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Legal Analysis: Can Patent Law Protect Hedera Hashgraph?

Hedera Hashgraph began life as an algorithm. But over the years since 2015 it morphed into a leviathan, raising around $100M on a $6bn valuation from institutional and accredited investors. After launch, it will be almost entirely independent from founding parent Swirlds, which is now one of the members of the Hedera Council and will have the same voting rights as other members.

The hashgraph algorithm is protected by patents, but numerous projects – including Maidsafe, Tolar, Aleph, InterValue, CryptoNear, Monet and Trias – have included some version of the algorithm in their technological solutions. The question therefore becomes: is that allowed? – Intro by Editor.


Hedera Hashgraph Legal Analysis: Background

Swirlds, Inc., a New York City-based software company, is testing the waters to see whether international patent law can protect a blockchain-like digital ledger. The question is how courts in different countries will protect a platform spread out across different countries.

Leemon Baird, the cofounder and CTO of Swirlds, is the inventor of the algorithm behind the digital ledger. This algorithm is called the hashgraph distributed consensus algorithm. Swirlds is promoting use of the algorithm in a platform called Hedera Hashgraph. Hedera Hashgraph, LLC is organized as a limited liability company separate from Swirlds.

Hedera Hashgraph is promoting the platform as a safe method to exchange information and engage in transactions online. The platform has no central server. It has nodes, or devices, belonging to the platform that contain records of events that took place on the platform. This piece will explore how courts in the U.S. and abroad can interpret patent laws to protect the algorithm behind the platform.


Who is in control of Hedera Hashgraph?

Swirlds says the platform will be managed by 39 organizations, including Swirlds, from different industries around the world. All of the organizations will have equal voting power. The platform is closed to modification by outside parties. It is not open source. Swirlds was granted three U.S. patents to protect the platform in 2016. The protection of those patents only extends to the borders of the U.S.

Who will remain in control of Hedera Hashgraph?

It is a question whether Swirlds will seek to be the patent-holder in every country. Swirlds could benefit from an agreement in which foreign organizations belonging to their 39-member group filed for the patent in their home countries. This is unlikely, but such an agreement could cut down on filing and litigation costs. Swirlds and the other member organizations could use patents in different countries as a selling point. They could say that the patents in different countries increased the stability of the platform and lowered its risk.

As Swirlds and its 38 partner organizations come to further change the code of the Hashgraph platform, the platform may transform so much that Swirlds may need to file for new patents.

The other 38 organizations could argue that they deserve to hold the patent as well. Swirlds and the other 38 organizations may eliminate such potential disagreements with a blanket contract for all 39 members. Such a contract might be extremely useful in order to reduce infighting between the members and keep all internal disagreements out of the public eye.

That way, Swirlds and the other 38 organizations could say that the platform was extremely stable. They could promote its use and present themselves as a strong and united council.


How Hedera Hashgraph can get international patent protection

Swirlds can get patent protection in other countries through two paths, the Paris Convention and the Patent Cooperation Treaty (PCT). The Paris Convention has 177 member countries. The PCT has 152 participating countries. Both paths require an entity that is granted a patent in the U.S. to file in the countries where it is seeking patent protection shortly after it filed in the U.S.

Each country has its own procedures and costs. The major drawbacks of filing in a range of countries are time and cost. Patent protection, translation, legal fees, and maintenance fees for a 20-year period can run between $30,000 and $50,000 per country.


How the courts may protect Hedera Hashgraph

Swirlds decides which entities are infringing upon its patents. Swirlds could argue that any entity which is not one of the 39 member organizations is an infringer. The other 38 entities would have an argument that they are not an infringer. They have Swirlds’ authorization to modify and use the platform.

The court in which Swirlds files will determine whether the activities of the alleged infringer actually constitute infringement. It is highly likely that U.S. courts would have jurisdiction over any entity based in the U.S. that copied Swirlds’ algorithm.


Do U.S. courts have jurisdiction over foreign infringers?

If a foreign infringer used nodes in the U.S. for the platform, a U.S. court would likely see those nodes as sufficient physical presence in the U.S. to subject the infringer to jurisdiction. A foreign infringer could have no physical presence in the U.S. but take actions to infringe upon a U.S. patent-holder’s patent.

If the patent-holder files a lawsuit and a U.S. court issued a summons to that party, the foreign infringer might refuse to come to court in the U.S. The patent-holder could attempt to resolve this by getting a default judgment after the foreign defendant failed to show.

Once the patent-holder had a U.S. judgment, it could file the lawsuit anew in the proper court in the foreign defendant’s home country. The patent-holder could then ask that court to enforce the U.S. judgment so that the patent-holder can collect damages. Some foreign courts will make the patent-holder prove their damages again. Foreign countries usually have different rules than the U.S. about evidence and limits on damages.

Courts do not like vagueness and ambiguity. For Swirlds to win a suit abroad, it would likely have to show an actual financial loss. Then the foreign court would likely order the infringer to pay the amount Swirlds requested. If Swirlds asked for something that has no value, like the infringer’s profits, the court might entertain both parties’ arguments about the value of the profits.

Once the main net of an infringer is live, it is likely that only the infringer could shut it down. Since patent infringement is in the arena of civil law, it is highly unlikely that a foreign country’s government would shut down an infringer’s main net because the infringer caused the patent-holder to suffer damages

If the foreign country’s regulatory agency that controls cryptocurrencies decided the infringer was acting illegally by operating the main net, the agency could order the infringer to shut it down.

A nation’s federal law enforcement office has the power to shut down a website of an entity that is operating illegally. As an example, the Federal Bureau of Investigation shut down Silk Road’s website in 2013.


Could Swirlds get another entity’s ICO funding?

It is unlikely that a court would allow to Swirlds to receive an infringer’s Initial Coin Offering (ICO) funding as money damages. The court in the country in which the lawsuit has been filed would have to have a history of viewing the type of coin that the infringer is issuing to have value.

An agency like the Securities and Exchange Commission (SEC) may see the coin as a utility token. A utility token is an asset with no inherent value that is traded within a platform. The utility token’s existence ensures the viability of the platform.

If the agency sees the coin as a security, a tradable financial asset with value outside the platform, then the agency may have concerns about whether the infringer complied with the agency’s rules and the laws of that country. As an example, in 2017, the Securities and Exchange Commission ordered Munchee to stop issuing its MUN coin. The SEC saw Munchee as failing to comply with SEC regulations. As a result, the MUN coin lost value.

If a national agency requires an infringer to stop issuing its coin and shut down its platform, the infringer’s ICO funding would have no value.


Should lawmakers and courts protect inventors?

Technology will inevitably develop faster than patent laws. Inventors should take a proactive approach in educating politicians and judges about the need to protect algorithms and platforms built on them.

Similar laws that ensure an inventor’s algorithm will not be copied without punishment give inventors a safe harbor to perfect and modify platforms like Hedera Hashgraph. Innovation and data exchange will benefit if patent laws and court decisions ensure platforms like Hedera Hashgraph and data on them remain secure.

Please note that this article does not constitute either legal or financial advice. For individualized advice, please contact an attorney or licensed financial advisor.

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