768 F.Supp.2d 221 (D.D.C. 2011), C. A. 07-974 (RMC), CLS Bank Intern. v. Alice Corp. Pty. Ltd.

Docket Nº:Civil Action 07-974 (RMC).
Citation:768 F.Supp.2d 221
Opinion Judge:ROSEMARY M. COLLYER, District Judge.
Attorney:David O. Bickart, Kaye Scholer LLP, Washington, DC, Stephen J. Elliott, Steven J. Glassman, William A. Tanenbaum, Kaye Scholer LLP, New York, NY, for Plaintiff. Bruce Roger Genderson, David Milton Krinsky, Ryan T. Scarborough, Michael Jesse Carlson, Stanley Edward Fisher, Williams & Connolly, LLP...
Case Date:March 09, 2011
Court:United States District Courts, District of Columbia

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768 F.Supp.2d 221 (D.D.C. 2011)




Civil Action No. 07-974 (RMC).

United States District Court, District of Columbia.

March 9, 2011

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[Copyrighted Material Omitted]

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David O. Bickart, Kaye Scholer LLP, Washington, DC, Stephen J. Elliott, Steven J. Glassman, William A. Tanenbaum, Kaye Scholer LLP, New York, NY, for Plaintiff.

Bruce Roger Genderson, David Milton Krinsky, Ryan T. Scarborough, Michael Jesse Carlson, Stanley Edward Fisher, Williams & Connolly, LLP, Washington, DC, for Defendant.


ROSEMARY M. COLLYER, District Judge.

CLS Bank International moves for summary judgment, contending that all patent claims asserted by Alice Corporation Pty. Ltd. in this case are invalid under 35 U.S.C. § 101 for lack of patentable subject matter. Alice cross-moves for partial summary judgment, arguing that its asserted claims are directed to patent-eligible subject matter. Before the Court are claims 33 and 34 of U.S. Patent No. 5,970,479, and every claim of U.S. Patent No. 6,912,510; U.S. Patent No. 7,149,720; and U.S. Patent No. 7,725,375. For the reasons set out below, the Court finds each of the claims at issue to be directed to unpatentable subject matter and will grant summary judgment in full to CLS.


A. The Patents

Alice is an Australian company that owns four United States patents; it asserts that CLS infringes these four patents. CLS is an " Edge Act Corporation," organized under Section 25A of the Federal Reserve Act, as amended, 12 U.S.C. § 611, and authorized by statute to engage in international banking activities. In response to Alice's charge of infringement, CLS challenges the subject matter patentability of the asserted claims of the four patents. Alice's four patents at issue are: (1) U.S. Patent No. 7,149,720 (" '720 Patent" ); (2) U.S. Patent No. 6,912,510 (" '510 Patent" ); (3) U.S. Patent No. 5,970,479 (" '479 Patent" ); and U.S. Patent No. 7,725,375 (" '375 Patent" ) (collectively the " Patents" ). The relevant claims of the '479 and '510 Patents are directed to a method (i.e., process), while the claims of the '720 and '375 Patents are directed to a system or product. The Court has not construed the allegedly infringed claims.

In the early 1990's, the founder of Alice, Ian Shepherd, invented an " innovative trading platform" which entailed a " computerized system for the establishment, settlement, and administration of financial

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instruments, principally of basic derivatives, that would solve problems inherent in the way such trading had been done in the past." Alice Mem. in Supp. of Mot. for Summ. J. & Opp'n [Dkts. 95, 96] 4 (" Alice Mem." ). One aspect of the trading platform is " an automated method and system for eliminating counter-party risk when parties who were often unknown to each other and in different time zones wanted to exchange payments." Id. The " electronic settlement mechanism [ ] settled trades without the risk that one party would perform and the other would not." Id. Alice's expert, Paul Ginsberg, explains that the Patents " disclose and claim in various ways a novel computerized trading platform for exchanging obligations in which a trusted third party, running a computer system programmed in a specific way, settles parties' obligations so as to eliminate what is variously referred to as ‘ Herstatt,’ ‘ counterparty,’ or ‘ settlement’ risk— the risk that only one party's obligation will be paid, leaving the other party without its principal." Id. 4-5 (citing Alice Mem., [Ex. 1] Ginsberg Decl. ¶ ¶ 23-24). " The trusted third party— a ‘ supervisory institution’ — operates a data processing system that exchanges both parties' obligations or neither." Id. at 5.

Mr. Ginsberg elucidates the risk the Patents are intended to mitigate. " When obligations arise from a trade made between two parties, e.g., a trade of stock or a trade of foreign currency, typically, there is a gap in time between when the obligation arises and when the trade is ‘ settled.’ " Ginsberg Decl. ¶ 21. " In a number of financial contexts, the process of exchanging obligations, or settlement, is separate from the process of entering into a contract to perform a trade." Id. Mr. Ginsberg provides the example of two banks that wish to exchange large sums of currency would normally enter into a binding agreement to make an enumerated exchange but would postpone the actual exchange until after the price is set and the agreement confirmed, which is typically a two day period. Id. ¶ 22. After two days, the two banks would " settle" the trade by both paying their predetermined amounts to the other bank. However, a risk exists that one bank might wire its money, but the second bank would fail to do the same; the loss possibly becoming permanent, for instance, if the second bank thereafter goes bankrupt or is shut down by regulators. Id. ¶ 23. The Patent claims at issue here seek to minimize this " settlement" risk that only one side of a trade would be fulfilled during the settlement process. Id. " Generally speaking, a trusted third party might operate a computer system that is configured in a particular way to exchange the parties' obligations, and by performing the particular electronic method using that computer system, can lessen settlement risk." Id. ¶ 24.

Therefore, Mr. Ginsberg reads the asserted claims of the four Patents to be " generally directed to methods or systems that help lessen settlement risk using a computer system." Id. Very broadly speaking, the process claims are directed to methods of exchanging financial obligations between parties while the system claims relate to data processing systems to implement the steps of exchanging obligations and the computer product claims enable a computer to send a transaction to the system to be implemented and allow a user to view the steps of exchanging obligations being performed.

1. '479 Patent

The '479 Patent is entitled " Methods and Apparatus Relating to the Formulation and Trading of Risk Management Contracts." See CLS Mem. in Supp. of Mot. for Summ. J. [Dkt. # 94] (" CLS Mem." ), [Ex. 1] '479 Patent. The application

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for the '479 Patent was filed on May 28, 1993, and the Patent issued on October 19, 1999. The '479 Patent, at large, allegedly " discloses a complex computer-based system and various electronic methods for formulating risk management contracts, trading the contracts, and exchanging the resulting obligations." Ginsberg Decl. ¶ 25. The specification discloses:

The invention encompasses methods and apparatus enabling the management of risk relating to specified, yet unknown, future events by enabling entities (parties) to reduce their exposure to specified risks by constructing compensatory claim contract orders on yet-to-be-identified counter-parties, being contingent on the occurrence of the specified future events. The entities submit such orders to a ‘ system’ which seeks to price and match the most appropriate counter-party, whereupon matched contracts are appropriately processed through to their maturity. Therefore, the invention enables parties to manage perceived risk in respect of known, yet non-predictable, possible future events.

'479 Patent, col. 3:29-42. The disclosure of the '479 Patent reveals an invention that, as a whole, appears to be directed to a seemingly complex trading platform which facilitates a wide array of parties to come together and enter into contracts to hedge against future risks of all sorts; the system allows parties to trade such contracts already entered into, the system manages contracts until maturity, and the system provides for the transfer or exchange of entitlements or payments once they arise.

Only claims 33 and 34 of the '479 Patent are at issue in this matter. These two claims are directed to a " method of exchanging obligations" between parties, and in their entirety, they claim:

33. A method of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of:

(a) creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions;

(b) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;

(c) for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party's shadow credit record or shadow debit record, allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order; and

(d) at the end-of-day, the supervisory institution instructing ones of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions.

34. The method as in claim 33, wherein the end-of-day instructions represent credits and debits netted throughout the day for each party in respect of all the transactions of that day.

'479 Patent, col. 65:23-54. Both claims recite a " shadow credit record," a " shadow

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debit record," and a " transaction." See, e.g., id. col. 65:27, 33 (Claim 33).

The methods in claims 33 and 34 relate to just one feature of the entire invention disclosed in the '479 Patent, see...

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