927 F.Supp. 502 (D.Mass. 1996), C. A. 94-11344, State Street Bank and Trust Co. v. Signature Financial Group, Inc.

Docket Nº:C. A. 94-11344
Citation:927 F.Supp. 502
Party Name:State Street Bank and Trust Co. v. Signature Financial Group, Inc.
Case Date:March 26, 1996
Court:United States District Courts, 1st Circuit, District of Massachusetts

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927 F.Supp. 502 (D.Mass. 1996)




Civil Action No. 94-11344-PBS.

United States District Court, D. Massachusetts.

March 26, 1996

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[Copyrighted Material Omitted]

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William L. Patton, James L. Sigel, Sharon Baker Morin, Ropes & Gray, Boston, MA, Maurice E. Gauthier, Samuels, Gauthier & Stevens, Boston, MA, for State Street Bank & Trust Co.

Philip G. Koenig, James J. Foster, Philip G. Koenig, Wolf, Greenfield & Sacks, Boston, MA, Steven L. Friedman, Dilworth, Paxson, Kalish & Kauffman, Philadelphia, PA, for Signature Financial Group, Inc.


SARIS, District Judge.

I. Introduction

Plaintiff, State Street Bank and Trust Company ("State Street") brings this action against Defendant, Signature Financial Group, Inc. ("Signature"), seeking a declaratory judgment that Signature's patent for a computerized accounting system for managing a mutual fund investment structure is invalid and unenforceable. 1 After hearing, the Court ALLOWS Plaintiff's motion for partial summary judgment and DISMISSES Defendant's counter-claims.

II. Background

State Street and Signature are companies, which, among other things, act as administrators and accounting agents of mutual funds. Signature owns U.S. Patent No. 5,193,056 ("056 Patent"), entitled "Data Processing System for Hub and Spoke Financial Services Configuration," issued on March 9, 1993, by assignment of the inventor, R. Todd Boes. As the patent summary states, the claimed invention "provides a data processing system and method for monitoring and recording the information flow and data, and making all calculations, necessary for maintaining a partnership portfolio and partner fund (Hub and Spoke) financial services configuration." In order to assess the scope and nature of the claimed invention, it is first necessary to discuss briefly the financial configuration which the data processing system is designed to service.

A. Hub and Spoke Configuration

The invention relates to a newly-developed financial investment vehicle, which State Street terms a "multi-tiered fund complex" and Signature calls by its own proprietary mark, a "Hub and Spoke" configuration. In essence, a Hub and Spoke arrangement is an investment structure whereby mutual funds ("Spokes") pool their assets in an investment portfolio ("Hub") organized as a partnership. "This financial services configuration involves an entity that is treated as a partnership for federal income tax purposes and that holds the investment portfolio ... and funds that invest as partners in the partnership portfolio." 056 Patent, col. 1. Enabling mutual

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funds to pool their assets in this manner provides for economies of scale with regard to the costs of fund administration and has beneficial tax consequences.

This complex financial structure, however, creates its own set of administrative challenges. As a partnership, the Hub portfolio assesses all economic gains and losses with respect to the Spoke funds on a pro rata basis. Because each of the Spokes are themselves investment vehicles, which are subject to constant changes in assets as individual investors add or withdraw funds and market prices fluctuate, the partnership interest of the Spokes in the Hub constantly varies. Administering this structure requires a daily allocation of income, capital gains, and expenses or investment losses. The daily allocations are made on the basis of the Spoke funds' percentage share in the total assets of the Hub portfolio.

B. The Claimed Invention

Signature's invention is directed to a data processing system for administering this Hub and Spoke configuration. The disclosure provides extensive flowcharts and a detailed description of the invention's preferred embodiment. The system is operated by means of a personal computer, software capable of performing the various functions described in the claims and detailed in the preferred embodiment and flowcharts, data storage means such as a floppy disk, and display means such as printed output and a computer screen.

Specifically, the invention calculates and stores data representing: the percentage share that each Spoke fund holds in the Hub portfolio; any daily activity affecting the portfolio's assets; allocations of gains, losses and expenses to each of the Spoke member funds; and tracking and updating data that are used to determine aggregate year-end income, gains, losses, and expenses for accounting and tax purposes.

The invention is claimed in means-plus-function language as an apparatus. 2 Of the six claims, only the first is independent:

(1) A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:

(a) computer processor means for processing data;

(b) storage means for storing data on a storage medium;

(c) first means for initializing the storage medium;

(d) second means for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds, assets and for allocating the percentage share that each fund holds in the portfolio;

(e) third means for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;

(f) fourth means for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and

(g) fifth means for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.

The specification discloses the specific structure, circuitry or other devices by which the invention operates as follows:

The portfolio/fund accountant makes use of a personal computer 44 programmed with software 50. One example of software 50 is the "HandS" (a service mark of Signature Financial Group, Inc.) computer program. The personal computer 44 used by portfolio/fund accountant is capable of producing printed output 46 and storing data on data disk 52, which preferably is a

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floppy disk, although other types of storage media may be used.

'056 Patent, col. 6 (numbers are references to flowcharts included in specification).

By way of patent prosecution history, the patent examiner apparently pondered whether to deny patentability on statutory-subject matter grounds but after consultation with other examiners determined that the claimed invention was directed to statutory subject matter. The patent application originally included both apparatus and method claims. The six apparatus claims were determined to be patentable, while the six method claims (phrased identically to the apparatus claims except for the absence of means-plus-function language as used in claim one quoted above) were rejected. Indeed, throughout the patent specification, there are numerous references to the invention as a "data processing system and method," even though the claims themselves state only an apparatus. '056 Patent, col. 4-5. The record does not disclose why the method claims were not successfully prosecuted.

Signature admits that it informed State Street that any data processing system designed to perform book accounting for a multi-tiered fund arranged in a Hub and Spoke configuration likely would infringe the '056 Patent. Answer ¶ 12. State Street serves as the custodian and accounting agent for several multi-tiered fund complexes and had negotiated with Signature for a license for its patented data processing system. When negotiations broke down, State Street brought the present declaratory judgment action seeking to invalidate Signature's patent.

III. Analysis

State Street alleges that Signature's patent is not drawn to statutory subject matter under 35 U.S.C. § 101 because the invention claims an unpatentable mathematic algorithm as defined by established Supreme Court precedent. Signature counters that its data processing system is a computer-implemented invention that is patentable both under recent Federal Circuit precedent and guidelines for patent examiners issued by the U.S. Patent and Trademark Office ("PTO").

The core issue on summary judgment is whether computer software that essentially performs mathematical accounting functions and is configured to run on a general purpose (i.e., personal) computer is patentable under 35 U.S.C§ 101. "[T]he question whether computer-related inventions driven by mathematically-based software deserve the market protection afforded under federal patent law has vexed both theorists and practitioners since computers entered the marketplace some thirty years ago." John A. Burtis, Towards a Rational Jurisprudence of Computer-Related Patentability in Light of In re Alappat, 79 MINN.L.REV. 1129, 1129 (1995). It is into this jurisprudential quagmire that the Court must dive.

A. Summary Judgment

Unlike the question presented in this case, the standards for summary judgment are familiar and well defined. "Summary judgment is appropriate when 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.' " Barbour v. Dynamics Research Corp., 63 F.3d 32, 36 (1st Cir. 1995) (quoting Fed.R.Civ.P. 56(c)). "To succeed [in a motion for summary judgment], the moving party must show that there is an absence of evidence to support the nonmoving party's position." Rogers v. Fair, 902 F.2d 140, 143 (1st Cir. 1990); see also Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).

"Once the moving party has properly supported...

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