Summary and Takeaways from USPTO Roundtable on Patents and NFTs
Wednesday, April 26, 2023
On January 26, 2023, the US Patent and Trademark Office (USPTO) conducted a public roundtable, during which various attorneys and industry experts discussed their thoughts on the intersection of patent law with non-fungible tokens (NFTs).
From this discussion, we have compiled a summary of our takeaways of various NFT-related issues concerning patents that we consider to be of primary relevance to patent owners and industry representatives.
Summary of Roundtable Discussion
NFTs are unique, cryptographic tokens on a blockchain which may each represent a recorded transaction in the blockchain with a smart contract in relation to a digital asset. Many companies are currently incorporating aspects of NFTs and other emerging technology, such as distributed ledger technology (e.g., blockchain) and smart contracts, in applications for patent protection, and NFTs are currently being used to track patent asset ownership. While NFTs may provide opportunities to patent rights holders, they may also provide various challenges in protection, ownership, and enforcement.
For example, NFT-related patents may fall into two categories. The first category includes patents directed to improve NFT technology itself, such as the technological ability of NFTs to be used as a means to authenticate individual identities and their underlying digital assets. These types of patent applications tend to include inventions refining the process of creating or minting NFTs, storing NFTs in blockchain, or securing stored NFTs. The second category includes patents directed to the application of NFT technology. These types of patent applications may include inventions that use NFTs to identify elements in a financial workflow, to authenticate a user with a bank, or for other purposes that basically amount to a way to use NFTs, blockchain, or associated technology.
In contrast to the first category, which type of inventions tend to have a lower hurdle in obtaining patent protection, the second category tends to be more difficult to succeed in patent protection, since the USPTO tends to view mere application of NFTs as amounting to not being significantly more than an unpatentable abstract idea. Moreover, as NFT usage has gained much visibility over the recent years, there is a good chance that a large amount of non-patent literature may be found on inventions related to NFTs in the second category, further raising the hurdle to patent applicants in meeting the requirements of having a novel and nonobvious invention for patent protection.
Currently there is interest in the use of NFTs to authenticate assignment and ownership of patent rights on blockchain networks which track purchases and sales of these rights. For example, some industry experts have insisted that the USPTO implement a public blockchain system allowing inventors or patent owners to record NFTs validating assignments of patent rights. Some companies are even converting numerous patent assets to NFTs stored on a blockchain, so that data regarding each asset such as licenses and chain of title may be more visible to the public, as well as to potentially facilitate satisfaction of corporate governance requirements in countries that may require IP investments to be reported.
However, one of the primary characteristics of NFTs and blockchain technology of interest to many patent owners is the ability for these technologies to be decentralized, and thus resistant to censorship. This interest has led to the question of whether a centralized, government agency, such as the USPTO, may recognize or validate title changes through NFT-authenticated and blockchain recorded patent assignments, and thus whether a patent applicant asserting ownership through such assignment may succeed when requesting patent protection or entering other proceedings before the USPTO. A similar question arises as to whether patent owners who acquired patent rights via NFTs have valid standing to initiate a patent infringement dispute. Experts tend to believe the answers to both questions is yes if the rights are documented on a public blockchain network, but maybe not on a private blockchain network due to lack of visibility or notice.
Moreover, blockchain is expensive to implement, and thus while the NFTs themselves may be stored on the chain given their low data content, the patent assets themselves, such as the patents, assignments, licenses, or other related data, are generally stored elsewhere off the blockchain. As a result, these patent assets may be vulnerable to cyber-attacks which can compromise the veracity of the patent assets, and thus jeopardize the patent license or ownership rights of the NFT owner. Moreover, any smart contracts associated with these patent asset NFTs, such as self-executing computer code stored on the blockchain which may be triggered in response to sale or transfer of patent assets, may be exploited or subject to bugs that result in non-payment for the transfer of patent rights, an ineffective assignment, or other issues. Additionally, many NFTs are designed such that transfer of the NFT does not result in transfer of ownership of the underlying patent asset, but only results in a limited license to use or perform some other action in connection with the patent asset.
Additionally, patent owners may have other issues to consider in connection with patent-related NFTs, such as with respect to joint ownership and patent exhaustion. For example, with respect to joint ownership, 35 U.S.C. §262 allows each of the joint owners of a patent to make, use, offer to sell, or sell a patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners. As a result, if an NFT owner sells the same token to multiple purchasers with ownership rights to the underlying patent asset, these purchasers may potentially be joint owners of the patent and can therefore perform their own patent asset transfers via NFTs without accounting to other joint owners. The resulting tokenization of the underlying patent asset may consequently devalue the patent. Moreover, patent exhaustion doctrine provides that once an authorized sale of a patented article occurs by a patent owner or a licensee of the patent owner, the patent owner’s right to control the use and sale of that article is said to be exhausted, and thus that the purchaser is free to use and resell the article without liability to the patent owner. Thus, it is possible for an owner of an NFT, which underlying patent asset is the invention itself (as opposed to a patent to the invention), to exhaust the patent via sale of the NFT if ownership rights to the invention are transferred with the NFT. This exhaustion of patent rights may prevent the patent owner from seeking damages or other remedies if an NFT purchaser later resells the NFT.
Patent owners should consider, before seeking a patent on an NFT-related invention, under which category of inventions their patent may fall, namely an improvement to NFT technology or alternatively a use of NFT technology, and if the latter case, whether their invention can be structured as a resulting in an improvement to the underlying technology. For example, patent owners should consider whether the use of blockchain for storing NFTs is merely an alternative to the decades-old technology of storing data on a database and is just an application of blockchain technology, or if an actual improvement to the technology can be found from the invention. Moreover, before seeking patent protection on a NFT-related invention, patent owners should conduct a search of not only patents and published patent applications, but also non-patent literature, to determine whether their invention has already been disclosed by another and if patent protection cannot consequently be obtained.
Patent owners, inventors, and investors should also consider, before intending to assign or obtain assignment of patent rights using NFTs, whether they are using a public or private blockchain and how that may potentially impact their rights. Furthermore, when transacting licenses or assignments of patent rights using NFTs, patent owners, inventors, and investors should consider beforehand the risks of cyber-attacks or software bugs in smart contracts affecting the transfer, as well as what type of transfer is actually occurring (e.g., a patent license or a patent assignment). Patent owners should also consider whether an NFT transfer may potentially result in an undesirable joint ownership situation or exhaustion of the underlying patent.