unpatentable “abstract idea”? The Supreme Court is not entirely clear in Alice, but it was sure that “fundamental economic practices” are abstract ideas. The court specifically determined that a claimed method for mitigating “settlement risk” was an abstract idea.

Second, the Supreme Court adapted the two-step analysis it had devised for life sciences patents in Mayo Collaboration Services vs Prometheus Laboratories (2012) to apply to financial technology patents.

The first step in ‘Mayo’ was to analyze the patent claim as a whole to see if an abstract idea (the exception to patent eligibility) is claimed. If so, then the second step in Mayo was to see if that patent claim recites additional elements to implement the abstract idea that are “significantly more” than the abstract idea itself (the exception to the exception).

If so, then the patent claims are directed to patent-eligible subject matter. If not, then the patent claims are directed to a patent-ineligible abstract idea.

Determining what qualifies as “significantly more” may seem a bit subjective. The courts have warned that adding well-known activities, routine and conventional activities, or insignificant extra-solution activities do not qualify. Linking a claimed method to a particular field of use is also not adding “significantly more.” Such circular definitions, however, are not particularly helpful guidance.

What has been considered “significantly more?” An improvement in another technology or technical field, an improvement to a computer itself, adding a limitation that is not routine or conventional, linking the use to a particular technological environment (other than a computer network), and applying the method to a particular machine (other than a general purpose computer) have generally been found to be “significantly more” sufficient for patent eligibility.

In applying Mayo to technology inventions, Alice created quite a stir at the US Patent and Trademark Office (USPTO). USPTO examiners were required to figure out which inventions were the exceptions and which inventions were the exceptions-to-the-exceptions. Those lines proved to be not so easy to draw.

The decision also immediately impacted all patent litigation cases, because Alice has a retroactive effect.

For example, even though Nakamoto could have filed his patent application in 2007 and had it examined under pre-Alice law, any challenge to the validity of that patent today would be reviewed under Alice. The Federal Circuit, the court of appeals for patent cases, has issued several decisions to help the district courts understand and apply Alice.

Just ask Alice

How does Alice impact blockchain inventions? In short, they start behind the eight ball.

Applying Alice to FinTech inventions, the Federal Circuit has held that methods for risk hedging, for creating a contractual relationship, of using advertising as currency, and of processing information in a clearinghouse, are all “abstract ideas”.

In none of those cases did the patent claims recite something sufficiently “significantly more” to qualify as an exception-to-the-exception.

In view of those decisions, there was an understandable concern that the Federal Circuit would classify any method for carrying out a traditional financial transaction performed on a computer (or over the Internet), as an unpatentable abstract idea.

While the prospects for patenting FinTech may have looked grim, the scope of the exceptions-to-the-exception has been expanding and provides an opening for patenting blockchain inventions.

Hold the Mayo

The first hurdle for patenting a blockchain invention is preparing a patent application that will pass muster at the post-Alice PTO.

To convince a USPTO examiner that the invention is not an unpatentable “abstract idea”, it is most helpful if the application carefully frames the invention in concrete terms.

As an example, consider a hypothetical Nakamoto patent application for bitcoin. Following traditional patent drafting techniques, the invention may be described as “directed to a method of peer-to-peer payments using electronic cash.” However, under Alice, a peer-to-peer electronic payment is likely to be considered a “fundamental economic practice” and, therefore, an unpatentable abstract idea.

If, however, the invention is described as being “directed to an improved ledger data structure (the blockchain) for use in an electronic cash payment method,” it is arguably an improvement in computer technology and should not be considered merely an abstract idea. (Of course, the patent application must also describe and properly claim that improved ledger data structure).

Why should we expect that an improved ledger data structure in the form of a blockchain is sufficient under Mayo to provide something “significantly more”?

Well, it just so happens that the Federal Circuit, held that a claim to an improved data structure, specifically a self-referential spreadsheet, was patent eligible. In fact, the court determined that the improved data structure was patent eligible under the first Mayo step – as being not an abstract idea (Enfish vs Microsoft, May 2016).

Since Enfish, the Federal Circuit has cautiously continued to expand the exceptions-to-the-exception.

In mid-2016, in Bascom Global Internet Services vs AT&T Mobility, the Federal Circuit clarified the patent eligibility of new combinations of old elements.

Before Bascom, it was thought that combinations of well-known functions were likely to be considered abstract ideas. The Bascom decision put an end to that thought.

The court held that:

“The inventive concept inquiry requires more than recognizing that each claim element, by itself, was known in the art. As is the case here, an inventive concept can be found in the non-conventional and non-generic arrangement of known, conventional pieces.”

Moreover, the Federal Circuit has recognized that certain computer-automated tasks performed by a computer, utilizing a limited set of novel software instructions that do not include all ways of performing the task, can be patent eligible. Specifically, a “claim [that] uses the limited rules in a process specifically designed to achieve an improved technological result in a conventional industry practice” is not an abstract idea (MCRO vs Bandai, September 2016).

And, for the sake of completeness, if Nakamoto applied for a patent by submitting a more traditional description of his bitcoin invention, and had his claims rejected as patent-ineligible subject matter, all may not be lost.

Nakamoto might still find refuge in the second step of the Mayo analysis by showing that his invention was “significantly more” than an abstract idea. In order to do so, the patent application itself would need to describe that “significantly more” technological addition.

Avoiding the rabbit hole

While it is interesting that Nakamoto could have patented the blockchain, the question on many minds is what blockchain inventions remain patentable in view of his prior art?

Without getting into too much detail, the Nakamoto method involves hashing, encrypting with a public key and private key, solving a proof of work hashing problem, and storing the proven transactions in a chain of blocks.

One can argue that the Nakamoto paper and the use of the bitcoin network since 2009 make such hashing, encrypting, solving a proof of work problem and (block)chaining all routine activities that cannot constitute something “significantly more” under Mayo.

Nevertheless, under recent Federal Circuit interpretations of Mayo and Alice, improvements in blockchain data structures, in solving proof of work problems, and in encryption and hashing functions have the potential to be patent-eligible subject matter.

Even new arrangements of the known functions Nakamoto described and implemented may be patent-eligible. Furthermore, it may be possible to patent narrowly crafted software implementations of blockchain technology.

With the right approach, the careful blockchain inventor should be able to avoid the “abstract idea” rabbit-hole and earn a new patent on the blockchain.