The emerging patent landscape related to blockchain and smart home technology

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Thank you, Nick. This is Mark Kaufman. Thank you all for your attendance today. I wanted to begin by offering my, my best wishes to all of you and your families. I hope you're managing well during these very strange and difficult times. And again, thanks for your attention today. Uh, Nick, will I be seeing the results of the poll? There we go. Oh, perfect. That gives me an idea. Uh, okay, we have sort of a mixed group, so I will, uh, in advance apologize to those of you who are patent experts. I'm going to go over some basics. You'll just have to bear with me, but I hope that there will still be a lot of new information that will be interesting or of value to you also. Again, my name is Mark Kaufman. I'm a partner here at Rehmone based in Washington, D.C. And today, if I can get my slides to move, Here we go. Today we'll be talking about the, the patent landscape related to blockchain technology and smart home technology, and by patent landscape I mean essentially who is seeking patents, what they're seeking patents for, and where they're seeking patents with respect to these technologies. And to begin, as an overview, our search found about 28,000 patent families related directly to smart home technology. And we'll talk a little bit more about what I mean by directly. Around 16,000 patent families related directly, directly to blockchain technology. You'll see that in both cases, blockchain and smart home. There have been recent, very large increases in activity. And also in both landscapes, you'll see that as far as patent numbers go, China is an apparent leader in innovation. And we'll talk about that in a bit of detail. So first, let's all get on the same page with respect to patents, what they are. And how they can help facilitate innovation. And many of you know that a patent is a limited right in time to exclude others from making, using, selling, or importing an innovation. The limited right in time means that the patent expires, and at some point, the subject matter of the patent upon expiration, which is roughly 20 years from filing, give or take, the patent expires and the subject matter of that patent is available to the public. Thus, and the patent is granted in exchange for teaching the world how to make and use the innovation so that when the patent does expire, the full invention will become part of the public domain. I want to give you an example of how patents can facilitate innovation using Bitcoin and a little bit of our imagination. As many of you know, Bitcoin is a cryptocurrency based upon the blockchain, and in fact, it was the first introduction to us of blockchain technology. And blockchain technology is a shared database that uses a combination of known elements to achieve— to solve the double-spend problem, to keep track on a ledger spending of cryptocurrencies, which are just digital tokens. And amongst these elements are linked timestamping, a thing called Merkle trees, named after Mr. Merkle. We'll talk about Ralph Merkle. And Merkle trees— well, and Byzantine fault tolerance. Merkle trees are essentially a tree-like structure of cryptographic elements that allow verification of the data entered in the blockchain database in a way that makes it immutable yet inspectable by all. So they're critical to the invention of blockchain. You don't really need to understand it for our purposes today any more than that. Again, having trouble advancing slides. There we go. So Ralph Merkle had a patent on, uh, on Merkle trees, and, uh, that patent had expired by the time, uh, Satoshi Nakamoto whoever he, she, or they were introduced blockchain to us, and thus they were allowed to use that. That expired in 1999, and the patent served to teach the world how to make and use these cryptographic tree structures. So now is where we use our imagination. A little bit. Let's pretend we are in an alternate universe where two things are different. Satoshi Nakamoto, the inventor of blockchain, is a capitalist, and patents don't ever expire. What would happen in this universe? First, our capitalist Satoshi seek investors, of course, who would insist that there be barriers to entry prior to making the investment. So Satoshi would obtain patent protection for Bitcoin to secure the investment. Uh, possibly Satoshi and his investors would be very greedy and not allow others to freely use Bitcoin once they obtained patent protection. Second, since recall in our alternative universe that patents don't expire Merkle would have an enforceable patent, and Stanford University, also being a capitalist entity, would likely insist on a royalty for all uses of Merkle trees in Bitcoin, including that use by Satoshi. Clearly, this wouldn't be ideal, uh, for network effect. First, Satoshi would be limiting use, and secondarily, Merkle would be limiting use. Fortunately, we're in a universe where patents can foster, not necessarily hinder, innovation. So let's come back to reality. Satoshi was not a capitalist. Satoshi dedicated the work of blockchain to the public by publishing a paper and related software code. And patent term is limited. Merkel was rewarded for his innovation. Merkle disclosed the innovation, Merkle trees, uh, fully, and they were able to be used by Satoshi as building blocks for creating Bitcoin. So I think you can see that, that patents, while providing a limited right to exclude what some people often call monopoly, actually can facilitate innovation and in fact do facilitate innovation all the time. When used properly. Okay, with that background, uh, we will turn to patent landscape analysis. And there are a few assumptions we make with patent landscape analysis that makes it valuable. We assume that patents are an indicator of innovation. Make a pretty safe assumption. We can We can debate a bit how much they correlate to innovation, but there's some correlation between patents and innovation. Patents also ordinarily precede market activity. Often the first thing we learn about a new iPhone coming out or some other new innovation is what we learn through patents. Patents, patents can be used to identify leaders and followers, and we'll talk a little bit more about that. Later. And certainly patents identify risk and barriers to entry that the parties wishing to participate in a particular technology space such as these two should be aware of. So, so a little word about our search strategy. The, the results you're going to see today are the result of a strategic combination of keyword searches in the Questel Orbit database of worldwide patent publications. As I mentioned earlier, only patents directly related to the two technologies, smart home and blockchain, are going to be shown. For example, as we noted earlier, Blockchain relies a lot on general cryptography, mathematical cryptography. It also relies on computer networking, but patents directed generally to cryptography and computer networking are not included in the search. And the same thing for some of the basic building blocks of smart home technology. The patents you'll see are directly related to these two technologies. The— another thing to note is that the aggregate data is presented as what are called patent families, and a family is a group of patents. It could be one patent, could be more than one patent that are directed to a single innovation. For example, you may have a patent on the same innovation in China, U.S., and Germany. That would be 3 patents, one patent family. I mentioned that China shows up as a leader, and before we, we show you the data, I wanted to discuss this a bit. Many of you may have heard of the Belt and Road Initiative, which was an initiative by the Chinese government to build infrastructure encourage investment and generally plan to extend China's influence around the world. And part of this was the National Patent Development Strategy, also issued by the Chinese government. What China did is they took a hard look at other IP systems and adapted theirs to be more investment and innovation friendly, or at least they attempted to. They were particularly enamored, I think, with the IP structure of Germany and took many elements from the German structure, including specialized courts and injunctions as a matter of right in patent infringement. In fact, the German Patent Office has trained Chinese patent examiners for many years now. And as a result, China has now become the country of origin of more patent filings than any other country in the world. Until this year, that had been the U.S. for as long as I can remember, maybe for as long as patents have existed. At least one factor of this dominance by China in patents generally, and as you will see in smart home and blockchain patents, are direct financial incentives provided by the Chinese government to Chinese companies for filing patents in China. This has resulted in— this and the other activities of the Chinese government resulted in a huge number of filings, patent filings in recent years, especially in emerging technologies like smart home and blockchain. Uh, anecdotal evidence tells us that many of these patent filings might not be of the quality and detail that you might find filed in other patent offices. But it appears that some parties have even gamed the system, and this has resulted in some recent adjustments by the Chinese government to the incentives. For example, they've set a maximum, and they are now paying incentives only for granted patents, not merely for filed patent applications. As a result, notwithstanding the huge increase in filings we've seen coming out of China going forward, we may see less filings or at least a smaller growth curve of those filings. So the reason I'm telling you all this before we get into the patent data is that the sheer number of patents originating in China does indicate that a great deal of innovation is going on in China. However, one could argue that the sheer volume doesn't tell the entire story. So today we'll look at, at what's called citation analysis, and I'll describe that a little bit later, which can be seen as an indicator of quality of patents in order to, to put a quality metric on these patents and maybe lend some clarity to that issue. So citation analysis, as I mentioned, it's an indicator of patent quality. What is it? So when filing a patent application in the U.S. and in some other countries, the applicant, the patent applicant, is required to provide a list of the most relevant known publications, patents, and non-patent publications that are most relevant to their invention. Now, it's important to note that the patent applicant is not required to do a search, certainly not an exhaustive search, but just required to list the most relevant known publications. And these publications are cited, and they're called a citation. So since the patent applicant, which includes the inventor, the attorney preparing the application, and others involved in drafting the patent, have to list the most relevant publications, we can assume that a lot of community expertise goes into providing these citations, citing the most relevant prior art. It follows that patents that are cited, cited many times by others, by other patent applicants, are logically deemed by many in the community to be very relevant and valuable. So while this mechanism, patent citation analysis, for determining patent quality is far from perfect, when we have a large enough statistical sample of patents and related citations, and in the absence of any other hard metric of patent quality, it can be very meaningful and informative. So we're going to also discuss a little bit of patent citation analysis at a very high level, just to inject a metric of patent quality, not merely quantity, into our discussion. Okay. I told you we were going to talk about patent landscapes today, so let's jump into that for the patent landscape related to smart home technology. Looking at what we call the investment trend, which are patent family filings by the first application year, first filing year. As opposed to first year of publication. And we use first filing year because that is the closest date and time that we have a record of from the patent filing, uh, closest date and time to the actual innovation R&D investment. Uh, looking at first application years, we see clearly a steep growth curve beginning around 2010, uh, related to smart home technology. And continuing through 2018. Now, the apparent drop-off in 2019 and 2020 is just that, it's apparent. Patent applications publish roughly 18 months after filing, with some exceptions. So we are not seeing publication yet of patent applications actually filed, of all the patent applications filed in 2019. Or 2020. And based upon what we have seen so far, we have every reason to believe that this increasing trend will continue in 2019 and at least through 2020. And this is not surprising in view of the large investment in R&D that we've been seeing in the— and media coverage for that matter— that we've been seeing related to smart home technology. Excuse me. So let's look at the who. Who are these parties that are filing for patent applications? Here's the top 20. You can see that as far as number of patent publication— patent families, published patent families, Samsung is way out front. Note that the light bluish-greenish, depending on the color saturation of your monitor, are pending applications. The dark blue, sort of purple, are actual patents, and the red are abandoned or expired documents. You'll note that in a relative sense, there aren't that many granted patents, mostly a lot of published applications. This isn't surprising, of course, looking at the filing trend. It's a very new emerging technology. Most of the filings, the patent filings, have been accomplished in the last 4 or 5 years. And patents typically take 2— as many of you are aware, patents typically take 2 to 4 years from filing to grant as a patent. So it's not surprising that most of these have not just not made their way through the pipeline yet. And there's not that many granted patents. However, I think if this trend continues, the filing trend and trend of granting patents, we'll see tens of thousands of patents related to smart home technologies in just a few years. Another thing to note, as we hinted at earlier, you'll see a lot of names of Chinese companies in here dominating by companies in China, at least as far as quantity of patent filings go. Some U.S. companies, Google for example, show up there, but very few outside of China in the top 20. So let's look at the what. What, what technologies are being protected. Again, we're looking at the top 20 patent owners along the left, and along the bottom, along the x-axis, we have plotted technical concepts that are prominent in the patents. These technical concepts were obtained through a combination of automated semantic analysis using the Questel Orbit tool, some normalization, some manual normalization and reiteration. And it turns out that these topics that you see, these concepts, technical concepts, are the most prevalent that we see in the group of patents. Uh, I think most of them are pretty self-explanatory. Uh, we'll get to blockchain technology, we'll talk about them a bit. What we see here though is that amongst the top 20, they are seeking patent protection for a wide variety of concepts. And, uh, in many cases for each and every concept of the— that we found as a primary concept. Particularly if you look at Samsung, while they're focused on intelligent services, they have patents that are directed to each and every one of the other top concepts. Where are the patents being filed? If we look, this is not a map of country of origin of the patents, but a map of actual filings, which tells us where the patent owners think are their most valuable markets and/or the markets of their competitors. These are places that they are seeking protection, and the darker the blue, the more patents that are being filed. Interestingly, of the 28,000, roughly 28,000 patent families that we found, that our search found related to smart home technology, over 18,000 of those patent families were filed in China. I can tell you that the large majority of those were filed by Chinese companies in their home country. Some were filed by US companies and companies from around the world, but most of them by Chinese companies. And of course, other markets, it's sort of the usual suspects of large markets, the US, Germany, France, UK, Brazil, Australia, and a few others. India, you'll see, are places where people are filing patents related to smart home technology. And these are known large markets and strong patent systems where applicants often file. So we mentioned quality versus quantity and patent citation analysis. Here's why I gave you that description. Let's try to put a little bit of quality metrics on this. When we look at citations, again, Samsung has the is cited the most by the entirety of the community of patent owners relating to smart home technology. By far, the entirety of that community is, is saying to us, we think Samsung has a relevant portfolio to what we're doing. And, uh, the rest of the chart kind of falls down very much, uh, like the top 20 patent owners in general. Not terribly surprising. What is interesting is that if we look at citations between the top patent owners in the space of each other, we see a very different story. So this chart shows us graphically citations between the top players. Now, this excludes a lot of the players, you know, hundreds if not thousands of the players that are not the top players. And interestingly, when we look at the top players, nobody is citing Samsung, which would be— well, let me back up a bit. The arrow goes from the citing company to the cited company. So, for example, here we see that Samsung cites to Google a lot, shown by the thickness of the gray arrow. We see a lot of back and forth citation between the big players. Interestingly, nobody is citing to Samsung's portfolio with any great level. Now, there may be some citations because we put a threshold filter on this chart, Otherwise, you'd have thousands and thousands of arrows and we wouldn't even be that— make any sense of it. But very few citations from others to Samsung's portfolio, meaning that these top players don't seem to think that Samsung's portfolio is very relevant to what they're doing. On the other hand, Samsung seems to think Google's patents are very relevant to what they're doing. and then we see a whole bunch of cross-citations in there. And you can see there's some, you know, leaders like Google, where a lot of people are citing to them, and there are some followers, uh, I guess like Samsung, based upon this citation analysis. Now again, citation analysis must be taken with somewhat of a grain of salt, but as this portfolio— as this landscape matures, this will become more and more meaningful. But again, lots of players signing to Samsung, but the big players not signing to Samsung. That is what we have for smart home technology. Let's now take a look at blockchain technology and the patent landscape related there too. Looking at the investment trend, again, looks a lot like the investment trend, the filing trend that we saw for smart home technology. However, this one's even more compressed. You know, this one, uh, we really don't see any significant filings until 2013, and then we see this huge sort of exponential rise. In effect, and keep in mind 2019 and 2020 not complete data yet because of the publication lag, but just a, uh, simple linear extrapolation of the 2019 numbers gets us, you know, well over 20,000 patent families first filed in 2019 related to blockchain technology. Huge increase. And again, we can expect that to continue based upon the investment and innovation that's going on in this space. Who are the key players? This is, uh, and again, the, the key is at the bottom, uh, pending are in the greenish blue, granted are in the darker blue, uh, but before we, we get to that, what, what's really interesting here is, to me, is the, the diversity of the players here. We have large technology companies: IBM, Microsoft. We have large financial services companies: MasterCard, Bank of America. We have communications companies. We have banks and, and a lot of smaller technology companies and fintech companies. Companies. These are companies that are not used to competing with one another. It'll be very interesting to see whether or not they use patents to help stake out their place in the marketplace. Uh, very interesting seeing that, and I can't recall ever a new technology that had this diversity of players. Again, and this is even more stark here than it was in smart home technology, Very few granted patents at this point, but that again is to be expected because the filings are all within the last couple years. They just have not had time to make their way through the process of maturing into a granted patent. A lot of pending applications. Again, I think that it's highly likely we'll see tens of thousands of granted patents over the coming years related directly to blockchain technology. Again, we distilled some of the primary concepts related to blockchain technology based upon some semantic— automated semantic analysis and then some manual iteration of that. A couple of these I'll take a moment to describe very briefly. Because I think a lot of you, several of you indicated that you are not experts in blockchain, and not many of us are. Uh, in particular, smart contracts. Smart contract is executable computer code that automatically runs on a blockchain in a, in an immutable manner. You know, think of a, of a vending machine. You put in a dollar and you get out a soda. Every time, no matter who you are, the contract is you put in a dollar and you get out a silver. Now, the name has been called very misleading because they are not smart and they're not really contracts, but they execute known code in a known manner, uh, in an automated manner. Consensus, uh, relates to the mechanism by which the, the participants in a blockchain decide which transactions, which data should be recorded on the blockchain, uh, in an immutable manner so it can't be changed. It's, it's sort of a voting mechanism, a very simple form, just what it sounds like. But there's a lot of cryptography and various other technologies involved in coming to a consensus that is not likely to be gained by the players, by the participants. And, uh, another blockchain node, if that's worthy of description. Blockchain node is, is, uh, client software that is run by one of the participants of the blockchain. Sorry, not client software, peer-to-peer software, uh, run by participants of the blockchain. That's a key element of blockchain is that there's no centralized server. It's a bunch of peer-to-peer nodes. So looking at these players, this is an even more interesting distribution of, of technologies. With few exceptions, each of the top 20 players is significantly seeking patent protection across each and every one of these top technical concepts. So people are not specializing in blockchain technology. They are patenting a broad scope of technologies. Looking at where they're seeking patent protection, where the perceived markets are, again, China, dark blue, over 8,000 of the patent families of the— I think it was 16,000 patent families that we found, I can't recall now. But more than half are filed in China, and again, mostly by Chinese companies. You know, the U.S. is second, and then a lot of the other major markets, European markets, Australia, Russia, Brazil, India, are also areas where protection is being sought. Again, let's get back to patent quality through citation analysis. Again, we see something very interesting. Uh, Tencent and Alibaba, uh, are the, the leading cited patent families. So when we look at the entire community of patent owners, they seem to think that the patent applications in, in those two portfolios are very valuable. And a couple others, uh, IBM, Bismuth, also, and then it kind of falls off after that a bit. But again, when we look at the citations between the top patent owners, it's very different in a way. So lots of cross-citation between IBM and Alibaba, MasterCard, and some others on the left, and then Tencent and Vismodeline sitting out there at the top right all alone. Of the top owners, very few citations to or from either of them. So the, the, you know, what this means is that the other large players don't seem to see a lot of relevance in those portfolios. And similarly, uh, those portfolios don't see a lot of relevance in, uh, in, uh, the other portfolios, which is sort of interesting because if we look if we go back to the concepts, while Bismodalene is focused on payments because they're a payment company, these companies are, are patenting a wide variety of concepts. And it seems odd that they wouldn't be citing to the other portfolios. Could be a statistical issue in that maybe they have not filed in the US or another country often enough that would require them to, uh, to make citations. Could be maybe many of their patents— and I know this is the case with Tencent— many of their patent publications have not yet been translated in, or at least not published in, uh, English. So many players who are not Chinese speaking would not even know about them, not understand the technology. So it's interesting. It may tell us something. It may be an anomaly based upon statistics or lack of large enough numbers. But again, as the patent landscape matures, this type of, of statistical analysis, citation analysis, will help us to really understand the quality of patent portfolios as opposed to just the quantity. So, uh, that, that ends my presentation. And, uh, I have a couple of questions I see that I will address now. Uh, one question— this is one I get all the time. There must be somebody in the audience who, uh, is a blockchain project. Uh, And it's a long question, so I will paraphrase a bit, but many blockchain projects, many blockchain implementations are based upon open source software. Bitcoin, as I mentioned, is, is, you know, public domain, and the software, the node software, is released under an open source license. Ethereum and most other standards are released under open source licenses to gain the network effect. The question is, how can— how do patents relate to that? And the answer is that most blockchain innovators are surprised to see how aggressively others are filing patents related to blockchain technology, and there's a risk that they weren't aware of. The fact that you're using open source software, as many of you know, only prevents the developers of that software from asserting rights against you for use of that same software, the same software base. It does not prevent third-party patent owners from asserting their patents against users of open source software. So there's, there's a risk there that many people are not aware of. In fact, you may have noticed one of the leaders in the number of blockchain bans is a company called nChain Holdings, and their CEO and founder is a guy named Craig Wright. Who has claimed to be the anonymous Satoshi Nakamoto that created Bitcoin. And there's a lot of reason that a lot of people doubt that, but he's really— he has a couple hundred patents, patent applications, and he has said on many occasions that he intends to assert those patents to, in his words, you know, direct blockchain in the direction that he his desired direction. So I think, uh, we will, we will see, uh, uh, some patent activity there. And that kind of segues into the next question, uh, have there been a lot of patent assertions related to blockchain technology? And the answer is no. To my knowledge, there have not been any patent assertions relating to blockchain technology. Doesn't mean some don't exist, but none that have come to light in the public yet, or at least to my awareness. But keep in mind, there, as of now, there are very few patents, and there's also just beginning to be a lot of commercial activity related to blockchain. So it's not surprising that we haven't seen patent activity, but I think we will see patent assertion activity by both competitors, those, those varied competitors trying to to stake out their space and by patent assertion entities. Those are all the questions I have. I don't see any others coming through. Feel free to type some in as I thank you all for attending today, and you have my contact information. Please feel free to contact me if you have any questions or for any reason want to discuss this further.

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Thank you. Bye-bye.