July 2010
Contractual Obligation to Perform an Act Is Not Sufficient to Show Performance of Step of Method Claim
| Judges: Mayer, Clevenger (concurring), Moore (author) |
| [Appealed from N.D. Iowa, Judge Bennett] |
In Lincoln National Life Insurance Co. v. Transamerica Life Insurance Co., Nos. 09-1403, -1491 (Fed. Cir. June 23, 2010), the Federal Circuit reversed the district court’s denial of JMOL of noninfringement and remanded for entry of judgment of noninfringement in favor of the defendants.
Lincoln National Life Insurance Company (“Lincoln”), assignee of U.S. Patent No. 7,089,201 (“the ’201 patent”), sued Transamerica Life Insurance Company (“Transamerica”) for infringement of the ’201 patent. The ’201 patent relates to computerized methods for administering variable deferred annuities. During the “accumulation phase,” the variable deferred annuity owner deposits money into an account controlled by the insurer who invests it. For variable annuities, the overall account value varies according to the performance of those investments. Later, in the “distribution phase,” the insurer periodically pays the annuitant from the proceeds of the account. The amount of the payment depends on the current account value and, given sufficiently poor fund performance, the payments could theoretically decrease to zero when the account is exhausted. To mitigate uncertainty related to an exhausted account, insurers offer a guaranteed minimum payment regardless of market activity. Transamerica sells and administers a variable deferred annuity that includes such a minimum payment guarantee rider.
Claim 35 of the ’201 patent recites a computerized method by which insurers may administer variable annuity plans with a guaranteed minimum payment feature. The claim requires computerized monitoring of the account’s value, determining the amount of each scheduled payment, and, in the last step, “periodically paying the scheduled payment to the owner for the period of benefit payments, even if the account value is exhausted before all payments have been made.”
Transamerica filed a complaint seeking DJ of noninfringement and invalidity under 35 U.S.C. §§ 102, 103, and 112, but not § 101. Lincoln, in turn, filed a counterclaim for infringement. The district court construed the last step of claim 35 of the ’201 patent to mean “[a]t the regular intervals required by the plan, paying the scheduled payment to the owner for the period of benefit payments, even if the account value is less than the scheduled payment amount or zero before the payments guaranteed under the plan have been made,” but not to require actual exhaustion of the account value.
Following the Federal Circuit’s decision in Bilski, Transamerica filed a motion to amend its complaint to assert a claim under 35 U.S.C. § 101, which the district court denied because it found that Transamerica had not diligently pursued its § 101 claim and thus lacked good cause for untimely asserting it. Following the jury’s verdict that claim 35 of the ’201 patent was infringed and not invalid, the district court denied Transamerica’s motions for JMOL of noninfringement and invalidity.
On appeal, Transamerica argued that it was entitled to JMOL of noninfringement of the asserted claims and that the district court abused its discretion in denying leave to amend its complaint to assert the § 101 claim. Applying Eighth Circuit law, the Federal Circuit engaged in a de novo review of the district court’s denial of JMOL.
Transamerica primarily argued that the district court erred in denying its motion for JMOL of noninfringement because Transamerica does not perform the last step of claim 35 of the ’201 patent for a number of reasons. First, Transamerica asserted that none of its policy owners has ever had an exhausted account and, therefore, that it has never made payments after an “account value is exhausted.” The Federal Circuit agreed with Lincoln that Transamerica’s contention is directly contrary to the district court’s construction of the last step of the claimed method, which does not require actual exhaustion; rather, it recites making a guaranteed payment regardless of the account value. Under the district court’s construction, Lincoln was not required to prove actual exhaustion to establish infringement. Instead, Lincoln was required to prove that Transamerica’s computerized method of administering guaranteed payment riders must necessarily make a scheduled payment in the event of an exhausted account. Because actual exhaustion is not required to infringe the claim, the Federal Circuit concluded that Transamerica’s first argument does not provide any basis for reversing the district court’s denial of JMOL.
“A contractual obligation to perform an act is not performance; indeed, a party could avoid infringement simply by breaching its contract.” Slip op. at 12.
Second, Transamerica asserted that it has not yet implemented a computer system that will make a payment in the event an account becomes exhausted. Lincoln asserted that the evidence was sufficient to support the jury’s verdict, arguing that Transamerica uses multiple computer systems to make a payment that reduces an account’s value to zero (i.e., that exhausts an account). The Federal Circuit noted that the record shows that none of Transamerica’s multiple computerized systems makes a scheduled payment if an account is exhausted. Rather, Transamerica’s computerized system stops making payments when an account becomes exhausted and its Distribution Services department provides a manual check to the policy owner. Given that Transamerica’s computerized system is specifically configured such that it does not make a payment if an account is exhausted, the Federal Circuit concluded that Transamerica does not perform the last step of the claimed method.
Lincoln also argued that Transamerica is contractually obligated to practice the claimed method through its sale of the guaranteed payment riders. The district court instructed the jury that rider sales are “evidence of infringement to the extent that the sale of the riders or annuities necessarily requires or obligates Transamerica to practice each and every step of the claimed invention.” Slip op. at 11 (citation omitted). Relying on this instruction, Lincoln argued that the guaranteed payment riders require Transamerica to continue making payments to policy owners even in the event of account exhaustion. Although it was undisputed that the guaranteed payment riders require Transamerica to make payments after an account is exhausted, the Federal Circuit explained the fact that such payment is required does not mean that it must be made by a computerized method. The Federal Circuit specifically pointed out that the claim at issue is not directed to the concept of guaranteed minimum payment variable annuities but to a computerized method of administering the same.
More fundamentally, even if the guaranteed payment riders did obligate Transamerica to perform the claimed method, the Federal Circuit held that such evidence would not be sufficient to establish infringement. The Court emphasized that “a method claim is directly infringed only if each step of the claimed method is performed.” Id. at 12 (quoting Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318, 1328 (Fed. Cir. 2008)). A contractual obligation to perform an act is not performance; indeed, a party could avoid infringement simply by breaching its contract. To the extent the jury instructions implied that Lincoln could establish direct infringement by relying on the terms of the guaranteed payment riders rather than on Transamerica’s actual performance of the claimed steps, the Federal Circuit held that this instruction was erroneous.
Because it found that the evidence of record did not support the jury’s verdict of infringement, the Federal Circuit reversed the district court’s denial of JMOL of noninfringement and remanded. Because the Federal Circuit reversed the finding of infringement, it concluded there was no longer any case or controversy between these parties and declined to address Transamerica’s argument that the district court abused its discretion in denying Transamerica leave to amend its complaint to assert a claim for invalidity under 35 U.S.C. § 101.
Judge Clevenger concurred with the majority in all respects except whether the district court erred in denying Transamerica’s motion for leave to amend its complaint. In Judge Clevenger’s view, the majority should have reviewed the denial of the motion to amend under the regional circuit standard—here, abuse of discretion. Judge Clevenger concluded that the district court did not abuse its discretion in denying Transamerica’s motion for leave to amend because Transamerica clearly knew of the import of the § 101 issue to its case well before the deadline for amendments passed, yet waited too long to file its motion.
