DCT

1:22-cv-08483

True Return Systems LLC v. Compound Protocol

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I. Executive Summary and Procedural Information

  • Parties & Counsel:
  • Case Identification: 1:22-cv-08483, S.D.N.Y., 10/05/2022
  • Venue Allegations: Plaintiff alleges venue is proper because Defendant has committed acts of patent infringement in the Southern District of New York, solicits customers in the district, and has purposefully availed itself of the privileges of conducting business in New York.
  • Core Dispute: Plaintiff alleges that Defendant’s decentralized finance protocol infringes a patent related to a method and system for improving distributed ledger functionality by separating certain data storage and processing from the main ledger.
  • Technical Context: The technology operates in the field of blockchain and distributed ledger technology (DLT), addressing technical challenges related to scalability, speed, and security that arise when DLTs are used for complex applications beyond simple cryptocurrency transactions.
  • Key Procedural History: The complaint notes that the asserted patent claims priority from a provisional application filed on February 23, 2018. No prior litigation or post-grant proceedings are mentioned in the complaint.

Case Timeline

Date Event
2018-02-23 ’797 Patent Priority Date (Provisional Application Filing)
2018-07-17 ’797 Patent Issue Date
2018-09-01 Accused Protocol (Compound) Mainnet Launch
2022-10-05 Complaint Filing Date

II. Technology and Patent(s)-in-Suit Analysis

  • Patent Identification: U.S. Patent No. 10,025,797, “METHOD AND SYSTEM FOR SEPARATING STORAGE AND PROCESS OF A COMPUTERIZED LEDGER FOR IMPROVED FUNCTION,” issued July 17, 2018. (Compl. ¶1, ¶24).

The Invention Explained

  • Problem Addressed: The patent describes that distributed computerized ledgers (DCLs), such as blockchains, face significant challenges in performance and scalability when used for complex applications. (’797 Patent, col. 2:12-18). Specifically, implementing features like smart contracts or representing real-world assets introduces large amounts of data and computational overhead, which can slow down the network, increase transaction costs, and introduce security vulnerabilities. (’797 Patent, col. 3:5-20).
  • The Patented Solution: The invention proposes separating the storage and processing of certain data from the base DCL. It introduces a parallel, modular storage architecture (termed a "parallel storage of difference layer" or PSDL) that handles "differences, measurements, or descriptors" derived from external, or "exogenous," data sources (e.g., market price feeds). (’797 Patent, Abstract; col. 6:22-25). This off-chain layer is then electronically linked back to the transaction records on the main DCL, allowing the DCL to gain enhanced functionality without being burdened by the associated data and processing loads. (’797 Patent, col. 5:10-29). Figure 18 of the patent illustrates this separation, showing a "differentials processor" and "differential storage" operating in parallel to a "distributed computer ledger." (’797 Patent, Fig. 18).
  • Technical Importance: This architecture was designed to enable DCLs to support more sophisticated, real-world use cases—such as financial instruments or commercial trade records—by improving efficiency, speed, and security, thereby overcoming the limitations of conventional, homogenous cryptocurrency ledgers. (’797 Patent, col. 5:35-54).

Key Claims at a Glance

  • The complaint asserts infringement of "one or more claims" of the ’797 Patent, with the complaint narrative and unprovided exhibits identifying certain "Exemplary '797 Patent Claims." (Compl. ¶85, ¶93). Independent method claim 1 is representative of the asserted technology.
  • The essential elements of independent claim 1 include:
    • Creating at least one "electronic parallel storage of a differences layer" linked to a distributed computer ledger (DCL).
    • Accessing and storing a value in this parallel layer, where the value comes from at least one "time-sequenced electronically published data stream" or a "descriptive differential."
    • Storing the DCL's transaction records on a distributed or decentralized network.
    • Storing the parallel "differences layer" on a centralized or decentralized storage device to increase the DCL's functionality.
    • "Linking" the transaction records on the DCL to the records in the parallel storage layer using a time-sequenced value, string, code, or key.
    • "Imputing" a measured differential from the parallel layer to the DCL's transaction records.
  • The complaint reserves the right to assert other claims, including dependent claims. (Compl. ¶85).

III. The Accused Instrumentality

Product Identification

  • The Compound Protocol, a decentralized finance (DeFi) protocol operating on the Ethereum blockchain. (Compl. ¶1, ¶4).

Functionality and Market Context

  • The Compound Protocol is described as an "algorithmic, autonomous interest rate protocol" that facilitates the lending and borrowing of various cryptocurrencies. (Compl. ¶35). Users supply assets to the protocol and receive "cTokens" in return, which represent their balance and accrue interest over time. (Compl. ¶34, ¶66).
  • The protocol utilizes a "Price Oracle" that "pools prices from the top 10 exchanges" to determine the value of assets, user borrowing capacity, and collateral requirements. (Compl. ¶48). It also maintains an "Interest Rate Index" that captures the history of interest rates for each market. (Compl. ¶45). The complaint alleges that the protocol's "Comptroller" contract is the "risk management layer" that uses the data from the Price Oracle to approve or deny transactions and manage liquidations. (Compl. ¶76-77).
  • The complaint positions the Compound Protocol as a "leading lending protocol" with balances that have exceeded $10 billion. (Compl. ¶8, ¶41).

IV. Analysis of Infringement Allegations

The complaint provides an annotated version of the patent's Figure 18 to illustrate the alleged architecture, depicting a "differentials processing/storage system" (green) linked to, but separate from, a "base distributed computer ledger" (cyan). (Compl. ¶26-28, p. 8).

’797 Patent Infringement Allegations

Claim Element (from Independent Claim 1) Alleged Infringing Functionality Complaint Citation Patent Citation
...creating at least one electronic parallel storage of a differences layer linked to a distributed computer ledger (DCL)... The Compound Protocol (the DCL) allegedly uses a parallel processing/storage system, including its Price Oracle and Comptroller, to link published data (e.g., asset prices) to the blockchain. ¶33 col. 17:6-12
...accessing and storing a value...from a group comprising of at least one time-sequenced electronically published data stream and at least one descriptive differential... The protocol's "Price Oracle" allegedly pools prices from external cryptocurrency exchanges, which constitute time-sequenced data streams. The "market history service" retrieves historical, time-series data. ¶48, ¶54 col. 17:13-22
...storing the DCL containing an electronic transactions record on at least one of a distributed network...or a decentralized network of computers... The Compound Protocol allegedly operates and records transactions on the Ethereum blockchain, which is a distributed and decentralized network. ¶7 col. 17:23-29
...storing the at least one electronic parallel storage of the differences layer on at least one of a centralized storage device...or a decentralized storage device...for increasing functionality and utility of the DCL... The Price Oracle is allegedly "maintained by our team," suggesting it is a centralized or semi-centralized component stored separately from the main Ethereum ledger. This separation allegedly improves functionality by off-loading price calculations. ¶52, ¶29 col. 17:30-38
...linking the electronic transaction record in the DCL to records of the at least one electronic parallel storage of the differences layer utilizing at least one time sequenced value, string, code, or key... The "Comptroller" contract allegedly links on-chain user balances to off-chain price data from the Price Oracle to determine risk weights and liquidation thresholds for each user account. ¶77 col. 17:39-44
...imputing at least one measured differential...to the electronic transaction record of the DCL... As the protocol earns interest, a user's cToken "becomes convertible into an increasing quantity of the underlying asset." This increasing value, which accrues with every Ethereum block, is alleged to be a measured differential that is imputed to the user's on-chain balance record. ¶50, ¶79 col. 17:45-51

Identified Points of Contention

  • Scope Questions: A primary issue may be whether the Compound Protocol's Price Oracle system constitutes the claimed "electronic parallel storage of a differences layer." The defense may argue the oracle merely provides real-time price data, whereas the patent could be interpreted to require a system that stores and processes calculated "differentials" or changes over time. The Plaintiff's allegations regarding the "Interest Rate Index" and "market history service" may be intended to counter this argument. (Compl. ¶45, ¶54).
  • Technical Questions: The case may turn on whether the function of the "Comptroller" smart contract, which maps balances to prices, meets the "linking" limitation as defined in the patent. The court may need to consider whether this software-based mapping is equivalent to the "time sequenced value, string, code, or key" recited in the claim.
  • Technical Questions: Another point of contention could be whether the accrual of interest on a cToken satisfies the "imputing at least one measured differential" limitation. The analysis will likely focus on whether this is a standard interest calculation or if it functions as the specific type of data imputation from a separate layer as described in the patent specification.

V. Key Claim Terms for Construction

  • The Term: "differences layer"

  • Context and Importance: This term is central to the invention's novelty of separating storage. The outcome of the case may depend on whether Compound's off-chain components, like its Price Oracle and interest rate models, fall within the scope of this term.

  • Intrinsic Evidence for Interpretation:

    • Evidence for a Broader Interpretation: The patent specification states the layer stores "differences, measurements, or descriptors" and can be based on a wide array of "exogenous electronic published data" such as prices, volumes, and dates, suggesting a broad scope beyond simple mathematical deltas. (’797 Patent, col. 5:14, col. 6:22-25).
    • Evidence for a Narrower Interpretation: The patent repeatedly uses the specific phrase "parallel storage of difference layer (PSDL)" and includes figures illustrating the calculation of a "dif(t)" value, which represents a change over time. (’797 Patent, Fig. 11; col. 9:26-27). This could support a narrower construction requiring the layer to explicitly store calculated changes or differentials, not just raw data values.

  • The Term: "imputing"

  • Context and Importance: This term defines the action of applying the off-chain data to the on-chain record. Whether the interest accrual mechanism of cTokens constitutes "imputing" a "differential" will be a critical question for infringement.

  • Intrinsic Evidence for Interpretation:

    • Evidence for a Broader Interpretation: The patent does not appear to provide an explicit definition of "imputing," which may lead parties to argue for its plain and ordinary meaning, potentially covering any method of applying or attributing a value from one system to another.
    • Evidence for a Narrower Interpretation: The patent describes the process as "imputing at least one measured differential with a descriptive identifier... to the electronic transaction record." (’797 Patent, col. 17:45-51). This language could suggest a more specific technical process than a simple interest calculation, perhaps requiring the application of a distinct, pre-calculated data packet from the "differences layer."

VI. Other Allegations

  • Indirect Infringement: The complaint alleges inducement by asserting that Defendant provides "product literature and website materials" that instruct users on how to operate the protocol in a manner that infringes the ’797 Patent. (Compl. ¶88, ¶91). Contributory infringement is also pleaded. (Compl. ¶92).
  • Willful Infringement: Willfulness is alleged based on Defendant's knowledge of the patent and its infringement "at least since the date of the filing of the present Complaint," indicating a theory of post-suit willfulness. (Compl. ¶87, ¶89).

VII. Analyst’s Conclusion: Key Questions for the Case

  • A core issue will be one of definitional scope: can the patent's term "differences layer," which is described as a parallel storage system for exogenous data, be construed to read on the Compound Protocol's combination of a Price Oracle, interest rate models, and other off-chain computational components?
  • A key evidentiary question will be one of functional mapping: does the automated operation of the protocol's "Comptroller" contract and the interest accrual mechanism of its cTokens perform the specific functions of "linking" and "imputing" a "measured differential" as required by the patent claims, or is there a fundamental mismatch in the claimed architecture versus the accused system's operation?
  • The case presents a novel question of entity liability: how does patent infringement law, which requires an entity to "make, use, sell, or offer for sale" an invention, apply to a "decentralized autonomous organization" (DAO)? The resolution may depend on the degree of control exercised by associated entities like Compound Labs or the governance token holders. (Compl. ¶10, ¶13, ¶38).