Chicago Board Options Exchange, Inc. v. International Securities Exchange, LLC , 748 F.3d 1134 ( 2014 )

United States Court of Appeals
for the Federal Circuit
______________________
CHICAGO BOARD OPTIONS EXCHANGE,
INCORPORATED,
Plaintiff-Appellee,
v.
INTERNATIONAL SECURITIES EXCHANGE, LLC,
Defendant-Appellant.
______________________
2013-1326
______________________
Appeal from the United States District Court for the
Northern District of Illinois in No. 07-CV-0623, Judge
Joan H. Lefkow.
______________________
Decided: April 7, 2014
______________________
JONATHAN A. MARSHALL, Fish & Richardson P.C., of
New York, New York, argued for plaintiff-appellee. With
him on the brief were DAVID FRANCESCANI, MICHAEL T.
ZOPPO, BRIAN J. DOYLE, LEAH A. EDELMAN, and JEFFREY
C. MOK; and FRANK POCELLI, of Boston, Massachusetts.
Of counsel on the brief was STACIE R. HARTMAN, Schiff
Hardin LLP, of Chicago, Illinois.
PARKER H. BAGLEY, Boies Schiller & Flexner LLP, of
New York, New York, argued for defendant-appellant.
With him on the brief were MICHAEL UNDERHILL and
2 CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL
SECURITIES
RICHARD MEYER, of Washington, DC. Of counsel on the
brief were MICHAEL S. DE VINCENZO and CALVIN E.
WINGFIELD, Goodwin Procter LLP, of New York, New
York; DOUGLAS J. KLINE, of Boston, Massachusetts; and
LAUREL A. KILGOUR, of San Francisco, California. Of
counsel was NEAL CURTIS HANNAN, Boies Schiller &
Flexner LLP, of Washington, DC.
______________________
Before RADER, Chief Judge, REYNA and WALLACH, Circuit
Judges.
REYNA, Circuit Judge
This patent case, involving systems for trading finan-
cial instruments, is before us on appeal for the second
time. Defendant-Appellant International Securities
Exchange, LLC (“ISE”) argues that the district court
erred in making certain pretrial rulings that led ISE to
stipulate to non-infringement and in finding claim 2
indefinite. We affirm the lower court’s judgment of non-
infringement because none of its pretrial rulings were in
error. Because the specification discloses an algorithm for
“matching” on a “pro rata” basis, we reverse the finding
that claim 2 is indefinite.
BACKGROUND
ISE asserted U.S. Patent No. 6,618,707 (“’707 Patent”)
against Plaintiff-Appellee Chicago Board Options Ex-
change Inc. (“CBOE”) in the Southern District of New
York. Subsequently, CBOE filed suit in the Northern
District of Illinois seeking a declaratory judgment of non-
infringement. The New York case was transferred to
Illinois.
The ’707 Patent generally discloses an “automated ex-
change” for trading financial instruments. Claim 1 re-
cites:
CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL 3
SECURITIES
An automated exchange for trading a financial in-
strument wherein the trade may be one of a pur-
chase of a quantity of the instrument and a sale of
a quantity of the instrument, the exchange com-
prising:
an interface for receiving an incoming order or
quotation to trade the instrument, the incoming
order or quotation having a size associated there-
with;
book memory means for storing a plurality of pre-
viously received orders or quotations to trade a
corresponding plurality of quantities of the in-
strument, the previously received orders and quo-
tations each having a size associated therewith
and the previously received orders including pub-
lic customer orders previously entered for public
customers and professional orders or quotations
previously entered for one or more professionals;
system memory means for storing allocating pa-
rameters for allocating trades between the incom-
ing order or quotation and the previously received
orders and quotations; and
processor means for allocating portions of the in-
coming order or quotation among the plurality of
previously received orders and quotations in the
book memory means based on the allocating pa-
rameters in the system memory means,
wherein the allocating parameters include param-
eters for allocating a first portion of the incoming
order or quotation against previously received
customer orders and allocating a remaining por-
tion of the incoming order or quotation preferen-
tially against professional orders and quotations
with larger size.
’707 Patent at col. 29, l. 53 – col. 30, l. 14. Claim 2 adds:
4 CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL
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The exchange according to claim 1, wherein pro-
cessor means further comprises means for match-
ing the remaining portion with professional orders
or quotations in the book memory means on a pro
rata basis.
Id. at col. 30, ll. 15–19. This court’s previous opinion
described the claimed invention:
The ’707 Patent, titled “Automated Exchange for
Trading Derivative Securities,” discloses an in-
vention that relates generally to markets for the
exchange of securities. ’707 Patent, col. 1 ll. 13–
14. In particular, the ’707 Patent is directed to an
automated exchange for the trading of options
contracts that allocates trades among market pro-
fessionals and that assures liquidity. Id. col. 1 ll.
14–17. The Patent distinguishes an “automated”
exchange from the traditional, floor-based “open-
outcry” system for trading options contracts. Id.col. 1 ll. 24–26.
In an open-outcry system, trading takes place
through oral communications between market
professionals at a central location in open view of
other market professionals. Id. col. 1 ll. 27–29.
For example, an order is typically relayed out to a
trader standing in a “pit.” Id. col. 1 ll. 29–30. The
trader shouts out that he has received an order
and waits until another trader or traders shouts
back a two-sided market (the prices at which they
are willing to buy and sell a particular option con-
tract), then a trade results. Id. col. 1 ll. 30–34.
The ’707 Patent builds on this traditional ex-
change system. Specifically, the Patent purports
that “[i]t is an advantage of the invention to pro-
vide an automated system for matching previously
entered orders and quotations with incoming or-
ders and quotations on an exchange for securities,
CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL 5
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which will improve liquidity and assure the fair
handling of orders.”
Chicago Bd. Options Exch., Inc. v. Int’l Sec. Exch., LLC,
677 F.3d 1361, 1363–64 (Fed. Cir. 2012).
CBOE’s accused product is the “Chicago Board Op-
tions Exchange,” which uses the Hybrid Trading System
(“Hybrid”). The Hybrid system includes a fully screen-
based trading system called “CBOEdirect.” The Hybrid
system integrates CBOEdirect with traditional, open-
outcry trading. The previous panel noted that “CBOE has
described the Hybrid as an integrated single market
system that blends the elements of open-outcry and
electronic execution.” Id. at 1365.
In 2011, CBOE moved for summary judgment that,
among other limitations, Hybrid lacks an “automated
exchange.” The district court denied the motion. On
appeal, this court construed the term “automated ex-
change” to mean “a system for executing trades of finan-
cial instruments that is fully computerized, such that it
does not include matching or allocating through the use of
open-outcry.” Id. at 1373. We agreed with the district
court that the patentee disavowed all manual or partially
automated systems of trading:
The ’707 Patent thus disavows the traditional
open-outcry or floor-based trading systems. There
is no other way to interpret the listing in the spec-
ification of the many reasons why manual and
partially automated exchanges cannot sustain the
growing demands of the market. Indeed, the spec-
ification goes well beyond expressing the patent-
ee’s preference for a fully automated exchange
over a manual or a partially automated one, and
its repeated derogatory statements about the lat-
ter reasonably may be viewed as a disavowal of
that subject matter from the scope of the Patent’s
claims.
6 CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL
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Id. at 1372 (citing Honeywell Int’l, Inc. v. ITT Indus., Inc.,
452 F.3d 1312, 1319 (Fed. Cir. 2006)). Thus, under this
court’s construction, the claims require a fully computer-
ized trading system that does not include “matching or
allocating through the use of open-outcry.” While it is
undisputed that the Hybrid system includes both comput-
erized and open-outcry features, it is not clear to what
extent these features are intertwined. In particular,
unresolved in the previous appeal was whether CBOEdi-
rect is a separate system that could, on its own, infringe
the ’707 Patent or whether is it intertwined with the open
outcry aspects of the Hybrid system such that it is not an
“automated exchange.”
This court also construed “matching” as “identifying a
counterpart order or quotation for an incoming order or
quotation” and agreed with the district court that “match-
ing” and “allocating” are distinct processes. Id. at 1371.
PROCEEDINGS ON REMAND
On remand, the district court made certain eviden-
tiary and other pretrial rulings. ISE stipulated to non-
infringement because it felt that the district court’s pre-
trial rulings prevented it from proving that the accused
product met the “automated exchange” limitation.
The parties could not agree on a jury instruction re-
garding the meaning of “automated exchange.” After
hearing from both sides – including oral argument, writ-
ten submissions, and a motion for reconsideration from
ISE – the court ruled that the jury instruction regarding
the “automated exchange” claim limitation would be:
An automated exchange is a system for executing
trades of financial instruments that is fully com-
puterized, such that it does not include matching
or allocating through the use of open outcry. Con-
versely, a system for executing trades of financial
instruments that includes matching or allocating
CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL 7
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through the use of open outcry is not an automat-
ed exchange.
The first sentence above is a direct quotation of this
court’s construction, while the remaining text was added
by the district court. In the same order, based upon the
“automated exchange” claim construction and what it
knew about the accused product, the district court identi-
fied the factual issue that remained for the jury:
Presumably, ISE will argue that CBOEdirect in-
fringes because it is an automated exchange, i.e.,
a system for executing trades of financial instru-
ments that includes automated matching or allo-
cating (even though it permits matching or
allocating through open outcry for some trades).
CBOE will argue that CBOEdirect is not an au-
tomated exchange because it does not provide that
all matching or allocating be done automatically.
Because CBOEdirect is a computerized trading
system with a floor-based component for matching
and allocating some trades through open outcry, it
will be a jury question whether CBOEdirect is a
stand alone automated exchange alongside a floor-
based system or whether it is a system that in-
cludes matching or allocating through open outcry.
(emphasis added). Thus, the district court recognized
that ISE would argue that CBOEdirect infringed but also
recognized that ISE would have to address the degree to
which CBOEdirect was integrated with the open-outcry
aspects of Hybrid. When ruling on CBOE’s Motion in
Limine No. 1, the court elaborated on the factual in-
fringement question for the jury:
ISE expects to demonstrate that, although
CBOEdirect may route orders to the floor,
CBOEdirect also matches and allocates without
the use of open outcry; thus, CBOEdirect is an au-
tomatic exchange.
8 CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL
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The issue for trial is whether Hybrid is merely
two independent exchanges, one an “automatic
exchange” (CBOEdirect) and the other open out-
cry on the trading floor, or whether it is an inte-
grated system that requires interaction with the
trading floor. As such, ISE will have the burden
to demonstrate (1) that each element (e.g., inter-
face, book memory means and processor means) of
one or more claims is present in CBOEdirect, and
(2) that Hybrid’s “rule-based order routing algo-
rithm” does not include matching or allocating
through open outcry. This is necessary because
the ’707 patent disavows floor based trading. In
other words, ISE must prove that Hybrid is a sys-
tem for executing trades of financial instruments
that is fully computerized, such that it does not
include matching or allocating through the use of
open outcry.
ISE may offer evidence that the elements of the
claims of the ’707 patent are found in CBOEdirect
but it may not argue that, therefore, CBOEdirect
infringes or that Hybrid’s algorithm that includes
routing orders to the trading floor is irrelevant.
(footnote omitted). Again, the court recognized the im-
portance of whether CBOEdirect includes the open-outcry
aspects of Hybrid.
CBOE also moved in limine to exclude certain por-
tions of ISE’s expert testimony. Ruling on this motion,
the district court noted that “the invention of the ’707
patent does not encompass Hybrid unless ISE can also
establish that [Hybrid] is actually two independent trad-
ing systems.” The court restated its view of “the issue for
trial” as “whether Hybrid is actually two independent
exchanges, one an ‘automatic exchange’ (CBOEdirect) and
the other open outcry on the trading floor or whether it is
an integrated system that requires interaction with the
CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL 9
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trading floor.” The court then ruled that ISE’s expert, Dr.
Marvin, “may testify but may not express an opinion that
CBOEdirect infringes unless ISE can show that the
system of CBOEdirect is independent of floor-based
trading.”
At a pre-trial hearing, the parties and the court again
discussed the interplay between Hybrid and CBOEdirect
as it related to proof of infringement. The court stated:
“it seems to me that the accused system is Hybrid. How-
ever, if CBOEdirect is an independent exchange so that it
can operate without the [trading] floor, then there could
be infringement if all the elements of infringement are
proved.” It went on to state: “the patented process is a
system for executing trades. Hybrid is a system for exe-
cuting trades. And these are the two apples that we’re
going to compare” and “I don’t know what more I can say
about that that I think the accused system is Hybrid.”
The district court also found that claim 2, a computer
implemented means-plus-function claim, was indefinite
because the specification failed to disclose an algorithm
for performing the recited function.
In view of the district court’s rulings in limine and its
description of the factual issue for trial, ISE concluded
that it could not prove that the accused system met the
“automated exchange” claim limitation. As such, ISE
stipulated to non-infringement. Based upon this stipula-
tion, the court entered final judgment and ISE appealed.
We have jurisdiction under 28 U.S.C. § 1295(a)(1).
DISCUSSION
The District Court’s Pre-Trial Rulings
ISE argues that the district court erred by “holding
that” Hybrid is the accused product and “precluding ISE
from accusing CBOEdirect of infringement.” The district
court, however, did not preclude ISE from arguing that
CBOEdirect infringes the ’707 Patent. In fact, on more
10 CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL
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than one occasion, the district court said just the opposite:
“if CBOEdirect is an independent exchange so that it can
operate without the [trading] floor, then there could be
infringement if all the elements of infringement are
proved” and “ISE expects to demonstrate that, although
CBOEdirect may route orders to the floor, CBOEdirect
also matches and allocates without the use of open outcry;
thus, CBOEdirect is an automatic exchange.” While the
court did refer, on occasion, to Hybrid as the accused
product, it clearly recognized that ISE could prove its
infringement case if it showed that CBOEdirect, by itself,
was the claimed automated exchange. For example, the
court identified “the issue for trial” as “whether Hybrid is
actually two independent exchanges, one an ‘automatic
exchange’ (CBOEdirect) and the other open outcry on the
trading floor or whether it is an integrated system that
requires interaction with the trading floor.” It also noted
that “it will be a jury question whether CBOEdirect is a
stand alone automated exchange alongside a floor-based
system or whether it is a system that includes matching
or allocating through open outcry.” Thus, the court did
not preclude ISE from accusing CBOEdirect of infringing.
Rather, it expressly invited ISE to show that CBOEdirect
was independent of the open-outcry aspects of Hybrid, as
required by this court’s construction of “automated ex-
change.”
ISE also argues that, by requiring it to prove that
CBOEdirect was independent from, or not integrated
with, Hybrid, the district court improperly added addi-
tional limitations to this court’s construction of “automat-
ed exchange.” ISE argues that it should have “no burden
to prove ‘independence’ or to disprove ‘integration’ . . . or
to mention Hybrid at all; rather, it must prove only that
CBOEdirect is ‘a system for executing trades of financial
instruments that is fully computerized, such that it does
not include matching or allocating through the use of
open-outcry.’” ISE argues that requiring it to prove that
CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL 11
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CBOEdirect is not integrated with Hybrid or the trading
floor violates the mandate rule. See, e.g., Del Mar Avion-
ics, Inc. v. Quinton Instrument Co., 836 F.2d 1320, 1324
(Fed. Cir. 1987) (“[P]rior findings and the claim construc-
tion based thereon are the law of the case. They are not
available for redetermination.”).
The district court correctly framed the factual issue
remaining for the jury by requiring ISE to show that
CBOEdirect did not include open-outcry. ISE recognizes
that, in order to prove infringement, it must show that
CBOEdirect is “a system for executing trades of financial
instruments that is fully computerized, such that it does
not include matching or allocating through the use of
open-outcry.” As noted above, CBOEdirect is a part of the
larger Hybrid trading system. The Hybrid system does
utilize, at least to some extent, “matching or allocating
through the use of open-outcry.” Thus, ISE must demon-
strate that CBOEdirect is separate from the open-outcry
aspects of Hybrid. The district court recognized this
unresolved factual issue on more than one occasion. (“The
issue for trial is whether Hybrid is merely two independ-
ent exchanges, one an ‘automatic exchange’ (CBOEdirect)
and the other open outcry on the trading floor, or whether
it is an integrated system that requires interaction with
the trading floor.”); (noting “the issue for trial” as “wheth-
er Hybrid is actually two independent exchanges, one an
‘automatic exchange’ (CBOEdirect) and the other open
outcry on the trading floor or whether it is an integrated
system that requires interaction with the trading floor”).
We hold that, because this factual issue was unresolved in
the previous appeal, the trial court did not violate the
mandate rule by allowing this unresolved issue to go to
the jury. See, e.g., Del Mar Avionics, 836 F.2d at 1324.
Indefiniteness of Claim 2
Claim 2, a computer-implemented means-plus-
function claim, recites:
12 CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL
SECURITIES
The exchange according to claim 1, wherein pro-
cessor means further comprises means for match-
ing the remaining portion with professional orders
or quotations in the book memory means on a pro
rata basis.
’707 Patent at col. 30, ll. 15–19. (emphasis added). The
parties agree that the claimed function is precisely what
the claim recites: “matching the remaining portion with
professional orders or quotations in the book memory
means on a pro rata basis.” As noted, this court previous-
ly construed “matching” as “identifying a counterpart
order or quotation for an incoming order or quotation” and
agreed with the district court that “matching” and “allo-
cating” are distinct processes. Chicago Bd., 677 F.3d at
1371.
Relying on Aristocrat Techs. Australia Pty Ltd. v. Int’l
Game Tech., 521 F.3d 1328, 1333 (Fed. Cir. 2008), the
district court found that claim 2 was indefinite because
the specification did not disclose a step-by-step algorithm
for performing the claimed function. Aristocrat and
related cases hold that, for means-plus-function claims,
the corresponding structure in the specification must be a
step-by-step algorithm, unless a general purpose comput-
er is sufficient for performing the claimed function.
Aristocrat, 521 F.3d at 1333 (requiring disclosure of an
algorithm); WMS Gaming Inc. v. Int’l Game Tech., 184
F.3d 1339, 1349 (Fed. Cir. 1999) (same); ePlus, Inc. v.
Lawson Software, Inc., 700 F.3d 509, 518 (Fed. Cir. 2012)
(same); In re Katz Interactive Call Processing Patent
Litig., 639 F.3d 1303, 1316 (Fed. Cir. 2011) (finding that
disclosure of a general purpose computer is sufficient
corresponding structure for the means-plus-function
claims at issue).
Such an “algorithm” may be expressed “in any under-
standable terms including as a mathematical formula, in
prose, or as a flow chart, or in any other manner that
CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL 13
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provides sufficient structure” to a person of ordinary skill
in the art. Finisar Corp. v. DirecTV Grp., Inc., 523 F.3d
1323, 1340 (Fed. Cir. 2008) (internal citation omitted);
Noah Sys., Inc. v. Intuit Inc., 675 F.3d 1302, 1313 (Fed.
Cir. 2012) (“When the specification discloses some algo-
rithm, on the other hand, the question is whether the
disclosed algorithm, from the viewpoint of a person of
ordinary skill, is sufficient to define the structure and
make the bounds of the claim understandable.”). We
must also remember that “a challenge to a claim contain-
ing a means-plus-function limitation as lacking structural
support requires a finding, by clear and convincing evi-
dence, that the specification lacks disclosure of structure
sufficient to be understood by one skilled in the art as
being adequate to perform the recited function.” Budde v.
Harley-Davidson, Inc., 250 F.3d 1369, 1376–77 (Fed. Cir.
2001).
We find that claim 2 is not indefinite because the
specification discloses an algorithm for matching the
remaining orders on a pro rata basis. First, “matching”
itself is not indefinite, having been construed by this court
as “identifying a counterpart order or quotation for an
incoming order or quotation.” Chicago Bd., 677 F.3d at
1371. The remaining question then is whether the speci-
fication discloses an algorithm for “identifying a counter-
part order” on a pro rata basis.
“Pro rata” means in proportion. The summary of the
invention explains that pro rata assignments in the ’707
Patent are made based upon order size. See ’707 Patent
at col. 4, ll. 60–64 (“[A]n incoming order is filled first
against public customer orders and then filled against
professional orders and quotations on a pro rata basis
based on the size of the professional order or quotation.”).
The specification specifically describes matching the
“remaining” portion of orders on a size-based, pro rata
basis, as recited in claim 2:
14 CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL
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The remainder of the order is filled by the profes-
sionals, PRO #1 and PRO #2 on a pro rata basis.
Although PRO #1 has time priority, PRO #2 has a
greater size, so his share is computed first. PRO
#2 has 20 out of the 30 contracts of the orders
placed by the two professionals at the lowest offer
and is entitled to 66% of the 6 remaining con-
tracts, or 4 contracts. The remaining 2 contracts
are traded by PRO #1.
...
In this case, PRO #1 and PRO #2 have the same
size, which is greater than PRO #3. Because PRO
#1 has time priority over PRO #2, PRO #1 gets
matched first. PRO #1 has 40% of the orders
among the professionals (20/50) and is entitled to
15 contracts, leaving 21 contracts. PRO #2 has
now has the largest size and 66% of the size at the
highest bid (20/30) and is matched for 14 con-
tracts, leaving 7 contracts. PRO #3, the last re-
maining professional, trades the balance of 7
contracts.
Id. at col. 18, ll. 1–8; col. 18, l. 63 – col. 19, l. 4 (emphases
added). Thus, the specification explains that orders are
matched in proportion to the size of the order requested
by the professional. It also explains that, if the order
sizes are equal for two professionals, the professional who
placed the first order, gets matched first. Based upon this
discussion of size-based, pro rata matching, a person of
ordinary skill in the art would understand the algorithmic
structure for performing the claimed function.
The specification discusses using a similar pro rata
process to allocate orders. See, e.g., ’707 Patent at col. 16,
ll. 57–67. At times, the discussion of pro rata allocation
and the discussion of pro rata matching somewhat over-
lap. See, e.g., id. at col. 18, l. 61 – col. 19, l. 4 (stating that
the contracts are “allocated” on a pro rata basis before
CHICAGO BOARD OPTIONS EXCHANGE v. INTERNATIONAL 15
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describing “matching” contracts on a pro rata basis).
According to CBOE, because this court construed allocat-
ing and matching as distinct processes, any discussion of
pro rata allocating cannot provide structure for pro rata
matching. It may be correct that, if the specification
disclosed only pro rata allocation, there would not be
sufficient structure for the claimed pro rata matching
function. But this is not the case. As outlined above, the
specification outlines an algorithm for matching on a size-
based, pro rata basis. The disclosure of pro rata alloca-
tion does not detract from the disclosure of pro rata
matching. Indeed, a person of ordinary skill in the art
would likely look to the similar pro rata allocating process
when implementing pro rata matching. Additionally,
simply because the pro rata aspects of allocation and
matching may be similar, or even the same, does not
mean that the overall processes are no longer “distinct.”
As an example, two distinct calculation processes may
both use addition but remain distinct overall.
The district court erred in finding that there was clear
and convincing evidence that the specification did not
disclose sufficient structure such that a person of ordinary
skill in the art would know how to match on a pro rata
basis. While it is true that the specification also discusses
pro rata allocating, this does not detract from the disclo-
sure of pro rata matching such that claim 2 is indefinite.
Accordingly, we reverse the district court’s decision that
claim 2 is indefinite.
AFFIRMED-IN-PART AND REVERSED-IN-PART
COSTS
Each party shall bear its own costs.