Risk of “Standard-Essential” Patent Litigation to Bitcoin

Bitcoin  •  Litigation

ScaleIt’s tempting to think that Bitcoin services would be immune to patent litigation.

After all, Bitcoin protocol is open source and seems to be in the public domain. Satoshi Nakamoto, the pseudonymous designer of Bitcoin, uploaded a whitepaper describing the currency on October 31, 2008, and he released operative source code months later. Neither Satoshi nor anyone else filed a patent application within a year of these events, so Bitcoin should be public domain, right? Besides, as a former Bitcoin entrepreneur scoffed, “There is no issuer, who are they gonna sue?”

The answer may be “they will sue everyone.” As online merchants have learned, an issued patent can be asserted across an industry. As cryptocurrency businesses continue to grow, its operators will face similar patent litigation risks.

There are at least three types of patents that could be asserted against Bitcoin operators: (1) pre-October 2008 patents that claim elements of Bitcoin’s protocol, (2) patents that should not have been issued at all, and (3) patents for non-obvious applications of Bitcoin and other cryptocurrencies.

In this post, I address only the first sort of patent.

Patents filed years ago may cover portions of the Bitcoin protocol. Although Satoshi’s complete invention does not appear to be claimed by any patent application, elements of Bitcoin were publicly known long before 2008.

Bitcoin is a decentralized peer-to-peer open-source reusable proof-of-work cryptographic protocol. It was unprecedented at the time of its invention, but Bitcoin owes its existence to cryptographic proof-of-work concepts developed years earlier. Bitcoin was also presaged by theoretical digital currencies proposed a decade earlier.

Satoshi was apparently the first to combine all of Bitcoin’s features, but a patent over parts of the protocol may be asserted against Bitcoin adopters. This is because patents grant their owners the right to exclude others. Multiple patents may cover technologies essential to Bitcoin.

Such patents need not even be issued yet. Patent prosecution usually occurs over many years, and inventors may file numerous child applications to claim various implementations of their putative invention. In child applications, a patent owner can often tailor the claims to target known products, such as Bitcoin. Patentees are only limited by whether the original (pre-October 2009) patent application discloses and “enables” features claimed by the patent eventually issued.  Such a patent could be a de facto standard-essential patent for the Bitcoin protocol.

If and when such a patent emerges, what defenses are available?

Non-infringement may be a strong defense against patents that do not specifically target Bitcoin, but this may not deter potential plaintiffs. A win by one defendant on non-infringement does not necessarily translate to everyone, especially if the asserted patent depends on algorithms that vary from client to client.

The Bitcoin community itself may be able to “design around” an asserted patent so that the protocol does not infringe. This is possible if the asserted patent only claims a non-essential part of the Bitcoin protocol. If so, the protocol could conceivably be amended to prevent future infringement, but this would not let current Bitcoin operators off the hook. In the United States, it is usually possible to collect back damages up to six years before suit is filed.

A challenge to the validity of the patent could be a potentially strong defense.

Invalidity is typically difficult to prove in U.S. district courts because issued patents are presumed to be valid. An accused infringer must prove an issued patent is invalid based on “clear and convincing” evidence, which is a heightened burden of proof. This may be particularly difficult to prove with a patent application that predates Bitcoin. Satoshi’s 2008 white paper and 2009 software could not be used to prove that an earlier-filed application was previously invented (anticipated) or obvious.

Accused infringers may have more luck challenging a patent before the Patent Office by inter partes review (IPR) or covered business method review (CBM) proceedings. District courts will often stay proceedings if one of these administrative challenges to the validity of the patent is filed and taken up by the Patent Office. These procedures may be especially useful to invalidate patents that claim abstract ideas. Last year’s decision in Alice Corp. v. CLS Bank suggests that software algorithms performed by a generic computer may be an abstract idea. Since this decision, many older software patents have been found to claim un-patentable abstract ideas.

None of these defenses are cheap. Accused infringers often pay settlements or license fees to owners of dubious patents because that is cheaper than the cost of defense. Even in IPR and CBM proceedings, which are generally less expensive than district court litigation, the legal fees from a successful challenge easily run six digits. Still, the cost may be worthwhile because a defendant deters others from asserting meritless patents, which is the strategy of Overstock.com (a Bitcoin and cryptosecurity trailblazer).

If someone does try to assert a patent against the Bitcoin protocol, adopters could share the costs by banding together. For example, those with a common interest in litigation can enter into a joint defense agreement committing all signatories to share the burden of an IPR challenge. Such agreement only becomes operative once the group has enough buy-in to make the cost low for every defendant. By joining together, Bitcoin adopters can economically challenge a patent that is alleged to be essential to the Bitcoin protocol and therefore threatening to all adopters.

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