Richard A. Catalina Jr., Hill Wallack

Decentralized data structure management technology (DDSM), such as blockchain and distributed ledger technology, is grabbing ever-increasing attention as a result of its potential to revolutionize the way we conduct business, run our governments and go about daily life. While cryptographic digital currencies, such as Bitcoin, have garnered significant hype more recently due to intense market volatility, DDSM technology offers much more.

At its core, DDSM is a decentralized software-based and implemented system that openly manages vast amounts of data over the Internet thereby allowing ready access to verify the exchange of the data. Transactions are transparent, and once verified by consensus, are locked and virtually impossible to change. As a result of the technology’s transparency, consensus-based transaction confirmation process, and locking of blocks of data that cannot be changed, the potential for fraud and abuse is essentially eliminated. The management of trust is thereby deferred from an historically trusted (or, perhaps, not so trusted) intermediary, such as a bank, government or government agency, school, company or any other entity asserting centralized control over data (thereby representing a single point of failure), to a decentralized network guided by a common protocol.

As noted by experts in the field, DDSM technology offers the following possibilities:

  • Inviolable property registries, which people may use to prove that they own their houses, cars, or other assets.
  • Real-time, direct, bank-to-bank settlement of securities exchanges, which could unlock trillions of dollars in an interbank market that currently passes such transactions through dozens of specialized institutions in a process that takes two to seven days.
  • Self-sovereign identities, which do not depend on a government or a company to assert a person’s ID.
  • Decentralized computing, which supplants the corporate business of cloud computing and Web hosting with the processing power of ordinary users’ computers.
  • Decentralized Internet of Things (IoT) transactions, where devices can securely communicate and transact with each other without the friction of an intermediary, making possible enormous advances in transportation and decentralized energy grids.
  • Blockchain-based supply chains, in which suppliers use a common data platform to share information about their business processes to greatly improve accountability, efficiency and financing with the common purpose of producing a particular good.
  • Decentralized media and content, which would empower musicians and artists to take charge of their digital content, knowing they can track and manage the use of their digital assets.

The above use cases are not exhaustive, and we are only beginning to see the immense potential of DDSM technology. From an intellectual property perspective, since DDSM technology is essentially software-based—indeed, the protocols, logic and algorithms are in the code and the software runs openly over the Internet on countless networked computers and computer systems—is it patentable? To answer that question, a brief stroll down memory lane is in order.

In Alice v. CLS Bank International, 573 U.S. __, 134 S.Ct. 2347 (2014), the U.S. Supreme Court unanimously held that claims directed to a computer-implemented technique of mitigating “settlement risk” in financial transactions were ineligible for patenting. The court clarified that a claim directed to an “abstract idea” is not eligible for patent protection when it “merely requires generic computer implementation”or “attempts to limit the use of [the idea] to a particular technological environment.” Citing its decision in Mayo Collaborative Services v. Prometheus Laboratories, 566 U.S. 66, 132 S.Ct. 1289 (2012), the court in Alice developed a two-part analysis directed toward patent eligible subject matter under Section 101 of the patent statute known as the “Alice/Mayo test.” Notably, however, the Court in Alice declined to define “abstract idea,” leaving the matter to be resolved by the lower courts—in particular, the U.S. Court of Appeals for the Federal Circuit (the CAFC)—on a case-by-case basis.

Section 101 defines patent eligible subject matter as “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof,” subject to the other limitations of the patent statute. Apart from the patent statute, the courts have created exceptions to the literal scope of Section 101: laws of nature, natural phenomena, and abstract ideas are not patentable.

Under step one of the Alice/Mayo test, courts are first required to determine whether the claim at issue is “directed to” a judicial exception, such as an abstract idea. Mathematical formulas, for example, are a type of abstract idea. However, since “all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas,” “the claims are considered in their entirety to ascertain whether their character as a whole is directed to excluded subject matter.” If the claims are not directed to an abstract idea, the inquiry ends. If the claims are directed to an abstract idea, then the inquiry proceeds to the second step of the Alice/Mayo framework.

In step two of the Alice/Mayo test, courts are to consider whether the claims directed towards the abstract idea nonetheless contain an “inventive concept” sufficient to “transform the nature of the claim into a patent-eligible application.” To do so, courts must examine both the claim as a whole and the individual claim elements to determine whether the claims contain “an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.’” The second step of the Alice/Mayo test is satisfied when the claim limitations “involve more than performance of ‘well-understood, routine, [and] conventional activities previously known to the industry.’”

Since Alice, the CAFC has tackled the issue of software patents and whether the claimed subject matter merely comprises abstract ideas or whether the methods and processes thereof comprise “significantly more” as required by Alice. While the CAFC has somewhat struggled with application of the Alice/Mayo test to software-based patents—and in large part, judicial outcomes by the court depend on the three judges comprising the panel hearing the case—the slow trend has been in favor of finding patent eligible subject matter. The CAFC has repeatedly held that inventions which are directed to improvements in the functioning and operation of a computer are patent eligible. In Enfish, the court determined that claims related to a database architecture that used a new, self-referential logical table were non-abstract because they focused on “an improvement to computer functionality itself, not on economic or other tasks for which a computer is used in its ordinary capacity.”Indeed, the self-referential database found patent eligible in Enfish did more than allow computers to perform familiar tasks with greater speed and efficiency; it actually permitted users to launch and construct databases in a new way. Moreover, in Finjan v. Blue Coat Systems, the CAFC found that the method claims employ a new kind of file that enables a computer security system to scan for suspicious behavior in a new manner; the “asserted claims are therefore directed to a non-abstract improvement in computer functionality, rather than the abstract idea of computer security writ large.”

Given the enormous potential of DDSM, the race to patent specific applications of the technology is on—and the USPTO has obliged. In September 2016, it was reported that the USPTO had issued at least 92 patents relating to cryptocurrency and fintech blockchain technologies. Hundreds of additional applications are pending and many have been published for public review. There can be no doubt that at the agency level, the USPTO recognizes that DDSM technology is indeed patent eligible subject matter.

In a general sense, DDSM is “significantly more” than the mere computerization of “abstract ideas.” Indeed, what makes the technology possible is that it can only be implemented via software-based protocols over a global network comprising hundreds of thousands (perhaps millions) of computers each performing the complex calculations necessary to create a decentralized data structure system that can be trusted. The decentralized data network—without a controlling intermediary—is simply not possible without software, computers and network implementation. The technology elevates the Internet to what many have now described as Web 3.0.

Moreover, DDSM technology is a far cry from taking already existing human activities and merely digitizing them via software to run on a generic computer. As noted, the second step of the Alice/Mayo test is satisfied when the claim limitations “involve more than performance of ‘well-understood, routine, [and] conventional activities previously known to the industry.’” DDSM technology is anything but routine and conventional, albeit initial platforms and applications of the technology are now already several years old. Yet, the technology is evolving rapidly—very rapidly. As with the self-referential logical tables in Enfish, DDSM is permitting users to construct and launch decentralized data structures and conduct transactions in new and different ways, heretofore unavailable to civilization.

Underlying, almost silently, in both Enfish and Finjan is the fact that both technologies were new—new ways of conducting certain processes. In Enfish, the self-referential logical tables comprised new technological ways of creating and using database structures. In Finjan, the security system scan comprised a new technological way of detecting malicious behavior as opposed to existing prior art methods that relied upon already detected and known malware profiles. While novelty is a matter of Section 102 of the patent statute, one cannot ignore the subtle reliance on novelty by the courts in their analyses of issues pertaining to Section 101 patent eligible subject matter.

Eventually, the CAFC will hear an appeal questioning the patentability of an application involving DDSM technology. In light of the jurisprudence developed under the Alice/Mayo framework, there is no reason to expect that the CAFC will treat the matter any different than previously considered software-based patents.

Richard A. Catalina Jr. is a partner in the Princeton, New Jersey, office of Hill Wallack. He is the partner in charge of the firm’s intellectual property practice group and is a member of the life sciences practice group. Contact him at rcatalina@hillwallack.com.