Distinguish “Smart Contract” From Abstract Idea To Pass Blockchain Patentability Scrutiny – Intellectual Property

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

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
 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
, 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
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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.