Players in the nascent distributed ledger technology (DLT) industry need to collaborate and develop an intellectual property strategy, or run the risk of patent wars and a chilling effect on innovation.
Many players are aggressively pursuing patents in the blockchain space. News of banks, start-ups, mining outfits, exchanges and other entities filing blockchain-related patent applications is common.
As of mid-June 2016, there were 48 granted patents and more than 200 pending applications, worldwide, directed to DLT, according to a study conducted by Reed Smith LLP and Questel.
This is certainly just the tip of the iceberg. Over recent years, we have seen an exponential increase in patent filings in this space and we can expect to see this trend continue over the next several years, running to thousands and possibly tens of thousands of patent assets. Current filings are primarily in the US, the UK, China, Australia, France, Canada and Netherlands.
Marc Kaufman, a partner at Reed Smith who specialises in intellectual property, discussed the IP landscape at a recent Blockchain IP Workshop organised by the European Union Intellectual Property Office (EUIPO). He said: "The last thing we want in the DLT ecosystem is as replay of the smart phone 'patent wars'. Patent disputes are the 'sport of kings'; it is expensive and to be avoided."
There are several ways to go here. Players in an industry can agree not to assert patents against one another in non-aggression agreements. For example, Blockstream, which at this time apparently does not own any granted patents, has unilaterally pledged that it will not offensively assert a patent in court.
Another approach is for the industry players to develop a patent pool which is available for cross-license to all participants in the ecosystem. This is the approach of the Open Innovation Network, a consortium for fostering risk-free use of Linux.
However, these types of consortia and non-aggression pledges take time and can be difficult to achieve because they require cooperation among a large amount of competitors. As well as collaboration, pursuing a strategic patent acquisition program by each player is recommended.
Kaufman said: "Players in the DLT space must strategically protect their own innovations. The best defence to any patent assertion by a competitor is a counter-assertion. In other words, if your company is sued for patent infringement, it is invaluable to have patents that cover the asserters activities and offer some sort of cross-license."
Further, the growth environment of DLT attracts Non-Practising Entities (NPEs), sometimes referred to as "patent trolls", seeking patent rights. For example, EITC Holdings, which is linked to Craig Wright, has filed at least 45 patent applications directed to DLT technology but has no apparent business model other than enforcing the patents.
"Dr Craig Wright has about 50 patent applications filed in the UK. Most are to do with interfacing the blockchain to enterprise. These are just applications and will not necessarily ever be granted. But it looks like EITC will be enforcing patents as a business model," added Kaufman.
NPEs leverage the asymmetries in the cost of patent litigation and the uncertainties of the resulting verdicts to pressure targets into settlements. For example, legal fees alone for a relatively simple patent litigation defence can cost over $2m (£1.6m).
"These patent assertion entities often buy patents on secondary markets. NPEs don't make any product. They will buy patents from struggling companies. If the past is any indication of the future, there will be failed companies in the DLT space and those companies will sell their patent assets to NPEs.
"In many cases, it is a prudent business decision to pay what is sometimes seen as an 'extortion fee' rather than defend against the patent assertion and face an uncertain outcome. But a collaborative approach might include litigation defence pools, which are jointly funded entities that provide resources for defending against a patent assertions by NPEs," he said.
More offensive weapons against patent trolls include patent challenge pools, in which an entity is funded by industry members to file offensive challenges to patents presenting risk to the members, said Kaufman.
Another approach is to challenge patent trolls by reducing the inventory of patents available for purchase and assertion. A good example of this strategy is the License on Transfer (LOT) model pioneered by Google. Members of the group agree that they will not sell patents, to trolls or other competitors, without first granting a patent licence to all other members of the group. This insures that members will never be sued by a patent troll who purchases the patents from other members.
Insurance is also an option. As any insurance policy requires that a requisite number of policies be purchased by parties subject to similar risk, insurance can be considered as industry collaboration. While patent infringement insurance historically has been very expensive, recent policies with focused coverage and limited benefits are quite affordable.
Greg McMullen, chief policy officer, BigchainDB, who was also attending the EUIPO Blockchain IP workshop, said: "I absolutely agree with Marc that as an industry we need to work to make sure that the potential of this technology is not limited by patent wars between incumbents or patent trolling by patent portfolio collectors.
"I think it's great that there are already discussions going on to guard against wars or trolling, and we will definitely want to take part in those discussions. I want there to be fierce competition, but I want it to be competition based on technology and building great things rather than attrition in the courtroom."
A formal body to explore the types of strategies outlined by Kaufman is forthcoming from within the Chamber of Digital Commerce.