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CLS Bank International v. Alice Corp. Pty. Ltd.

October 13, 2009

CLS BANK INTERNATIONAL, PLAINTIFF,
v.
ALICE CORPORATION PTY. LTD., DEFENDANT.



The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge

REDACTED MEMORANDUM OPINION*fn1

CLS Bank International ("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 extraterritoriality [Dkt. # 51].*fn2 For the reasons explained herein, the Court will deny CLS's motion 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 (1) 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. § 611, 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 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 performed, on computer hardware and software (the "CLS Core System") located entirely outside of the United States.*fn3 The "Scheduler" module of the CLS Core System manages and initiates the various processes that must be accomplished by the CLS Core System to achieve settlement. The Scheduler is programmed to start each day in manual mode. CLS staff in New York or London switch the Scheduler to automatic mode at the start of each business day.*fn4 If a CLS operator does not click "assume control" on the operational taskbar and switch the Scheduler to automatic, no transactions will be settled and no pay-outs will be made. In addition to switching the Scheduler to automatic, an operator who has clicked "assume control" may also use the operational taskbar to input various commands to the CLS Core System to, inter alia, adjust member accounts, start and stop the settlement and pay-out processes generally or for particular members or currencies, and change the manner in which settlement is performed. At the end of each business day, when settlement of transactions on the CLS Core System has been completed, the Scheduler automatically switches back to manual mode.

In automatic mode, the Scheduler makes decisions about when to trigger various processes based on its own internal rules. In manual mode, the Scheduler does not take action on its own but initiates other processes based on commands from CLS operators. Even in automatic mode, however, CLS operators in New York and London monitor the CLS Core System and deal with exceptions to normal automatic operations. These exceptions rarely occur when compared with the daily volume of instructions that are settled by the CLS Core System, with an average of 10.8 operator actions for every 700,000 instructions settled. But it is not uncommon for CLS operators to intervene in the operation of the CLS Core System to manually initiate Circles settlement processing (which settles all remaining pending transactions in bulk) or manually adjust accounts to reflect pay-ins (necessary because a CLS Member's transactions are not settled until it has paid in sufficient funds). Likewise, CLS operators occasionally need to suspend a CLS Member from settlement or pay-out. An empirical analysis of commands input by CLS operators during one week (June 23-27, 2008) shows that operators in New York assumed control, switched the system from automatic to manual (and vice versa), created multiple manual account transfers, altered the method of settlement, and initiated sweep pay-outs.

CLS Members electronically submit instructions for settlement of foreign exchange transactions on a particular date (the "settlement date"). The CLS Core System receives, authenticates and matches instructions relating to the same foreign exchange transaction, and stores 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 a judgment as a matter of law." Fed. R. Civ. P. 56(c); Anderson v. Liberty 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." Celotex 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 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. Dalton, 164 F.3d 671, 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. ...


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