Patent Suit Over Gemstone Authentication Blockchain Fizzles Out at CAFC Under Section 101

On March 27, the U.S. Court of Appeals for the Federal Circuit (CAFC) issued a decision in Rady v. The Boston Consulting Group affirming a lower court’s invalidation of patent claims covering improvements to physical asset provenance via blockchain. The ruling, though marked non-precedential, arguably expands the application of the abstract idea exception to patentability under 35 U.S.C. § 101 for blockchain technologies even when those patents are claiming the use of specialized, non-generic computer hardware.

Rady’s Patent Claims Long-Standing, Well-Established Practice of Collecting Data

In 2020, independent inventor Max A. Rady filed a lawsuit against The Boston Consulting Group (BCG), Rady’s former employer, and diamond mining firm De Beers asserting claims from U.S. Patent No. 10469250, Physical Item Mapping to Blockchain Framework. News reports on Rady’s complaint noted allegations that Boston Consulting Group and De Beers used Rady’s personal academic research to develop a blockchain-based authentication and tracing tool designed to eliminate industry issues regarding supplies of false gemstones. Rady also alleged that BCG fired Rady because he confronted the company over its potential misappropriation of Rady’s research and development for De Beers’ Tracr blockchain platform for gemstone authentication.

The Southern District of New York dismissed Rady’s lawsuit on BCG’s motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The district court found that the ‘250 patent did not claim an improvement to the underlying blockchain technology despite acknowledging that Rady’s system “record[s] a fingerprint for a gemstone.” The recent Federal Circuit ruling also reiterated the district court’s finding that “tracking physical objects do[es] not make [the] claims any less abstract.”

The Federal Circuit’s per curiam opinion in Rady affirmed the district court’s invalidation of the ‘250 patent’s claims under the two-step patent eligibility test under Alice v. Mayo (2014). At step one, the appellate court found that Rady’s patent claims were directed to an abstract idea, finding that they claimed little more than the long-standing and well-established practice of identifying items by their unique physical features. Support for this finding came from the specification for the ‘250 patent, which noted that the gemstone industry has long understood that many stones have small-scale imperfections. Further, the specification incorporated by reference a jewelry website disclosing that diamonds can be identified from their unique imperfections.

No Improvement to Underlying Blockchain Technology Dooms Patent Claims

The principal shortcoming in Rady’s patent claims, according to the Federal Circuit, was that they recited generic steps and results rather than a specific solution to a technical problem. The appellate court found that the ‘250 patent’s specification did not establish how the claimed item analysis components functioned to determine the unique signature of a physical object. Citing to language from the Federal Circuit’s 2016 decision in Affinity Labs of Texas v. DirecTV, the appellate court noted:

“In essence, Rady’s specification ‘underscores the . . . abstract nature of the idea embodied in [his] claims,’ because rather than purporting to disclose any technological improvement to the item analysis components, it confirms that such devices are used in the same manner as they have been used in the past.”

Rady argued to the Federal Circuit on appeal that his invention was the first system to pair the use of a non-invasive, non-reproducible unique identifier with blockchain technology to provide authentication and self-provenance functionality addressing an issue that costs the global gemstone industry billions of dollars in lost revenues each year. However, as the Federal Circuit found, “Rady’s claimed system may be useful in preventing the counterfeiting of gemstones, but utility is not the measure of patent eligibility.”

Briefly applying step two of the Alice framework, the Federal Circuit ruled that Rady’s patent claims did not recite any elements transforming the abstract idea of gathering and storing data into a patent-eligible application. While Rady argued that his claims covered the inventive combination of multiple item analysis components to capture unique imperfections in physical objects, the Federal Circuit held that the ‘250 patent did not meaningfully explain how the various components are configured and combined. According to the appellate court, the ‘250 patent merely claimed conventional analysis components with existing blockchain technology, thus failing step two of Alice.

Finally, the Federal Circuit rejected Rady’s claims that the district court improperly reached a determination on patent invalidity at the motion to dismiss stage. Rady’s response to Rule 12(b)(6) motion to dismiss only included conclusory allegations about the use of specialized sensors and the system’s ability to solve a complicated, long-standing problem felt in many industries. In such situations, the Federal Circuit noted that it was not improper for a district court to grant a motion to dismiss when the invalidity questions can be answered by the undisputed facts on the record.