6 PRANGE 03.10.20 (DO NOT DELETE) 4/8/2020 12:39 AM BLOCKCHAIN & BUSINESS METHODS: HOW BUSINESS METHOD PATENTS MAY BE REDEEMED BY FURTHERING BLOCKCHAIN INNOVATION KURT PRANGE* Business methods remain a controversial area of innovation for which the United States Patent and Trademark Office (“USPTO”) grants patent protection. The USPTO frequently rejects business method patent applications for attempting to claim an “abstract idea,” only granting patents after the initial patent claims have been narrowed to improve a specific physical technology. Some argue that granting patent rights for business methods cannot be justified because the costs to society outweigh the benefits, concluding that business methods should always be excluded from consideration for patent protection. If these arguments are persuasive and successful, it could lead to the patent office neglecting useful innovations near the intersection of computing technology and business methods to the detriment of the public good. To show that business method patents can be more beneficial than costly to society, the USPTO must demonstrate that it is granting business method patents with unquestionable utility. * Kurt is a J.D. Class of 2019 graduate of the University of Colorado Law School, where he served as a member of the Colorado Technology Law Journal (the "CTLJ") and a student attorney with the Entrepreneurial Law Clinic. Many thanks to all who helped along the way. First, I give special thanks to Professor Harry Surden (my Patent Law professor) and Molly Kocialski (Director of the Rocky Mountain Regional United States Patent and Trademark Office) for bringing the two sides of this business- method-patent controversy to life for me during my 2L year. The coffee-stained pages of my Patent Law textbook trigger now fond memories of that magical semester when I started many a day reading for class on the 6 a.m. bus from Boulder to Denver en route to my USPTO externship. Second, I would like to thank Josephine Chang (Partner, Lewis Roca Rothgerber Christie). Her article, published during my 2L-summer clerkship, "Blockchain: What is it and can I protect it via patents?" inspired my approach to this Note. Third, I would like to thank Professor Amy Griffin for her insightful comments to my early draft. Fourth, I would like to thank the Colorado Intellectual Property American Inn of Court for assigning me to the "Blockchain and the Law" presentation team for November 15, 2018, at the USPTO. Finally, I would like to thank everyone involved with the CTLJ for their enthusiasm and encouragement. They pack a ton of hard work and learning into one credit hour. 185 6 PRANGE 03.10.20 (DO NOT DELETE) 4/8/2020 12:39 AM 186 COLO. TECH. L.J. Vol. 18.1 Business method patents could be pivotal to furthering “blockchain” innovation. Blockchain—the technology behind cryptocurrencies like Bitcoin and Ethereum—is nascent and in need of innovation before it can be a realistic, sustainable solution for a wide variety of main-stream applications. Blockchain technology was designed to eliminate the need for trusted third-party intermediaries (e.g., banks and credit card companies) between transacting parties. Initially intended to support cryptocurrencies, blockchain technology may be useful in other areas where the immutability, reliability, and security of a database are essential. However, the computational power required to perpetuate and secure a blockchain, as designed by its creator, consumes tremendous electrical energy. Efficiency gains from hardware improvements alone cannot keep up with projected increases in demand. The business method patent could be a powerful tool for encouraging innovation that transforms blockchain from a fledgling technology with great potential to a technology that profoundly improves business transactions. INTRODUCTION................................................................................. 187 I. HISTORY OF BUSINESS METHOD PATENTS—AS THE PENDULUM SWINGS .................................................................................. 193 A. Hotel Security Checking: Advice Is Not Patentable ........ 194 B. State Street: A Useful, Concrete, and Tangible Result ... 195 C. Efforts to Curb Patent Trolling? ...................................... 195 1. Bilski: The Machine or Transformation Test Is Not the Only Test...................................................................... 195 2. Mayo & Alice: Abstract Ideas and Significantly More ............................................................................ 197 D. Pathways to Patentability ................................................ 198 1. Alice/Mayo Step One (USPTO Step 2A) ................... 199 a. Enfish: Improvements in Computer Functionality ......................................................... 199 2. Alice/Mayo Step Two (USPTO Step 2B) ................... 200 a. BASCOM: Non-Conventional and Non-Generic Combinations ........................................................ 200 II. AN ARGUMENT AGAINST BUSINESS METHOD PATENTS .......... 200 A. When Patent Rights Are Justified: A Taxonomy for Problematic Patents .......................................................... 201 B. A Comparison of Patent Types—Justifiable or Unjustifiable? .................................................................... 203 1. Pharmaceutical Patents Are Justifiable ................... 203 2. Business Method Patents Are Problematic ............... 203 3. Amazon’s “1-Click” Patent: A Real-World Business Method ......................................................................... 204 6 PRANGE 03.10.20 (DO NOT DELETE) 4/8/2020 12:39 AM 2020 BLOCKCHAIN & BUSINESS METHODS 187 III. BLOCKCHAIN ............................................................................. 206 A. What is Blockchain? ............................................................ 206 B. The Big Concepts Behind How Blockchain Works.......... 207 1. Distributed Ledger Technology: The Transaction Process ......................................................................... 208 2. Incentive, Consensus, and Irreversibility Through Proof-of-Work............................................................... 209 3. Smart Contracts and Decentralized Applications .... 211 4. Proof-of-Work vs. Proof-of-Stake ................................ 212 C. Would the Inventor of Blockchain Have Received a Patent? ............................................................................... 213 D. Blockchain-Related Invention Beyond Cryptocurrency .. 214 1. Product Tracking/Traceability ................................... 215 2. Peer-to-Peer Energy Trading ..................................... 216 3. Medical Record Coordination ..................................... 216 E. Blockchain Limitations .................................................... 218 1. Burdensome Power Consumption ............................. 218 a. Alternate Approaches to Proof-of-Work ................ 218 b. Unanticipated Real-World Weaknesses ............... 219 3. Extremely Limited Data Storage ............................... 220 IV. AN ARGUMENT FOR BUSINESS METHOD PATENTS VIS-À-VIS BLOCKCHAIN ......................................................................... 220 A. Alice and Its Progeny Have Eliminated the Pure Business Method Patent ................................................................... 221 B. Blockchain Is Ripe for Alice-era Business Method Improvements .................................................................... 221 C. Alice-era Business Method Patents May Be More Justifiable Than Problematic .......................................... 222 1. Will Blockchain Inventions Be Expensive to Develop and Easy to Copy? ....................................................... 222 2. Would Blockchain Inventions Be Produced Absent Exclusivity?.................................................................. 223 3. Will Society Receive Something Valuable in Exchange? .................................................................... 223 4. Will Blockchain Patents Unduly Inhibit Competitors? ................................................................ 223 5. Is the 20-year Term Needed to Capture Value? ....... 224 CONCLUSION .................................................................................... 224 INTRODUCTION In 2014, Alice Corp. v. CLS Bank ushered in a shift in the requirements for patent eligibility in the areas of business method 6 PRANGE 03.10.20 (DO NOT DELETE) 4/8/2020 12:39 AM 188 COLO. TECH. L.J. Vol. 18.1 and software patents.1 The Supreme Court put an end to the era of the “pure” business method patent by effectively requiring that such inventions yield technological improvements instead of merely a useful result.2 Alice sent shockwaves of uncertainty through the patent law community.3 The Supreme Court declared Alice Corp.’s business method patent claims invalid as patent-ineligible subject matter under 35 U.S.C. § 101.4 Applying a new two-prong test, the Court held that (1) Alice Corp.’s claims were “directed to”—i.e., claimed, at least in part—the “abstract idea” of intermediated settlement and (2) failed to add “significantly more” to that abstract idea; thus, the patent claims amounted to no more than a mere claim to the abstract idea itself.5 Alice Corp.’s patent was for a method of mitigating settlement risk in financial transactions between two parties.6 Settlement risk is the risk that one party will not pay, but still receive the benefit of the exchange.7 Alice Corp.’s solution was to have a computer