An Untraceable Currency? Bitcoin Privacy Concerns
By Tyler G. Newby and Ana Razmazma
Bitcoin is often portrayed as an untraceable method of payment that facilitates illicit activities by enabling criminals to make and receive payments without being tracked. This depiction implies that users transacting in bitcoin can do so completely anonymously — that their identities will not be exposed. However, that is not necessarily the case. While bitcoin offers increased privacy compared to traditional payment methods involving a third-party intermediary such as a credit card provider, it is still not as anonymous as a cash transaction. In fact, there are many ways a person’s identity could potentially be exposed in bitcoin transactions.
An Overview of the Blockchain
Bitcoin is not anonymous. As we explain below, it is pseudonymous — an important distinction. It is also a decentralized, peer-to-peer digital currency, having no third-party intermediary (for instance, a credit card issuer, merchant processor or bank) that is involved to verify a transaction between a buyer and seller. Since there is no third party, there must be another way to verify a transaction between two users and avoid the “double-spending” problem (i.e., a way of ensuring that a user does not spend bitcoin they have previously transferred).
This is where the blockchain, the truly revolutionary aspect of cryptocurrencies such as bitcoin, comes into play. A blockchain is a public, distributed ledger, in which every transaction is recorded. Unlike traditional payment systems in which the ledger is maintained by a single third party, a blockchain ledger is distributed across a group of computers (thousands of them), each with its own copy of the blockchain transactions. Each block of transactions in a blockchain is confirmed by users in the peer-to-peer network, called “miners,” who compete to solve a complex computational problem. The first successful miner to validate the transaction broadcasts it to the network, which then checks the results. Once checked, the new transactions are added as a new block to the blockchain. In the case of bitcoin, the miner who first successfully verified this transaction gets rewarded by the network with newly created bitcoins. As of July 2016, the reward was reduced from 25 to 12.5 bitcoins, and it is expected that the reward will be further reduced to 6.25 bitcoins in 2021.
Anonymity vs. Pseudonymity
Because the bitcoin blockchain is a permanent public record of all transactions accessible by anyone at any time, it is not anonymous. Instead, the transactions in the blockchain are encrypted with public key cryptography that masks the real identities of the individuals behind the transactions. This makes bitcoin pseudonymous. In each bitcoin transaction, each user is assigned two digital keys: (1) a public key or address — the address is actually a hash derived from the public key, but for purposes of this article, we use these terms interchangeably — which everyone can see and is published on the bitcoin blockchain, and (2) a private key, which is only known to the user and is the user’s “signature.” The private key is used by others to verify that the transaction was in fact signed by that user. The bitcoin blockchain will only show that a transaction has taken place between two public keys (an identifier of 34 random alphanumeric characters), indicating the time and amount of the transaction.
Tracing Bitcoins Back to Individuals
Encryption might create the impression that these transactions are viewable but unmatchable to specific individuals. However, bitcoin is not as untraceable as encryption may imply. Tying an encrypted transaction to an actual individual is possible — it is not a remote risk. There are several ways this could occur.
Users who rely on a bitcoin trading exchange (such as Bitfinex, Binance or Kraken) to exchange currency for bitcoin have to divulge their personal information to that exchange to create an account. The information collected by the exchange varies, but normally includes, at a minimum, a user’s first and last name, and, possibly, a phone number. The exchange may also collect a user’s IP address. If these exchanges were subject to a data security breach, a user’s personal information could be exposed. In addition, some centralized exchanges offer to manage users’ bitcoin funds and users’ private keys on their behalf.
There are also online wallet service providers that manage users’ wallets on their behalf. A wallet is a software program that stores a collection of a user’s public and private key pairs. The storage of private keys makes these centralized exchanges, and online wallet service providers, prime targets for criminals because, as discussed above, anyone with access to a user’s private key will be able to create a valid bitcoin transaction. A hacker who accesses a user’s private key can send all of that user’s bitcoins to him or herself, or to any intermediary of their choosing. There have been several high-profile breaches of exchanges in the past, including the February 2014 hack of Mt. Gox, once the world’s largest bitcoin exchange. The Mt. Gox attack resulted in a loss of 850,000 bitcoins then valued at $450 million. Thus, hackers who gain control over a user’s exchange or online wallet account not only gain access to a user’s personal information and transaction history but also to a user’s bitcoin funds.
Exchanges are also increasingly subject to regulatory requirements that could lead to government entities accessing a user’s personal information. Bitcoin valuation plunged recently when the U.S. Securities and Exchange Commission released a statement warning that online platforms trading digital assets that meet the definition of “securities” would be considered exchanges under the securities laws and need to register with the SEC or show exemption from registration. Although the SEC has not taken any action to date, this means that cryptocurrency exchanges could be subject to the stringent securities regulations applicable to national securities exchanges. Similarly, South Korea announced greater regulation of bitcoin earlier this year. Under the new South Korean regulation, users will only be able to deposit into their exchange wallets if the name used on the exchange matches the name on the user’s bank account. Exchanges are also already subject to certain legal requirements, such as responding to subpoenas, which could require them to share personal information with governmental authorities if required by law. For instance, the U.S.-based exchange Coinbase was recently ordered by a court to turn over to the Internal Revenue Service information regarding approximately 14,000 of its customers. A brief review of several exchanges’ online privacy policies indicates that exchanges will share a user’s information as needed to comply with their legal and regulatory obligations.
It is also possible to identify users simply by analyzing transactions on the blockchain. Companies like Elliptic and Chainanalysis have built businesses based on blockchain forensics. These companies use analytics on the bitcoin blockchain to link bitcoin addresses to web entities and help their customers assess the risk of illegal activities. Their customers include exchanges but also government entities. In fact, it became public last year that the IRS is using Chainanalysis’s software to track potential tax evaders.
Several studies have also shown that it is possible to use network analysis and other methods to observe and potentially tie back blockchain transactions to certain websites and individuals. Specifically, one 2013 study by researchers at the University of California, San Diego and George Mason University showed that it was possible to tag bitcoin addresses belonging to the same user by using clustering analysis of bitcoin addresses. A small number of private transactions with various services were used to identify major institutions (such as exchanges or large websites). From there, the researchers were able to get information on the structure of the bitcoin network, where transaction funds are going and which organizations are party to it. Another study by researchers at ETH Zurich and NEC Laboratories Europe that looked at bitcoin transactions in a small university sample found that using behavior-based clustering techniques could unveil in a typical university environment the profiles of up to 40 percent of the users.
How Bitcoin Users Can Enhance Their Privacy
Despite these privacy issues, bitcoin users need not despair — there are ways to enhance one’s privacy on the bitcoin blockchain. First, a bitcoin user can use a new bitcoin address for each transaction and will thus receive a new public key for each transaction, making it more difficult to trace one specific individual’s transactions to the same address. This is actually the approach that was envisioned by Satoshi Nakamoto, bitcoin’s pseudonymous (and still unknown) founder, who recommended in the paper that first introduced bitcoin using “a new key pair … for each transaction to keep them from being linked to a common owner.” Second, a bitcoin user can take some additional precautions to minimize the risk of traceability on third-party exchanges. The user could use the anonymous Tor browser to access the exchange and create an account without including any real personal information; the user’s IP address and personal information would not be exposed. Third, the user could avoid storing bitcoins in online third-party wallets, and only use offline desktop wallets; that reduces the exposure to exchange hacks. Fourth, bitcoin mixing algorithms, such as CoinJoin, link users and allow them to pay together such that the bitcoins are mixed. This makes it harder to identify a particular user because only a group of transactions is published on the blockchain (although studies and research have shown that even CoinJoin presents weaknesses and could allow linking back to a particular individual).
The Monero Alternative
These privacy issues have not gone unnoticed and alternative cryptocurrencies with an increased privacy focus have emerged. Monero is the most prominent of these alternatives. Unlike the bitcoin blockchain, which, as we have noted, is based on a two-key (public and private key) cryptography, the Monero blockchain is based on unique one-time keys and ring signatures. With ring signature technology, the actual signer is pooled together with a group of possible signers, forming a “ring.” This creates a distinctive signature that can authorize a transaction. When an individual initiates a Monero transaction, the verifier is able to establish that a transaction came from a group but is not able to determine the identity of the initiator whose private key was used to produce the signature. As a result, the Monero blockchain does not identify a specific sender, and the receivers’ addresses and the transaction amounts are hidden. Monero has become the cryptocurrency of choice for privacy-focused users.
Although bitcoin is a decentralized and unregulated payment method, users should understand that this does not mean that their bitcoin transactions are anonymous and hidden from scrutiny. The public nature of the blockchain combined with the increasing threat of government regulation can lead to the identification of users engaged in transacting the currency.
Federal Circuit Rehearing Denial Gives Clues to Post-AIA On-Sale Bar
By Daniel R. Brownstone and Christopher P. King
U.S. patent law has long included an “on-sale bar,” which limits the time for filing a patent application to one year from the date the invention was sold or offered for sale. Perhaps the strongest public policy justification for the on-sale bar is to incentivize inventors to promptly apply for their patents.
The 2011 Leahy-Smith America Invents Act overhauled U.S. patent law and, among other changes, altered the wording of the provision that includes the on-sale bar.
Before the AIA, 35 U.S.C. § 102(b) prevented the grant of a patent if “the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States” (emphasis added).
The AIA version of the on-sale bar, now codified at § 102(a)(1), bars a patent if “the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention” (emphasis added).
The change in language — in particular, the addition of the phrase “or otherwise available to the public” — left commentators wondering whether under the AIA, a so-called “secret sale” — a sale that takes place unbeknownst to the public and subject to confidentiality obligations — avoids triggering the on-sale bar.
The Helsinn Case
The U.S. Court of Appeals for the Federal Circuit found an opportunity in 2017 to interpret the on-sale bar under the AIA. In Helsinn Healthcare v. Teva Pharmaceuticals USA, the court addressed the question of whether private and non-public offers for sale are considered the same post-AIA as pre-AIA. More recently, the Federal Circuit declined to review the issues en banc, with Judge Kathleen O’Malley elaborating in a non-precedential concurrence on the reasoning for and implications of the 2017 Helsinn panel decision.
Helsinn owned four patents related to reducing the side effects of chemotherapy-induced nausea and vomiting. Three of the patents were subject to pre-AIA law, and the fourth was evaluated under the AIA. More than a year before applying for the patents, Helsinn and another company, MGI Pharma, agreed that MGI would pay Helsinn an initial sum, together with future royalties on distribution of the products in the United States. The agreement was publicly disclosed by MGI in a public filing with the SEC, although the filing did not include the price terms or specific dosage formulations.
Teva challenged the validity of Helsinn’s patents. The district court found that the contract for sale constituted a sale under pre-AIA § 102(b), but not under the AIA’s § 102(a)(1). The court held that the AIA had changed the meaning of the on-sale bar to require that the sale or offer for sale be public, rather than secret, and that in this case, since the dosage amount was not disclosed, the sale was not public.
At the Federal Circuit, Helsinn and the United States, with the support of several amici, argued that by adding “otherwise available to the public” to § 102, Congress intended to exclude secret sales from the prior art. While acknowledging the argument, the court “decline[d] the invitation by the parties to decide this case more broadly than necessary.” Instead, the court pointed out that the existence of the agreement was not secret, having been disclosed by MGI in its public filing, and considered only the narrower question of whether the exclusion of the price and dosage amounts from the public filing saved the invention from being (publicly) “on sale.” The court answered that question in the negative, concluding that, “after the AIA, if the existence of the sale is public, the details of the invention need not be publicly disclosed in the terms of sale.” So, while Helsinn provides some insight on the Federal Circuit’s approach to the on-sale bar under the AIA, many related questions — as the court acknowledged — remain to be addressed another day.
Helsinn petitioned the Federal Circuit for rehearing, which the court denied on January 16, 2018. Judge O’Malley, one of three judges on the original panel, wrote a detailed concurrence to the denial, offering a glimpse into her approach.
Several of Judge O’Malley’s points reiterated the Helsinn panel’s emphasis on the flexible nature of the (pre-AIA) “offer for sale” test — which focuses on whether the parties’ activities would be understood as commercial offers for sale in the commercial community — and the non-determinativeness of the individual factors. For example, she rejected the suggestion that all sales disclosed to the public will necessarily trigger the on-sale bar, regardless of the exact nature of the disclosure. Rather, she determined, the confidentiality of a transaction is but one factor in determining whether there has been an offer for sale. Judge O’Malley similarly rejected the assertion that all supply-side arrangements for future sales will invalidate a later-filed patent, theorizing that — although admittedly difficult — it would not be impossible to structure a supply-side arrangement that does not trigger the on-sale bar.
As to whether the AIA narrowed the scope of the on-sale bar, the concurrence relied heavily on textual canons of statutory construction, such as using grammar-based analysis to reject the notion that the language “otherwise available to the public” implies that all activities triggering the on-sale bar must be fully available to “the public.” Judge O’Malley also concluded that the legislative history does not suggest a desire to alter the on-sale bar, characterizing Helsinn’s citations to senatorial statements as “at best equivocal.”
Finally, Judge O’Malley pointed out that public policy considerations behind the on-sale bar remain unchanged, and that in any event, the Supreme Court’s two-step Pfaff test is rigid and affords little room for the Federal Circuit to apply its own policy considerations.
Although there remain open questions about the on-sale bar’s application as applied to secret sales, it may be instructive to summarize the pertinent law, as set forth by the Supreme Court in Pfaff and elaborated upon in Helsinn and The Medicines Company v. Hospira. At the outset, as required by Pfaff, for the on-sale bar to apply to an offer for sale of a product embodying a claimed invention, (1) “the product must be the subject of a commercial offer for sale,” and (2) “the invention must be ready for patenting.”
Commercial Character and Coverage of Agreement
Regarding the first Pfaff prong, The Medicine Company decision held that for the on-sale bar to apply, the activity constituting the alleged offer for sale must be found to have the appropriate commercial character when “analyzed under the law of contracts as generally understood.” Relevant factors include (1) whether communications between the parties rise to the level of a commercial offer for sale under the UCC, (2) whether there is passage of title, (3) whether the transaction is confidential and (4) whether there is commercial marketing of the invention, although — as emphasized by Judge O’Malley in her concurrence — none of these factors is itself dispositive.
In addition, Helsinn clarified that “the offer or contract for sale must unambiguously place the invention on sale, as defined by the patent’s claims” (emphasis in original). Thus, it must be clear from the agreement that the claims themselves are covered.
Readiness for Patenting
Regarding the second prong of Pfaff, the Helsinn panel stated that “[u]nder Pfaff, there are at least two ways in which an invention can be shown to be ready for patenting: ‘by proof of reduction to practice before the critical date; or by proof that prior to the critical date the inventor had prepared drawings or other descriptions of the invention that were sufficiently specific to enable a person skilled in the art to practice the invention.’” Reduction to practice is established when “the inventor (1) constructed an embodiment … that met all the limitations and (2) determined that the invention would work for its intended purpose.” One need only show that an invention would work for its intended purpose “beyond a probability” of failure, not “beyond a possibility” of failure. In particular, official government approval (e.g., FDA approval) is not required, and later, more refined tests do not imply that the “probability” threshold was not already met earlier. Evidence that the “probability” threshold was met can include statistical studies, statements of the inventors, meeting minutes of the engineering team, press releases and inventor declarations.
Given the emphasis of the Federal Circuit — and Judge O’Malley — on the non-determinative nature of any given one of the factors pertinent to the applicability of the on-sale bar, uncertainty remains, both as to private and to public agreements. Helsinn has filed a request for a writ of certiorari to clear up some of this uncertainty by addressing the question: “Whether, under the Leahy-Smith America Invents Act, an inventor’s sale of an invention to a third party that is obligated to keep the invention confidential qualifies as prior art for purposes of determining the patentability of the invention.” Unless and until the Supreme Court takes up and resolves this question, however, inventors should take a conservative approach and presume that even a non-public sale or offer for sale will serve as the beginning of the one-year grace period within which to file an application.
Three Key Changes the Music Modernization Act May Bring
By William Brenc and Jennifer Stanley
Despite the turmoil and gridlock in Washington, D.C., the Senate and House of Representatives appear poised to pass sweeping legislation that would overhaul the music copyright licensing infrastructure. On December 21, 2017, a bipartisan group of 52 members of Congress introduced the Music Modernization Act of 2017. Only a month later, nine Senators, both Republicans and Democrats, introduced nearly identical legislation, the Music Modernization Act of 2018.
The bills would fundamentally alter § 115 of the Copyright Act, which regulates compulsory licenses in nondramatic musical works, or songs outside of a movie, television show or play. If passed, the new law would make three key changes:
First, the Act would create a new agency to handle licensing and royalties. That agency would be led by a board composed of a currently undefined number of representatives from various sectors, including publishers and songwriters. It would have the power to issue blanket mechanical licenses to digital services — like a streaming service. The new agency should provide certainty and consistency for artists and streaming services alike. The Music Modernization Act tasks this agency with identifying rights holders and, from there, collecting and paying royalties. For songwriters, this means getting paid with fewer complications. Streaming services would no longer have to identify rights holders and — perhaps more importantly — would not be exposed to statutory damages for failing to identify the correct rights holder. The bill would require that digital services collectively pay for the agency’s operating costs.
Second, songwriters would receive a mechanical royalty every time someone makes a copy of their track. And, more notably, this rate would be a negotiated one, rather than fixed (as rates currently are).
Finally, the bill would alter the rate court system. Rate courts hear disputes over royalties paid by digital services. Currently, one judge hears all rate court cases for ASCAP and another decides all for BMI, the largest music publishing performance rights groups. The Music Modernization Act would have a judge from the Southern District of New York randomly assigned to each individual case. Relatedly, the act would repeal Copyright Act § 114(i) to allow rate courts to consider sound recording royalty rates. This, in theory, would allow judges to more accurately gauge the market for musical compositions.
As it stands, there is support for the Music Modernization Act from artists, streaming services and labels. However, each interested party is still jockeying and negotiating for more favorable terms. Songwriters associations and the National Music Publishers’ Association have agreed on proposed changes, including increasing the representation of songwriters on the new agency’s board.
The bill is likely to undergo additional changes before it comes to a vote, but, as is, the restructuring proposed by the legislation aims to provide clarity and stability for all parties involved.
Will the ITC Become a New Forum for Fast-Track Trade Secret Lawsuits?
By Shannon Turner
In a case of first impression, Manitowoc Cranes v. Sany America, the U.S. District Court for the Eastern District of Wisconsin held that an International Trade Commission determination regarding trade secret misappropriation has preclusive effect in subsequent litigation.
On June 12, 2013, Manitowoc Cranes sued Sany America and Sany Heavy Industry for patent infringement and misappropriation of trade secrets in violation of Wisconsin law. On the same day, Manitowoc filed a complaint with the ITC alleging that Sany committed unfair trade practices by misappropriating Manitowoc’s trade secrets in violation of § 337 of the Tariff Act (codified at 19 U.S.C. § 1337). The court stayed the case pending resolution of the ITC proceedings. Manitowoc then filed a second complaint asserting a claim for tortious interference with contract. The court consolidated the cases and continued the stay.
On April 16, 2015, the ITC issued a Notice of Final Determination, finding that Sany violated § 337 by misappropriating Manitowoc’s trade secrets and infringing one of Manitowoc’s patents. On October 11, 2016, the U.S. Court of Appeals for the Federal Circuit affirmed the ITC’s decision, and the district court lifted the stay. Manitowoc then moved for partial summary judgment as to Sany’s liability for misappropriation of trade secrets, arguing that the ITC’s trade secret misappropriation determinations are entitled to preclusive effect.
The district court’s opinion first surveyed how federal courts analyze the preclusive effect of ITC determinations in other contexts. The court concluded that federal courts have found that ITC determinations are given preclusive effect in other areas of unfair trade practices, including trademark infringement, as well as antitrust claims. In addition, the court flatly rejected Sany’s argument that Texas Instruments v. Cypress Semiconductor created a general rule against preclusion with respect to all ITC determinations. In Texas Instruments, the Federal Circuit examined the legislative history of § 337 and determined that Congress intended a preclusive effect for cases involving patent determinations. Because the Manitowic case did not involve a patent determination, the court found that ITC determinations on trade secret misappropriation are entitled to preclusive effect in later proceedings.
After finding that ITC determinations regarding trade secret misappropriation are preclusive, the court turned to whether Sany was collaterally estopped from disputing that it misappropriated Manitowoc’s trade secrets. Sany argued that there was no preclusive effect because the ITC determined that it was liable for misappropriation under federal law, not Wisconsin law. The court disagreed and concluded that a Wisconsin court would not apply a different standard under the Wisconsin Uniform Trade Secrets Act than the standard applied by the ITC. Specifically, the ITC relied on both the Uniform Trade Secrets Act and Restatement of Unfair Competition. While the court noted that there are slight variations between the UTSA and the WUTSA, they are minor differences that do not defeat preclusion.
The Manitowoc decision paves the way for litigants to adjudicate trade secret misappropriation claims on an expedited basis before the ITC, potentially saving time and money. While litigants seeking preclusive effect of an ITC determination regarding trade secret misappropriation should be mindful of the differences between federal law applied by the ITC and state law applied in the district court, the enactment of the Defend Trade Secrets Act may provide trade secret plaintiffs with a uniform law to be applied by both the ITC and district courts. Although the Manitowic decision is good news for those seeking fast-track trade secret determinations, it remains to be seen whether other jurisdictions will follow suit.
MPEP Updated to Include New Guidance on Subject Matter Eligibility
By Jason Amsel
In late January 2018, the U.S. Patent and Trademark Office published a revision to the Manual of Patent Examining Procedure that includes substantial guidance on patent subject matter eligibility under 35 U.S.C. § 101. While the MPEP has no authority of law in itself, it is the primary resource that instructs patent examiners in all aspects of examination. The update to the MPEP does not purport to change the examination practice set forth in a series of earlier memoranda issued by the USPTO in the years following the 2014 decision in Alice v. CLS Bank. However, the recent revision does consolidate and organize the guidance from these memoranda in a single resource, one that provides new clues as to how examiners will approach the subject matter eligibility question going forward.
Notably for software companies, the revised MPEP expressly recites that “software and business methods are not excluded categories of subject matter,” providing a direct statement rebutting any misconception that such subject matter categories are universally ineligible following Alice. See MPEP 2106.04(a) (emphasis added). Such categories of invention will continue to face elevated scrutiny and will require practitioners to carefully craft claims that meet the eligibility threshold. However, the framework in the revised MPEP sets forth clear paths to eligibility, signaling that applicants may see increased consistency and predictability from the USPTO in finding eligible subject matter.
The revised MPEP organizes the eligibility determination into three possible pathways to eligibility. Under “Pathway A,” examiners may apply a “streamlined analysis” when the claims fall within a statutory category (processes, machines, manufactures and compositions of matter) and when “eligibility is self-evident” (MPEP 2106.III). The streamlined analysis gives an examiner discretion to bypass a more rigorous approach when the claim “clearly improves a technology or computer functionality” (MPEP 2106.06). Claims drafted specifically to highlight such technological improvements should therefore be at an immediate advantage.
Under “Pathway B,” examiners may conclude that a claim is patent eligible if the claim falls within a statutory category and is “not directed to a judicial exception” (MPEP 2106.III). Here, the revised MPEP notes that while not the standalone test, “preemption is the concern underlying the judicial exceptions” (MPEP 2106.04). Thus, drafting claims that are sufficiently specific to not preempt a particular technical field may be critical to a favorable outcome.
Under “Pathway C,” examiners may conclude that a claim is patent eligible if the claim falls within a statutory category and recites elements “that amount to significantly more than the judicial exception.” The revised MPEP characterizes this analysis as essentially a “search for an inventive concept” (MPEP 2106.05). Here, the revised MPEP provides numerous examples contrasting patent-eligible claims directed to technological improvements, particular machines, and particular transformations with patent-ineligible claims that are merely directed to “well-understood, routine, conventional activity.” Applicants may find it useful to draw analogies to the favorable examples in this section when arguing a rejection.
The revised MPEP will become the definitive guide for addressing subject matter eligibility during examination. Examiners will likely give deference to arguments consistent with its framework, so practitioners should become familiar with its teachings and use it to their advantage when approaching subject matter eligibility rejections.
Riding on the Coattails of Crypto-Mania: Regulatory Warnings and Trademark/Tradename Implications
By Moira Lion
Over the last several months, a number of companies that have had no history of pursuing blockchain technology or incorporating it into their commercial offerings have rebranded to add BLOCKCHAIN or other crypto-centric terms to their tradenames. Not surprisingly, these rebrands have led to a new perceived potential in these companies — and with that, a sudden rise in participation in their related initial coin offerings (or, in the case of public companies, in their market caps). Rebranding to a blockchain or crypto-related name and then immediately offering securities — potentially without adequate disclosures about those business changes and the risks involved — has caused the U.S. Securities and Exchange Commission to issue warnings around this practice and the potential SEC scrutiny, investigations and enforcement actions that could follow.
As background, cryptocurrency and blockchain technology have had an increasingly meaningful impact on the way the world thinks about how value can be transferred. With the remarkable rise (and fall) in the price of bitcoin and other cryptocurrencies over the last year, and the resulting hype surrounding the industry, more than just tech and financially savvy individuals have become captivated by cryptocurrency and blockchain technology. Accordingly, what has always been an important and disruptive technology has evolved into a public infatuation, attracting a multitude of everyday, Main Street investors. That in turn has galvanized some companies to try to take advantage of the phenomenon.
This impact on individual Main Street investors — many of whom approach these investments as if they are purchasing products like an everyday consumer — is one of the primary reasons the government and its regulatory agencies (including the CFTC and FTC, in addition to the SEC) have become more concerned about the hype surrounding blockchain and cryptocurrencies. In the current climate, an existing company changing its name to include BLOCKCHAIN can, on its own, be enough to convince someone to buy shares in an already public company or participate in an initial coin offering without knowing much more.
Regulatory agencies’ concerns about rebrands are intrinsically tied to deceptiveness issues and brand promotion in trademark/unfair competition law. Under Lanham Act § 43(a)(1)(B) (codified at 15 U.S.C. § 1125), anyone who uses trademarks in commercial advertising or promotion in a way that misrepresents the nature, characteristics or qualities of products, services or commercial activities can be liable in a civil action by anyone who believes they are likely to be damaged by that. Further, deceptive marks and deceptively misdescriptive marks are not even registrable as trademarks under Lanham Act §§ 2(a) and 2(e)(1) (codified at 15 U.S.C. § 1052) (with one exception to the latter of these two sections).
Accordingly, the most important lesson learned from the recent mistakes made by some companies rebranding to BLOCKCHAIN or CRYPTO-inclusive names is that the branding and rebranding process in the field of blockchain or cryptocurrency implicates trademark laws, securities laws and various consumer protection regulations, together with the warnings or guidelines provided by relevant regulatory agencies.
In light of this, here are some key things to remember when a company wants to use or rebrand to blockchain or crypto-related names:
A name that includes BLOCKCHAIN, CRYPTO and other related terms — even the term “EXCHANGE” (when used for a digital currency exchange not registered with the SEC) — can easily lead to negative public relations issues, investigations into potential consumer deception, investigations into appropriate SEC disclosures (or exemptions) and, at worst, enforcement actions by the SEC, CFTC or FTC or other consumer or third-party complaints.
Private companies are not off the hook: Securities laws apply to both public and private companies, although differently.
If a company plans to immediately accept investments or advertise/promote offers like initial coin offerings, or ICOs, or if the company is already publicly held, it must make appropriate disclosures involved before doing so, and before announcing a rebrand.
USPTO examining attorneys have a basic knowledge of blockchain technology and may increasingly request further information about an applicant’s plans if a mark contains blockchain or crypto terms, to confirm the mark is not deceptively misdescriptive.
U.S. trademark applications related to these rebrands could be more vulnerable to challenges, particularly based on a lack of bona fide intent to use the mark for blockchain technology or cryptocurrencies. Many companies that have run into trouble by rebranding have not done much more than decide to shift business models or reach out to a blockchain technology company for a potential acquisition before actually offering securities. This type of information could potentially be used to challenge an applicant’s bona fide intent to use a mark for blockchain or cryptocurrency products at the time the trademark application was filed.
The U.S. Trademark Trial and Appeal Board has not had to substantively address blockchain or crypto issues in any ex parte or inter partes proceedings, but there are 160+ active applications for BLOCKCHAIN-inclusive marks pending with the USPTO. As competition in this market grows, companies will inevitably take advantage of potential vulnerabilities in applications when they encounter competitors using similar names that they want to challenge.
Update: Mean Girls vs. the Right of Publicity
By Nicholas A. Plassaras and Jennifer Stanley
In 2016, the Fenwick games team detailed actress Lindsay Lohan’s lawsuit against the makers of “Grand Theft Auto V” for allegedly violating her right of publicity. You can read the full article on Fenwick.com.
On March 29, 2018, New York’s highest court issued a unanimous decision affirming the lower court’s dismissal of Lohan’s case. The appellate court concluded that Grand Theft Auto V character, “Lacey Jonas,” did not implicate Lohan’s publicity rights under New York law.
The decision is notable for two reasons:
First, it reaffirmed the narrowness of New York’s right of publicity statute, which only protects a person’s name, portrait, picture or voice.
Second, it clarified that a “portrait” theoretically encompasses an in-game rendering or depiction of a person, such as a game avatar. But in order to be actionable under New York’s publicity statute, the in-game rendering has to be recognizable as the plaintiff. Although Lohan had a theoretically valid claim, the court concluded that the Jonas character was merely “a generic artistic depiction” of a modern, 20-something, beach-going woman without any particular identifying physical characteristics linking her to Lohan.
In light of the Lohan decision, game developers should remember to consult with counsel early in the development process to avoid potential publicity-related pitfalls.