First blockchain patent analyzed by a court is invalidated

Although blockchain patents have been around for quite some time, they are not yet often the subject of litigation.  Now, for the first time (as far as I can tell), a federal court in a patent litigation case has issued a decision on the patent eligibility of a blockchain-related patent.

Background of the case

In Rady v. Boston Consulting Group, Max Rady, the inventor of U.S. Patent No. 10,469,250, sued Boston Consulting Group and De Beers UK Ltd. in the Southern District of New York for patent infringement and misappropriation of trade secrets.  According to Rady, in 2017, BCG began working with De Beers “to develop a method to identify and insure the provenance of gemstones,” but they weren’t able to develop a solution until Rady came along.  Rady, who was working for BCG on other projects at the time, allegedly disclosed confidential information to BCG from his trade secrets and then-unpublished patent application.

Afterwards, in April 2019, BCG publicized Tracr, which it describes as follows:

Initiated by De Beers Group, the blockchain platform Tracr provides end-to-end diamond tracing from the mine to the point of sale. It was created to address long-standing issues and provide benefits within the diamond industry—authenticating a diamond’s natural creation, provenance, and ethical sourcing.  

Tracr works by creating a “unique digital ‘fingerprint’ for each diamond and then us[ing] that information to track and trace the diamond’s journey.”  Each diamond’s fingerprint would be recorded on the blockchain, and participants along the supply chain (like miners and distributors) are able to record additional data to attach to each fingerprint.

Compare BCG’s description of Tracr with Rady’s patent, which issued on November 5, 2019.  The patent essentially claims the following:

A method comprising

(1) analyzing a physical item using 3D spatial mapping and spectral analysis to determine its unique signature,

(2) determining whether the unique signature has been previously recorded onto a blockchain, and

(3) recording the unique signature onto the blockchain. 

Rady claimed that Tracr was “substantially similar to the detailed method disclosed to BCG” by Rady, that BCG never compensated him, and that BCG terminated his employment.

Rady filed suit in March 2020.  In October 2020, the defendants moved to dismiss for failure to state a claim because the patent’s claims, they argue, are invalid under 35 U.S.C. § 101 for being directed to patent-ineligible subject matter.  The court issued its decision on March 31, 2022.

The court’s opinion

The court began by explaining what patent-eligible subject matter is.  The Patent Act as interpreted by the Supreme Court prohibits patenting “the laws of nature, physical phenomena, and abstract ideas.”  In order to determine if something is an abstract idea, the Supreme Court developed a two-part test in a 2014 case called Alice Corp. v. CLS Bank Int’l, known as the “Alice test.”

Under this test, the court must first determine “whether the claims at issue are directed to one of those patent-ineligible concepts” (e.g., an abstract idea or law of nature).  If they are, then, in step two, the court considers whether any “additional elements [of the claim] ‘transform the nature of the claim’ into a patent-eligible application.”  In other words, the claim must present “significantly more” than the ineligible concept itself.  (If this sounds unclear and vague, you’re in good company; the Alice test is one of the most convoluted tests in the law!  If you want a deeper dive into the Alice test, including examples of eligible and ineligible inventions, you can start by checking out Chapter 2106.04 of the Manual of Patent Examining Procedure.)

Applying step one, the court found that Rady’s patent was directed to the patent-ineligible abstract idea of “collecting, analyzing, and storing data.”  Using a computer “to obtain data and other computer functions ‘are well-known, routine, and conventional activities.’”  And using a computer to track physical objects did not make them any less abstract.  Thus, Rady failed step one of the Alice test.

Next, the court turned to step two and whether the claims presented “significantly more” than the abstract idea.  Rady argued that “the patent uniquely records gemstone data and logs this data in a ‘peer-to-peer network’ maintained by Blockchain Authentication, thus enhancing the functionality of computers.”  But the court found that recording a unique fingerprint for a gemstone does not improve the functionality of storing or processing data on a blockchain.  The court recognized that “a blockchain is merely a ledger maintained and verified through a peer-to-peer network, and Plaintiff does not describe how the patent improves blockchains.”

Failing both steps of the Alice test, the court found Rady’s patent invalid and dismissed his patent infringement claim.

Takeaways

Unfortunately, the court’s opinion is brief and relatively light on analysis, so I don’t get to dive into the legal issues as much as I normally like.  Nevertheless, the opinion is a helpful data point on how courts think about patent eligibility in the blockchain context.  It reinforces the notion that inventions in the blockchain space need to be more than simply applying blockchain technology to existing problems.

After the judge issued his opinion, Rady filed an opposed motion asking the court to allow him to appeal it to the Court of Appeals for the Federal Circuit (where all patent-related cases get appealed).  It took the court one and a half years to issue its decision on the motion to dismiss, so it may be some time before we get the judge’s decision on this issue.  If the judge agrees that Rady could appeal this decision, this case could be the first time an appellate court analyzes the patentability of a blockchain patent.

If you have questions about whether your blockchain-related invention is patent-eligible, contact us.

This article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites. Such links are only for the convenience of the reader; we do not recommend or endorse the contents of the third-party sites.