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Crypto-Pie in the Sky? How Blockchain Technology is Impacting Intellectual Property Law

by Dr. Birgit Clark, Lead Knowledge Lawyer for Baker McKenzie's IP and Technology Practice and Ruth Burstall, Senior Legal Counsel at Johnson & Johnson Innovation EMEA
Crypto-Pie in the Sky? How Blockchain Technology is Impacting Intellectual Property Law
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Published
Jun 28, 2019

Introduction

Blockchain and related distributed ledger technologies (“DLT”) remain a hot topic beyond the world of fintech. Owing to the fact that it enables a secure, incorruptible chain of information, blockchain technology is increasingly being applied to new applications in IP-heavy industries, brand protection and enforcement, marketing and customer engagement—and has been on the radar of various governmental agencies, including the EUIPO,1 EPO,2 USPTO, UKIPO, the Australian and Russian Intellectual Property Offices and WIPO.3

In the context of IP-heavy industries, blockchain and related distributed ledger technology offer obvious possibilities for evidencing IP protection and registration, either at the registry stage or in court during infringement proceedings.4 It also could offer a cost-effective way to speed up such processes. Potential use cases include: evidencing creatorship and provenance authentication, registering and clearing IP rights; controlling and tracking the distribution of (un)registered IP; providing evidence of genuine and/or first use in trade and/or commerce; digital rights management (e.g. online music sites); establishing and enforcing IP agreements, licenses or exclusive distribution networks through smart contracts; and transmitting payments in real-time to IP owners.5

“Smart” IP Rights and Registries

The potential to use blockchain technology for the management of IP rights is vast. Recording IP rights in a distributed ledger rather than a traditional database could effectively turn them into “smart IP rights.”6 Related is the idea of IP offices using distributed ledger technology to create “smart IP registries” in the form of a centralized solution run by the IP office as an accountable authority, which would create an immutable record of events in the life of a registered IP right. It could include when a trademark was first applied for, registered, first used in trade; when a design, trademark or patent was licensed, assigned, and so on. It would also resolve the practicalities of collating, storing and providing such evidence. The ability to track the entire life cycle of a right has multiple benefits, including smoother IP right audits and simplified due diligence exercises in the context of IP transactions. Confidentiality concerns on the side of the IP owners could be addressed by an opt-in scheme.7

Trademarks

With the utilisation of blockchain technology, the registration process of a trademark could be simplified and freed of a significant burden of evidence and administration for IPR holders and IP offices.8 This would equally apply for the maintenance of IP rights once registered, especially in those jurisdictions where the maintenance, renewal or incontestability of a right requires additional evidence of use.9

Collecting information on the use of a trademark in trade on a blockchain ledger would allow the relevant IP office to be notified virtually immediately on the occurrence of a verified event of this use.10 This means that reliable evidence and information of actual use of a trademark in trade, as well as the frequency of this use, could be readily shared and be available on the official trademark register. Indeed, blockchain could have a knock-on effect on trademark specifications with the result that UK and EU trademark practices could move to a more short and concise specification of goods and services, as exists in the US.11

If such a development were to prove legally acceptable, blockchain technology could simplify the process of providing evidence of use of a trademark and other evidence at an IP office or court; for example, in cases of proving first use, genuine use, acquired distinctiveness or secondary meaning or goodwill in a trademark. In contrast to traditional IP registers, a smart trademark register could also reflect the state of the market, which is relevant when it comes to assessing the infringement risk in many jurisdictions. Much of this data is likely to be considered highly confidential by trademark owners. However, the newest generation of blockchain technology, which combines layered public and private elements, should help to address these concerns; alternatively, this type of sharing could be made optional. The logistics of setting up such a system could put a significant upfront burden on trademark owners, reducing the likely uptake if it were introduced as a voluntary system. This possibility does, however, have to be balanced against the benefit of having information available without delay, saving time, resources and money when a trademark owner needs to draw on it.

Blockchain could also be used in connection with certification marks to certify that products meet certain established criteria or standards; for example, the Woolmark, which certifies that the goods are made of 100 percent wool.12 Fake certificates could be identified almost immediately, which would benefit both trademark owners and consumers. While national differences exist, for certification marks it is a requirement that the entity owning the mark must be “competent to certify”—these might be best suited to permissioned blockchains rather than open blockchain solutions.13

Evidence of Creatorship—Unregistered IP Rights

Blockchain technology stands to play an important role within the context of unregistered IPR, such as copyright and unregistered design rights, since it can provide evidence of their conception, use, qualification requirements and whether the right is still in the period of protection. Uploading an original design or copyright document and details of its designer or creator to a blockchain would allow the creation of a time-stamped record and solid evidence to prove these matters.14 Various online platforms already employ blockchain technology together with digital certificates to allow creators to make a record of their copyright or IPR ownership and to license and track the use and potential infringements of their works on the Internet. These services function by providing each creative work with a unique cryptographic identity that is verified with a blockchain solution.15

Anti-Counterfeiting, Enforcement and Traceability

Adding scannable blockchain-connected tags or engravings to products, which include legal and other information, would also enhance the effectiveness of customs enforcement in the fight against counterfeits and assist when it comes to validating a genuine product by customs authorities.16 Although it is currently possible to record trademarks, patents and designs with customs authorities and to request that they detain and destroy infringing products, it is often difficult for customs authorities to ascertain whether products are indeed infringing. If an IP rights owner is able to inform the customs authorities that its genuine products are embedded with a tag or engraving, then the absence of this tag or a tag bearing incorrect data is an easy way for customs officers to check whether a product is counterfeit—it also enables education for consumers regarding the dangers of fake goods.17 The idea of using interactive tags, such as QR codes, is not new. However, unlike blockchain-based solutions, these more traditional and established technologies link to a single source of information—rather than a distributed ledger—and, although they make life more difficult for counterfeiters, they are still prone to corruption and copying. Blockchain technology does not suffer from this drawback since counterfeiters are effectively unable to alter information on the blockchain.18

The ability to add blocks of data to the chain also creates opportunities for IP right owners to record details on a product’s progress through stages in the manufacturing and supply chain.19 Trademark owners could use this function to record where goods are placed on the market—allowing them to distinguish grey goods in cases of parallel imports and to identify where they left the supply chain. In the same way, blockchain could be used to monitor and control leaks from selective distribution networks and so assist in enforcing such agreements, bearing in mind, of course, competition law considerations. Blockchain technology allows for provenance authentication since it can record objectively verifiable details about when and where products are made, as well as details about their manufacturing. Such tracing and tracking of goods are also required by legislation which has been introduced to address counterfeits in the pharmaceutical industry.

Smart Contracts and IP

Often cited in the context of blockchain is the concept of “smart contracts.”20 As some blockchain solutions can hold, execute and monitor contractual codes, such “smart contract performance” could be of interest for digital rights management and other IP transactions.

Even though the term “smart contracts” was coined in the mid-1990s, smart contracts have become one of the buzzwords in the context of blockchain technology.21 There is currently a near-complete lack of a uniform or legal definition of the term. Instead, there are two diverging views: one, an optimistic view of smart contracts, is that they could do away with lawyers altogether and be self-enforcing.22 Whilst appealing, this hypothesis appears a somewhat oversimplified definition which does not reflect real-life human and business interaction, where contractual disputes often centre on the quality of a contractual performance. Even though binary responses to predictably occurring smaller disputes can be coded, such as through micropayments, the idea of entirely self-executing contracts struggles where there is the need for a subjective judgment and evidence of facts. An arguably more realistic definition sees smart contracts as a type of coded instruction, which execute on the occurrence of an event, usually but not always via the use of blockchain technology which records and also executes transactions.23 This definition sees smart contracts as computerised transaction protocols that execute contract terms (such as the payment of a periodic milestone payment or a fixed licence fee) automatically without the need for third parties. A counterparty performance is triggered automatically by a relevant act. Smart contract performance can be used to implement a contract without human involvement once the underlying binding contract has been coded.24

In the context of IP rights, smart contracts could be used to establish and enforce IP agreements, such as licences, and allow the transmission of payments in real time to IP owners.25 Such smart information could also include rights management information, such as ownership, use permissions and payment terms. These ideas are fast becoming mainstream, with commercial providers, start-ups and non-profit organisations such as the Accord Project26 developing and launching various blockchain-based IPR rights management platforms. It is still too early to determine whether smart contracts are the future of digital rights management, but it appears safe to say that blockchain technology could redefine how creators are remunerated—often instantly via micropayments—by acting as a platform for creators and distributors of IP.

With global standards for self-executing contracts now being discussed by various organizations and academics, it appears only a matter of time before we arrive at a more reliable definition of the term. Whether smart contract performance will be able to accurately execute more complex contractual terms or legal concepts, such as public domain and multi-territorial licensing information, will have to be seen. With many of the underlying terms and conditions and contracts being drafted by companies, other concerns such as consumer protection laws and public interest considerations will also come into play and shape the concept of smart contracts beyond the ambit of IP law.27 One issue that has eluded sufficient discussion is whether it will be possible to find reliable “oracles,” i.e. agents who retrieve and verify real-world occurrences and submit this information to a blockchain in order for smart contracts to self-execute.

Patents

The promise of blockchain technology has triggered the filing of numerous patent applications for blockchain-related inventions in recent years. Many of the initial patent filings were made by financial institutions. However, as blockchain technology becomes increasingly mainstream, applications are being filed across a broad spectrum of industries. A report by Thomson Reuters based on WIPO figures indicates that China leads blockchain and DLT patent applications, having filed 226 of the DLT patents in 2017 and 59 in 2016, compared to the US, which saw 91 applications in 2017 and 21 in 2016.28 While comparatively few patent applications have been granted so far, it seems likely that applicants have had to navigate several difficult issues on the question of patentability.29

As with any patent, blockchain patent applicants will need to demonstrate novelty and an inventive step. Blockchain was described in a 2008 paper by its anonymous inventor(s), who uses the pseudonym Satoshi Nakamoto,30 and was made available to the public as a way of transferring bitcoin in 2009. Although Nakamoto did not seek patent protection for blockchain technology, it forms part of the prior art for any subsequent DLT. With the speed at which the technology is being developed and applications filed, the prior art is a quickly expanding and shifting landscape, meaning it likely will be difficult to carve out a monopoly. Furthermore, blockchain patent applications need to be carefully drafted to ensure that the claims cover patentable subject matter, with the potential to fall foul of restrictions on patenting business methods and computer programmes. Computer programmes are expressly excluded from patent protection in many jurisdictions, although where a computer programme has a technical effect it may still be capable of protection. Likewise, computer programmes and business methods may not be capable of protection if they are simply ideas of an abstract nature.

The US Supreme Court in Alice v CLS Bank31 held that patents claiming an escrow system implemented on a computer were too abstract to be valid. Although the court held that claim elements that add “significantly more” to an abstract idea might transform it into patent-eligible subject matter, it did not give clear guidance as to what these elements might be. Following the decision, US federal courts have declared many computer-related inventions to be invalid on the basis that they are too abstract to attract protection. These restrictions not only make it more difficult to draft a patent which will proceed to grant, but also increase the risk that a granted patent will be subject to challenge by competitors on grounds of invalidity.

The land-grab for patents has led to speculation that DLT will be the next innovation to spark patent wars. The Blockchain Intellectual Property Council—established by the Digital Chamber of Commerce, a US advocacy group which promotes the emerging DLT industry—already warned in 2017 that the exponential rise in patent filings creates a high risk of IP abuse, and it has made helping DLT developers manage this risk a key element of its strategy. Finally, the Chinese Ministry of Information Technology and the European Commission are reportedly working on blockchain standards, which are likely to lead to the emergence of Standard Essential Patents (“SEP”s). SEPs must be licensed on fair, reasonable and non discriminatory (“FRAND”) terms.32

There exist different schools of thought as to whether filing patents is the correct way to protect blockchain technology, and many developers are not applying for patents. For some start-ups, the cost of filing patent applications and the delay that the application process may introduce in bringing a technology to market could prove prohibitive.33 These companies might rely on trade secret protection in preference to patents, but for companies seeking investment, applying for a registered patent and related monopoly may be a prerequisite to securing funding. Other proponents believe that developing DLT on an open source basis will prove to be the best way to support the success of the technology by allowing interoperability of developments. Another approach has been to establish patent pools which allow the cross-licensing of patents. Some developers may take a hybrid approach—applying for patents on technology and then licensing them under open source licences.

Trade Secrets

Several features of blockchain technology, notably its ability to encrypt data and securely store and share information, also makes it suitable to protect and enforce trade secrets. Trade secret protection has recently seen a renaissance, not least due to the enactment of the US Defend Trade Secrets Act 2016 and the EU Trade Secrets Directive.34

Blockchain can potentially assist at various stages of the life cycle of a trade secret, notably when it comes to the “reasonable measure of protection” and enforcement of a trade secret, i.e., the ability to prove that the information has been kept secret in the event of a misappropriation. Creating a trade secret inventory and recording who had access to the information have traditionally been considered as making a “reasonable step” to maintain confidentiality, and recording a trade secret on a blockchain could fulfil this requirement under the EU Trade Secrets Directive and equivalent laws.35

Since blockchain enables the recording of timestamped and “hashed” (encrypted) information in a secure and immutable environment, it can support the protection of trade secrets by providing a way to prove the existence and ownership of a trade secret at a certain time (e.g., if X asserts that it created the same trade secrets prior to Y). Blockchain technology can also impact how trade secrets are enforced and shared with third parties. Confidentiality and NDAs with employees and business partners constitute a first line of defence in trade secret misappropriation cases, since they are usually regarded as “reasonable steps” of protection. A “smart NDA” could be linked to the blockchain and identify the trade secret in an annexed blockchain certificate.36 Thereby confidential information would be kept secret and only accessible via the blockchain, with the benefit of having proof that access to the trade secrets had been granted to the other party. Using DLT in this context would also allow verification that someone has signed an NDA and confirm the party’s identity, relevant in case of a breach. Smart contract technology could also be utilised when it comes to documenting the transfer of trade secrets to another party.

Conclusion

The large-scale adoption of blockchain technology faces a number of obstacles: technical hurdles, such as scalability and interoperability standards and protocols; legal hurdles, such as questions of governing laws and jurisdictions; enforceability of smart rights, data security and privacy concerns and resistance, not least since some still associate Bitcoin and blockchain with media reports of criminal activities on the Dark Web; and cynics who regard blockchain as a solution in search of a problem.37

While blockchain has frequently been described as “unhackable” due to the large amount of computing power which would be required to reverse the consensus of the nodes in a distributed ledger—which are responsible for collectively agreeing information which can be added to the chain—this notion has recently been called into question by a number of successful breaches. An attacker was recently able to gain control of more than 51% of the Ethereum Classic blockchain exchange and steal cryptocurrency. Such attacks are becoming more common, with attackers taking advantage of vulnerabilities in cryptographic codes or software clients. Bugs in smart contracts could also be exploited to divert payments to attackers. While traditional cybersecurity methods may not be effective to tackle these sort of attacks, artificial intelligence is being used to identify exploitble weaknesses and to spot unusual activity. It is expected that much innovation in blockchain technology and new patent applications will focus on blockchain security.38

On the other hand, blockchain technology is slowly but surely becoming mainstream: various governmental agencies and IP registries are actively looking into the capabilities of blockchain; the EU Commission has launched the blockchain observatory,39 and the US Congress created a Congressional Blockchain Caucus.40 In the United Kingdom, the Ministry of Justice is piloting a blockchain-based project to secure digital evidence.41

Blockchain’s potential for recording evidence has also been recognised in recent Chinese court decisions. The Chinese Supreme People’s Court issued a judicial interpretation on the hearing of cases by the country’s newly created Internet courts which allows, inter alia, for evidence which is stored and verified on blockchain platforms to be used in legal disputes. Under this interpretation, China’s Internet courts may consider evidence that can be proven authentic through electronic signatures, time stamps, hash value checks, and tamper-proof verification methods stored on blockchain platforms.42 Accordingly, in a recent decision, Hangzhou Internet Court accepted blockchain-based evidence in an online copyright infringement case. The claimant had reportedly captured the infringing websites together with their source code and recorded the data to a blockchain platform, thereby creating an immutable record of the copyright infringement. The court found that on the premise that the technical verification was consistent and other evidence could be mutually verified, the blockchain-based evidence was admissible. Similarly, the current European eIDAS (“electronic Identification and Trust Services”) regulation already includes a provision that prohibits courts from denying the legal admissibility of timestamps as evidence on the sole grounds that the timestamp does not meet the more stringent requirements of an EU-qualified timestamp.43

Many of these blockchain ideas may be feasible or sufficiently attractive for implementation in practice, and blockchain is now widely expected to have a transformative effect on IP-heavy industries, especially those faced with counterfeit goods and parallel imports, such as the luxury and consumer goods and pharmaceutical industries. How quickly that transformation will take place is likely to be at least partially dependant on the development of corresponding technology and changes to the regulatory and IP enforcement landscapes.

Footnotes
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