Even in a pandemic, energy innovators are developing blockchain technology to implement powerful changes. From automating crude oil trading to amplifying the impact of renewable energy sources, innovations harnessing blockchain technology are likely to change the energy industry in profound ways. Inventors, enterprises, and investors who act today to obtain patent protection for their early blockchain-based inventions will find themselves in an enviable position tomorrow to capitalize on their early visions. This article explains some basics of blockchain technology, highlights two exciting applications of energy-related blockchain technology, suggests patenting strategies, and recognizes challenges to patentability and enforcement of such technologies.
Blockchain Technology Basics: Distributed Ledgers and Smart Contracts
Blockchain is a software-based technology used to track and secure a list of continuously growing data records (blocks) that are linked together (chain) using cryptography, over a network of computers (nodes). It was introduced along with the cryptocurrency Bitcoin. However, innovators are now developing applications of blockchain technology beyond cryptocurrency.
Blockchain technology is often called “distributed ledger technology” to emphasize the distributed or decentralized nature of its list of records (that is, its ledger or database), in contrast to a traditional, centralized database. Conventionally, databases have been secured by entrusting them to third-party intermediaries having administrative privileges. However, blockchain technology secures a database, without the trusted third-party, through a combination of three core enabling technologies: peer-to-peer networks, digital signatures, and consensus algorithms.
Peer-to-peer computer networks account for the decentralized nature of blockchain technology. In a conventional client-server network, one central computer (server) stores data and responds to requests from numerous computers (clients). In contrast, each node in a peer-to-peer network can act as a server and a client. If a server fails, a client-server network fails. However, if a node fails, a peer-to-peer network continues to work.
Digital signatures provide the integrity and authenticity for transactions that make up a blockchain ledger through cryptographic hash functions and public-key encryption. Consensus algorithms allow the nodes in a blockchain network to agree on the current state of the ledger while making it virtually irreversible and tamperproof. Different types of consensus algorithms—such as, “Proof-of-Work” and “Proof-of-Stake”—are being developed to better serve the needs of specific applications of blockchain technology.
Smart contracts allow agreements to be automated through terms and conditions preprogrammed into a blockchain. Smart contracts are where blockchain technology becomes unleashed from its cryptocurrency origins.
Applications of Blockchain Technology in Energy-Related Industries
In the energy industry, blockchain technology is being developed to dramatically alter the supply, demand, and distribution of energy. For example, VAKT Global Ltd., a European company, is developing a blockchain-based energy commodity trading platform, with no cryptocurrency involved. As of April 8, 2020, the platform was in use in the “North Sea BFOET crude oil market.” The platform makes physical commodity markets more efficient by becoming a “single source of truth for the trading parties and ecosystem participants: terminals, surveyors, agents, ship owners, brokers, banks, etc.” By transforming conventional paper-based processing—which tends to be slow, complicated, and error-prone—into a digital process that is fast, “secure, immutable and private,” VAKT intends to become the “digital backbone” of commodities trading within the energy industry and beyond.
Energy Web Foundation (EWF) is also developing an energy-specific blockchain called the “Energy Web Chain” (EW Chain), which uses a “Proof-of-Authority” consensus mechanism for reduced energy consumption. This blockchain aims to “accelerate the global transition to a decentralized, democratized, decarbonized, and digitalized energy system.” EWF has collaborated with Wirepas and Vodafone Business to combine blockchain technology with the Internet of Things (IoT) to develop systems for connecting renewable energy assets to energy grids. By providing the “core digital infrastructure” connecting utilities, distributed energy resources, and consumers, EWF sees itself as the “digital backbone” of the future’s low-carbon electricity systems.
Importantly, such digital platforms are likely to exhibit network effects. That is, digital networks of energy providers and consumers are likely to become more valuable to their users as they gain more users and, at some point, an expanding energy network may prevent competitors from entering the market. Accordingly, pioneering energy platforms may have a head start to dominate energy-related industries through the power of network effects.
Patenting Energy-Related Blockchain Inventions: Shield and Sword Strategies
The database of the U.S. Patent and Trademark Office (USPTO) suggests that energy-related blockchain patent application filings have continued to increase since the first of such applications was filed in 2016. Nevertheless, the energy-related blockchain patent landscape is currently not a crowded one. Thus, the time is ripe for energy innovators to claim valuable patent rights. Patent owners may use patents defensively and offensively to gain an edge over competitors and realize significant business value.
A defensive approach to patenting allows patent owners to benefit without suing. For example, patents can deter competitors from copying and encourage them, instead, to seek a licensing agreement or focus their research efforts elsewhere. Furthermore, patents are considered assets of a company and therefore increase the company’s valuation and provide leverage in negotiating business deals.
An offensive approach to patenting allows patent owners to enforce their rights through litigation in a federal district court, or at the U.S. International Trade Commission (ITC). Courts may award a successful patent owner litigant remedies including injunction, lost profits, reasonable royalties, and—for egregious intentional infringers—punitive/enhanced damages. As importantly, the ITC provides a quicker process than the courts and is able to stop patent infringers from importing infringing products or services into the U.S.
Key Challenges to Patentability and Enforcement
To adequately benefit from patent ownership, a patent application must be prepared to overcome the statutory hurdles to patentability, without giving up valuable scope of protection. Software-based technologies, like blockchain technology, are often rejected under the subject matter eligibility hurdle of the U.S. Patent Law (35 U.S.C. § 101). To overcome this hurdle, care should be taken to ensure that the disclosure of the invention in the patent application emphasizes a practical, and advantageous, technological application of the invention to prevent the rejection of the patent application based on an unpatentable “abstract idea”—such as, a mathematical concept, a method of organizing human activity, or a mental process—and/or provides for additional elements amounting to an inventive concept beyond a mere abstract idea.
For example, patent claims describing a method of renewable energy trading using IoT sensors, processors, and memory to autonomously measure, record, and analyze energy supply and usage data through a blockchain ledger may be rejected by the USPTO based on the grounds that they are directed to a method of organizing human activity (that is, measuring, recording, and analyzing energy data may be considered as organizing human activity or a fundamental economic practice). Furthermore, the USPTO may reason that merely recording and analyzing energy-related data through a generic blockchain ledger provides no practical application of the fundamental economic practice and that the recitation of generic IoT sensors and computer hardware does not provide an inventive concept beyond the fundamental economic practice.
Such a rejection may be avoided altogether by drafting the application with a technological problem-solution emphasis and identifying how problems of existing approaches are overcome by the applicant’s invention. This approach would help ensure that the patent claims are not drafted to preempt all future technological improvements, but to focus more reasonably on the relevant technological area of invention. For example, claims incorporating features of an energy-specific data structure to be stored in a blockchain to improve the processing of transactions would likely remove the claims from the abstract idea realm, because the invention would not threaten to preempt virtually all applications of blockchain technology as applied to energy trading.
Furthermore, inventions that improve the functionality of blockchain technology itself may avoid or overcome a rejection under 35 U.S.C. § 101. That is, improvements to distributed storage, distributed processing, cryptography, security and authentication, data structures, and data exchange protocols would not likely be interpreted as being directed to an abstract idea. For example, proof-of-work consensus algorithms provide security for many cryptocurrencies, but they intentionally slow down processing and waste electricity. Accordingly, an invention involving an energy-specific consensus algorithm that provides adequate security with greater energy efficiency and faster processing would not likely be rejected under 35 U.S.C. § 101.
Additionally, patent claims should be drafted to facilitate investigation and the collection of facts to support an infringement allegation. For example, patent claims related to distributed renewable energy assets and linked via blockchain technology should allow for a finding of infringement by one infringer in one location, rather than requiring a series of steps to be performed by multiple parties in multiple jurisdictions.
While blockchain technology is in its infancy, choosing to invest and become a patent holder for early blockchain inventions could pay dividends as the technology matures to become widely popular and useful, particularly in energy-related industries. To benefit from the maximum scope of patent protection, it is important to seek out counsel with the experience and sufficient understanding of the legal and technical issues to handle the challenges associated with patenting software-related technologies.
—Raymond R. Tabandeh and Kurt S. Prange are Intellectual Property attorneys with Lewis Roca Rothgerber Christie LLP.