The Situation
Smart contracts are often mentioned in blockchain-themed patent applications and recited in claims. However, Examiners without a thorough understanding of this concept or unfamiliar with blockchain technology often equate smart contracts with legal or commercial contracts stored on blockchains. As a result, the Examiners may find claims directed to merely applying the blockchain technology to execute legal or commercial contracts, for example, as part of a commerce system, like hedging. See, e.g., Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S.Ct. at 2356 (citing Bilski v. Kappas, 561, U.S. 593, 611 (2010)).
Without detailed explanations of “smart contract” set forth in the specification, patent prosecutors may find themselves in anuphill battle against the abstract idea finding. What makes it worse is that several mainstream online sources often explain “smart contract” in a narrow sense or an incorrect way, from where Examiners may have looked up and gathered an impression. For example, Wikipedia tells its readers that “[a] smart contract is a computer program or a transaction protocol which is intended to automatically execute, control or document legally relevant events and actions according to the terms of a contract or an agreement” (emphasis added). See here. For another example, Investopedia provides that “A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code” (emphases added). See Investopedia.
Although smart contracts have been found to revamp many traditional areas, narrowly interpreting smart contracts by the specific applications takes away the technical feature of this important function of blockchain. Thus, patent drafters should spare attention to critical terms like “smart contract” when preparing the specification. Before discussing the strategy, a quick review of the patentable subject matter rules in the U.S. may help re-cap the important hurdles to patent eligibility.
The Rules
Under Step 2A Prong 1 of the USPTO’s 2019 Revised Patent Subject Matter Eligibility Guidance (2019 PEG), Examiners may reject ineligible claims by determining whether the claims recite a judicial exception – including laws of nature, natural phenomenon, and abstract ideas. For abstract ideas, 2019 PEG enumerated three fully-encompassing categories: (1) “mathematical concepts” (mathematical relationships, mathematical formulas or equations, mathematical calculations); (2) “certain methods of organizing human activity” (fundamental economic principles or practices, commercial or legal interactions, managing personal behavior or relationships or interactions between people); and (3) “mental processes” (concepts performed in the human mind: encompassing acts people can perform using their mind, or using pen and paper). Therefore, if an Examiner equates a claim limitation “smart contract” as a legal or commercial contract, and the claim does not otherwise appear to fall outside the judicial exception, the Examiner will likely conclude that the claim is directed to an abstract idea and specifically a “certain method of organizing human activities.”
Then, the subject matter analysis proceeds to Step 2A Prong 2, where Examiners determine if the exception is integrated into a practical application. To this end, the Examiners should (1) identify whether there are any additional elements beyond the abstract idea, and (2) evaluate those elements to determine whether they integrate the exception into a practical application. Two examples of practical application provided by the 2019 PEG are most relevant to blockchain patent applications: (i) an improvement in computer functionalities, and (ii) limiting the judicial exception in some other meaningful way beyond generally linking to a technological environment.
The Strategy
In view of the above, an accurate description of “smart contract” from the technical perspective may avoid the abstract idea trap under Step 2A Prong 1 and lead the claims straight to eligibility, or if proceeded to Step 2A Prong 2, help build a strong argument for practical application. Such descriptions may be found in various scholarly publications such as the following.
“A smart contract is a computer program which verifies and executes its terms upon the occurrence of predetermined events.” See Mark Giancaspro, Is a ‘smart contract’ really a smart idea? Insights from a legal perspective, 33 Comput. Law & Sec. Rev. 6, 825 (2017).
As nicely explained by the authors, the history of the smart contract misconception dates back from when the name was created. “The term smart contract has been used over the years to describe a wide variety of different things. In the 1990s, cryptographer Nick Szabo coined the term and defined it as ‘a set of promises, specified in digital form, including protocols within which the parties perform on the other promises.’ Since then, the concept of smart contracts has evolved, especially after the introduction of decentralized blockchain platforms with the invention of Bitcoin in 2009. In the context of Ethereum, the term is actually a bit of a misnomer, given that Ethereum smart contracts are neither smart nor legal contracts, but the term has stuck. In this book, we use the term ‘smart contracts’ to refer to immutable computer programs that run deterministically in the context of an Ethereum Virtual Machine as part of the Ethereum network protocol—i.e., on the decentralized Ethereum world computer. … Computer programs Smart contracts are simply computer programs. The word “contract” has no legal meaning in this context.” See Andreas M. Antonopoulos & Gavin Wood, Mastering Ethereum: Building Smart Contracts and DApps, § 7 (1st ed. 2018).
Another way to strengthen the technical feature of smart contracts would be by describing the Ethereum Virtual Machine (EVM) that is used to deploy and execute smart contracts. The EVM creates a virtual environment as a local instance on every Ethereum node for handling smart contracts. Since all instances of the EVM operate from the same initial state and produce the same final state by consensus, the system of nodes as a whole operates like a single computer. See Id.
In conclusion, to anticipate potential confusion, patent drafters should define or describe the phrase smart contract based on the context of the application to avoid subject matter rejections. If the invention improves any technical feature of smart contract, more effort should be devoted to explaining the existing technical environment and improvement thereon.
Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 88