OPEN SECRETS: Can Business Methods Based on Blockchain Technology Constitute Trade Secrets?

Several months ago, we reported on the potential to protect trade secrets by encrypting information using blockchain technology.  Then, earlier this month, we reported on an order out of the Southern District of California involving “CryptoKitties,” a decentralized application (or “DApp”) built on the Ethereum blockchain (using the ERC721 protocol) that allows users to securely buy, sell, trade, and breed genetically unique virtual cats.

While the potential to protect trade secrets using blockchain technology is clear, the reasoning in the CryptoKitties order raises questions regarding whether blockchain technology could constitute a trade secret in and of itself or when combined with other concepts or business methods pursuant to Federal and California law.

The CryptoKitties court ultimately denied the plaintiff’s request for a preliminary injunction to bar the defendant’s use of CryptoKitties bearing the likeness of celebrities (like Steph Curry), finding that all four preliminary injunction factors weighed in favor of denial.  One reason that the court denied the preliminary injunction was based on a finding that the alleged trade secret—which the plaintiff characterized as “licensing digital collectibles based on athletes, entertainers and celebrities”—was not in fact a trade secret.  The court explained that the concept of celebrity licensing cannot, by itself, be a trade secret, and the plaintiff failed to show how combining this idea with blockchain technology was a secret: “[m]arrying the concept of celebrity licensing with blockchain technology appears, on its face, to be unremarkable, obvious, and general knowledge.”

The court’s reasoning suggests that combining well-known concepts or business methods with blockchain technology cannot, without more, transform them into trade secrets.  Still, the court’s reasoning does not foreclose the possibility of a trade secret involving blockchain technology.  Presumably, if one created a secret method or business plan that involved blockchain technology, this could constitute a trade secret, so long as other elements such as independent economic value were present.  And while various blockchain technologies like Bitcoin and Ethereum are open source (and therefore not trade secrets), some companies have developed private blockchains that are not accessible to the general public.  Thus, non-open source blockchain technologies could theoretically constitute valid trade secrets in and of themselves if they meet the requisite elements (i.e. derive independent economic value from not being generally known and are the subject of reasonable efforts to maintain secrecy).  Alternatively, one could make material alterations to opensource blockchain software (like Bitcoin which is subject to the MIT License) and guard the altered code as a trade secret.

Blockchain technology is still in its infancy and business methods involving blockchain technology will continue to proliferate for the foreseeable future.  Because it has become difficult to protect business methods using the patent system, companies may seek to protect certain blockchain based business methods as trade secrets.  However, before filing suit, companies should think carefully about whether their blockchain based business method involves well known concepts as it will likely fail to qualify for trade secret protection.