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District Court Must Allow Adequate Discovery Before Granting SJ of Noninfringement

07-1312
June 02, 2008

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Last Month at the Federal Circuit - July 2008

Judges: Mayer, Dyk (author), Moore

[Appealed from: E.D. Mo., Chief Judge Jackson]

In Metropolitan Life Insurance Co. v. Bancorp Services, L.L.C., No. 07-1312 (Fed. Cir. June 2, 2008), the Federal Circuit affirmed the district court’s claim construction but vacated and remanded the district court’s grant of SJ of noninfringement.

Metropolitan Life Insurance Company (“MetLife”) sued Bancorp Services, L.L.C. and Benefit Finance Partners, L.L.C. (collectively “Bancorp”), seeking a DJ of noninfringement and invalidity with respect to Bancorp’s U.S. Patent No. 5,926,792 (“the ’792 patent”). The ’792 patent claims a method of using a computer to track the book value and market value of Business Owned Life Insurance policies that are stable value protected (“SVP”) by an additional layer of insurance, and calculating the credits the SVP writer must guarantee and pay if the policy is paid out prematurely. The district court stayed MetLife’s DJ action pending appeal of another case involving the ’792 patent; after the Federal Circuit reversed an invalidity holding in that case, Bancorp filed an infringement action against MetLife. The district court consolidated the two cases involving MetLife and lifted the stay, at which point discovery had taken place in the DJ action but not in the infringement action.

Shortly after the stay was lifted, MetLife moved for SJ of noninfringement, supporting its motion with affidavits stating that MetLife did not calculate SVP investment credits as required by the ’792 patent. Bancorp requested depositions and document discovery from MetLife. MetLife agreed to produce some of the requested documents, but denied Bancorp’s requested depositions. Bancorp filed a motion pursuant to Fed. R. Civ. P. 56(f) seeking additional discovery necessary to respond to the SJ motion; it also opposed the SJ motion. The district court denied Bancorp’s Rule 56(f) motion, rejecting Bancorp’s contention that the MetLife affiants committed perjury.

The district court, however, allowed Bancorp to supplement its opposition to SJ based on late-produced source code for MetLife’s system. Bancorp submitted an affidavit from its expert stating that MetLife’s system did calculate SVP investment credits either directly or through external spreadsheets. The district court denied MetLife’s SJ motion after construing a disputed claim term based on the Federal Circuit’s opinion in a related case.

After granting MetLife’s motion for reconsideration, the district court granted SJ of noninfringement. The district court explained that it had misunderstood Bancorp’s expert and rejected his statements regarding the accused product. The district court accepted as true MetLife’s expert’s declaration and concluded that Bancorp’s expert’s declaration did not show that MetLife’s product infringes. On appeal, the Federal Circuit first dismissed Bancorp’s first argument that the district court had applied an erroneous claim construction. The Court determined that its earlier decision resolved the issue and requires the construction adopted by the district court. Accordingly, the Court held the district court properly construed the term “SVP investment credits.”

The Court then considered Bancorp’s other claim construction argument that the district court had erroneously imported a limitation requiring use of the SVP investment credit calculation in administering SVP policies. It noted that, while not expressly construing the claims as requiring such, the district court concluded that Bancorp could only show infringement if the MetLife system used an SVP investment credit calculation in administering policies. Because “administering” and “managing” appeared only in the preamble of certain claims, the parties disputed their effect. The Federal Circuit declined to answer the question, instead remanding for the district court to determine whether the preamble should limit the claims.

The Court, however, held that the district court erred in granting SJ of noninfringement even under MetLife’s more limited claim construction. It first concluded that the district court should have granted Bancorp’s Rule 56(f) motion for discovery, holding that the district court abused its discretion by not allowing Bancorp to conduct any discovery in its infringement action. The Federal Circuit cited Eighth Circuit and Federal Circuit case law supporting Bancorp’s position that, when given no adequate initial opportunity for discovery, the strict showing of necessity and diligence required for a Rule 56(f) request for additional discovery does not apply. The Court held that the district court should not have treated the MetLife declarations as truthful. Instead, the district court should have allowed Bancorp a reasonable opportunity for discovery.

The Court further rejected MetLife’s alternative argument that Bancorp could have obtained the requested discovery in MetLife’s DJ action before the stay was imposed. The Federal Circuit noted that MetLife’s system did not incorporate the accused aspects until two years after MetLife filed the DJ action, and that MetLife had not shown Bancorp was aware of those accused aspects before the close of discovery in the DJ action. Accordingly, the Federal Circuit remanded the case to the district court with instructions to allow reasonable discovery by Bancorp; it left the proper scope of that discovery up to the district court.

The Federal Circuit next stated that the district court erred in granting MetLife’s SJ motion, even on the present record. According to the Court, there was a direct conflict in the parties’ declarations as to a material fact. The district court, however, dismissed the conflict by crediting MetLife’s declarations. The Court held that resolving such credibility disputes is not appropriate on SJ and that the conflict in declarations created a genuine issue of material fact that made SJ inappropriate. Accordingly, the Federal Circuit vacated the district court’s decision and remanded for further proceedings.