Patenting Strategies For Nonfungible Token Technology

25 March 2021 Privacy, Cybersecurity & Technology Law Perspectives Blog
Authors: Eric L. Sophir Matthew Horton

This article was originally published by Law360 on March 25, 2021, and is reproduced below in full with permission.

Intellectual property lawyers are attracted to shiny new toys, and we contemplate strategies for how to protect new technologies.

Nonfungible tokens, or NFTs, have been making headlines in the last few weeks with their enormous valuations. Based on our experience with NFTs and blockchain innovations, the patent lawyer side of our personalities rushed to consider how to best protect these innovations. We even contemplated a few new inventions involving the use of NFTs as we wrote this article.

There are some challenges to protecting NFTs themselves, though technology utilizing NFTs may be patentable. Below are some considerations for preparing and prosecuting patent applications involving NFT technology.

Patent Eligibility

NFTs involve noncryptocurrency uses of blockchain technology. The variations of NFTs fall within a spectrum. At one end of the spectrum, an NFT is used to store art, music, videos or other media on a blockchain, and the rights to that media are transferred to another entity by distributing a token uniquely associated with that entity.

At the other end of the spectrum, the tokens are employed in new applications offering a new functionality, not just the mere use of blockchain technology. The patentability implications, notably patent eligibility, vary according to where on the spectrum the particular NFT resides.

When considering patent eligibility, the first end of the spectrum presents some challenges. Using the U.S. Patent and Trademark Office's subject matter eligibility examples for abstract ideas1 for guidance, a storage and transfer of rights alone may not meet the eligibility requirements of Title 35 of the U.S. Code, Section 101.

Example 40 examines the patent eligibility of claims covering an invention for monitoring network data traffic. The guidance explains that claim 2 recites that collecting traffic data and comparing the traffic data to a predefined threshold is patent ineligible.

The analysis suggests that the collecting and comparison steps are recited at a high level of generality that are no more than mere instructions to apply an abstract idea — i.e., the mental process of comparing the network data — using a generic computer component.

These instructions cannot integrate the exception into a practical application, as the collecting step was extra-solution activity using a generic, off-the-shelf computer component. In other words, claim 2 simply describes operations for comparing data without a particular hook to technology.

This particular example illustrates one of the hurdles to patenting the storage of an NFT. The collection of data used to store the NFT and even a consensus among nodes of a blockchain could fall within the analysis of Example 40. Indeed, innovators continue to improve blockchain technologies, but at what point is storage on a blockchain going to be considered well-understood, routine and conventional activity?

Example 41 suggests that cryptographic communications may be eligible. The claim recites encoding message block word signals to produce a ciphertext word signal and transmitting the cipertext word signal to another computer. Despite the math recited in the claim, Example 41 states that it is patent eligible as it sufficiently limits the use of the mathematical concepts to the practical application of transmitting the ciphertext word signal to a computer terminal over a communication channel.

But merely encoding data and transmitting the data to another computer may not be sufficient for eligibility. Encoding digital media for an NFT for a blockchain and transmitting information about the encoded NFT may not be enough. The breadth of such a claim may be monopolizing and preempting, as it describes technology used for other purposes, including storage of documents or cryptocurrency transactions.

Claim 2 of Example 42 recites an ineligible method of storing information, providing access to users and storing updated information. Example 42 explains that the mere nominal recitation of a generic content server and generic network-based storage devices do not take the claim out of the methods of organizing human interactions grouping and simply implementing the abstract idea on a generic computer is not a practical application of the abstract idea.

The fundamental operation of a blockchain includes storing information, providing access, and, when an NFT changes owners, storing updated information, like other distributed database technology. So the first end of the spectrum may pose eligibility challenges if one is merely storing an NFT, transferring ownership and updating an NFT on a blockchain.

Recent patent applications try to protect improvements at this end of the NFT spectrum. When the conventional blockchain technology is removed from those claims, a recitation to digital media or a distributed database may be all that remains.

Similar challenges may exist abroad. Consider whether the mere generation, storage and transfer of an NFT would satisfy requirements for a technical solution to a technical problem.

The other end of the spectrum, where the NFTs may be utilized for a new application, presents many more opportunities for patent protection, particularly with regard to eligibility challenges.

The applications may involve, for example, restrictions for viewing NFTs, distribution of NFTs, multiple platform viewing, NFTs used in conducting transactions, and smart contract innovations. Ironically, the business model of how the NFTs are utilized may be a source of innovation, not the underlying use of a blockchain.

Detecting Infringement

As with other computer-based technologies, another concern with patent protection of NFTs is the detectability of infringement. The end users may be anonymous, so claims drafted to capture infringement by the end users may be difficult to enforce when the end users cannot be readily, if ever, identified.

Instead, claims should seek to capture infringement by a system host. For example, consider drafting claims to a trading platform or a distributed ledger rather than an artist or a buyer. It may be desirable to have claims that read on an entity where the patentee can detect infringement and also identify the infringing entity.

Patentability Searching

As the USPTO receives a wave of new applications directed to NFT-related technology, the examiners face a similar problem as they do with other burgeoning technologies. NFT technology can involve a transaction, a distributed database or a cryptography innovation, each of which may be directed to a different art unit. Prior art may also be limited based on what is currently publicly available. Applicants will also face limitations in prior art searching, as it is difficult to assess the state of the art as publications and patent filings increase so quickly.

Conclusion

With any new technology, a practitioner should consider whether patent protection is available or appropriate. The increasing popularity and volume of NFTs will increase the number of patent filings and ultimately provide more guidance and lessons of approaches for patenting NFTs. This additional certainty is likely to encourage even more filings over time. In the meantime, practitioners may consider addressing patent eligibility issues, directing claims to a potentially infringing and identifiable entity, and identifying prior art for consideration to ensure a more thorough examination.

Eric Sophir is a partner and Matthew Horton is senior counsel at Foley & Lardner LLP.

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1 Subject Matter Eligibility Examples: Abstract Ideas, available at https://www.uspto.gov/sites/default/files/documents/101_examples_37to42_20190107.pdf
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