Claiming Trade Secret Protection for Blockchain Technology

Is anyone is arguing that blockchain technology is a protected trade secret?

Based on a high-level survey of court cases in the United States, the answer is that there are a few instances in which this has happened, but not enough – at least so far – to discern any meaningful trends. Much more litigation on claims of this type is expected.

Why is it important to answer this question? There are at least two reasons:

Reason #1 – there are incredibly valuable applications that have been or will be developed by tapping inherent blockchain benefits such as decentralized security, global transferability and immutable public recordkeeping of ownership and provenance.[1] 

Reasonable people disagree about this. Query whether the minimalists have been influenced by negative press surrounding Bitcoin and other cryptocurrencies – financial transactions recorded on a blockchain using cryptography. Whether the criticism is deserved or not,[2] the point is that cryptocurrency is not the same thing as blockchain. The latter forms the rails upon which specific applications like Bitcoin are built.

Further dampening the current enthusiasm for blockchain is that the user experience (UX) and user interface design (UI) are not as good as they need to be to achieve broad commercial adoption. There are interoperability issues, clumsy desktop interfaces, no good mobile dApps, and most of all, the onboarding process for an outside blockchain user is still a major roadblock (see what happens, for example, when you try discussing with a company’s middle manager the set up and operation of a wallet holding the keys to NFTs owned by the company).[3] All of this said, the user experience issues by all accounts can be corrected, and it looks like this will happen sooner rather than later.

Reason #2 - – the calculus whether to rely on patents or trade secrets to protect valuable blockchain technology often favors trade secrets. Blockchain solutions are based on software architecture, business methods utilizing hash functions, digital signatures and other cryptography concepts, algorithms, user interface designs, and mathematical modeling. Assets of this type may be better protected as trade secrets for a number of reasons, including, for example, the cost of obtaining coverage, limited opportunities for reverse engineering, the speed of innovation and the period of commercial exploitation does not align with the time-to-issuance or life of a patent, court decisions restricting the patentability of these assets or diminishing scope of patent rights, and a development ecosystem that requires sharing proprietary information on a confidential basis with suppliers located around the world.

While patents have been awarded for blockchain-based inventions, enforcing them may be difficult. Rady v. Bos. Consulting Grp. is a recent case in which the plaintiff asserted infringement of a patented method for recording the provenance of gemstones on a blockchain. The court dismissed the case on the grounds that the patent was invalid because it was directed to the abstract idea of collecting, storing and analyzing data on a computer – that this occurred on a blockchain network did not transform the patent into a patent-eligible concept.[4]

Furthermore, companies are increasingly relying on trade secret law to protect their IP assets generally. A major reason why this is occurring is that non-patented confidential information often constitutes the majority of a companies’ asset base.[5] And this insight from startup Tangibly Inc: “Patents are certainly here to stay, but for large technology companies they are no longer about innovation – they are about keeping your competition at bay. Can you find the algorithm that drives the sensational viewer metrics on TikTok in a patent? Or the details of Google’s page ranking algorithm? Or the load shifting technology that drives unfathomable scalability in AWS? Or the actuarial models of any number of insurance companies? Not a chance! Real innovations in technology are kept as trade secrets.”[6]

Accordingly, there are compelling reasons for closely examining whether and how trade secret law is currently being used to protect blockchain-based products and services.

Current status of trade secret litigation specific to blockchain technology - there are relatively few cases filed to-date that claim misappropriation of trade secrets encompassing blockchain technology. While the research is not exhaustive, the number of new case filings is in the low double digits. And in only a couple of these cases did the court address the merits of claims that proprietary blockchain information is a trade secret or has been misappropriated.

In Founder Starcoin, Inc. v. Launch Labs, Inc,[7] the plaintiff alleged misappropriation of trade secrets regarding the licensing of celebrity collectibles on a blockchain and a blockchain-based method to commoditize and invest in celebrities, and moved for a preliminary injunction enjoining the defendant’s conduct. The court denied the motion based on its finding that the alleged trade secrets simply “married” well-known licensing and investment concepts with blockchain technology. Since the subject matter was, in the court’s eyes, “unremarkable, obvious and general knowledge,” the plaintiff had not carried its burden to establish that it had a valid trade secret. It followed that Plaintiff did not satisfy the requirement that it show that it was likely to succeed on the merits.[8] The ruling apparently took the wind out of the plaintiff’s sails as it voluntarily dismissed the action without prejudice shortly thereafter.

In another blockchain case, PPEX, LLC v. Buttonwood, Inc.,[9] the plaintiff alleged misappropriation of trade secrets involving the use of blockchain technology to connect customers of personal protective equipment (“PPE”), sanitation products, surgical products, and other medical equipment, with verified suppliers. Defendant moved for summary judgment based on a) the argument that the alleged proprietary technology was used in a permissioned IBM blockchain and therefore was not a trade secret, and b) the court’s earlier denial of the plaintiff's motion for preliminary injunction. The court denied the motion, stating that there were material questions of fact regarding the specific contours of the asserted trade secrets and whether these secrets were already known or could be derived from independent sources such as the IBM blockchain. The court also rejected the argument that the plaintiff’s failure to make a sufficient showing at the preliminary injunction stage was dispositive of how the court should apply the separate standards governing summary judgment.[10] The parties subsequently stipulated a few months later to a pre-trial dismissal with prejudice; presumably there was an underlying settlement, but there is no publicly available information on whether the settlement was favorable to one side or the other.

What we can glean from this small litigation sample is that courts, while open to the idea that blockchain solutions may qualify as trade secrets, have not yet engaged in more than a cursory survey of general blockchain concepts and the availability of trade secret law to protect these concepts. 

Summary - this snapshot of blockchain trade secrets is motivated by two observations: 1) that extremely valuable applications will be built on a blockchain infrastructure (again, setting aside what happens to cryptocurrency); and 2) that core blockchain technologies are best protected as trade secrets as compared to patents or other types of IP. The stronger the foundations on which these observations are based, the more important it is to monitor the development of trade secret law as it applies to blockchain subject matter. Stay tuned for further installments.

Notes

[1] An excellent explanation of core blockchain concepts is provided in a recent article in the Stanford Journal of Blockchain Technology (full cite below): As for a general function blockchain: “Transacting parties update the blockchain ledger with transfers in almost real time, which, in turn, is regularly broadcast to all of the blockchain‘s network nodes located across the globe. This continuous process of recording and public broadcasting creates an immutable record of ownership that is designed to prevent double-spending or fraudulent cancellations without the need for trusted third parties to act as custodians or intermediaries. When a blockchain is sufficiently decentralized, no one entity, whether an individual, corporation, consortium or nation-state, is capable of controlling the blockchain network.” Non-fungible tokens (NFTs): “[NFTs] promise a new democratized and decentralized manner of controlling property. NFTs are individually unique digital assets built on top of blockchain technology. . . NFTs, once introduced to the global blockchain ecosystem, become a permanent part of it. . . Conventional blockchain [cryptocurrency] tokens such as bitcoin or ether are often characterized as being totally ― ‘fungible.’ This is because purchasers are assigned a quantity of tokens on a ledger but, apart from the wallet addresses of the owners, there is nothing that sets the identity of one token apart from another token of the same type. In contrast, NFTs are assigned unique identifiers to allow one token to be distinguished from any other, regardless of ownership.” See Cravath, D. J. K. Partner and Co-Chair of the IP Practice et al., NFTs, Incentives and Control: Technical Mechanisms and Intellectual Property Rights. Stanford Journal of Blockchain Law & Policy (Jan. 10, 2023) [Preprint]. Retrieved from https://stanford-jblp.pubpub.org/pub/nfts-incentives-control (See Editor-in-Chief Steven Nam for print copies)

[2] Bad actors and ambiguous and unsettled regulation among other things have combined to cast a significant pall over cryptocurrency applications. This may be temporary. Smart people like Paul Grewal and other talented people at Coinbase are on the case.

[3] Zeus Wallet, 5 necessary milestones to bring Web3 to the masses, Medium (Sept. 15, 2022). Retrieved from https://medium.com/@ZelusWallet/5-necessary-milestones-to-bring-web3-to-the-masses-d08e867b6f67

[4] Rady v. Bos. Consulting Grp., LLC, No. 1:20-CV-02285 (ALC), 2022 WL 976877, at *3 (S.D.N.Y. Mar. 31, 2022) (“The Court finds that Plaintiff's '250 patent is directed at a patent-ineligible concept. First, Plaintiff's claims for ‘network nodes,’ ‘processing devices,’ ‘storage device,’ ‘communication subsystem,’ ‘3D scanning and spatial’ devices, and ‘blockchains’ are similar to the computer hardware in Alice. Importantly, Plaintiff's claims are directed at the abstract idea of collecting, analyzing, and storing data. . . . Second, the Court finds that Plaintiff's claims individually and as ‘an ordered combination’ do not transform the patent into a patent-eligible application. . . . Though recording a fingerprint for a gemstone, the patent is not improving the functionality of storing and processing data on a blockchain. Importantly, 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.”).

[5] See, e.g., "The Board Ultimatum: Protect and Preserve," BakerMcKenzie (2017) (As reported in this study: over 80 percent of senior executives recognized that trade secrets are critical and essential to their businesses; 48 percent of the senior executives said that trade secrets are more important than their patents and trademarks; and 69 percent of the senior executives said they foresee trade secret protection becoming more critical than safeguarding other types of intellectual property because of the rapid and furious pace of innovation). Retrieved from https://bit.ly/3vkpqNU

[6] “Rapid Innovation is Driving Demand for Trade Secrets,” Tangibly Inc (2022). retrieved from https://www.tangibly.com/rapid-innovation-is-driving-demand-for-trade-secrets (Thanks again to Liat Belinson for pointing me towards her company and its insights)

[7] Founder Starcoin, Inc. v. Launch Labs, Inc., No. 18-CV-972 JLS (MDD), 2018 WL 3343790, at *7 (S.D. Cal. July 9, 2018).

[8] Id. at *7-8.

[9] PPEX, LLC v. Buttonwood, Inc., No. 21-CV-0053-F, 2022 WL 620226, at *6 (D. Wyo. Jan. 20, 2022).

[10] Id. at *7.