Will DAOs Be Patent Litigants?

Decentralized autonomous organizations (DAOs) are a popular way to organize technical projects. They perform significant work in multiple areas, especially developing crypto financial software systems. As such, they may one day become embroiled in patent litigation, even though such litigation has been rare in the blockchain space.

DAOs have many unique properties related to how they engage in litigation. In this article, we discuss DAOs as potential patent litigants. DAOs are rising in prominence and are used to manage capital in an ever-increasing number of technology areas. As this continues, the odds that DAOs are involved in patent litigation, as plaintiff or defendant, continue to grow.

DAOs suing for patent infringement

Undoubtedly, DAOs have helped develop technologies in the decentralized finance technology space. As DAOs are used to coordinate increasingly complicated technical work, they may generate novel ideas that qualify for patent protection. Currently, much of the work in a DAO is done by volunteers or through work for hire. In these cases, intellectual property (IP) rights are typically a minor consideration in comparison to the large goals of the DAO. Those drawn to work in DAOs also often view patent rights skeptically, meaning that filing for patent protection is not a priority. Further, much of the software being developed is released under an open-source license granting users a license to the IP of the developer, the DAO in this case.

Despite this, as people invest more of their time and resources into DAOs, at least some will likely want to cover the rights in any new technologies the DAO develops. In this manner, they can protect the mission of the DAO from what they may view as free riders. There are certainly some issues with DAOs obtaining patents. As a threshold issue, the DAO would need a legal entity to which to assign the rights to the patent in the first place. While some DAOs have taken on a recognized corporate form, others have yet to operate with any specific corporate form.

As DAOs are often not focused on protecting their IP, they may not do the necessary planning to obtain a patent. For example, as much of the work performed by DAOs is done in the open, this may commit any patentable ideas to the public if a patent application is not filed quickly. To obtain a patent, the DAO would need to invest at least some of its resources in hiring patent counsel to file the patent, which would take immediate resources away from its core mission. There may also be complicated inventorship issues dealing with whether those working on behalf of the DAO must assign any IP they generate to the DAO, as those working may be doing so on a volunteer or ad hoc basis.

Finally, DAOs could be a vehicle for asserting patents acquired from other entities.  While several legal considerations for this are beyond the scope of the article, DAOs could be used as a mechanism for acquiring and asserting patents.

DAOs defending against allegations of patent infringement

DAOs organize work on increasingly complicated technical projects. As such, they will likely have to deal with the patents held by others. However, DAOs have many unique properties that generally make them resistant to patent and civil litigation.

As the name DAO implies, they are “decentralized” and do not always have an agent that can be served with a lawsuit. As such, if the DAO has chosen not to take a formal legal entity form (LLC, etc.), it may be difficult to serve the DAO with a complaint for a civil lawsuit, which is required to start the litigation process. However, some courts have already started to pave the way for novel forms of service against a DAO. In the Ooki DAO case, the Commodity Futures Trading Commission served the members of the DAO by posting the complaint in a chatbot channel used by its members. In that case, the court permitted this service method, potentially opening the way for private parties to use this method as well. In another case, in New York State court, defendants were served a temporary restraining order by a non-fungible token (NFT) being airdropped to their account, which contained a hyperlink to the order to show cause. While this case does not relate to a DAO, it does show that new methods of service are being considered where the defendants of a lawsuit are difficult to identify other than by an address on a blockchain. Certainly, courts are unlikely to rule that there is no way to serve a DAO if it collectively engages in improper activity.

DAOs can also be effectively judgment proof. Most patent cases seek monetary damages in the form of a reasonable royalty. Where would this money come from if a DAO were found liable for infringement? DAOs often have treasuries, but they are typically locked up with a smart contract limiting when funds can be withdrawn. Even if a judgment were obtained, you would still need to force those with voting power to release the funds resulting from the lawsuit. This could be difficult, as the members of DAOs can be pseudo-anonymous and difficult to track down. In these cases, a litigant suing a DAO for patent infringement may need to chase down individual members of the DAO to recover. Litigants seeking an injunction against using the patent invention within the United States also have the problem that they cannot enforce this against those outside the United States, who, in the case of software, could make it available for anyone to download.

An additional complicating factor is that it may be difficult to ascertain who the infringer is if multiple parties work independently. For example, software for a potentially infringing computer network may be developed by many programmers worldwide. Putting aside the difficulty in determining who these people are, they may be based outside the U.S. when U.S. patents are only enforceable on activity inside the U.S.

DAOs also have structural issues that could work against them in civil litigation. First, their decentralized nature could make coordinating and retaining counsel difficult. Depending on the form of the DAO, there may also be open questions on who the actual client is and how to structure an engagement with it. Additionally, as the work and deliberations of the DAO are often accessible to outsiders, it is easier for those wanting to gather evidence of patent infringement to find detailed technical information that may, in a traditional company, be held confidential.

Conclusion

As of now, we are unaware of any DAO sued for patent infringement. However, as DAOs continue to grow, patent issues will likely arise. This is an interesting area to watch, particularly if DAOs continue to grow in influence and scope.