DeFi Group Takes on ‘Patent Troll’ in USPTO Petition: Will Crypto Innovation Prevail?

Is open-source innovation in decentralized finance (DeFi) under threat? A prominent DeFi advocacy group is raising the alarm, accusing a company of being a “patent troll” and taking action to protect the DeFi space. Let’s dive into the details of this unfolding legal battle.

DeFi Education Fund Challenges Patent Claim

The DeFi Education Fund (DEF), a vocal advocate for the decentralized finance sector, has officially petitioned the United States Patent and Trademark Office (USPTO). Their target? A patent held by True Return Systems, a company DEF alleges is operating as a “patent troll.” But what does this mean for DeFi, and why should you care?

In a nutshell, DEF is trying to invalidate a patent they believe is overly broad and could stifle innovation within the DeFi ecosystem. Here’s a breakdown of the key events:

• The Accusation: DEF publicly labeled True Return Systems as a “patent troll,” a term used for companies that aggressively pursue patent lawsuits primarily to generate revenue rather than to develop or utilize the patented technology themselves.
• The Petition: On September 7th, DEF filed a comprehensive, over 90-page petition with the USPTO’s Patent Trial and Appeal Board. This petition aims to initiate a review and ultimately cancel a patent (US10025797B1) owned by True Return Systems.
• The Patent in Question: Granted back in 2018, this patent broadly covers a process for “linking off-chain data to a blockchain.” Amanda Tuminelli, DEF’s legal chief, highlighted this in a recent post on X (formerly Twitter).

From NFT Sales to Lawsuits: True Return’s Patent Strategy

According to Tuminelli, True Return’s journey with this patent took an interesting turn. Initially, they reportedly attempted to capitalize on the NFT craze by trying to sell the patent as a nonfungible token (NFT). However, when a sale didn’t materialize, their strategy shifted.

In October, True Return Systems initiated lawsuits against prominent DeFi protocols MakerDAO and Compound Finance. DEF’s legal chief suggests the choice of defendants wasn’t accidental, implying it was a calculated move to target entities that might struggle to mount a strong legal defense.

Tuminelli stated, “Clearly [True Return’s] goal was to name defendants who could not answer the complaint so [it] could get a default judgement.” This raises concerns about the potential for smaller DeFi projects to be unfairly targeted by similar patent claims.

True Return Defends Its Actions

Jack Fonss, the founder of True Return Systems, offered a different perspective when contacted for comment. He refuted the “patent troll” label, asserting that “an inventor’s diligence over their own inventions is [not] patent trolling.”

Fonss characterized the lawsuits against MakerDAO and Compound as being about “disclosures and not legal outcomes.” He further emphasized that because their technology was publicly disclosed, “patent infringement assessments are readily doable and a practical necessity for an [intellectual property] owner.”

He defended the patent’s legitimacy, stating it was based on “more than a decade of tech work” within traditional financial markets, specifically in trading and operations related to public equity and institutional derivatives.

DEF’s Counter-Argument: Prior Art and Open Source

In its petition to the USPTO, DEF argues that True Return’s patented technology wasn’t actually novel when the patent was granted in 2018. They contend that similar technologies already existed, pointing to examples like:

• InterPlanetary File System (IPFS): A decentralized system for storing and accessing files.
• Decentralized Storage Platforms: Platforms like Sia, Storj, and Swarm, which offer decentralized alternatives to traditional cloud storage.

Fonss countered this by stating True Return is aware of the patents cited in DEF’s petition. He suggested a “perception vs. reality gap” often exists regarding intellectual property in DeFi, implying their patent is genuinely innovative despite the existence of prior technologies.

Why is DEF Taking Action?

DEF’s motivations for launching this USPTO petition are multifaceted. They aim to:

• Defend Open Source: Protect the ability to freely use and develop open-source software within the DeFi space.
• Prevent Future Lawsuits: Stop True Return from potentially pursuing further lawsuits against other crypto projects, which DEF believes could stifle growth and innovation.
• Support MakerDAO and Compound: Aid in the legal defense of MakerDAO and Compound Finance against True Return’s ongoing lawsuits.

What’s Next in the Patent Battle?

The ball is now in True Return’s court. They have a three-month window to respond to DEF’s petition. After this response period (or if True Return chooses not to respond), the USPTO will have six months to decide whether to proceed with a formal review of the patent. If a review is initiated, the USPTO then has a further 12 months to determine if the patent should be invalidated.

Fonss has indicated that True Return is actively “preparing a complete response,” suggesting they intend to vigorously defend their patent.

The Stakes for DeFi Innovation

This case highlights a critical issue for the DeFi industry: the balance between protecting intellectual property and fostering open-source innovation. The outcome of this USPTO petition could set a precedent for how patents are viewed and enforced within the rapidly evolving world of decentralized finance.

Will this petition successfully challenge what DEF sees as a threat to open innovation, or will True Return’s patent stand, potentially impacting the future landscape of DeFi development? The coming months will be crucial in determining the answer.