Paine, Webber v. Merrill Lynch, Pierce

• Decision Date: 21 June 1983
• Docket Number: Civ. A. No. 82-680.
• Citation: 564 F. Supp. 1358
• Parties: PAINE, WEBBER, JACKSON & CURTIS, INC., Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant, Counter-claimant, and Third-Party Plaintiff, v. DEAN WITTER REYNOLDS, INC., Third-Party Defendant.
• Court: U.S. District Court — District of Delaware

564 F. Supp. 1358

PAINE, WEBBER, JACKSON & CURTIS, INC., Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant, Counter-claimant, and Third-Party Plaintiff, v. DEAN WITTER REYNOLDS, INC., Third-Party Defendant.

Civ. A. No. 82-680.

United States District Court, D. Delaware.

May 27, 1983.

As Amended June 21, 1983.

COPYRIGHT MATERIAL OMITTED

Alan T. Boyd of Bayard, Brill & Handelman, P.A., Wilmington, Del., Kenneth E. Madsen, Richard L. Mayer and James Galbraith of Kenyon & Kenyon, New York City, of counsel, for plaintiff.

Rudolf E. Hutz and James M. Mulligan of Connolly, Bove, Lodge & Hutz, Wilmington, Del., Stephen B. Judlowe of Hopgood, Calimafde, Kalil, Blaustein & Judlowe and James W. Grady, Jr., New York City, of counsel, for defendant.

Robert K. Payson of Potter, Anderson & Corroon, Wilmington, Del., Reed E. Hundt and Peter L. Winik of Latham, Watkins & Hills, Washington, D.C., James G. Hunter, Jr., of Latham, Watkins, Hedlund, Hunter & Lynch, Chicago, Ill., of counsel, for thirdparty defendant.

William Leighton, pro se, New York City.

OPINION

LATCHUM, Chief Judge.

Plaintiff, Paine, Webber, Jackson and Curtis, Inc. ("Paine Webber"), brings this action pursuant to 28 U.S.C. §§ 2201-2202 and Rule 57, Fed.R.Civ.P.,¹ seeking a declaratory judgment of noninfringement, invalidity and unenforceability of United States Patent No. 4,346,442 ("the '442 patent"), and ancillary injunctive relief against defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), from initiating infringement litigation against and/or charging Paine Webber or any of its customers, officers, directors or employees with the infringement of the '442 patent. Merrill Lynch has counterclaimed seeking injunctive relief against Paine Webber for infringing or contributing to infringe the '442 patent, and monetary damages for Paine Webber's infringing activities. Merrill Lynch also has filed a third-party complaint against third-party defendant Dean Witter Reynolds, Inc. ("Dean Witter"), alleging that it has infringed and continues to infringe the '442 patent by making, using and selling an implementation of the '442 patent and seeks injunctive relief against Dean Witter to enjoin the infringing, inducing infringement or contributing to infringe the '442 patent. Merrill Lynch also alleges that Dean Witter has wrongfully appropriated the trade secrets of Merrill Lynch when it hired one of Merrill Lynch's employees. It requests this Court to exercise its pendent jurisdiction to enjoin Dean Witter from misusing the trade secrets allegedly misappropriated.

Paine Webber has moved this Court pursuant to Rule 56(c), Fed.R.Civ.P., for a summary judgment declaring the '442 patent invalid and unenforceable under 35 U.S.C. § 101 on the sole ground that the patent does not claim subject matter which can form the basis for a valid patent. (Docket Item "D.I." 12.) Paine Webber also has moved this Court (1) to strike so much of Merrill Lynch's "Answer, Counterclaim, Third Party Complaint and Jury Demand" as is denominated "Third Party Complaint," on the ground that the Third Party Complaint does not comply with the provisions of Rule 14, Fed.R.Civ.P.; or (2) to dismiss, or alternatively to sever, so much of the Third Party Complaint on the grounds that the attempted joinder of the third party does not comply with the provisions of Rules 13(h), 19 or 20.

Dean Witter has moved this Court, pursuant to Rules 12(b)(1) & (6), Fed.R.Civ.P., for an order dismissing each cause of action alleged by Merrill Lynch on the grounds that (1) the first cause of action fails to state a claim upon which relief can be granted because the '442 patent is invalid and unenforceable under Section 101, and that (2) the second cause of action alleging trade secrets misappropriation should be dismissed for lack of subject matter jurisdiction.

William Leighton d/b/a Option Advisory Service, Inc. ("Leighton") also has moved pursuant to Rules 19 and 21 as a pro se litigant to join Leighton as a third party plaintiff. Leighton requests this Court to declare the '442 patent invalid and unenforceable and hold Merrill Lynch liable for unfair competition for its use of the '442 patent.

I. The Cash Management Account

In 1977 Merrill Lynch offered to the public the Cash Management Account program ("CMA") which combined three financial services commonly offered by financial institutions and brokerage houses and included a brokerage security account (the "Securities Account"), several money market funds (the "Money Market Fund"), and a charge/checking account (the "Visa Account"). The Securities Account, the primary component of the CMA program, is a conventional Merrill Lynch margin account which may be used to purchase and sell securities and options on margin or on a fully-paid basis. It is maintained pursuant to the rules and regulations of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the New York Stock Exchange, and the National Association of Securities Dealers, Inc. As is the case with a conventional margin account, the customer of the CMA pays normal brokerage fees for securities transactions in the Securities Account. (D.I. 13A, CMA Money Trust Prospectus at 2.)

The Money Market Fund is a conventional money market fund which provides the customer of the CMA with a choice of three CMA money market funds: the CMA Money Fund, the CMA Government Securities Funds, or the CMA Tax-Exempt Fund. Each of these funds is a no-load, diversified, open-end management investment company registered under the Investment Company Act. The objectives of the funds are similar to the objectives of other money market funds (such as the Merrill Lynch Ready Assets Trusts). Each seek the safety of principal, liquidity and current income available from investing in a portfolio of money market securities. Dividends are declared daily and automatically reinvested in the Money Market Fund similar to the method by which the dividends are distributed, and reinvested in other money market funds. (Id.)

The Visa Account is the third component of the CMA and is managed by Bank One of Columbus, N.A. ("Bank One"). Bank One issues a Visa card and checks to each person who is a CMA customer. The card may be used to make purchases of merchandise or services at Visa-participating establishments or to obtain cash advances from any Visa-participating bank or branch. The CMA customer may draw checks upon his Visa Account for any purpose and the Visa card is similar to the conventional card in that the card is honored at more than the 100,000 worldwide bank branches in the Visa system, as well as the 3,000,000 business establishments accepting the Visa card. (Id. at 3.)

No question exists that the three major components of the CMA were offered to the public prior to the marketing of the CMA by financial institutions and/or brokerage houses: one could have placed securities into a brokerage account, purchased shares in a money market fund, or obtained a Visa charge account. Merrill Lynch, however, argues that by combining the three components of the CMA, the customer receives synergistic benefits. According to Merrill Lynch, one of the advantages of the CMA is that all money generated in the Securities Account is automatically invested within a week into the Money Market Fund. This differs from a conventional brokerage account, which might not invest money generated from activity in the brokerage account and thus some money might remain in an account without yielding any financial return. These proceeds, referred to as "idle cash" do not enhance the customer's portfolio and usually is not compatible with the customer's overall financial objectives. By investing any idle cash generated in the Securities Account, into the Money Market Fund, the customer apparently receives a greater return on his initial investment and therefore is consistent with the customer's overall objectives.

Another advantage of having an integrated financial service, as provided by the CMA, is that the cash balances in the Securities Account, shares in the Money Market Fund, and available margin loan value of the securities in the Securities Account are calculated when determining the amount of credit available in the Visa Account. Also, payments made by Merrill Lynch to Bank One in payment of Visa balances, on behalf of the CMA customers, are made in the following order of priority: (1) from the cash balances, if any held in the Securities Account; (2) from the proceeds of redemption of Money Fund shares in CMA accounts; and (3) from margin loans to the customer by Merrill Lynch within the available margin loan value of the securities in the Securities Account. This system of priority arguably provides for an efficient use of funds because the customer will not incur the cost of a margin loan until all free credit cash balances and funds invested in Money Market Fund shares are fully utilized. (Id.)

Another advantage of the CMA, according to Merrill Lynch, is that those customers who subscribe to the CMA receive a monthly transaction statement from Merrill Lynch which details all CMA transactions during the preceding month. The statement describes securities and options bought and sold in the Securities Account, whether on margin or on a fully-paid basis, any other type of transaction effected in the Securities Account, margin interest charges, if any, Money Market Fund shares that were purchased or redeemed, dividends on Money Market Fund shares, purchases of merchandise or services that were made with the Visa card, checks drawn against the Visa Account and cash advances. (Id.)

II. The Invention

A. The Patent Office

The '442 patent application was filed in the United States Patent Office on July 29, 1980 asserting twelve claims for a "Securities Brokerage-Cash Management System." With the application, Merrill Lynch notified the Patent Office that a portion of...