A recent decision by the Federal Circuit articulated two points with far reaching implications for companies in the financial and insurance sectors. First, the court held that a claim directed to a computerized method is not infringed when one of the method steps is performed manually. Second, the court held that a contract to perform a step in a method claim is not sufficient to establish that the step is being carried out for purposes of proving patent infringement; rather infringement requires proof that the defendant actually carries out the step in question. Consequently, the decision suggests design around options and defenses for companies seeking to avoid or defend against charges of infringement. Lincoln Nat’l Life Ins. Co. v. Transamerica Life Ins. Co., 609 F.3d 1364 (Fed. Cir. 2010).
Lincoln National Life Insurance Company (Lincoln) is the assignee of U.S. Pat. No. 7,089,201 (the ‘201 patent), which relates to computerized methods for administering variable annuity plans. At issue in Lincoln were variable deferred annuities (VDAs). VDAs work as follows: First, capital is deposited into an account and “invested in one or more funds representing a particular asset class, such as U.S. corporate bonds or money market instruments.” The insurer then makes periodic benefit payments to the annuitant based on how the investments performed. As this performancebased payment system leads to uncertainty, the ‘201 patent teaches offering “annuitants a minimum benefit feature that guarantees a minimum payment regardless of market activity.” The claims at issue in Lincoln are directed to a computerized method of administering “a variable annuity plan that has such a guaranteed minimum payment feature.”
Transamerica Life Insurance Company, Western Reserve Life Assurance Company of Ohio, and Transamerica Financial Life Insurance Company (collectively, Transamerica) sell and administer Guaranteed Minimum Withdrawal Benefit (GMWB) riders that guarantee “policy owners the right to receive a minimum payment regardless of market performance.” Transamerica filed a complaint in the Northern District of Iowa seeking a declaratory judgment that it does not infringe any claim of the ‘201 patent and that its claims were invalid under 35 U.S.C. §§ 102, 103, and 112. Lincoln filed a counterclaim for infringement.
Claim 35 was the only independent claim at issue and provides as follows:
35. A computerized method for administering a variable annuity plan having a guaranteed minimum payment feature associated with a systematic withdrawal program, and for periodically determining an amount of a scheduled payment to be made to the owner under the plan, comprising the steps of:
a) storing data relating to a variable annuity account, including data relating to at least one of an account value, a withdrawal rate, a scheduled payment, a payout term and a period of benefit payments;
b) determining an initial scheduled payment;
c) periodically determining the account value associated with the plan and making the scheduled payment by withdrawing that amount from the account value;
d) monitoring for an unscheduled withdrawal made under the plan and adjusting the amount of the scheduled payment in response to said un-scheduled withdrawal; and
e) 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.
The final “even if” clause was added “during prosecution to overcome a rejection over the prior art.” The district court construed step (e) to mean at “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.” The district court later clarified that “step (e) does not require actual exhaustion of the account value; as explained in its claim construction order, the ‘even if’ clause simply recites one of the circumstances in which the guaranteed payment must still be made, ‘not a requirement that the account value be exhausted.’”
A jury found that “claim 35 and dependent claims 36-39 and 42 of the ‘201 patent were infringed and not invalid” and awarded $13 million in damages. Transamerica then filed a motion for judgment as a matter of law (JMOL) asserting that: “the evidence was insufficient to support the jury’s finding of infringement”; and “the asserted claims were invalid under 35 U.S.C. § 103 and § 112.” These motions were denied and the district court entered a permanent injunction against Transamerica.
Infringement of Step (e) Does Not Require Actual Exhaustion
The Federal Circuit, in an opinion by Judge Moore, joined by Judges Mayer and Clevenger, reversed and remanded because the jury’s verdict of infringement was not supported by the evidence of record. On appeal, Transamerica argued that it did not perform step (e) of claim 35 for two reasons: (1) it “never made payments after an ‘account value is exhausted’” because “none of its policy owners has ever had an exhausted account”; and (2) it “has not yet implemented a computer system that will [automatically] make a payment in the event an account becomes exhausted.”
The Federal Circuit did not agree with Transamerica’s first argument and explained:
[S]tep (e) 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 GMWB riders must necessarily make a scheduled payment in the event of an exhausted account. If Transamerica’s computerized system makes a payment regardless of account value--i.e., if the system will make a payment to the owner of an exhausted account, should that circumstance arise--Transamerica performs step (e). Conversely, if the computerized system is configured such that it does not make a payment if an account is exhausted, Transamerica does not perform step (e). Because actual exhaustion is not required to infringe claim 35, Transamerica’s first argument does not provide any basis for reversing the district court’s denial of JMOL.
The Federal Circuit did, however, agree with Transamerica’s second argument. Because Transamerica’s computerized system for administering annuities was configured not to automatically make payments when an account was exhausted, the appellate panel found that Transamerica did not infringe claim 35.
The functional specification [of Transamerica’s allegedly infringing variable annuity system, Vantage] shows that when a policy owner’s account value drops to less than the scheduled withdrawal amount--that is, when the account value becomes exhausted--Vantage stops making payments to the policy owner. . . . Transamerica’s Distribution Services department produces a manual check for the withdrawal amount and sends the check to the policy owner. . . .Vantage generates a letter informing the policy owner that his policy was terminated due to lack of account value and that future scheduled payments will be made using a Repetitive Payment System (RPS). . . . The underlying account file is then terminated in Vantage and transferred to RPS.
In short, “Vantage stops making scheduled payments when an account becomes exhausted.” Having established its grounds for noninfringement, the Federal Circuit turned to Lincoln’s arguments.
Method Claims Directed to Computerized Processes Are Not Infringed when Manual Steps Are Combined with Separate Computer Programs
Contrary to Lincoln’s assertions, the Federal Circuit stressed that Transamerica did not infringe claim 35 merely because “Vantage interacts with various other programs to administer the GMWB riders.” For instance, although “Vantage uses a program called Infopac to generate [a] policy termination letter” it does not use a “computer system to make a scheduled payment to the owner of an exhausted account.” Rather, its specifications provide that a manual check must be produced.
A Contract to Perform a Step in a Method Claim Does Not Necessarily Equate to Infringement
Finally, the Federal Circuit rejected Lincoln’s argument that Transamerica infringed claim 35 because it “is contractually obligated to practice the claimed method through its sale of the GMWB riders.” While it was undisputed that “the GMWB riders require Transamerica to make payments after an account is exhausted,” this does not mean “that it must be made by a computerized method,” or that a contractual obligation is sufficient to prove the performance of an element in a method claim.
Claim 35 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 GMWB riders did obligate Transamerica to perform the claimed method, this would not be sufficient to establish infringement. “The law of this circuit is axiomatic that a method claim is directly infringed only if each step of the claimed method is performed.” . . . A contractual obligation to perform an act is not performance; indeed, a party could avoid infringement simply by breaching its contract.
The Lincoln National case highlights the care that must be taken in drafting method claims requiring steps to be performed by a computer and in analyzing such claims to evaluate infringement. The claim drafter and the potential infringer must both pay particular attention to whether the claim language requires an act to be performed every time the method is carried out or only when certain conditions are met. The case also is instructive in making it clear that the mere contractual obligation to perform a step of a claimed method is not sufficient to establish that the step is performed for purposes of proving patent infringement; rather, evidence that the step is actually performed is necessary.