Tokenization of IP Rights — Part 2: Patents and Potential Problems of Their Tokenization

In the first part, I gave a small overview of IP law for non-legal people. If you haven’t read it yet, click here.

Now, let’s dive into the world of patents:

Patents

Patents give the inventor a right to ban third parties from using the innovation for 20 years in general.

Patents are not necessary to use or license the innovation, but they are necessary to ban third parties from doing so.

To apply for a patent, the inventor should file an application to the patent office in the respective jurisdiction (or jurisdictions by referring to international treaties and conventions). In the application phase, the applicant should know enough about what a patentable invention is, how to fill out the forms, how he or she should describe or illustrate the invention according to the standards of the office.

This preparation phase already requires a lot of know-how and many times companies outsource it to patent attorneys. The cost of patent attorney adds up to the application fee.

After having applied, the office reviews the application and publishes it for a certain period of time to make it open for objections from third parties. If there is no objection, the patent is granted when the time for publishing elapses and it is written in the patent registry. In general, this process takes about 18 months. This duration can change from country to country or if a protection is wanted in more than one jurisdiction. So, in the best-case scenario, the inventor pays money, waits more than a year for the patent grant and disclose the details of his or her invention just to have a regional monopoly over the invention for 20 years.

However, if the application is objected by a party or parties, the applicant can object the objection and provide for evidences or review the application and change it. This would mean extra time, and depending on the collaboration with a patent attorney, extra cost.

In addition, after being granted a patent, if the patent owner wants to assign or license the patent, an application for patent assignment or license should be made to the patent office so that the assignment or the license is registered. Otherwise, the assignment or license will not be valid.

All in all, patents cost money and time for its owner. The owner must inform the patent office about the changes regarding the right. This brings too much administrative and legal work as well as dependency on the workload of an officer to be able to use a right. And of course, friction.

Potential Problems in Patent Tokenization

As patents and the rights attached to them have high friction costs, the tokenization of patent rights and the distribution of their ownerships through tokens would cause the same problems. Even though it is technically possible to tokenize patents or the license right, for these rights to be legally valid, the token issuer, who is the patent owner, should file an application to the respective patent office each time when there is a token sale. This would add additional time and cost to the trade, although the transaction has already taken place on the blockchain.

Another problem would be for the token issuer is to find the identity of the purchasing party in order to write it on the assignment or licensing agreement which will be submitted to the patent office. Depending on the user interface of the trading software/web application, this might be hard to discover. If it is not possible to find the identity of the licensee or assignee, the patent token would not have any value and the buyer would have spent money for nothing.

Furthermore, patents have a time-restriction which is 20 years. If a patent, which is close to its expiration, is tokenized and sold on a trading platform, it will have no value again after its expiration as anyone will be able to use the invention freely. In another scenario, if this patent token is traded on a secondary market, the buyer might not be well-informed that the patent will expire soon. This would bring additional problems on the investor protection.

Consequently, patents do not seem to be the right tool for tokenization and the creation of a frictionless market.

Image Source:  

BusinessInsider