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IP/IT: Protecting blockchain innovations with patents or as a trade secret – an overview of the advantages and disadvantages

Despite significant losses in the market value of nearly all cryptocurrencies in 2018, interest in the underlying blockchain technology remains unbroken. This article focuses on the question of whether it is best to protect blockchain innovations with patents or as a trade secret.

A blockchain is a decentralised peer-to-peer (P2P) database, in which data, such as for example about transactions, is saved in data blocks that are linked using cryptography and in time. This linking makes blockchain secure. Each block contains a timestamp, data and a cryptographic hash of the previous block.

I. Protection by patents

Patents are granted for any inventions in all areas of technology, provided that they are new, involve an inventive step and are industrially applicable (see Article 52 para. 1 European Patent Convention (EPC) / § 1 German Patent Act (Patentgesetz, PatG)). The maximum term of protection for a patent is 20 years from the date of filing of the application (Article 63 EPC / § 16 PatG). These principles also apply to patents on blockchain innovations. The European Patent Office considers that patents may be granted for blockchain innovations provided the innovations are related to cryptography, computers or networks, produce a technical effect and fulfil the further requirementsoutlined above. An effective patent gives the holder an exclusive monopoly right over the patented invention. It allows the holder to prevent third parties from using the invention.

Patents for blockchain innovations are becoming increasingly popular and patent applications are currently experiencing a real boom. While only a few hundred patents have been granted in relation to blockchain technology, thousands of applications have been filed. Applications have come from start-ups and established technology corporations, such as IBM, GE, Sony, HP, Accenture and SAP. Chinese companies are particularly strongly represented, led by Alibaba with currently nearly 50 filed patent applications.

It is still too early to say whether patents will actually be granted for the majority of these patent applications and whether the patents will be maintained if their validity is challenged. However, the ability to enforce a patent against competitors is an indication of its value for the patent holder. Still, the high number of patent applications suggests that there could be “patent wars” in the area of blockchain technology in the future, similar to those seen in the telecommunications industry.

For this reason alone, building a patent portfolio can be a strategic consideration for companies active in the area of blockchain technology.

II. Protection as a trade secret / know-how protection

Building a patent portfolio is expensive and can be a real challenge, especially for young start-ups. In addition, many years can pass between the filing of an application for a patent and the grant of that patent. In the worst case – particularly in the case of fast paced innovation - the technology can be outdated before the patent is granted.

This downside to the patent system has made some blockchain innovators, especially start-ups, decide instead to protect their blockchain innovations as a trade secret or secret know-how.

Fewer conditions apply to the protection of trade secrets. However, contrary to a patent, a trade secret is not a comprehensive quasi-property right.

Known as the European Trade Secrets Directive, Directive (EU) 2016/943 has significantly increased the level of protection for trade secrets. Germany is expected to implement the Directive by the end of this year. According to the Directive, a trade secret will exist when three conditions are fulfilled:

  • First, the information in question must be secret, i.e. it is not generally known by persons within circles that normally deal with this kind of information, nor is the information readily accessible.
  • Second, the information must have a commercial value because it is secret.
  • Third, the information holder must have taken steps that were appropriate in the circumstances to protect this information.

If these conditions are fulfilled, the holder of the trade secret will be entitled to injunctive relief and damages against third parties, who seek to unlawfully exploit the trade secret. How the courts will in particular apply the third condition set out above will only be clear once the first court judgments on violations of trade secrets under the new law have been handed down.

One disadvantage of trade secrets is that they provide holders with no protection against parallel developments or lawful reverse engineering by competitors, as such measures are legal.

III. Summary

Patents and trade secrets both offer advantages and disadvantages for the protection of blockchain innovations. It is therefore important, especially for start-ups, to consider an appropriate strategy at an early stage. Any considerations must take into account the high costs of strategic patent portfolios and the high speed of innovation in this area of technology. On the other hand, a patent portfolio can present a competitive advantage: not only can IP rights be leverage against third party claims, but they can also significantly increase the value of the company.

Christian Hess
(Lawyer, LL.M., Certified Specialist for IP law)

Contact us

Christian Hess T   +49 89 35065-1421 E   Christian.Hess@advant-beiten.com