Decade-Long Financial Services Campaign Hits an Alice Wall

  • June 5, 2020
  • Category: Patent Litigation Feature
    Market Sector: Financial Services

Island Intellectual Property LLC (Island IP) has suffered a Section 101 setback in the bank deposit campaign it has waged for more than a decade, as the Southern District of New York has just invalidated all five patents asserted in the plaintiff’s last remaining suit under Alice. On May 29, District Judge J. Paul Oetken granted a motion to dismiss filed by defendant StoneCastle Partners, ruling that the five patents at issue are unpatentably directed to abstract ideas: four to the abstract idea of “use of a multibank depository program to stay within insurance limits”, and the fifth to “execution on a computer of a bookkeeping process that could be executed by humans manually”. The decision eliminated all remaining causes of action against StoneCastle that relate to patent infringement and also dismissed a trade secrets claim (though with leave to amend), with the court further declining to exercise supplemental jurisdiction over remaining state law claims.

Island IP, a subsidiary of Double Rock Corporation (the latter described by the court as a “cash-management business that caters to financial-services providers”), sued StoneCastle in May 2019 (1:19-cv-04792) as part of its most recent wave of litigation, followed shortly after by a July 2019 complaint against American Deposit Management (2:19-cv-01038). Like the other campaign defendants, StoneCastle was accused of infringement (here, of five patents: 8,150,766; 8,359,267; 8,655,689; 8,712,911; and 8,719,157) through the provision of “deposit sweep”, or “cash sweep”, services, where customer funds are distributed between multiple bank accounts so that the balance in each remains within the $250K Federal Deposit Insurance Commission (FDIC) insurance limit. The complaint also alleged a trade secrets cause of action related to StoneCastle’s hiring of former Double Rock executives as well as a series of related state law claims (including breach of contract and unjust enrichment).

StoneCastle challenged the five asserted patents in an August 2019 motion to dismiss, asserting that the ‘766, ‘267, ‘911, and ‘157 patents (the “Reciprocal Deposit Patents”, as characterized by the plaintiff) are directed to the abstract idea of “dividing and transferring funds to stay within insurance limits”, asserting that this “is a fundamental economic practice that is well-known in the financial industry” of the type that courts have held to be an abstract idea in cases like Bilski and Alice itself. Furthermore, argued StoneCastle, the inventive concept identified by Island IP—“allocating an amount of governmental funds from a first financial institution to a first set of financial institutions and held therein, based on obtaining government backed deposit insurance and/or collateralization by government securities for the funds”—“is just the abstract idea itself, limited to deposits of government funds”. Meanwhile, StoneCastle alleged that the ‘689 patent (the “Allocation Model Patent”, per the plaintiff) is directed to the abstract idea of “keeping a digital ledger to facilitate that same abstract idea” identified in the other four patents, stating as to the plaintiff’s identified inventive concept of “client account stratifications” that “[t]here is nothing inventive about pooling client accounts in different tiers”.

Judge Oetken granted StoneCastle’s motion on May 29 as to all five patents. The court ruled that the Reciprocal Deposit Patents are directed to the abstract idea of “use of a multibank depository program to stay within insurance limits”, explaining that “[t]he idea of dividing and transferring funds to stay within insurance limits is a fundamental economic practice”. Here, the court rejected Island IP’s argument that the patents recited an improvement in computer technology like the claims found non-abstract in cases like Enfish, holding instead that the claim language “disclos[ing] computerization ‘do[es] nothing more than spell out what it means to ‘apply it on a computer’’ at a high level of generality” (citations omitted). To the extent that the specification reveals an improvement, that improvement is not to the “existing computerized methods of executing reciprocal deposits, but rather the problem the reciprocal deposits are themselves intended to solve: regulatory burdens and associated costs on banks”. The court also rejected Island IP’s arguments as to the second step of Alice, holding that the plaintiff never sufficiently identified the “difficult technological problem” the patents purportedly solve.

Furthermore, the court held that the Allocation Model Patent is also directed to an abstract idea: “the patent merely recites execution on a computer of a bookkeeping process that could be executed by humans manually: essentially, accessing and obtaining information about a plurality of tiered accounts participating in the program, calculating a bank’s excess capacity for program funds, allocating funds to be transferred, and updating account information to reflect transfers”. Because this amounts to an attempt to “automate ‘pen and paper methodologies’”, the patent is thus a “quintessential ‘do it on a computer’ patent . . . directed to [an] abstract idea[]” (citations omitted). The court then quickly dispensed with the inventive concept identified in Island IP’s opposition brief, dismissing it as “merely a verbose recitation of otherwise quotidian and manually executable bookkeeping practices”.

With the patent claims thus disposed of, the court ended by dismissing Island IP’s trade secret cause of action for failure to state a claim as based on “extremely general” factual allegations, though with leave to amend, also declining to exercise subject matter jurisdiction over the remaining claims that arose under state law, given the absence of any remaining federal causes of action.

Prior Litigation: Section 101 Invalidity Dispute Sparks a Licensing Battle

This is not the first time that Island IP’s patents have been challenged under Section 101 over the course of the Double Rock/Island IP campaign.

In November 2016, both Island IP and Double Rock were hit with six declaratory judgment complaints—in part, alleging the invalidity of more than 50 Island IP patents under Section 101 and other grounds—filed by Reich & Tang, a provider of “cash sweep” services, which distribute (or “sweep”) customer funds between multiple bank accounts so that the balance in each remains within the $250K FDIC insurance limit. The six Delaware lawsuits resulted from a terminated partnership gone sour: the complaints allege that Reich & Tang hired Double Rock in 2009 to manage its cash sweep business on a temporary basis after ending its relationship with another partner, intending to later take those management functions in-house. As part of their services agreement, Reich & Tang took a license to the account management patents held by Island IP, and in 2010, after that contractual arrangement had ended, Reich & Tang agreed to acquire Double Rock’s cash sweep business outright rather than handle those operations internally. The purchase price purportedly reflected additional consideration in the form of future license payments from Reich & Tang, as set forth in an amended license agreement.

However, in May 2015, Reich & Tang informed Double Rock that it would stop making license payments on the patents at issue because they were purportedly directed to unpatentable subject matter. Double Rock subsequently filed a complaint against Reich & Tang in New York state court, seeking to force the financial services firm to continue making its payments until the patents either expired or were declared invalid.

In December 2016, Double Rock and Island IP filed motions to dismiss in the Delaware cases, seeking dismissal under the first-to-file rule in light of the state court action, alleging that the complaints’ filing was an attempt to engage in “‘procedural fencing’ to deprive Defendants of their choice of forum”, and asserting that the court lacked declaratory judgment jurisdiction because Reich & Tang had not sought an invalidity judgment as to all licensed patents. The companies also sought in the alternative to stay the cases pending the outcome of the state court suit, relief that the district court granted in June 2017. That same month, the state court rejected Reich & Tang’s position that it was entitled to stop paying royalties and granted partial summary judgment for Double Rock and Island Rock as to their claims of breach of contract and indemnification, the latter relating to a provision imposing liability upon Reich & Tang for certain losses (interpreted by the court as covering losses from Reich & Tang’s cessation of royalty payments).

Double Rock and Island IP first began asserting patents in March 2009, targeting eight banks and brokerage firms, including Deutsche Bank, MBSC Securities, and Plains Capital. After nearly three years of litigation, which included several declaratory judgment actions, the campaign’s consolidated case was dismissed without prejudice in February 2012, six days before a scheduled trial. Filed documents indicated that multiple defendants reached settlements with Double Rock, following the dismissal of a Section 101 invalidity motion earlier that February.

About the Plaintiffs

New-York-based Double Rock describes itself as a “leading cash management and financial technology company”. In addition to Island IP, identified on the Double Rock website as the entity that holds and manages the latter’s patents, Double Rock advertises one other affiliated company, Access Control Advantage, Inc., touted as offering a “complete loan automation program for Recordkeepers and Plan Sponsors”. Double Rock is the successor to Reserve Management Company, an investment firm whose flagship money market fund collapsed in September 2008 in the wake of the Lehman Brothers bankruptcy.

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