Update on the Digital Asset Industry

Despite reduced enthusiasm in the trading markets over the past couple of years, technological innovation and advancement from all corners of the crypto^[1] space has continued to thrive—including layer 2 scaling solutions for the Ethereum and Bitcoin blockchains, improvements to crypto mining equipment, novel applications for non-fungible tokens (NFTs), decentralized finance (DeFi) protocols, and decentralized autonomous organizations (DAOs), just to name a few.^[2] 

As we discussed previously, while open source innovation is a tenet of the crypto industry and the underlying blockchain technology that empowers it, companies involved in this technology should consider securing intellectual property rights for their innovations.  This could include obtaining patents for inventions that complement or are adjacent to open decentralized public ledgers such as Bitcoin and Ethereum.

Patenting Activity for Cryptoassets and Other Blockchain Technology

As the graphs below indicate, patenting activity for cryptoassets and other blockchain-related innovations experienced a year-over-year increase for several years, though activity has tapered more recently.

The diagram below indicates that major payment processors (including Mastercard, VISA, and Alipay), banks (Bank of American and Capital One), and various retailers and technology conglomerates are among the top applicants for patent filings in this space.

The above data shows that larger, more established companies have been most active in patenting crypto and other blockchain-related innovations.  Nonetheless, smaller or earlier-stage companies should likewise consider patent protection for core technology that could be key to successful execution of the business strategy.    

Key Patent Drafting Takeaways From Recent Patent Disputes  

While the number of patent infringement lawsuits involving crypto or other blockchain technology has remained relatively low, companies contemplating patent protection in in this space should consider the cases below, which provide some critical lessons.

Rady’s Blockchain Identification Patent Succumbs to § 101 Challenge.  In March 2020, Rady accused Defendants Boston Consulting Group, LLC (“BCG”) and De Beers UK Limited (“De Beers”) of infringing U.S. Patent No. 10,469,250, which discloses the use of blockchain technology to record identification signatures of physical items, such as gemstones or artwork, that have unique random properties.  The claims of the ’250 patent pertain to the use of spectral analysis and 3D scanning to determine a unique signature of such items, and using that signature to authenticate and track the items through the supply chain, without a central authority. 

Defendants moved to dismiss the suit, arguing that the claims were invalid under § 101 of the Patent Act because they were directed to the patent-ineligible abstract idea of collecting, processing, and storing data to track physical items—in this case, storing spectral analysis and 3D scan data by “recording it to the blockchain.”  De Beers noted that “blockchains implement ledgers . . . which Courts have found to be a patent-ineligible abstract idea.” 

As De Beers explained, the Supreme Court’s landmark Alice decision^[3] addressed claims involving generic computer implementation of “account ledgers” to store financial obligation data.  As to the ’250 patent, Defendants argued that claims for conventional imaging hardware that collects spectral analysis and 3D scan data are “abstract” under Alice.  They further argued that, since the claims did not improve anything about computer technology itself, the claims lack an “inventive concept” that could transform the abstract idea into a patent-eligible subject matter. 

While Rady alleged that the novelty of its patent claims stems from its “intricate combination” of computers, 3D spatial identification, and spectral analysis components, this argument was undermined by the fact that the ’250 patent cited the same prior art disclosure for hardware that could be used to generate both of these claimed features. The Court agreed with Defendants—finding that claims are directed to the abstract idea of collecting, analyzing, and storing data.  In doing so, the Court observed that “‘blockchains,’” like other key components of the patent claims, “are similar to the computer hardware in Alice . . . ‘well-understood, routine, conventional activities.’”^[4]

Rady demonstrates that patent eligibility remains a potentially dispositive threshold issue for blockchain-related innovations, and highlights the importance of drafting claims that can withstand such challenges.  Claim strategies may include reciting a technical contribution that is supported by a detailed description in the specification of how the contribution differs from well-known, conventional uses of blockchains.  Describing such contributions in the specification, with sufficient detail and technical authority, may aid the patentee in successfully withstanding subject matter eligibility challenges—whether during prosecution before the Patent Office or during subsequent litigation. 

Lancium’s Assertions and Inventorship Dispute.  Lancium owns patents directed at adjusting power consumption during cryptocurrency mining operations (“demand-response and curtailment” technology).  In 2020, Lancium accused Layer1 Technologies, Inc. of infringing U.S. Patent No. 10,608,433 (“the ’433 patent”).^[5]  The parties settled the lawsuit in 2021.  This past May, Lancium asserted the ’433 patent and six additional patents against U.S. Data Mining Group, Inc. (d.b.a. US Bitcoin) and other defendants engaged in crypto mining.

While Lancium’s patent assertions were underway, in April 2021, Bearbox LLC and its CEO, Austin Storms sued Lancium to add Storms as a co-inventor to the ‘433 patent.^[6] According to the record, from late 2018 to 2019, Storms began to develop his “Bearbox system”— containers housing crypto miners, along with source code for operating miners based on energy demand.  Separately, Lancium filed its application for the ’433 patent in January 2018, and by Fall 2018, was operating 120 miners at its Houston facility using off-the-shelf control software.  At a crypto mining conference in May 2019, Storms met with an executive of Lancium to discuss a potential collaboration. Storms emailed to the Lancium executive a spec sheet for the BearBox system, along with an illustrative diagram, and a data file modeling a simulation of the system’s functionality. 

The Court, having analyzed Storm’s email files, the claims of the ’433 patent, and the chronology of events, found that Plaintiffs failed to establish that Storms communicated any of the claimed inventions of the ’433 patent prior to Lancium’s independent conception, and entered judgment in favor of Lancium.^[7]

Bearbox illustrates that patent inventorship can present complex legal and factual issues, and underscores that technical organizations should implement sophisticated procedures to document the development of patentable inventions. For example, employee and third-party consulting agreements having robust IP assignment provisions, as well as joint collaboration agreements that allocate IP rights in a manner consistent with the intent of the parties, may help avert subsequent inventorship disputes.  Similarly, creating contemporaneous records for potentially inventive contributions made by a given party—including when the contribution was made relative to other events in the timeline—can also help avoid potential disputes.    

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Aside from the issues presented in the Rady and Lancium cases, other patenting considerations can arise in the context of digital asset and other blockchain-related technology.  In our previous post, for example, we addressed “divided infringement” scenarios and extraterritoriality considerations.  We will continue to monitor patenting activity in this burgeoning space and highlight noteworthy developments.

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[1] ”Crypto” is often used as a shorthand for “cryptoasset”—which includes for example cryptocurrencies, as well as various tokens (utility tokens, platform tokens, NFTs).

[2] Covington attorneys have deep experience counseling clients on various legal issues surrounding cryptoassets.

[3] Alice Corp. Pty. Ltd. v. CLS Bank Intern., 573 U.S. 208 (2014) (relating to patent eligibility).

[4] Rady v. Boston Consulting Group, LLC, 2022 WL 976877 (Mar. 31 2022 Order) at *3.  This case is currently on appeal before the Federal Circuit.

[5] Lancium LLC v. Layer1 Technologies, Inc., 6-20-cv-00739 (WDTX).

[6] BearBox LLC et al v. Lancium LLC et al., C.A. No. 21-534 (D. Del.).

[7] Id., Dkt. 262 (March 6, 2023 Opinion) ¶¶ 130-145. This case is also on appeal before the Federal Circuit.