The world of Bitcoin, built on the principles of decentralization and open-source innovation, now faces a significant threat: patent trolls. NPEs buy patents with the intent to sue. They have no plans to create or even develop real technology; rather, their business model lies in enforcing these patents against developers who do innovate. In a case recently filed against giant Bitcoin miners Core Scientific and Marathon Digital Holdings, Malikie Innovations Ltd. This action signals a strong priority to address the persistent inequities in the industry. We’ll make this article a primer on how patent trolls operate. It will cover their attacks, overall potential impact on the Bitcoin ecosystem, and the necessary tactics to protect against these attacks.

Overview of Patent Trolls in Bitcoin Mining

Definition of Patent Trolls

Patent trolls, or NPEs, are companies that acquire patents with the primary intention of asserting them against businesses that are actively using similar technology. Unlike operating companies that innovate and create products or services, patent trolls do not typically engage in research, development, or manufacturing. Their business model is based on litigation, where they extract licensing fees or settlements from companies they accuse of infringement. This practice can hamper innovations and even impose hundreds of millions or billions of dollars in costs on businesses, drawing capital and labor away from potential new discoveries.

The emergence of patent trolls has been a huge issue for many industries, from technology to telecommunications, and now, cryptocurrency. These entities often target companies with deep pockets or those heavily reliant on specific technologies, making them vulnerable to legal action. Given the industry’s advanced hardware and software infrastructure, the Bitcoin mining industry is uniquely vulnerable to patent troll assaults.

The Impact on Bitcoin Mining

Malikie Innovations Ltd. has recently sued Core Scientific and Marathon Digital Holdings. This recent action underscores the very real threat that patent trolls pose to the entire Bitcoin ecosystem, including Bitcoin mining. As we noted last year, Malikie Innovations, a patent troll, has bought thousands of such patents from BlackBerry’s portfolio. Fast-forward to today and they’re accusing these mining companies of patent infringement on their cryptographic methods. If Malikie prevails, he stands to receive millions of dollars in unpaid royalty payments. These can add up to tens of millions of dollars per company, covering up to six years of past-due back royalties.

This legal challenge poses several threats to the Bitcoin mining industry:

  • Financial Burden: Defending against patent lawsuits can be expensive, requiring significant legal fees and potentially leading to substantial settlement costs or adverse judgments.
  • Operational Disruption: Lawsuits can disrupt mining operations, as companies must divert resources and personnel to address legal matters.
  • Innovation Chill: The threat of patent litigation can discourage innovation and investment in new mining technologies, as companies fear becoming targets of patent trolls.
  • Ecosystem-Wide Impact: If patent trolls are successful in extracting royalties from miners, it could increase the cost of mining, potentially affecting the overall security and decentralization of the Bitcoin network.

It is imperative that we prove the cryptographic methods underpinning Bitcoin are public goods and not special private sector monopolies. Rather, they spring from decades of public research and collaboration, which are absolutely essential in our ongoing fight against patent trolls such as Malikie. This all necessitates, of course, a shared effort to collect evidence, perform prior art searches and present a strong legal defense.

Strategies for Combatting NPE Patent Lawsuits

Historical Approaches

Many strategies have been used to fight patent troll lawsuits, from legal defensive maneuvers to reforms in state legislatures. One of the best ways to fight back is to question the legitimacy of the claimed patents. You accomplish this by proving that the patented invention was already described or suggested before the patent application was submitted. This begins with extensive prior art searches to find public disclosures, patents, or products that describe the same technology.

A second approach is the non-infringement gambit — asserting that the accused infringer’s products/services do not infringe the patent in question. This requires a detailed analysis of the patent claims and the accused product or process to show that they do not meet all the limitations of the patent claims. It gives companies a mechanism to more actively challenge a patent through new administrative proceedings. Another option is IPR at the USPTO.

To address this concern, in the past some of these companies adopted a zero settlements policy. They were willing to pay nothing at all to patent trolls—even when a settlement would have cost less than a court battle. This precedent-setting – also called the Newegg Model – strategy is intended to prevent patent trolls from suing the company in the first place. It is also fraught with danger as it may take lengthy and costly court battles.

Lessons Learned from Other Industries

Other industries that have been targeted by patent trolls, like the IT and car industries, have cultivated successful strategies to fight back against patent trolls. The software industry has responded by creating organizations such as the Crypto Open Patent Alliance (COPA). From the open source perspective, they encourage patent non-aggression and defend against inappropriate patents. COPA charges a small, fixed, annual due per company to its members. It uses that money to challenge patents that pose a danger to those industries, at zero cost to the individual member.

The airplane industry provides a cautionary tale. The entire industry was nearly brought to a halt due to patents on the airplane from the Wright brothers and others, arguably delaying the industrial revolution by 18 years. This serves as a reminder of how patents can truly inhibit innovation when left unchecked.

The music industry has experienced dramatic change from piracy, copying and streaming. Since then, the old business models of selling CDs have completely crashed. This dropoff is not simply a function of piracy — it’s because folks just don’t want to own music anymore. This makes the case even further for being agile and responsive to the rapidly shifting technological environment and business models.

Understanding Inter Partes Review

How It Works and Its Costs

Inter partes review (IPR) is a streamlined administrative process at the USPTO. It provides an opportunity for a third party to contest and ultimately have the patent invalidated. IPR is almost always faster and cheaper than district court litigation. This makes it an attractive option for anyone seeking to take on patents introduced by patent trolls.

The cost of an IPR varies depending on case complexity. It’s often less expensive than pursuing an enforcement action all the way through district court. The filing fee for an IPR is incredibly inexpensive. The legal costs associated in drafting and litigating the case can become prohibitively expensive.

  1. Petition Filing: The petitioner (the party challenging the patent) files a petition with the USPTO, arguing that the patent is invalid based on prior art.
  2. Institution Decision: The USPTO decides whether to institute the IPR based on the merits of the petition. If the USPTO finds that there is a reasonable likelihood that the petitioner will prevail, it will institute the IPR.
  3. Discovery and Briefing: The parties engage in limited discovery and file briefs arguing their respective positions.
  4. Oral Hearing: The USPTO conducts an oral hearing where the parties present their arguments.
  5. Final Written Decision: The USPTO issues a final written decision, either upholding the patent or finding it invalid.

IPR has been shown to be an extremely effective tool in challenging patents as a defense for technology cases. On an average basis, the USPTO is aggressively invalidating patents at IPR proceedings. This trend is particularly prevalent in cases involving software and other complex technologies. The USPTO has a wealth of experience that runs deep on these issues. This allows them to review the technical merits of patent claims in fine detail.

Effectiveness in Technology Cases

IPR is not without its limitations. Here, the petitioner has the burden to show that the challenged patent is invalid based on the cited prior art. If the petition is not strong enough, the USPTO has discretion to deny institution of the IPR. Moreover, the IPR process is lengthy, and the final decision outcome is uncertain.

These constraints notwithstanding, IPR continues to be a useful weapon in the arsenal of businesses that are sued by patent trolls. It therefore offers a faster, more efficient, and less expensive alternative to test the validity of patents and avoid spending millions in litigation.

The Bitcoin community has a strong tradition of collaboration and open-source development, which can be leveraged to combat patent troll attacks. From this, a number of initiatives have sprung up to help legal Bitcoin developers and businesses in trouble, such as the Bitcoin Legal Defense Fund.

Community Initiatives and Industry Support

Collaborative Efforts in the Bitcoin Community

In January 2022, Jack Dorsey, Adam Back, and others announced the formation of the Bitcoin Legal Defense Fund. This fund provides monetary and legal assistance to Bitcoin Core contributors being attacked with baseless legal action. The fund seeks to safeguard Bitcoin’s open-source character and ensure that patent trolls cannot crush innovation from the shadows.

The Bitcoin Legal Defense Fund is at the forefront of this fight to protect cryptocurrency rights. At the same time, nonprofit organizations like COPA are actively advocating for patent non-aggression and addressing dangerous patents in the practice. These kinds of collaborative efforts that help coordinate the BTC ecosystem’s collective response are critical to defending Bitcoin from patent troll attacks.

Several resources and networks are available to assist Bitcoin developers and businesses facing patent troll lawsuits:

Resources and Networks Available

The Bitcoin community needs to further shore up its defenses against patent troll attacks. By utilizing these resources and networks, it can ensure that the technology remains open-source.

  • Legal Counsel: Engaging experienced patent attorneys is crucial to developing a strong defense strategy.
  • Prior Art Databases: Conducting thorough prior art searches can help identify earlier publications, patents, or products that disclose the same technology.
  • Industry Associations: Joining industry associations, such as COPA, can provide access to resources, expertise, and collaborative opportunities.
  • Online Forums and Communities: Participating in online forums and communities can facilitate the sharing of information and strategies for combating patent trolls.

The result of the Malikie Innovations’ lawsuit and others like it can spell disastrous implications for the Bitcoin industry. If patent trolls are successful in extracting royalties from miners, it could lead to:

Consequences for Bitcoin and Comparisons to Other Sectors

Potential Outcomes for the Bitcoin Industry

Even a hint of complacency in the face of patent trolls can halt innovation. This grave negligence will likely stymie the development of Bitcoin technology in these very important years to come. The Bitcoin community will need to go to great lengths to protect Bitcoin from these nefarious attacks. Protecting the future of this bipartisan technology is more important than ever.

  • Increased Mining Costs: Royalty payments would increase the cost of mining, potentially affecting the profitability of mining operations and the overall security of the Bitcoin network.
  • Centralization of Mining: Higher costs could drive smaller miners out of business, leading to a greater concentration of mining power in the hands of larger firms.
  • Innovation Chill: The threat of patent litigation could discourage investment in new mining technologies and slow down the pace of innovation.
  • Ecosystem-Wide Impact: Increased mining costs could ultimately affect the price of Bitcoin and the overall adoption of the cryptocurrency.

Successful strategy from other industries have faced down the challenges of patent trolls. Their experiences can serve as a cautionary tale to the Bitcoin community. The software industry has been particularly hard hit by these lawsuits brought by patent trolls. In reaction to these attacks, enterprises have developed a slew of tactics to protect themselves from these incursions.

Similar Challenges Faced by Other Industries

It’s not just the IT sector – the telecommunications industry has been a regular target for hefty patent litigation, especially in the mobile technology space. To avoid the risk of sudden patent infringement lawsuits, companies have established patent pools and cross-licensing agreements.

Together the experiences of these industries illustrate the need for proactive measures to combat the growing threat of patent trolls. You do your own extensive prior art searches. You sue to invalidate bad patents and team up with other patent-threatening companies to pool resources and efforts to strengthen your strategy.

Trolls are a serious threat to the Bitcoin mining industry and one that is increasing. The lawsuit by Malikie Innovations Ltd. against Core Scientific and Marathon Digital Holdings underscores the urgency of addressing this challenge. Patent trolls threaten innovation, impose huge costs on businesses, and prevent the creation of new technologies.

Final Thoughts on Defending Bitcoin Mining

Summary of Key Points

There are steps the Bitcoin community can take now to proactively defend the open-source spirit of the technology. In doing so, they’ll help to ensure its continued growth and innovation.

We believe that the defense of Bitcoin mining against these patent troll attacks needs to be a community-wide, collective effort. Developers, miners, businesses and users all have a role to play in ensuring a prosperous future for Bitcoin.

  • Challenge the Validity of Patents: Conduct thorough prior art searches and challenge the validity of patents asserted by patent trolls.
  • Collaborate and Share Resources: Work together to share information, strategies, and resources for defending against patent lawsuits.
  • Support Legal Defense Funds: Contribute to legal defense funds that provide financial and legal support to Bitcoin developers and businesses facing legal challenges.
  • Advocate for Patent Reform: Support legislative reforms that would make it more difficult for patent trolls to assert weak or invalid patents.

Here are some specific actions that individuals and organizations can take:

Call to Action for the Community

The Bitcoin community is more than capable of solving the patent troll challenge, if only they focus their energies collectively. Together, they can help ensure that Bitcoin remains decentralized, open-source and innovative. We all have a part to play in determining what Bitcoin becomes. Remember, every donation counts, even if it’s just a few bucks—it really adds up!

Here are some specific actions that individuals and organizations can take:

  • Developers: Contribute to open-source projects that develop and implement defensive measures against patent troll attacks.
  • Miners: Support legal defense funds and participate in industry associations that are working to combat patent trolls.
  • Businesses: Conduct thorough patent due diligence before launching new products or services and consider joining COPA.
  • Users: Educate themselves about the threat of patent trolls and support organizations that are working to defend Bitcoin.

By working together, the Bitcoin community can overcome the challenge of patent trolls and ensure that Bitcoin remains a decentralized, open-source, and innovative technology. The fight for Bitcoin's future is a shared responsibility, and every contribution, no matter how small, can make a difference.