Cls Bank International v. Alice Corporation Pty. Ltd. ( 2009 )

Case 1:O7-cv-O0974-R|\/|C Document 79 Fi|ed 1‘|/06/2009 Page 1 of 16
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
CLS BANK INTERNATIONAL,
Plaintiff,
v. Civil Acti0n No. 07-974 (RNIC)
ALICE CORPORATION PTY. LTD.,
Defendant.
SS&S§\./SSS€\&
REDACTED MEMORANDUM OPINION}
CLS Bank Intemational ("CLS") seeks a declaration that it is not infringing patents
owned by Alice Corporation Pty. Ltd. ("Alice") and that the patents are invalid and unenforceable.
Alice counterclaims that CLS Bank is infringing its patents and seeks damages. A threshold issue
is whether the U.S. patent laws reach the acts of CLS that Alice alleges constitute infringement.
Because resolution of that issue could potentially dispose of the case, the Court ordered initial
discovery limited in scope to CLS’s operations See Dkt. # 24. The parties have since completed
that discovery
Pending before the Court is CLS’s motion for summary judgment of no infringement
within the United States [Dkt. # 42] and Alice’s cross motion for partial summary judgment as to
extrater'ritoriality [Dl545 F.3d 943 (Fed. Cir. 2008) (en banc). Because the Supreme Court granted certiorari in In re
Bilski on June l, 2009, the Court denied those motions without prejudice to re-filing after the
Supreme Court issues its ruling. See Minute Order dated June l6, 2009.
Case 1:07-cv-OO974~RI\/\C Document 79 Filed 11/06/2009 Page 2 of 16
and will deny without prejudice as premature Alice’s cross motion.
I. FACTS
Alice is an Australian company that owns three United States patents, two of which
are "method patents" with claims relating to a method or process of exchanging a financial
obligation between parties, and one of which is a "system patent" with claims relating to a data
processing system that implements the methods. The Court has yet to construe the claims of the
patents. For purposes of these motions only, the parties have agreed to assume that the steps of the
patented methods can be characterized as (l) maintaining accounts for two parties to a financial
transaction, (2) receiving a financial transaction, (3) adjusting the parties’ accounts to effect a
financial exchange obligation, and (4) generating an irrevocable instruction to another institution to
adjust its accounts to reflect the financial transaction. For purposes of these motions only, the parties
have agreed to assume that the patented data processing system can be characterized as
encompassing a computer system and coupled storage device configured to perform each of the
foregoing steps.
CLS is an "Edge Act Corporation," organized under Section 25A of the Federal
Reserve Act, as amended, 12 U.S.C. § 61 l, and is authorized by statute to engage in international
banking activities Relevant to this case is CLS’s provision of a "continuous linked settlement"
service for the settlement of payment instructions related to underlying foreign exchange transactions
(the "CLS Service").
CLS provides the CLS Service to banks known as CLS Bank Settlement Members
("CLS Members"), who maintain multi-currency accounts with CLS. CLS Members consist of 60
banks, some of which are located in the United States. Through the CLS Members, the CLS Service
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is provided to other third parties, including banks, worldwide. Some of the CLS Members, including
U.S,-based Bank of New York Mellon, in turn, act as "third-party service providers" and offer the
CLS Service to their customers As of December 2008, there were more than 4,000 third parties
using the CLS Service, some of whom are located in the United States. U.S. banks become CLS
Members by completing a membership application and executing a membership agreement governed
by New York law. CLS charges each CLS Member a fee for each settlement instruction. In 2007,
CLS had $139,709,000 in revenues from instruction charges around the world.
The CLS Service is implemented, and the steps of the settlement process are
perfonned, on computer hardware and software (the "CLS Core System") located entirely outside
of the United States.3
3 The CLS Core System settles approximately 700,000 financial transactions per day in
multiple currencies, valued at over $4 trillion.
k
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CLS Members electronically submit instructions for settlement of foreign exchange
transactions on a particular date (the "settlement date"). The CLS Core System receives,
Case 1:07-cv-00974-R|\/lC Document 79 Fi|ed 11/06/2009 Page 5 of 16
the matched ("paired") instructions until the settlement date. ` On the settlement date, each CLS
Member makes pay~ins to its member account to cover the settlement of all instructions it submitted
for that settlement date, based on a pay-in schedule that the CLS Core System prepared and
transmitted. Concurrently, each paired instruction to be settled is placed in a "settlement queue"
maintained on the CLS Core System, which tests the paired instructions in the settlement queue to
determine if settlement would cause the balance of either of the corresponding member accounts to
fall below certain predetermined values or to exceed certain limits (the "risk management tests").
If it passes the risk management tests, the CLS Core System simultaneously debits and credits the
member accounts of two CLS Members. CLS Members have no ability to intervene in the
functioning of the CLS Core System except to the extent that they can enter their instructions.
II. LEGAL STANDARD
Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment must be
granted 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 ajudgment as a matter oflaw." Fed. R. Civ. P, 56(c); Andersorz v. Liberly
Lobby, Inc., 477 U.S. 242, 247 (1986). Moreover, summary judgment is properly granted against
a party who "after adequate time for discovery and upon motion . . . fails to make a showing
sufficient to establish the existence of an element essential to that party’s case, and on which that
party will bear the burden of proof at trial." Celoz‘ex Corp. v, Catrett, 477 U.S. 317, 322 (1986).
In ruling on a motion for summary judgment, the court must draw all justifiable
inferences in the nonmoving party’s favor and accept the nonmoving party’s evidence as true.
Anderson, 477 U.S. at 255. A nonmoving party, however, must establish more than "the mere
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existence of a scintilla of evidence" in support of its position. Id. at 252. In addition, the nonmoving
party may not rely solely on allegations or conclusory statements Greene v. Daltorz, 164 F.3d 67 1 ,
675 (D.C. Cir. 1999). Rather, the nonmoving party must present specific facts that would enable a
reasonable jury to find in its favor. Id. at 675. If the evidence "is merely colorable, or is not
significantly probative, summary judgment may be granted." Ana'erson, 477 U.S. at 249-50
(citations omitted).
III. ANALYSIS
"[W]hoever without authority makes, uses, offers to sell, or sells any patented
invention, within the United States or imports into the United States any patented invention during
the term of the patent therefor, infringes the patent." 35 U.S.C. § 27l(a) (emphasis added). "The
statute makes it clear that it is not an infringement to make or use a patented product outside of the
United States." Deepsouth Packing Co. v. Laitram C0rp., 406 U.S. 518, 527 (1972). Alice asserts
infringement under two prongs of§ 271 (a): "uses" and "offers to sell, or sells." The threshold issue,
then, is whether the acts of CLS that Alice alleges constitute "use" and "offers to sell, or sells" occur
"within the bounds of this country." Id.
A. CLS "Uses" the CLS Core System "Within the United States"
"In terms of the infringing act of ‘use,’ courts have interpreted the term ‘use’
broadly." NTP, Irzc. v. Research In Molion Ltd., 418 F.3d 1282, 1316 (Fed. Cir. 2005). "The use
of a claimed system under section 27l(a) is the place at which the system as a whole is put into
service, i.e., the place where control of the system is exercised and beneficial use of the system
obtained." Id. at 13 l 7. ln NTP the Federal Circuit considered whether customers of Research In
Motion Ltd. ("RIM") "use" within the United States a wireless email system when they "send and
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receive messages" through the system "by manipulating the handheld devices" in the United States,
but where "the RIM Relay," a claimed component that "controls the accused systems and is
necessary for the other components of the system to function properly, is not located within the
United States." Id. The court held that "the location of the Relay in Canada did not, as a matter of
law, preclude infringement" because "RIM’s customers located within the United States controlled
the transmission of the originated information and also benefited [sic] from such an exchange of
information." Id. Notwithstanding that the Relay controlled the system and was located outside of
the United States, the court concluded that "[w]hen RIM’s United States customers send and receive
messages by manipulating the handheld devices in their possession in the United States, the location
of the use of the communication system as a whole occurs in the United States." Ia’. "This
satisfactorily establishes that the situs of the ‘use’ of RIM’s system by RIM’s United States
customers for purposes of section 27l(a) is the United States" Id.
Relying on NTP, Alice argues that CLS "uses" the CLS Core System within the
United States in two ways: (l) CLS personnel in the United States exercise operational control over
the system; and (2) CLS Members in the United States put the system into service by submitting
settlement instructions. CLS counters that NTP is inapposite because no part of the CLS Core
System is located within the United States, and, in any event, the system is not controlled from
within the United States.
As a preliminary matter, CLS appears to conflate the standard for "use" of a method
with the standard for "use" of a system. To determine whether a system is being "used" within the
United States, "[c]ourts analyze the invention as a whole to determine where the ‘claimed system
as whole . . . is put into service,’ and do not focus on the situs of use of each claimed element within
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the claimed invention." Rerchcollnc. v. Don Best Sports, 548 F. Supp. 2d 356, 361 (E.D. Tex. 2008)
(quoting NTP, 418 F.3d at 1317). By contrast, "infringement of a method claim is precluded as a
matter of law if one or more of the claimed steps is performed outside the United States." ld. For
this reason, the Federal Circuit rejected a similar argument in NTP:
RIM argues that the BlackBerry system is distinguishable from the
system in [Decca Ltd. v. United States, 544 F.2d 1070 (Ct. Cl. 1976)]
because the RIM Relay, which controls the accused systems and is
necessary for the other components of the system to function
properly, is not located in the United States. While this distinction
recognizes technical differences between the two systems, it fails to
appreciate the way in which the claimed NTP system is actually used
by RIM’s customers. When RIM’s United States customers send and
receive messages by manipulating the handheld devices in their
possession in the United States, the location of the use of the system
as a whole occurs in the United States.
NTP, 418 F.3d at 1317.
Likewise, CLS’s argument that the CLS Core System is distinguishable from the
system in NTP because no component of the system is located in the United States is a distinction
without legal significance. The court in NTP recognized that "use" of a system’s components may
"be separated from their physical location." ld. at 1313. In determining whether a "use" occurs
within the United States in such circumstances, NTP focused not on the location of the system or its
components, as CLS Bank would have this Court do, but on the location of the "users" of the system.
Id. at 1317 (lool550 F.3d 1325, 1334-35 (Fed. Cir. 2008) (recognizing that NTP "explicitly did not
decide the question of whether a ‘method claim may not be infringed under the ‘sells’ and ‘offers
to sell’ prongs of section 27 1 (a)" and concluding that "we need not definitively answer this
quesnon”)
Alice alleges that CLS "sells" and "offers to sel1" every step of its claimed methods
within the United States. CLS argues that, as a matter of law, no claim to a method can be infringed
underthe“seH§’or“ofkrsu)seH”prongsof§27l(aLand,nianyevenLitdoesnot“sdF’or“oHer
wsdVWhemdhmk,mMtomeeMmnndo%,me§wsEouwMeoHheUmwdSmms
The Federal Circuit in NTP could have held that method patents may never be
nnnngedbysawsoroHemtoseH,butnspmnHcaHydechnedtodoso.SeeAU¥I4l8I?3dat1320-
21 ("We need not and do not hold that method claims may not be infringed under the ‘sells’ and
‘offers to sell’ prongs of section 271(a)."). Rather, the court elected to "conclude only that RIM’s
performance of at least some of the recited steps of the asserted method claims as a service for its
cusunnerscannotbeconsHkxedtobeseHnqgoroHenngtoseHtheinvenuoncoveredbytheassened
method claims." ld. at 1321 (emphasis added). At least one court has interpreted NTP to allow an
infringement claim to proceed to trial where the alleged infringer performed each and every step of
the method that it sold, as opposed to only some of the steps of the method as in NTP, See
Transamerica Lzfe Ins. Co. v. Lz`ncoln Nal 'l Life Ins. C0., 597 F. Supp. 2d 897, 925 (N.D. lowa 2009)
(distinguishing NTP "because the alleged infringer was shown only to perform ‘at least some of the
recited steps ofthe asserted claims,’ not each and every step ofthe asserted claims") (emphasis in
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original). The Court agrees with that interpretation of NTP. Thus, the Court finds that one who
"sells" or "offers to sell" each and every step ofa patented method infringes the patent.
CLS argues that to the extent it "sells or offers to sell anything, it is only access to a
Service that provides for settlement of payment instructions related to underlying foreign exchange
transactions" and that "performance of the steps of a service for customers does not constitute a sale
or offer to sell the method." CLS’s Mem. at 35. The Court cannot agree. 1n Rz`coh, the Federal
Circuit held that selling "instructions to perform a process" does not constitute infringement under
§ 27 1(a) because the seller does not perform the method, but it implied that selling "the performance
ofthe process itself" may constitute infringement under § 271(a). Rz`coh, 550 F.3d at 1335. The
court’s implication that a method could be sold for purposes of§ 271 (a) is supported by the Supreme
Court’s decision in Quanta Cornputer, Inc. v. LG Eleclrom`cs, Inc., 128 S. Ct. 2109, 2117 (2008),
which held that a method could be sold for purposes of "patent exhaustion." If a method may be sold
for exhaustion purposes, then the Court sees no persuasive reason why a method could not also be
sold for infringement purposes CLS has not convinced the Court otherwise.
The Court also disagrees with CLS’s argument that the situs of its sales and offers
to sell is outside of the United States because it performs each of the steps of the methods outside
the United States. The determinative factor is where the infringing act occurs. CLS seems to confuse
the standard for "use" of a method with the standard for "sale" of a method. There can be no "use"
infringement of a method "if one or more of the claimed steps is performed outside the United
States." Renhcol, 548 F. Supp. 2d at 361. However, notwithstanding that all of the steps of a
method are performed abroad, an infringing "sale" or "offer to sell" can still occur within the United
States if "all of the essential activity pertaining to the offer and sale of that activity has taken place
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in the United States." Synapti'c Pharm. Corp. v. MDS Panlabs, Inc., 265 F. Supp. 2d 452, 463
(D.N.J. 2002). ln Synaptic, the court rejected the argument that the "purchase of services" performed
abroad could not "constitute an offer to sell or a sale . . . within the meaning of § 27 1 (a)." Ia’. at 462-
63. When the infringing act is an offer to sell or a sale, the relevant inquiry is not the place where
the methods are performed but the place where the offer to sell or sale occurs. Because CLS offers
to perform the methods for U.S. banks for a fee and does perform the methods for its U.S. members
for a fee, CLS "offers to sell" and "sells" the CLS Core System’s methods within the United States.§
That the methods are physically performed abroad does not change the fact that the methods are sold
to CLS Members in the United States and offered for sale to other banks in the United States.°
C. Alice’s Cross M0ti0n for Partial Summary Judgment is Premature
The Court agrees with Alice that CLS "uses" the CLS Core System within the United
States and that CLS "sells" or "offers to sell" the CLS Core System’s methods within the United
States. Nevertheless, the Court will deny without prejudice Alice’s cross motion for partial summary
5 While the Court is aware that "[t]he presumption that United States law govems
domestically but does not rule the world applies with particular force in patent law[,]" Microsoft
Corp. v. AT& TCorp, 550 U.S. 437, 454-55 (2007), the Court finds that the U.S. patent laws would
be frustrated if a U.S. patent holder could not prohibit the sale of the patented invention to U.S.
customers just because the infringer uses the invention abroad. Were it ot1ierwise, infringers could
avoid liability entirely even ifthey sold a patented invention exclusively to U.S. customers.
° The Court also rejects CLS’s assertion that it cannot be held liable for "offering to sell" the
system’s methods in the absence of a contemplated "sale" within the United States. While there is
authority to the contrary, the Court finds that an "offer to sell" within the United States is an
independent infringing act and does not require a further infringing act; i.e. an actual sale within the
United States, to be actionable See Wesley Jessen Corp. v. Bausch & Lomb, Inc., 256 F. Supp. 2d
228, 233-34 (D. Del. 2003) ("the ‘sale’ contemplated by the ‘offer to sell’ need not take place in the
United States or be intended to take place in the United States for there to be infringement because
ofthe ‘offer to sell"’); SEB, S.A. v. Montgornery Wara’ & Co., Inc.. 412 F. Supp. 2d 336, 341 n.6
(S.D.N.Y. 2006) (the "assertion that ‘offers in the United States to sell accused products outside of
the United States do not satisfy § 271’ is inaccurate").
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judgment as to extraterritoriality as premature.
To determine whether a patent claim has been infringed, a court must undertake a
two-step process. The court first construes or interprets each contested claim, or phrase or word
within a claim, to determine its meaning and scope; only afterward are the claims compared to the
accused device(s). See O.I. Corp. v. Teckmar Co. Inc., 115 F.3d 1576, 1580 (Fed. Cir. 1997)
("Deterrnining whether a patent claim has been infringed requires a two-step analysis: ‘First, the
claim must be properly construed to determine its scope and meaning. Second, the claim as properly
317
construed must be compared to the accused device or process. ) (quoting Carroll Touch, Inc. v.
Electro Mech. Sys., Inc., 15 F.3d 1573, 1576 (Fed. Cir. 1993)).
1n moving for partial summary jud gment as to extraterritoriality before the Court has
construed its claims, Alice essentially asks the Court to reverse this process See Alice’s Cross Mot.
for Partial Summ. J. [Dkt. # 51] at 2 (arguing that CLS "uses the invention claimed in Alice’s system
patent in the United States" and that "CLS is liable for infringing Alice’s method patents in the
United States by ‘offering to sell, or selling’ the performance ofAlice’s patented method for a fee.")
But the parties have only agreed to assume for present purposes that Alice’s claims are broad enough
to cover the CLS Core System and its methods. Indeed, CLS asserts that "[i]f this case were to
proceed beyond a decision on CLS’[s] Motion for Summary Judgment, CLS would contend, among
other things, that Alice’s patent claims should be more narrowly construed, and that they are invalid
and unenforceable." CLS’s Mem. at 8 n.4. lnasmuch as the Court has yet to construe Alice’s claims,
Alice is seeking reliefbased on a hypothetical claims construction Accordingly, the Court will deny
without prejudice Alice’s cross motion for partial summary judgment as to extraterritoriality as
premature.
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lpV. CONCLUSION
For the foregoing reasons, the Court will deny CLS’s motion for summary judgment
of no infringement within the United States [Dkt. # 42] and deny without prejudice as premature
Alice’s cross motion for partial summary judgment as to extraterritoriality [Dkt. # 51]. A
memorializing Order accompanies this Memorandum Opinion.
Date: October 13, 2009 /s/
ROSEMARY M. COLLYER
United States District Judge
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