How to navigate intellectual property risk in blockchain projects

Today, blockchain has gone well beyond cryptocurrency to serve as a vehicle for creating trust and driving collaboration between disparate parties. It’s used in everything from anti-money laundering tracking to IoT monitoring, and international money transfers to supply chain monitoring.

Yet as tech firms and financial service organisations stake more of their reputation and money on blockchain projects, it pays to acknowledge the intellectual property (IP) implications. Depending on the project, firms may need to understand the nuances of open-source licensing, and take steps to mitigate the legal risks associated with copyright infringement.

More patents, more risk?

The sheer volume of new patent applications filed each year illustrates just how popular blockchain has become. A study from consultancy KISSPatent claims that more blockchain-related patents were published in the first half of 2020 than in all of 2019, and that 2019 saw three times more blockchain patents published than in 2018. Interestingly it is Fortune 500 companies that appear most active in this space, rather than blockchain-centric start-ups. Alibaba and IBM were the top two publishers as of September 2020, with the Chinese tech giant filing 10 times more patents in the US than Big Blue.

However, filing for a patent doesn’t mean it will be granted. This can create uncertainty for companies looking to steer their own innovations clear of potential legal risk – whether for the patent applicant who does not know if their innovation will be protected or for the third party who does not know if a competitor's patent will actually be granted. And the more patent applications there are, the more possible risk. A second element of unpredictability is that the sheer volume of blockchain patent applications being filed means not all have been published. That means if your company wants to bring a blockchain-based product or service to market now, you’d have to launch “at risk”. There may be a patent pending which you technically infringe, but if information about it hasn’t been published in the public domain, it’s impossible to know.

The good news is that a lot of this uncertainty will certainly dissipate as the technology matures and blockchain implementations become more standardised and interoperable. Already some standards-setting organisations such as the Institute of Electrical and Electronics Engineers (IEEE) have published standards including Framework of Blockchain-based Internet of Things Data Management and Standard for General Process of Cryptocurrency Payment.

More will surely follow. When this happens and essential patents can be determined, it’s likely that patent licensing pools will follow. These enable patent rights to be aggregated among multiple holders and made available to licensees for a fee. Even where some elements of blockchain technology aren’t standardised, the most important patents will likely be licensed on fair, reasonable and non-discriminatory (FRAND) terms, representing a voluntary licensing commitment that standards organisations often request from the owner of an IP right (such as a patent) that is, or may become, essential to practice a technical standard. These developments will reduce risk for

companies that want to incorporate blockchain tech into their products and services, although royalty payments to patent holders will likely be necessary.

The challenges of using open source

Another risk relates to the use of open-source code. As in other areas of software development, companies are increasingly turning to third-party components as a low-cost way of accelerating time-to-market and competing with larger, better funded rivals. Open-source licences describe what can and can’t be done with this code, although whether a breach of terms constitutes copyright infringement or breach of contract may depend on the jurisdiction you operate in.

There are two main categories: permissive and restrictive. As the name suggests, permissive licences, such as the MIT licence Bitcoin has adopted, do not place any restrictions on software reuse—even for commercial purposes. Modifications of the code don’t even need to be distributed under the same licence, or at all. On the other hand, while restrictive licences such as the GPL 3.0 allow for free distribution of copies of the software, they also require that any modified versions of the code be licensed under the same terms.

This may cause problems for blockchain companies whose business model relies on selling licences to a product that incorporates this code. Unless they’re able to separate open source from proprietary code, the whole product could be considered a modification of the open-source code and therefore must be made freely available. If, however, the business model is offering services on top of a blockchain or offering blockchain-as-a-service, then using open-source code with restrictive licences may be less high-risk. That’s because the underlying software is not considered to be distributed.

What happens next?

When it comes to open source, using permissive licenses is usually the lower risk option, even in the latter scenarios outlined above. However, when it comes to the uncertainty created by mounting volumes of patent application filings, there are a couple of proactive steps that organisations could take.

The first is to file your own patent applications based on in-house innovation. That would put you in a strong position to benefit from cross-licensing or contributions to patent pools as the technology matures. A second, cheaper option, is defensive disclosures describing specific techniques and uses of technology. These provide “prior art” protection against patent applications filed later, ensuring the latter will be rendered invalid.

The bottom line is blockchain is here to stay. If your organisation wants to use the technology to drive business growth and reach new customers, it’s increasingly essential to understand the implications of IP law. It may save a lot of time and potential legal cost down the road.