Muniauction v. Thomson

The validity of the independent claim of the Muniauction patent addressed by the Federal Circuit related to auctions of municipal bonds by an original issuer over the Internet, using a Web browser. In such auction, an issuer offers a package of bonds having different principal amounts and different maturity dates to underwriters who bid on all of the packages, offering a price and interest rate for each of the bonds. The best bid is determined by the system based on the true interest cost of the blended rates for each bond in the package offered by each bidder.

The patent discusses prior art systems including the PARITY' bid submission system, which it contended had three disadvantages. First, the prior art systems required bidders to install the PARITY software on their computers prior to the auction. Second, such systems were designed to be used with fax and other bid submission methods, and third, such systems were sealed bid systems in which incoming bids were not evaluated during the auction and bidders did not receive feedback during the auction on how their bid compares with others. Muniauction's invention allows bidders to prepare and submit bids using a conventional Web browser without the use of other separate software.

Asserted Claim 1

Asserted claim 1 contained the following steps:

a. inputting data associated with at least one bid for at least one fixed income financial instrument into [a] bidder's computer via [an] input device [of that computer];

b. automatically computing at least one interest cost value based at least in part on said inputted data, said automatically computed interest cost value specifying a rate representing borrowing cost associated with said at least one fixed income financial instrument;

c. submitting said bid by transmitting as least some of said inputted data from said bidder's computer over at least one electronic network; and

d. communicating at least one message associated with said submitted bid to [an] issuer's computer over said at least one electronic network and displaying, on [a display of the] issuer's computer, information associated with said bid including said computed interest cost value;

e. wherein at least one of the inputting step, the automatically computing step, the submitting step, the communicating step and the displaying step is performed using a web browser.

The Issues

An issue both at trial and on appeal was whether the prior art PARITY system performed the “automatic computation” step, step (b) above. Muniauction contended that it did not and claimed that the Notice of Allowability supported this position. According to Muniauction, the PTO Examiner stated in the Notice of Allowability that prior publications discussing the PARITY system did not disclose its performance of that step.

For the Federal Circuit, however, the testimony of Muniauction's expert was determinative. The expert conceded on cross-examination that his direct testimony that the PARITY system “didn't do” the automatic computation step was based on the fact that the calculations were performed using independent software on the bidder's computer, which were then transferred using an export file of the PARITY system.

This interpretation of the claim element was not, however, the one the trial court had adopted and the expert conceded that when the correct interpretation was applied, the automatic computation step was performed by the PARITY system. The Federal Circuit ruled that the expert's testimony on direct was irrelevant because it was directed to an erroneous claim construction, leaving uncontradicted his concession on cross-examination that the PARITY system performed the automatic computation step, as that step was construed by the court.

The Federal Circuit held that this meant no reasonable jury could find other than that the use of a Web browser was the sole difference between the claim and the prior art, answering two of the factual foundation questions required by the Deere test, namely the contents of the prior art and the differences between the prior art and the claim. Graham v. John Deere Co., 383 U.S. 1, 17-18 (1966).

The question for the Federal Circuit, therefore, was whether it would have been obvious to a person of ordinary skill in the art to modify the prior art system to incorporate Web browser functionality? The use of Web browsers was certainly well known at the relevant date and was described in the patent as “conventional.” Answering this question after KSR required the court to ask “whether the improvement is more than the predictable use of prior art elements according to their established functions.” KSR, 127 S. Ct. at 1740. The court considered the Muniauction invention analogous to the phonetic reading device found obvious in Leapfrog Enterprises, Inc. v. Fisher-Price, Inc., 485 F.3d 1157, 1161 (Fed. Cir. 2007). In Leapfrog, the court held that it would have been obvious to a person of ordinary skill in the relevant art to replace mechanical means by electronic means because this replacement had been done successfully in other devices. Similarly, it would have been obvious to incorporate conventional Web browser functionality into the PARITY system.

This approach, as recognized in KSR, allows a showing of obviousness in situations in which there is a need, or there are commercial pressures, to solve a problem and the notional skilled person might be expected to try each one of a finite number of predictable solutions to the problem. KSR, 127 S. Ct. at 1742.

Having reached the view that the claim was prima facie obvious, the court considered but rejected the patentee's evidence on Deere secondary commercial considerations. The court held that much of the secondary considerations evidence of skepticism, praise, copying, and commercial success lacked any nexus to the claimed invention and that where there was arguably a nexus, the relationship was “too attenuated” to overcome the prima facie showing of obviousness.

The court's analysis did not result in a finding that all of the dependent claims were obvious, and the court considered whether Thomson had infringed the remaining claims. As seen above, independent claim 1 requires acts by the bidder and by the auction system. The parties agreed that no single person performed every step of the asserted claims so Muniauction argued, as it had at trial, for a theory of joint infringement, urging that Thomson's acts of controlling access to its auction system and instructing bidders on its use were sufficient to make it a direct infringer, combining the acts of the bidder with those of Thomson to find performance of all the claimed steps. The jury instruction encompassed this, instructing the jury to consider whether the parties were acting “jointly or together,” and whether one party is “teaching, instructing or facilitating” the other party's acts. The Federal Circuit found that this instruction was in error because it did not ask the jury to consider facts relevant to the correct “control or direction” standard.

'Control or Direction'

The Federal Circuit restated the “control or direction” standard of BMC Resources as requiring a showing that one party acted as a “mastermind,” citing NTP, Inc. v. Research In Motion, 418 F.3d 1282, 1380-81 (Fed. Cir. 2005), over the entire process. Only in that situation could every performed step be attributable to the controlling party, making that party a direct infringer. “Control or direction,” the court held, is satisfied in situations in which the direct infringer would be liable for the acts of the other party under traditional vicarious liability theories, but not in an arm's length situation such as the municipal bond auction in which the claimed steps were performed by the bidder and the auctioneer.

John M. Cone, jcone@hitchcockevert. com, an attorney with Hitchcock Evert LLP in Dallas, was lead counsel for Paymentech L.P. in the BMC Resources case.

In Muniauction, Inc. v. Thomson Corp. , 532 F.3d 1318 (Fed.Cir. 2008), Muniauction asserted a patent covering a method for conducting electronic auctions of financial instruments, such as municipal bonds. A jury found the claims were not obvious, that Thomson had willfully infringed, and that Muniauction was entitled to lost profits damages, which the court set at $77 million. Thomson moved for judgment as a matter of law or for a new trial. The district court denied the motion, finding substantial evidence in favor of the jury's verdict upholding the validity of the claims.

On appeal, the Federal Circuit reversed, finding certain of the claims obvious and the remainder not infringed. The opinion illustrates the Federal Circuit's application of the Supreme Court's decision on obviousness in KSR Int'l Co. v. Teleflex, Inc. , 127 S. Ct. 1727 (2007) and confirms the Federal Circuit's own decision on “joint or divided” infringement in BMC Resources, Inc. v. Paymentech, L.P. , 498 F.3d 1379 (Fed. Cir. 2007). The KSR ruling makes it easier to establish obviousness invalidity when the difference between the claimed invention and the prior art is the application of the test from BMC Resources, holding that a party which did not itself perform all of the steps of the claimed method could be a direct infringer, liable not only for its own acts but for those who performed the balance of the steps, only if it directed or controlled the other actors.

The Facts

The validity of the independent claim of the Muniauction patent addressed by the Federal Circuit related to auctions of municipal bonds by an original issuer over the Internet, using a Web browser. In such auction, an issuer offers a package of bonds having different principal amounts and different maturity dates to underwriters who bid on all of the packages, offering a price and interest rate for each of the bonds. The best bid is determined by the system based on the true interest cost of the blended rates for each bond in the package offered by each bidder.

The patent discusses prior art systems including the PARITY' bid submission system, which it contended had three disadvantages. First, the prior art systems required bidders to install the PARITY software on their computers prior to the auction. Second, such systems were designed to be used with fax and other bid submission methods, and third, such systems were sealed bid systems in which incoming bids were not evaluated during the auction and bidders did not receive feedback during the auction on how their bid compares with others. Muniauction's invention allows bidders to prepare and submit bids using a conventional Web browser without the use of other separate software.

Asserted Claim 1

Asserted claim 1 contained the following steps:

a. inputting data associated with at least one bid for at least one fixed income financial instrument into [a] bidder's computer via [an] input device [of that computer];

b. automatically computing at least one interest cost value based at least in part on said inputted data, said automatically computed interest cost value specifying a rate representing borrowing cost associated with said at least one fixed income financial instrument;

c. submitting said bid by transmitting as least some of said inputted data from said bidder's computer over at least one electronic network; and

d. communicating at least one message associated with said submitted bid to [an] issuer's computer over said at least one electronic network and displaying, on [a display of the] issuer's computer, information associated with said bid including said computed interest cost value;

e. wherein at least one of the inputting step, the automatically computing step, the submitting step, the communicating step and the displaying step is performed using a web browser.

The Issues

An issue both at trial and on appeal was whether the prior art PARITY system performed the “automatic computation” step, step (b) above. Muniauction contended that it did not and claimed that the Notice of Allowability supported this position. According to Muniauction, the PTO Examiner stated in the Notice of Allowability that prior publications discussing the PARITY system did not disclose its performance of that step.

For the Federal Circuit, however, the testimony of Muniauction's expert was determinative. The expert conceded on cross-examination that his direct testimony that the PARITY system “didn't do” the automatic computation step was based on the fact that the calculations were performed using independent software on the bidder's computer, which were then transferred using an export file of the PARITY system.

This interpretation of the claim element was not, however, the one the trial court had adopted and the expert conceded that when the correct interpretation was applied, the automatic computation step was performed by the PARITY system. The Federal Circuit ruled that the expert's testimony on direct was irrelevant because it was directed to an erroneous claim construction, leaving uncontradicted his concession on cross-examination that the PARITY system performed the automatic computation step, as that step was construed by the court.

The Federal Circuit held that this meant no reasonable jury could find other than that the use of a Web browser was the sole difference between the claim and the prior art, answering two of the factual foundation questions required by the Deere test, namely the contents of the prior art and the differences between the prior art and the claim. Graham v. John Deere Co. , 383 U.S. 1, 17-18 (1966).

The question for the Federal Circuit, therefore, was whether it would have been obvious to a person of ordinary skill in the art to modify the prior art system to incorporate Web browser functionality? The use of Web browsers was certainly well known at the relevant date and was described in the patent as “conventional.” Answering this question after KSR required the court to ask “whether the improvement is more than the predictable use of prior art elements according to their established functions.” KSR, 127 S. Ct. at 1740. The court considered the Muniauction invention analogous to the phonetic reading device found obvious in Leapfrog Enterprises, Inc. v. Fisher-Price, Inc. , 485 F.3d 1157, 1161 (Fed. Cir. 2007). In Leapfrog, the court held that it would have been obvious to a person of ordinary skill in the relevant art to replace mechanical means by electronic means because this replacement had been done successfully in other devices. Similarly, it would have been obvious to incorporate conventional Web browser functionality into the PARITY system.

This approach, as recognized in KSR, allows a showing of obviousness in situations in which there is a need, or there are commercial pressures, to solve a problem and the notional skilled person might be expected to try each one of a finite number of predictable solutions to the problem. KSR, 127 S. Ct. at 1742.

Having reached the view that the claim was prima facie obvious, the court considered but rejected the patentee's evidence on Deere secondary commercial considerations. The court held that much of the secondary considerations evidence of skepticism, praise, copying, and commercial success lacked any nexus to the claimed invention and that where there was arguably a nexus, the relationship was “too attenuated” to overcome the prima facie showing of obviousness.

The court's analysis did not result in a finding that all of the dependent claims were obvious, and the court considered whether Thomson had infringed the remaining claims. As seen above, independent claim 1 requires acts by the bidder and by the auction system. The parties agreed that no single person performed every step of the asserted claims so Muniauction argued, as it had at trial, for a theory of joint infringement, urging that Thomson's acts of controlling access to its auction system and instructing bidders on its use were sufficient to make it a direct infringer, combining the acts of the bidder with those of Thomson to find performance of all the claimed steps. The jury instruction encompassed this, instructing the jury to consider whether the parties were acting “jointly or together,” and whether one party is “teaching, instructing or facilitating” the other party's acts. The Federal Circuit found that this instruction was in error because it did not ask the jury to consider facts relevant to the correct “control or direction” standard.

'Control or Direction'

The Federal Circuit restated the “control or direction” standard of BMC Resources as requiring a showing that one party acted as a “mastermind,” citing NTP, Inc. v. Research In Motion , 418 F.3d 1282, 1380-81 (Fed. Cir. 2005), over the entire process. Only in that situation could every performed step be attributable to the controlling party, making that party a direct infringer. “Control or direction,” the court held, is satisfied in situations in which the direct infringer would be liable for the acts of the other party under traditional vicarious liability theories, but not in an arm's length situation such as the municipal bond auction in which the claimed steps were performed by the bidder and the auctioneer.

John M. Cone, jcone@hitchcockevert. com, an attorney with Hitchcock Evert LLP in Dallas, was lead counsel for Paymentech L.P. in the BMC Resources case.