Espeed, Inc. v. Brokertec Usa, L.L.C.

• Decision Date: 20 March 2007
• Docket Number: No. 2006-1385.,2006-1385.
• Parties: eSPEED, INC., Cantor Fitzgerald, L.P., CFPH, L.L.C., and eSpeed Government Securities, Inc., Plaintiffs-Appellants, v. BROKERTEC USA, L.L.C., Garban, L.L.C., OM Technology US, Inc., and OM Technology AB, Defendants-Appellees.
• Court: U.S. Court of Appeals — Federal Circuit

480 F.3d 1129

eSPEED, INC., Cantor Fitzgerald, L.P., CFPH, L.L.C., and eSpeed Government Securities, Inc., Plaintiffs-Appellants, v. BROKERTEC USA, L.L.C., Garban, L.L.C., OM Technology US, Inc., and OM Technology AB, Defendants-Appellees.

No. 2006-1385.

United States Court of Appeals, Federal Circuit.

March 20, 2007.

Gary A. Rosen, Law Offices of Gary A. Rosen, P.C., of Philadelphia, PA, argued for plaintiffs-appellants. With him on the brief was Jack B. Blumenfeld, Morris, Nichols, Arsht & Tunnell LLP, of Wilmington, DE.

J. Michael Jakes, Finnegan, Henderson, Farabow, Garrett & Dunner, L.L.P., of Washington, DC, argued for defendants-appellees. With him on the brief was James R. Barney.

Before LINN, DYK, and MOORE, Circuit Judges.

MOORE, Circuit Judge.

Plaintiffs-appellants eSpeed, Inc., Cantor Fitzgerald, L.P., CFPH, L.L.C. and eSpeed Government Securities, Inc. (collectively Cantor) appeal from the district court's final judgment declaring claims 20-23 of United States Patent No. 6,560,580 (the '580 patent) invalid, declaring the '580 patent unenforceable, and entering final judgment in favor of defendants. Because we affirm the district court's conclusion that the '580 patent is unenforceable due to inequitable conduct, we need not decide the other issues raised by Cantor.

I. BACKGROUND

A. Technological Background

1. Methods involving "open outcry" and "trade capture"

The '580 patent pertains to automated methods and systems for trading financial instruments, particularly fixed income securities. Prior to the development of the invention described in the '580 patent, financial instruments were sold using an "open-outcry" method whereby "voice brokers" would express various bid and offer prices for a given instrument. '580 patent, col.3 ll.6-9. According to the '580 patent, "[t]his expression would involve the loud oral `cry' of a customer-proposed bid or offer and the coordination with the fellow representatives regarding the extraction of complementary positions — until a transaction match is made and a deal is done." Id. at col.3 ll.9-12. Open outcry auction bond brokering served its customers well because it was efficient and permitted trading at "near perfect market pricing." Id. at col.2 ll.64-66.

While voice brokers were participating in open outcry trading, a process known as "trade capture" was performed by designated clerks. Id. at col.3 ll.13-18. These clerks would attempt to record the "outcry of many individual brokers simultaneously" using electronic input devices, such as a computer or workstation. Id. at col.3 ll.18-21. As might be apparent from its description, the quality of the information inputted into the electronic devices by a clerk was "a function of the interpretative skill of the input clerk, and the volume and the volatility of customer orders." Id. at col.3 ll.22-23.

The inventors of the '580 patent recognized that there was a need for greater efficiency and accuracy in the trading of instruments such as fixed income securities. Id. at col.3 l.29-col.4 l.3. Therefore, they sought to create a system to automate the trading process and avoid the use of open outcry and trade capture processes.

2. "New" vs. "Old" Rules of Workup

Traders in the secondary market for fixed income securities, such as United States Treasuries (e.g., T-bills, notes, and bonds), do not want to reveal the full volume that they are willing to trade at a given price because this information might be used against the trader by other market participants. However, in order to foster liquidity in the market, customers who initiate the trade at a given price are provided with the exclusive option to incrementally increase their purchase volume. This exclusivity is known as "workup rights." When given exclusivity, a customer can gradually increase the volume of his purchase while determining how the market is reacting to the purchase before trading further.

In what the parties have referred to as the "old rules" of workup, when the first buyer or seller has completed his transaction, new buyers or sellers are sequentially given, in the order in which they expressed interest, exclusive workup rights. One problem with the old rules of workup was that a few participants could tie up the market for long periods of time. As a result, brokers would, on occasion, engage in side deals to avoid losing business. Cantor presented evidence at trial showing that the old rules led to "chaos" and "pandemonium" when trading volume was heavy.

Because of the problems associated with the old rules of workup, Cantor employees began to develop new rules of workup. In 1994, the new rules of workup were designed to provide exclusivity to an initial pair of market participants, in a manner similar to the old rules of workup. After the initial pair of traders was finished, orders that were placed while the initial pair had exclusivity would then be rapidly executed in time priority order. Thus, by limiting exclusivity to the first pair of traders, the new rules of workup still provided an incentive for the first pair of traders to create liquidity while at the same time avoiding a long queue of traders waiting for their chance to trade.

3. The Super System/CFTS2.0

In the late 1980's Cantor began looking to replace its decade-old trade capture system with a new system. Between 1987 and 1992, programmers and software developers at Cantor wrote software code that would later become known internally as the "Super System" or the Cantor Fitzgerald Trading System (CFTS) 2.0. The district court found that "the Super System would provide a platform to support both automated trading and traditional outcry trading [using trade capture]." eSpeed, Inc. v. BrokerTec USA, L.L.C. (Unenforceability Ruling), 417 F.Supp.2d 580, 586 (D.Del.2006). The Super System included software code for various trading states including a workup state.¹ The Super System also included code that allowed brokers to use either the old rules or the new rules.²

As early as 1993, the Super System was used in Cantor trading rooms to conduct trades. Id. at 588. After using the Super System in 1993, Cantor determined that the system was too slow to be commercially used as an automated trading system and used it solely "as an order entry system, to support open outcry trading." Id. The Super System was used as a trade capture system in Cantor's trading rooms between 1993 and 1995 to transact billions of dollars worth of trades.

4. Subsequent Versions of CFTS

Cantor continued to improve the Super System in an attempt to create a more efficient automated trading system and first used Super System's successor, CFTS 3.1, in Cantor's Long Bond Room in 1995 during the week between Christmas and New Year's Day. Unenforceability Ruling, 417 F.Supp.2d at 588. CFTS 3.1 was able to implement trades efficiently enough that Cantor deemed it to be commercially viable.

B. The Prosecution History

The '580 patent was filed as United States Patent Application No. 09/294,526 (the '526 application). The '526 application claimed priority under 35 U.S.C. § 120 to United States Patent Application No. 08/766,733 (the '733 application). The '733 application was filed on December 13, 1996. This patent application matured into United States Patent No. 5,905,974 (the '974 patent) on May 18, 1999. Neither the Super System nor any other version of CFTS was disclosed to the United States Patent and Trademark Office (PTO) during the course of prosecution of the '733 parent application. Unenforceability Ruling, 417 F.Supp.2d at 588.

Shortly after the '974 patent issued, Cantor asserted the '974 patent against Liberty Brokerage. In preparing for that lawsuit, Cantor's outside counsel learned about the Super System and realized that it had not been disclosed to the PTO. Cantor dismissed its suit against Liberty Brokerage after this discovery.

In an effort to purge the possible inequitable conduct with regard to the '974 patent and avoid a similar problem with any patent that might issue based on the '526 application, Cantor submitted three declarations and numerous exhibits purporting to describe the Super System to the patent examiner in connection with the '526 application. Declarations were submitted by Stuart A. Fraser, Vice Chairman of Cantor Fitzgerald Securities (CFS), Howard W. Lutnick, Chairman of CFS, and Bijoy Paul, a Cantor employee responsible for the development of Super System's successors. Each of these individuals averred that he was an inventor of the '526 application and that they did not realize that they were under a duty to disclose the Super System during the prosecution of the '733 application. One declaration, submitted by Paul, stated that "[t]he Super System ... did not include new rules" and that "[t]he Super System code was based on `old rules' in which each successive broker had a period of exclusive control over the trade." Decl. of Bijoy Paul, '526 application, ¶¶ 11, 20 (Jan. 31, 2002) (emphasis added).³ The declarations submitted by Cantor referenced various exhibits that were submitted to the PTO along with the declarations. The exhibits amassed to 1139 pages, and included portions of the Super System source code.

The patent examiner considered the materials submitted by Cantor and concluded that the cited papers (presumably referring to the exhibits which were internal Cantor documents) did not constitute prior art, but were "given due consideration."

C. The District Court Proceedings

Cantor filed suit against BrokerTec USA, L.L.C., Garban, L.L.C., OM Technology US, Inc. and OM Technology AB (collectively BrokerTec) in the United States District Court for the District of Delaware on June 30, 2003. Cantor asserted that BrokerTec infringed claims 20-23 of the '580 patent. During the course of the litigation, the district court ruled, on motion by BrokerTec, that the submission of the inventor's declarations during the prosecution of the '526...