Island Intellectual Prop., LLC v. Stonecastle Asset Mgmt. LLC

• Decision Date: 29 May 2020
• Docket Number: 19-CV-4792 (JPO)
• Parties: ISLAND INTELLECTUAL PROPERTY, LLC, Plaintiff, v. STONECASTLE ASSET MANAGEMENT LLC et al., Defendants.
• Court: U.S. District Court — Southern District of New York

463 F.Supp.3d 490

ISLAND INTELLECTUAL PROPERTY, LLC, Plaintiff,

v.STONECASTLE ASSET MANAGEMENT LLC et al., Defendants.

19-CV-4792 (JPO)

United States District Court, S.D. New York.

Signed May 29, 2020

Beth Claire Khinchuk, John Dellaportas, Emmet, Marvin & Martin LLP, New York, NY, for Plaintiff.

Brian A. Rosenthal, Josh Andrew Krevitt, Katherine Quinn Dominguez, Gibson, Dunn & Crutcher, LLP, New York, NY, Jordan Bekier, Los Angeles, CA, for Defendants Stonecastle Cash Management LLC, StoneCastle Insured Sweep LLC, StoneCastle Partners LLC, StoneCastle Asset Management LLC.

Samuel Joseph Abate, Jr., Pepper Hamilton, LLP, Brian A. Rosenthal, Josh Andrew Krevitt, Katherine Quinn Dominguez, Gibson, Dunn & Crutcher, LLP, New York, NY, Stephanie Laura Jonaitis, Pepper Hamilton LLP, Princeton, NJ, Jordan Bekier, Los Angeles, CA, for Defendant StoneCastle Financial Corp.

OPINION AND ORDER

J. PAUL OETKEN, District Judge:

Island Intellectual Property, LLC ("Island") initiated this action against StoneCastle Cash Management LLC ("StoneCastle") and affiliated entities, alleging patent infringement and other federal and state-law causes of action. (See Dkt. No. 13 ("Compl.").) The principal issue raised on this motion to dismiss is whether the asserted patent claims — which, broadly speaking, disclose a computer-implemented, multibank reciprocal-deposit system — are drawn to a patent-ineligible abstract idea. StoneCastle also moves to dismiss Island's other causes of action on assorted grounds. The Court concludes that the patents are directed at a patent-ineligible abstract idea, that the complaint fails to state a trade secret claim, and that the exercise of supplemental jurisdiction over the remaining state-law claims is unwarranted. The motion to dismiss is therefore granted.

I. Background

Island is a corporate affiliate of Double Rock Corporation, a cash-management business that caters to financial-services providers. (See Compl. ¶ 13.) In 2017, StoneCastle Insured Sweep LLC (SCIS), a subsidiary of Stonecastle, acquired Intermedium Financial LLC ("Intermedium"), a licensee of Island's intellectual property. (See Compl. ¶ 42.) In light of the acquisition, Intermedium and Island executed an addendum to their pre-existing licensing agreement, permitting SCIS to assume any rights and obligations under that agreement, provided that StoneCastle's other corporate affiliates and subsidiaries would not use the intellectual property without additional licenses. (See Compl. ¶¶ 38–39, 42.) But by October 2018, Island grew suspicious that StoneCastle was employing its intellectual property without license by offering "Federally Insured Cash Accounts" to local government entities. (See Compl. ¶¶ 20, 44.)

The allegedly infringed patents at issue fall into two categories. The first category comprises the "Reciprocal Deposit Patents," four patents that share a single specification. See U.S. Patent No. 8,719,157 (the "'157 Patent") ; U.S. Patent No. 8,359,267 (the "'267 Patent") ; U.S. Patent No. 8,712,911 (the "'911 Patent") ; U.S. Patent No. 8,150,766 (the "'766 Patent"). The second category consists of a single patent, the "Allocation Model Patent," U.S. Patent No. 8,655,689 (the "'689 Patent").

A. The Reciprocal Deposit Patents

According to the Reciprocal Deposit Patents’ shared specification, the invention discloses "a method and system by which banks can earn greater returns on their investment of public deposits." See, e.g., '766 Patent col. 1 ll. 47–49. The scheme is a solution to a quandary raised by bank deposits from public entities. As the specification explains, "banks often are obliged by statute, practice or sense of community to accept public deposits from federal, state or municipal entities." Id. ll. 31–33. By law, those "public deposits ... often must be federally insured or, alternatively, ‘collateralized’ by having banks pledge government securities ... to secure public deposits in the event of the institution's failure." Id. ll. 34–39. That puts banks in a bind, though, because the interest rates paid to public depositors are typically higher than the interest rates earned on government securities; in short, the banks are on the losing end of the spread. Id. ll. 40–46. The disclosed scheme offers a way out of that jam: the recipient bank (often a local bank) may distribute the deposited public funds to another (usually larger) bank or network of banks that are better positioned to receive public deposits, in exchange for funds from those banks that do not trigger the same regulatory requirements and that may be covered by federal deposit insurance. Each claim is a variation on this basic model. For example, in one embodiment, the first bank transfers the public deposit to another bank or network of banks with ample government securities to secure the deposit, in exchange for funds that can be loaned out to borrowers at profitable interest rates. See id. col. 4 ll. 40–67, col. 5 ll. 1–38. By divvying up the public deposit among the network, the original deposit bank ensures that the funds are adequately secured without losing on the spread.

B. The Allocation Model Patent

According to its specification, the Allocation Model Patent "generally relates to a system, method and program product for modeling fund movements, such as for sweep programs" — like that disclosed in the Reciprocal Deposit Patents — "and/or for predicting available capacity in a deposit system." '689 Patent col. 1 ll. 14–17. It is, essentially, a scheme for computerized management of account balances across a multi-bank, multi-account depository system.

II. Legal Standard

To survive a motion to dismiss for failure to state a claim upon which relief may be granted, a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In considering such a motion, a court must accept the factual allegations in the plaintiff's complaint as true and draw all inferences in the plaintiff's favor. See Allaire Corp. v. Okumus , 433 F.3d 248, 249–50 (2d Cir. 2006).

"Patent eligibility, a question of law often involving subsidiary factual questions, can be decided on a motion to dismiss ‘when there are no factual allegations that, taken as true, prevent resolving the eligibility question as a matter of law.’ " Pers. Beasties Grp. LLC v. Nike, Inc. , 341 F. Supp. 3d 382, 386 (S.D.N.Y. 2018) (quoting Aatrix Software, Inc. v. Green Shades Software, Inc. , 882 F.3d 1121, 1125, 1128 (Fed. Cir. 2018) ), aff'd , 792 F. App'x 949 (Fed. Cir. 2020) (per curiam).

III. Discussion

The Court addresses first Island's claims for patent infringement and then its claim under the Defend Trade Secrets Act of 2016 ("DTSA"), 18 U.S.C. § 1831 et seq.

A. Patent Infringement

Section 101 of the Patent Act makes patentable "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." 35 U.S.C. § 101. This general principle is subject to a critical exception: "[l]aws of nature, natural phenomena, and abstract ideas" are not eligible for patent protection, because cordoning off that ground " ‘tend[s] to impede innovation more than it ... tend[s] to promote it,’ thereby thwarting the primary object of the patent laws.’ " Alice Corp. Pty. Ltd. v. CLS Bank Int'l , 573 U.S. 208, 216, 134 S.Ct. 2347, 189 L.Ed.2d 296 (2014) (citation omitted).

The framework set out in Mayo Collaborative Services v. Prometheus Laboratories, Inc. , 566 U.S. 66, 132 S.Ct. 1289, 182 L.Ed.2d 321 (2012), and refined in Alice Corp. v. CLS Bank International , 573 U.S. 208, 134 S.Ct. 2347, 189 L.Ed.2d 296, guides the Court's application of this exception. At the Mayo / Alice first step, the Court must determine whether the claims are "drawn to [an] abstract idea." Alice , 573 U.S. at 218, 134 S.Ct. 2347. The distinction between an unpatentable "abstract idea" and a patentable invention must be delineated "carefully," because, "[a]t some level, ‘all inventions ... embody, use, reflect, rest upon, or apply’ " unpatentable ideas. Id. at 217, 134 S.Ct. 2347 (quoting Mayo , 566 U.S. at 71, 132 S.Ct. 1289 (second alteration in original).) If, at the first step, the Court concludes the claims are directed to an unpatentable abstract idea, it must proceed to ask, at the second step, "What else is there in the claims ...?" Mayo , 566 U.S. at 78, 132 S.Ct. 1289. Step two is, in other words, "a search for an ‘inventive concept’ — i.e. , an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.’ " Alice , 573 U.S. at 217–18, 134 S.Ct. 2347 (quoting Mayo , 566 U.S. at 72–73, 132 S.Ct. 1289 ) (alteration in original).

In the context of computerized systems, claims "purporting to improve the functioning of the computer itself, or improving an existing technological process might not succumb to the abstract idea exception." Enfish, LLC v. Microsoft Corp. , 822 F.3d 1327, 1335 (Fed. Cir. 2016) (internal quotation marks, alterations, and citation omitted). But it is not enough that a patent invoke a computer "merely as a tool" to execute an otherwise unpatentable idea. Enfish , 822 F.3d at 1335–36.

To apply these principles, the Court first determines which claims to consider in analyzing the viability of the asserted patents. "In a § 101 analysis, courts may evaluate representative claims." Automated Tracking Sols., LLC v. Coca-Cola Co. , 723 F. App'x 989, 991 (Fed. Cir. 2018). StoneCastle submits that this Court need consider only claim 1 of the '766 Patent (Dkt. No. 41 at 7); Island responds that the Court should consider (a) claims 1 and 31 of the '766 Patent ; (b) claims 1 and 27 of the '267 Patent ; (c) claims 1 and 20 of the '911 Patent ; (d) claims 1 and 26 of the '157 Patent ; and (e) claims 1 and 19 of the '689 Patent (Dkt. No. 49 at 15 n.2). But...