Judges: Gajarsa (author), Plager, Prost

[Appealed from W.D. Pa., Judge Lancaster]

In Muniauction, Inc. v. Thomson Corp., No. 07-1485 (Fed. Cir. July 14, 2008), the Federal Circuit reversed the district court’s judgment of nonobviousness, finding that certain claims of Muniauction, Inc.’s (“Muniauction”) U.S. Patent No. 6,161,099 (“the ’099 patent”) were obvious as a matter of law. At the same time, the Court reversed the district court’s judgment of infringement with respect to the remaining asserted claims, finding that Thomson Corporation and I-Deal, LLC (collectively “Thomson”) did not infringe those claims as a matter of law.

The ’099 patent is directed to original issuer municipal bond auctions over an electronic network, such as the Internet, using a web browser. In this type of auction, a municipality (“issuer”) offers its bonds to underwriters (“bidders”), who typically bid on and purchase an entire bond offering and then resell the individual bonds to the public. Importantly, the claims of the ’099 patent recite an electronic auctioning process where at least one of the process steps “is performed using a web browser.”

Muniauction filed suit against Thomson, alleging that Thomson infringed certain claims of the ’099 patent when it conducts auctions on its BidComp/Parity® system. Thomson’s BidComp/ Parity® system originated in 1992 as the Parity® system, allowing bidders to use modems to access bid calculation software on a central server via a proprietary computer network. In 1998, Thomson modified BidComp/Parity® to allow issuers to view bids over the Internet using a web browser rather than a proprietary computer network.

After trial, a jury found that the asserted claims were not obvious and that Muniauction was entitled to approximately $38 million in lost profits damages for Thomson’s willful infringement. Thomson filed a motion for JMOL or a new trial, asserting, inter alia, that the claims of the ’099 patent were obvious and that Thomson did not infringe the claims. The district court denied Thomson’s motion in all respects, enhanced the damages award to $76.9 million, awarded $7.7 million in prejudgment interest, and granted a permanent injunction against Thomson. Thomson appealed.

On appeal, the Federal Circuit addressed first the district court’s denial of Thomson’s motion for JMOL with respect to obviousness. Thomson argued that a bidding process employing the prior art Parity® system performed every step of independent claims 1 and 31 of the ’099 patent other than a web browser. The Court agreed. It reasoned that because Muniauction’s expert conceded as much, no reasonable juror could find to the contrary. It concluded that substantial evidence did not support a finding that the submission of bids using Parity® lacked any element of claims 1 and 31 other than the use of a web browser.

Having ascertained the differences between the prior art Parity® system and the claims of the ’099 patent, the Federal Circuit next turned to the legal question of whether it would have been obvious to one of ordinary skill in the art to modify the Parity® system to incorporate conventional web browser functionality. The Court explained that section 35 U.S.C. § 103 “forbids issuance of a patent when ‘the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains.’” Slip op. at 9-10 (quoting KSR Int’l Co. v. Telefl ex Inc., 127 S. Ct. 1727, 1734 (2007)). A central principle in this inquiry, noted the Court, is that “a court must ask whether the improvement is more than the predictable use of prior art elements according to their established functions.” Id. at 10 (quoting KSR, 127 S. Ct. at 1740). The Court determined that here, it was not, and concluded that claims 1 and 31 were obvious as a matter of law.

The Court reasoned that when the ’099 patent application was filed, the use of web browsers was well known. It noted that the patent’s use of the terms “conventional Internet browser” and “conventional web browsing software” denoted references to web browsers in existence at the time of the alleged invention of the ’099 patent. Thus, the Court began its obviousness analysis with the understanding that the modification of the prior art Parity® system to add web browser functionality represented the combination of two well-known elements. Cataloging several earlier-filed patent applications and a May 1996 speech, the Court found that Internet-based auction technology was well-established when the ’099 patent was filed. The Court concluded that Thomson had clearly and convincingly established a prima facie case that claims 1 and 31 of the ’099 patent are obvious as a matter of law.

The Court then turned to Muniauction’s attempt to rebut Muniauction’s prima facie case with secondary considerations of nonobviousness. The Court reviewed the relevant evidence and concluded that at least some of the factors argued by Muniauction lacked the requisite nexus to the claims. And, to the extent some of the factors arguably met the nexus requirement, the Court observed that their relationship to the claims was simply too attenuated to overcome the strong prima facie demonstration by Thomson that the claims were obvious. Accordingly, the Court concluded that claims 1 and 31 were obvious. Because Muniauction’s expert testified that Parity® met the limitations of some of the dependent claims of the ’099 patent, the Court concluded that these claims were also obvious under its analysis of independent claims 1 and 31.

With respect to the remaining asserted claims of the ’099 patent, the Court held that Thomson did not infringe as a matter of law because Thomson, the auctioneer, did not perform every step of the claimed method. The Court noted that the parties did not dispute that a single party did not perform every step of the asserted method claims and that the issue was whether the actions of at least the bidder and the auctioneer may be combined under the law so as to give rise to a finding of direct infringement by the auctioneer. The Court observed that “where the actions of multiple parties combine to perform every step of a claimed method, the claim is directly infringed only if one party exercises ‘control or direction’ over the entire process such that every step is attributable to the controlling party, i.e., the ‘mastermind.’” Id. at 16 (citing BMC Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373, 1380-81 (Fed. Cir. 2007)). It noted that the issue of infringement turned on whether Thomson sufficiently controlled or directed other parties (e.g., the bidder) such that Thomson itself can be said to have performed every step of the asserted claims.

The Court found that Thomson’s control over access to its system and its instructions to bidders on its use were not sufficient to incur liability for direct infringement. It explained that the “control or direction” standard is satisfied where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method. The Court determined that in this case, Thomson neither performed every step of the claimed methods nor had another party perform steps on its behalf. And, because Muniauction had not identified a legal theory under which Thomson might be vicariously liable for the actions of the bidders, the Court held that Thomson did not infringe as a matter of law.

In sum, because the Court found certain claims obvious, it reversed the district court’s judgment that these claims were valid, and because it found the remaining asserted claims to be not infringed, it reversed the district court’s judgment of infringement with respect to those claims. Given these holdings, the Court did not consider Thomson’s remaining arguments and vacated the remainder of the district court’s judgment.