CITE: 564 F. Supp 1358
CMON: June 1983
PLAIN: Paine, Webber, Jackson & Curtis, Inc.
DEFND: Merrill Lynch, Pierce, Fenner & Smith; Dean Witter Reynolds
COURT: United States District Court, District Delaware
DATE: June 21, 1983
HISTORY:
In action for declaratory judgment of noninfringement, invalidity and
unenforceability of Patent No. 4,346,442 relating to data processing
methodology for cash management account and for ancillary injunctive
relief, motions were filed seeking, inter alia, grant of summary judgment,
striking and dismissal of third-party complaint, and joinder. The District
Court, Latchum, Chief Judge, held that: (1) claims of patent relating to
data processing methodology for cash management account, primarily teaching
schematic flow chart for CMA but not including any description of any
apparatus to effectuate CMA, were patentable subject matter; (2) stock
brokerage which patent-holder alleged to have infringed subject patent
could not by joined as third party of counterclaim defendant; (3) third
party had failed to demonstrate entitlement to non-statutory intervention
as of right; and (4) third party had failed to demonstrate justiciable
dispute with patentholder under patent laws so as to permit court to
exercise pendent jurisdiction over claim of unfair competition.
Ordered accordingly.
Decided May 27, 1983. Amended June 21, 1983.
SUMMARY:
Business method for cash management described with flow chart, but with
no corresponding apparatus description, is patentable.
JUDGE: LATCHUM, Chief Judge
DECISION:
Plaintiff, Paine, Webber, Jackson and Curtis, Inc. ("Paine Webber"), brings
this action pursuant to 28 U.S.C. Sect. 2201-2202 and Rule 57, Fed.R.Civ.P.
{1} seeking a declaratory judgment of noninfringement, invalidity and
unenforceability of United States Patent No. 4,346,442 ("the '442 patent"),
and ancillary injunctive relief against defendant Merrill Lynch, Pierce,
Fenner & Smith, Inc. ("Merrill Lynch"), from initiating infringement
litigation against and/or charging Paine Webber or any of its customers,
officers, directors or employees with the infringement of the '442 patent.
Merrill Lynch has counter-claimed seeking injunctive relief against Paine
Webber for infringing or contributing to infringe the '442 patent, and
monetary damages for Paine Webber's infringing activities. Merrill Lynch
also has filed a third-party complaint against third-party defendant
Dean Witter Reynolds, Inc. ("Dean Witter"), alleging that it has infringed
and continues to infringe the '442 patent by making, using and selling an
implementation of the '442 patent and seeks injunctive relief against Dean
Witter to enjoin the infringing, inducing infringement or contributing to
infringe the '442 patent. Merrill Lynch also alleges that Dean Witter has
wrongfully appropriated the trade secrets of Merrill Lynch when it hired
one of Merrill Lynch's employees. It requests this Court to exercise its
pendent jurisdiction to enjoin Dean Witter from misusing the trade secrets
allegedly misappropriated.
Paine Webber has moved this Court pursuant to Rule 56(c), Fed.R.Civ.P.,
for a summary judgment declaring the '442 patent invalid and unenforceable
under 35 U.S.C. Section 101 on the sole ground that the patent does not
claim subject matter which can form the basis for a valid patent. (Docket
Item ["D.I."] 12.) Paine Webber also has moved this Court (1) to strike
so much of Merrill Lynch's "Answer, Counterclaim, Third Party Complaint
and Jury Demand" as is denominated "Third Party Complaint," on the ground
that the Third Party Complaint does not comply with the provisions of
Rule 14, Fed.R.Civ.P.; or (2) to dismiss, or alternatively to sever, so
much of the Third Party Complaint on the grounds that the attempted
joinder of the third party does not comply with the provisions of Rules
13(h), 19 or 20.
Dean Witter has moved this Court, pursuant to Rules 12(b)(1) & (6),
Fed.R.Civ.P., for an order dismissing each cause of action alleged by
Merrill Lynch on the grounds that (1) the first cause of action fails
to state a claim upon which relief can be granted because the '442 patent
is invalid and unenforceable under Section 101, and that (2) the second
cause of action alleging trade secrets misappropriation should be
dismissed for lack of subject matter jurisdiction.
William Leighton d/b/a Option Advisory, Inc. ("Leighton") also has moved
pursuant to Rules 19 and 21 as a pro se litigant to join Leighton as a
third party plaintiff. Leighton requests this Court to declare the
'442 patent invalid and unenforceable and hold Merrill Lynch liable for
unfair competition for its use of the '442 patent.
I. The Cash Management Account
In 1977 Merrill Lynch offered to the public the Cash Management Account
program ("CMA") which combined three financial services commonly offered
by financial institutions and brokerage houses and included a brokerage
security account (the "Securities Account"), several money market funds
(the "Money Market Fund"), and a charge/checking account (the "Visa
Account"). The Securities Account, the primary component of the CMA
program, is a conventional Merrill Lynch margin account which may be used
to purchase and sell securities and options on margin or on a fully-paid
basis. It is maintained pursuant to the rules and regulations of the
Securities and Exchange Commission, the Board of Governors of the Federal
Reserve System, the New York Stock Exchange, and the National Association
of Securities Dealers, Inc. As is the case with conventional margin
account, the customer of the CMA pays normal brokerage fees for securities
transactions in the Securities Account. (D.I. 13A, CMA Money Trust
Prospectus at 2.)
The Money Market Fund is a conventional money market fund which provides
the customer of the CMA with a choice of three CMA money market funds:
the CMA Money Fund, the CMA Government Securities Funds, or the CMA
Tax-Exempt Fund. Each of these funds is a no-load, diversified,
open-end management investment company registered under the Investment
Company Act. The objectives of the funds are similar to the objectives
of other money market funds (such as the Merrill Lynch Ready Assets Trusts).
Each seek the safety of principal, liquidity and current income available
from investing in a portfolio of money market securities. Dividends are
declared daily and automatically reinvested in the Money Market Fund
similar to the method by which the dividends are distributed, and
reinvested in other money market funds. (Id.)
The Visa Account is the third component of the CMA and is managed by
Bank One of Columbus, NA. ("Bank One"). Bank One issues a Visa card and
checks to each person who is a CMA customer. The card may be used to make
purchases of merchandise or services at Visa-participating establishments
or to obtain cash advances from any Visa-participating bank or branch.
The CMA customer may draw checks upon his Visa Account for any purpose
and the Visa card is similar to the conventional card in that the card
is honored at more than the 100,000 worldwide bank branches in the Visa
system, as well as the 3,000,000 business establishments accepting the
Visa card. (Id. at 3.)
No question exists that the three major components of the CMA were offered
to the public prior to the marketing of the CMA by financial institutions
and/or brokerage houses: one could have placed securities into a brokerage
account, purchased shares in a money market fund, or obtained a Visa charge
account. Merrill Lynch, however, argues that by combining the three
components of the CMA, the customer receives synergistic benefits.
According to Merrill Lynch, one of the advantages of the CMA is that all
money generated in the Securities Account is automatically invested within
a week into the Money Market Fund. This differs from a conventional
brokerage account, which might not invest money generated from activity
in the brokerage account and thus some money might remain in an account
without yielding any financial return. These proceeds, referred to as
idle cash", do not enhance the customer's portfolio and usually are not
compatible with the customer's overall financial objectives. By investing
any idle cash generated in the Securities Account into the Money Market
Fund, the customer apparently receives a greater return on his initial
investment and therefore is consistent with the customer's overall
objectives.
Another advantage of having an integrated financial service, as provided
by the CMA, is that the cash balances in the Securities Account, shares
in the Money Market Fund, and available margin loan value of the securities
in the Securities Account are calculated when determining the amount of
credit available in the Visa Account. Also, payments made by Merrill Lynch
to Bank One in payment of Visa balances, on behalf of the CMA customers,
are made in the following order of priority: (1) from the cash balances,
if any held in the Securities Account; (2) from the proceeds of redemption
of Money Fund shares in CMA accounts; and (3) from margin loans to the
customer by Merrill Lynch within the available margin loan value of the
securities in the Securities Account. This system of priority arguably
provides for an efficient use of funds because the customer will not incur
the cost of a margin loan until all free credit cash balances and funds
invested in Money Market Fund shares are fully utilized. (Id.)
Another advantage of the CMA, according to Merrill Lynch, is that those
customers who subscribe to the CMA receive a monthly transaction statement
from Merrill Lynch which details all CMA transactions during the preceding
month. The statement describes securities and options bought and sold in
the Securities Account, whether on margin or on a fully paid basis, any
other type of transaction effected in the Securities Account, margin
interest charges, if any, Money Market Fund shares that were purchased
or redeemed, dividends on Money Market Fund shares, purchases of merchandise
or services that were made with the Visa card, checks drawn against the
Visa Account and cash advances. (Id.)
II. The Invention
A. The Patent Office
The '442 patent application was filed in the United States Patent Office
on July 29, 1980 asserting twelve claims for a "Securities Brokerage-Cash
Management System." With the application, Merrill Lynch notified the
Patent Office that a portion of the system had been used and had been
described in the CMA Money Trust-Prospectus, dated August 25, 1978 and
a brochure distributed by Merrill Lynch entitled "Merrill Lynch Cash
Management Accoun", published October 1978 by Merrill Lynch, and that
these documents were distributed more than one year prior to the filing
of the '442 patent application. On October 2, 1981, the Examiner rejected
all twelve claims on the grounds that all the claims were obvious under
Section 103, and that Claims 1-6 and 12 were not adequately described
under Section 112:
Claims 1-12 are rejected under 35 U.S.C. 103 as obvious over the CMA
Money Trust Prospectus which was cited by applicant. The features recited
in claims 1, 3, 4 and 6 are either inherently present in the description
of the CMA Money Trust or would be clearly obvious in any system needed
to carry out the functions of the Trust. The use of an anti-kiting means
is considered to be an obvious design expedient in any system dealing
with market transactions. It is conventional in financial systems in
maintaining a cross-reference file to indicate acceptable customers and
transactions. The method claims are obvious in similar manner. These
claims would be obvious to one of ordinary skill in the art in view of
the features described in the CMA Money Trust Prospectus.
Claims 1-6 and 12 are additionally rejected under 35 U.S.C. 112, second
paragraph, for failing to particularly point out and distinctly claim
the invention. In claims 1 and 2 line 15-16, there is no antecedent basis
for the phrase "said information storing and verifying means."
Also in claims 1 and 2, the output of the means for generating an updated
credit limit is not used elsewhere in the claims. It should be sent to
the bank or something. Claims 3-6 incorporate these errors. In Claim 12
line 9, there is no antecedent basis for the phrase "said account balance
difference computing means." Appropriate correction or clarification of
these errors is required.
Claims 5, 6, 11 and 12 are objected to as being improper multiple
dependent claims. A multiple dependent claim cannot depend from or
through another multiple dependent claim.
(D.I. 13A at 91.) On January 4, 1982, the '442 patent application was
amended. It cancelled claims 7-12 inclusive, thus leaving claims 1-6.
Further it substituted certain terminology in each of the remaining claims
in an attempt to overcome the Section 112 rejection. Further in response
to the Section 103 objection, Merrill Lynch maintained that the claims in
the '442 application were more complex than the prior art and that it would
be virtually impossible for one skilled in the art to duplicate the CMA
System by using only the information in the Prospectus and Brochure
without resorting to the use of a large staff, personal innovation and
problem-solving by members of that staff, and a major program of
experimentation and testing. Furthermore, Merrill Lynch represented to
the Examiner that even given all of the above, it would be uncertain
that the results called for in the claims could be achieved.
B. The '442 Patent
On August 24, 1982, the United States Patent and Trademark Office ("PTO")
issued the '442 patent for a Securities Brokerage-Cash Management System
on the six remaining claims. Merrill Lynch is the assignee of the patent.
The '442 patent relates to the CMA, and more specifically, to the data
processing methodology and apparatus for effecting the CMA. The
specifications of the '442 patent primarily teach the schematic flow
chart for the CMA, {2} but do not include any descriptions of any
apparatus to effectuate the CMA.
Claims 1 and 3 are illustrative of the six claims set forth in the
'442 patent:
1. In combination in a system for processing and supervising a plurality
of composite subscriber accounts each comprising a margin brokerage
account, a charge card and checks administered by a first institution,
and participation in at least one short term investment, administered by
a second institution, said system including brokerage account data file
means for storing current information characterizing each subscriber
margin brokerage account of the second institution, manual entry means
for entering short term investment orders in the second institution,
data receiving and verifying means for receiving and verifying charge
card and check transactions from said first institution and short term
investment orders from said manual entry means, means responsive to said
brokerage account data file means and said data receiving and verifying
means for generating an updated credit limit for each account, short term
investment updating means responsive to said brokerage account data file
means and said data receiving and verifying means for selectively
generating short term investment transactions as required to generate
and invest proceeds for subscribers' accounts, wherein said system
includes plural such short term investments, said system further
comprising means responsive to said short term updating means for
allocating said short term investment transactions among said plural
short term investments, communicating means to communicate said updated
credit limit for each account to said first institution.
3. A combination as in claim 1 or 2 where said updated credit limit
generating means comprises means for accumulating the amount of charge
card usage and checks for each subscriber, means responsive to said
brokerage account data file means for generating a subscriber updated
credit limit measured by the difference between the limiting residual
subscriber brokerage account securities loan value augmented by the
value of the subscriber's short term investment, decremented by the
value of the subscriber's aggregate expenditures and funds required or
brokerage account purposes, means for reporting said updated credit
limit to said brokerage account data file means.
As claims 1 & 3 demonstrate, the claims of the '442 patent are directed
to the CMA system described in the specifications. Unlike the specifications,
and for the purpose of the present motions, the various elements of the
claims are cast in terms of apparatus, that is, "means for" performing
certain tasks or steps, rather than in terms of the method steps
themselves. {3}
III. Paine Webber Contentions
Paine Webber contends that the '442 patent is invalid under 35 U.S.C.
Section 101 because it does not claim a "process, machine, manufacture
or composition of matter" as required by Section 101. It argues that the
'442 patent is unpatentable because the claims "define nothing more than
the combination of familiar business systems, that is, a margin brokerage
account, one or more money market funds, and a checking/charge account,
which have been connected together so that financial information can be
exchanged among them." (DI. 13 at 7-8.) It argues that business methods
and systems cannot form the subject matter of a valid patent monopoly and
that courts do not hesitate to invalidate patents on the grounds that
they merely describe business systems. See Loew's Drive-In Theatres, Inc.
v. Park-In Threatres, Inc., 174 F.2d 547, 552, (1st Cir. 1949); In re
Patton, 127 F.2d 324, 327 (C.C.P.A. 1942); Hotel Security Checking Co. v.
Lorraine Co., 160 F. 467, 470 (2d Cir. 1908); Beraidini v. Tocci, 190
F. 329 (S.D.N.Y. 1911), aff'd, 200 F. 1021 (2d Cir. 1912); United States
Credit System Co. v. American Credit Indemnity Co., 53 F. 818, 819
(S.D.N.Y.), aff'd, 59 F. 139 (2d Cir. 1883).
According to Paine Webber, in an attempt to obscure the fact that the
invention is merely a business system, the claims were drafted to recite
a combination of various means" for performing certain functions. Paine
Webber argues that the specifications do not refer to any apparatus, but
merely describe a method, and thus the claims of the '442 patent are
limited to the method described in the specifications. According to Paine
Webber, the "means" portions of the claims thereby refer only to the
functional steps rather than to specific apparatus or structure and that
the method claimed merely describes a series of manipulative steps that
can be performed by hand with the aid of paper, pencil and telephone.
Therefore Paine Webber maintains that the claims and the specifications
of the '442 patent reveal that the invention fits squarely into the
business system category and has nothing to do with machinery, technology,
process, manufacture, or composition of matter. (DI. 13 at 10.)
Merrill Lynch, however, argues that the "means plus function" form of the
claims in the '442 patent is recognized under 35 U.S.C. Sect. 112 which
provides:
An element in a claim for a combination may be expressed as a means
or step for performing a specified function without the recital of
structure, material, or acts in support thereof, and such claim shall
be construed to cover the corresponding structure, material, or acts
described in the specification and equivalents thereof.
It asserts that courts have repeatedly held that further specification is
not required to establish an apparatus claim (citing In re Sherwood, 613
F.2d 809, 811 (C.C.P.A. 1980)). Merrill Lynch, therefore, contends that
no requirement exists to identify any apparatus in the specifications
in order to claim a valid "means for" apparatus claim.
The Court need not determine, at this time, whether the '442 patent claims
an apparatus or a process because labels are not determinative in a
Section 101 analysis. See Application of Maucorps, 609 F.2d 481, 485,
(C.C.P.A. 1979); Application of Gelnovatch, 595 F.2d 32, 37 (C.C.P.A. 1979).
In Maucorps, the Court of Customs and Patent Appeals ("CCPA") noted that
whether an invention is claimed as an apparatus or process is often an
exercise in drafting and that those principles used to determine whether
a patent claims statutory subject matter equally applies whether an
invention is claimed as an apparatus or process. Accordingly, whether the
'442 patent claims a process or an apparatus, is not relevant in a
Section 101 analysis; the Court must determine as a threshold matter
whether the claims include statutory matter, regardless of the label
of the claims. {4}
IV. Section 101
A. Algorithm
Section 101 enumerates the categories into which inventions must fall to
qualify for patent protection: "[w]hoever invents or discovers any new
and useful process, machine, manufacture, or composition of matter, or
any new and useful improvement thereof, may obtain a patent." An invention
not falling within one of these four classes is deemed nonstatutory subject
matter and is not eligible for patent protection. The phrase "whoever
invents" requires that the claimed invention be man-made and lays the
foundation for the doctrine that phenomena of nature, mental process and
abstract intellectual concepts are not patentable because they are not the
basic tools of technology. Gottschalk v. Benson, 409 U.S. 63, 67, (1972).
Thus if a computer program is viewed as a series of thought processes, then
it merely consists of mental steps which are nonstatutory subject matter
and not patentable. This view has not been accepted and computer programs
are recognized as being patentable.
Although a computer program is recognized to be patentable, it must
nevertheless meet the same requirements as other inventions in order
to qualify for patent protection. For example, the Pythagorean theorem
(a geometric theorem which states that the square of the length of the
hypotenuse of a right triangle equals the sum of the squares of the lengths
of the two sides - also expressed A^2+B^2 = C^2) is not patentable because
it defines a mathematical formula. Likewise a computer program which does
no more than apply the theorem to a set of numbers is not patentable. The
Supreme Court and the CCPA has clearly stated that a mathematical algorithmic
formula is merely an idea and not patentable unless there is a new
application of the idea to a new and useful end. See Gottschalk v.
Benson,{5} 409 U.S. 63; In re Pardo, 684 F.2d 912 (C.C.P.A. 1982).
Unfortunately, the term "algorithm" has been a source of confusion which
stems from different uses of the term in the related, but distinct fields
of mathematics and computer science. In mathematics, the word algorithm
has attained the meaning of recursive computational procedure and appears
in notational language, defining a computational course of events which is
self contained, for example, A^2+B^2 = C^2. In contrast, the computer
algorithm is a procedure consisting of operation to combine data,
mathematical principles and equipment for the purpose of interpreting
and/or acting upon a certain data input. In comparison to the mathematical
algorithm, which is self-contained, the computer algorithm must be applied
to the solution of a specific problem. See J. Goodman, An Economic Analysis
of the Policy Implications of Granting Patent Protection for Computer
Programs (scheduled for publication Vand. L. Rev. (Nov. 1983)). Although
one may devise a computer algorithm for the Pythagorean theorem, it is
the step-by-step process which instructs the computer to solve the theorem
which is the algorithm, rather than the theorem itself.
The confusion that has resulted by the dual definition of the term
"algorithm" has been exemplified by the different findings by the PTO
and CCPA. The PTO, in the past, has had the tendency to hold that a
computer program, which is expressed in numerical expression, is not
statutory subject matter and thus unpatentable because the computer
program is inherently an algorithm. See In Application of Toma,
575 F.2d 872, (C.C.P.A. 1978); In Application of Phillips, 608 F.2d 879,
(C.C.P.A. 1979); In re Pardo, 684 F.2d 912, (C.C.P.A. 1982). The CCPA,
however, has reversed the findings of the PTO and held that a computer
algorithm, as opposed to a mathematical algorithm, is patentable subject
matter.
For example, in Toma, supra, the invention involves a method of operating
a digital computer to translate a source natural language (i.e. Russian)
to a target natural language (i.e. English). The PTO issued a Section 101
rejection relying on Benson because it believed that the program, which
was expressed in a series of mathematical expressions, was an algorithm.
It relied upon the broad definition of algorithm recognized within the
computer industry and found in C. Sipple and C. Sipple, Computer Dictionary
and Handbook 23 (2d ed. 1975), which provided that an algorithm is:
1) A fixed step-by-step procedure for accomplishing a given result;
usually a simplified procedure for solving a complex problem, also a
full statement of a finite number of steps.
2) A defined process or set of rules that leads [sic] and assures
development of a desired output from a given input. A sequence of
formulas and/or algebraic/logical steps to calculate or determine
a given task; processing rules.
It therefore concluded that the Supreme Court's use of the term algorithm
in Benson was not limited to those algorithms expressing pure mathematical
formula, but rather included expressions in natural language and that the
absence of mathematical notation or activity in the claims did not
significantly distinguish those claims from the subject matter in Benson.
575 F.2d at 876.
The CCPA, however, rejected the broad definition of algorithm given by the
PTO.{6} The Court stated that Benson used the term "algorithm" narrowly,
to include only those procedures for solving a given type of mathematical
problem. It then evaluated the claims in the patent and concluded that the
claims did not claim an algorithm because there was no procedure for
solving a mathematical problem:
[T]he Benson Court used the term "algorithm" in a specific sense, namely,
"a procedure for solving a given type of mathematical problem." . . .
Using this definition, we have carefully examined the claims in this case
and are unable to find any direct or indirect recitation of a procedure
for solving a mathematical problem. Translating between natural
languages is not a mathematical problem as we understand the term to have
been used in Benson. Nor are any of the recited steps in the claims mere
procedures for solving mathematical problems. Since the claims do not
directly or indirectly recite an algorithm, the claims cannot preempt an
algorithm. We hold, therefore, that the claims in this appeal are not
rendered nonstatutory by Benson. Id. at 877. {7}
The PTO also rejected the invention in the Application of Phillips,
608 F.2d 879, (C.C.P.A. 1979). In Phillips, the computer program was
designed to prepare a complete set of printed architectural specifications,
eliminating the need for handwritten specifications. The PTO rejected the
claims under Section 101, as nonstatutory because the program was described
in mathematical form and accordingly was an algorithm. It reasoned that
because the digital computer operated mathematically, employing numerical
quantities according to at least one radix, "even though, to the user, the
problem did not appear to be in mathematical form", the patent recited an
algorithm. The CCPA reversed this finding, holding that a radix, although
expressed in mathematical terms, merely defines a system and is not an
algorithm as defined by Benson because it did not arithmetically calculate
the solution to a mathematical problem. Id. at 881-82.
Finally, in In re Pardo, supra, the patent claimed a process which
allegedly converted a computer from a sequential processor to a processor
which was not dependent upon the order in which the computer received
the input data. The inventor had applied for the patent prior to Benson
and had used the term algorithm" within the description of the patent's
specifications. The PTO treated the use of the word "algorithm" as an
admission that the claims were drawn to nonstatutory subject matter. The
CCPA disagreed with the PTO's conclusion that the use of the word
"algorithm was not an admission and noted that the inventors had filed
their patent application more than two years before the decision in
Benson." The CCPA, thereby, evaluated the substantive claims of the
patent and found that the claims did not describe an algorithm in the
mathematical sense of the word, but rather an algorithm in the computer
sense:
There is no indication that "algorithm", as used by appellants,
means "mathematical algorithm" as that has been used by the Supreme
Court.
* * * * * *
Appellants method claims are directed to executing programs in a
computer. The method operates on any program and
any formula which may be input, regardless of mathematical
content. That a computer controlled according to the invention is
capable of handling mathematics is irrelevant to the question of
whether a mathematical algorithm is recited by the claims.
Id. at 915-16. Accordingly, the CCPA held that the patent claims were
not unpatentable under Benson but constituted proper statutory subject
matter, stressing that "[a] claim drawn to subject matter otherwise
statutory does not become nonstatutory simply because it uses a
mathematical formula, computer or digital computer. Id. at 916 (quoting
Diamond v. Diehr, 450 U.S. 175, 187, 101 S.Ct. 1048, 1057, 67 L.Ed.2d 155
(1981)).
Accordingly, under Toma, Phillips, and Pardo, the CCPA has held that the
Supreme Court in Benson used the term "algorithm" in a specific sense,
"a procedure for solving a given type of mathematical problem." 409 U.S.
at 65, 93 S.Ct. at 254. Using this definition, this Court has carefully
examined the claims in this case and is unable to find any direct or
indirect recitation of a procedure for solving a mathematical problem.
Rather, the patent allegedly claims a methodology to effectuate a highly
efficient business system and does not restate a mathematical formula as
defined by Benson. Nor are any of the recited steps in the claims mere
procedure for solving mathematical problems. Accordingly, the claims do
not recite or preempt an algorithm.
B. Method of Doing Business
Paine Webber contends that the '442 patent is unpatentable for another
reason. It claims that the patent defines "nothing more than familiar
business systems, that is, the financial management of individual brokerage
accounts." It urges the Court to focus on the product of the '442 patent
claims, that is, the services the CMA provides to the customers of Merrill
Lynch rather than to focus on the method by which the CMA operates. This
argument is similar to the one that was advanced in Toma, but rejected by
the CCPA. In Toma, the Examiner first noted that all statutory subject
matter "must be in the 'technological' or 'useful' arts, and that, as far
as computer-related inventions are concerned, only those inventions which
'enhance the internal operation of the digital computer' are in the
'technological' or 'useful' arts." The Examiner thereafter found that
natural language translation was merely a "liberal art" and that the
translation by a computer does not "transform the activity into a
'technological art'". Thus, the Examiner held the patent was unpatentable
under Section 101. 575 F.2d at 877.
The CCPA disagreed with the Examiner and looked to the method by which
the computer translated the natural languages. It held that the focus of
analysis should be on the operation of the computer program and not on the
product of the computer program (i.e. the translation). It stressed that
the operation of the computer is within the "technological arts" and a
computer which effects the operation of the computer is also patentable:
[t]he "technological" or "useful" arts inquiry must focus on whether
the claimed subject matter (a method of operating a machine to translate)
is statutory, not on whether the product of the claimed subject matter
(a translated text) is statutory, not on whether the prior art which the
claimed subject matter purports to replace (translation by human mind)
is statutory, and not on whether the claimed subject matter is presently
perceived to be an improvement over the prior art, e.g., whether it
"enhances" the operation of a machine. This was the law prior to Benson
and was not changed by Benson.
Id. at 877-78. See also Application of Phillips, 608 F.2d 879, (C.C.P.A. 1979)
(computer program designed to prepare additional specification eliminating
handwritten specification constitute proper statutory subject matter).
In re Johnston, 502 F.2d 765 (C.C.P.A. 1974), rev'd on. other grounds
sub nom. Dann v. Johnston, 425 US 219 (1976) (computer program for an
automatic financial record-keeping system within the technological arts;
the Supreme Court expressly declined to discuss the Section 101 arguments
because it held that the patent was invalid and unenforceable under
Section 103).
The subject matter of the '442 patent claims are similar to the claims of
the patents in Toma, Phillips, and Johnston. The product of the claims of
the '442 patent effectuates a highly useful business method and would be
unpatentable if done by hand. The CCPA, however, has made clear that if
no Benson algorithm exists, the product of a computer program is irrelevant,
and the focus of analysis should be on the operation of the program on
the computer. The Court finds that the '442 patent claims statutory subject
matter because the claims allegedly teach a method of operation on a
computer to effectuate a business activity. Accordingly, the '442 patent
passes the threshold requirement of Section 101. {8}
V. Merrill Lynch's Third Party Complaint
Paine Webber also moves this Court (1) to strike the Third Party Complaint
against Dean Witter on the grounds that the Third Party Complaint does not
comply with Rule 14(a) in that it does not allege that Dean Witter is liable
to Merrill Lynch for all or part of Paine Webber's claim against Merrill
Lynch, or (2) to dismiss or sever the Third Party Complaint against Dean
Witter on the grounds that the attempted joinder of Dean Witter does not
comply with the provisions of Rules 13(h), 19 or 20, Fed.R.Civ.P.
Rule 14(a) provides that a defendant may become a third party plaintiff by
causing a complaint to be served upon a person not a party to the original
action "who is or may be liable to him for all or part of the plaintiff's
claim against him." Merrill Lynch does not assert that Dean Witter is
liable for any or all part of Pain Webber's claim against Merrill Lynch.
Accordingly, Dean Witter may not be brought into this action as a third
party defendant under Rule 14(a).
Merrill Lynch, nevertheless, argues that Dean Witter may be made a party
in this action under Rules 13(h) and 20(a). Rule 13(h) provides that
"[p]ersons other than those made parties to the original action may be
made parties to a counterclaim or cross-claim in accordance with the
provisions of Rules 19 and 20." Merrill Lynch contends that Rule 20(a)
permits it to join Dean Witter in this action. Rule 20(a) in pertinent
part provides:
All persons . . . may be joined in one action as defendants if
there is asserted against them jointly, severally, or in the
alternative, any right to relief in respect of, or arising out of
the same transaction or occurrence, or series of transactions or
occurrences and if any question of law or fact common to all defendants
will arise in the action.
The quoted language contemplates two tests for joinder: (1) the occurrence
of some question of fact or law common to all parties, and (2) the
existence of a right to relief predicated upon or arising out of a single
transaction or occurrence or series thereof. Both tests must be satisfied
if joinder is to be permitted. Mesa Computer Utilities, Inc. v. Western
Union Computer Utilities, Inc., 67 F.R.D. 634, 636 (D.Del. 1975).
Merrill Lynch relies on the federal policy which encourages the joinder
of claims, parties and remedies. See e.g., United Mine Workers of America
v. Gibbs, 383 U.S. 715, 724 (1966); Mesa Computer, supra; Marsland
Engineering Ltd. v. Control Data Corp., 175 USPQ 440, 442 (D.Del. 1972).
It relies upon several cases arising under Rule 42(a), Fed.R.Civ.P., which
allowed consolidation when the separate patent actions involved common
questions of law or fact. {9} See e.g., In me Multidistrict Litigation
Involving Frost Patent, 398 F.Supp. 1353, (D.Del. 1975), affirmed in part
and reversed in part, 540 F.2d 601, (3d Cir. 1976); Celanese Corp. v.
E. I. duPont de Nemours & Co., 58 F.R.D. 606, (D.Del. 1973); Rohm & Haas
Co. v. Mobil Oil Corp., 525 F.Supp. 1298, 1309, 365 (D.Del. 1981).
Rule 42(a), however, is distinguishable from Rule 20(a) because cases
may be consolidated under Rule 42(a) before trial, when the actions
involve a common question of law or fact. No requirement exists, as in
Rule 20(a), that the right to relief must be predicated upon or must have
arisen out of a single transaction or occurrence or series thereof.
Accordingly, although the Court recognizes that there is a strong federal
policy to join claims, parties and remedies, those cases relied upon
Merrill Lynch applying Rule 42(a) are not dispositive of Paine Webber's
motion under Rule 20(a).
Merrill Lynch also relies upon H. Kahnstamm & Co. v. Allied Chemical
Corp., 182 USPQ 360 (S.D.N.Y. 1974) for the proposition that a patentee
may join an infringer under Rule 20(a) and proceed against multiple
infringers in a single action. In Kahnstamm, the plaintiff, Warner-Jenkinson,
brought action against Allied Chemical Corp. ("Allied") seeking a declaratory
judgment that United States Patent No. 3,519,617 ("the '617 patent"), owned
by Allied was invalid and unenforceable. Allied counterclaimed against the
plaintiffs seeking damages for the infringement of the '617 patent. Allied
also joined the Seven-Up Company ("Seven-Up") charging it with patent
infringement. The court permitted the joinder of Seven-Up pursuant to
Rule 13(h) in accordance with the provisions of Rule 20(a) for the
reason that joinder would avoid multiple lawsuits involving common
questions of law or fact.
Kohnstamm did not discuss the requirement that the right to relief must be
predicated upon or must have arisen out of a single transaction or
occurrence or series thereof because this second test of joinder was not
in dispute among the parties. (See DI. 40, Ex. A, Affidavit of Carr, trial
counsel for Warner-Jenkinson and Seven-Up.) Warner-Jenkinson, the
plaintiff, was a wholly owned subsidiary of Seven-Up, and Allied had
alleged that Seven-Up had induced Warner-Jenkinson to infringe the '617
patent. The allegations against Seven-Up, therefore, were based on the
same series of occurrences underlying those allegations asserted by
Allied against Warner-Jenkinson. Accordingly, joinder was proper under
Rule 20(a).
While Merrill Lynch's counterclaim and Third Party Complaint alleges acts
of infringement by Paine Webber and Dean Witter, there is no allegation
that the acts of infringement are connected in any manner. Allegations
of infringement against two unrelated parties based on different acts
do not arise from the same transaction. See Siemens Aktiengeselschaft v.
Sonotone Corp., 370 F.Supp. 970, (N.D. Ill. 1973). Accordingly, Merrill
Lynch's attempt to join Dean Witter as a third party or as a Counterclaim
defendant is improper and Merrill Lynch's Third Party Complaint must be
dismissed.
VI. Leighton's Third Party Complaint
Leighton has moved this Court pursuant to Rules 19 and 21 as a pro se
litigant to join Leighton as a third party plaintiff. Leighton contends
that his action is brought to redress the unfair competition that arises
out of Merrill Lynch's use of the '442 patent and the CMA trademark.
Leighton asserts that jurisdiction exists by virtue of 28 U.S.C. Section
1338(b). It seeks this Court to declare the '442 patent and CMA trademark
invalid and unenforceable and to enjoin Merrill Lynch from further
violating Section 7 of the Investment Company Act of 1940, 15 U.S.C. 80a-7
(1976), the Glass Steagall Act, 12 U.S.C. 378(a) (Supp. 1980), the Bank
Holding Company Act of 1956, 12 U.S.C. 1842(a) (Supp.1980), Section 19(b)
of the Federal Reserve Act, 12 U.S.C. 461(b) (Supp.1980), the Securities
Act of 1933, and Section 17(b) of the Investment Company Act of 1940,
15 U.S.C. 80a-17(b) (1976), by using the '442 patent.
The motion to join Leighton as a third party plaintiff is not properly
drafted because Leighton is not a party to the action and neither Paine
Webber nor Merrill Lynch seeks leave to join Leighton as a plaintiff
through any of the appropriate joinder devices. Rather, Leighton, on his
own behalf, seeks to join this action as a party plaintiff and, to that end,
erroneously invokes the joinder of parties' provisions of Rules 19 and 21.
See Parker-Hannifin Corp. v. Samuel Moore & Co., 436 F.Supp. 498, 500
(N.D. Ohio 1977). Properly pleaded, Leighton's participation in these
proceedings should be pursued through the intervention procedures
established in Rule 24, Fed.R.Civ.P.
Even if the Court were to treat Leighton's motion as a motion to intervene
pursuant to Rule 24, the Court must nonetheless deny the motion. Rule 24
makes a distinction between intervention as of right and discretionary
intervention and provides:
(a) Intervention of Right. Upon timely application anyone shall be
permitted to Intervene in an action: (1) when a statute of the United
States confers an unconditional right to intervene; or (2) when the
applicant claims an interest relating to the property or transaction
which is the subject of the action and he is so situated that the
disposition of the action may as a practical matter impair or impede
his ability to protect that interest, unless the applicant's interest
is adequately represented by existing parties.
(b) Permissive Intervention. Upon timely application anyone may be
permitted to intervene in an action: (1) when a statute of the United
States confers a conditional right to intervene; or (2) when an
applicant's claim or defense and the main action have a question of
law or fact in common. When a party to an action relies for ground of
claim or defense upon any statute or executive order administered
by a federal or state governmental officer or agency or upon any
regulation, order, requirement, or agreement issued or made pursuant
to the statute or executive order, the officer or agency upon timely
application may be permitted to intervene in the action. In exercising
its discretion the court shall consider whether the intervention will
unduly delay or prejudice the adjudication of the rights of the original
parties. No evidence exists to indicate that Leighton is seeking to
intervene by virtue of any statute, therefore, the Court will look to
Rule 24(a)(2) and (b)(2) - nonstatutory intervention.
Under Rule 24(a)(2), an applicant for non-statutory intervention as of
right must meet the following requirements: the application must (1) be
timely, (2) show an interest in the subject matter of the action, (3) show
that the protection of the interest may be impaired by the disposition of
the action, and (4) show that the interest is not adequately represented
by an existing party. No question exists as to the timeliness of the action
as Leighton moved this Court less than two months after the commencement of
the suit by Paine Webber and before Merrill Lynch filed its answer and
counterclaim. Leighton, however, has not demonstrated that he satisfies
the second and third requirement of Rule 24(a)(2).
The second requirement an applicant for intervention under Rule 24(a)(2)
must demonstrate is that he has an interest relating to the transaction
or property that is the subject of the action. Leighton has not borne
this burden. He does not claim any right, title, or interest in the '442
patent. The only interest which he is claiming is that if the '442 patent
is found to be valid then he might lose customers to Merrill Lynch because
Merrill Lynch is offering a better financial service. This interest,
without any factual support, is too speculative and therefore not a direct
interest to satisfy Rule 24(a)(2). See 3B Moore's Federal Practice
Sect. 24.07[2].
Leighton also has not demonstrated that he is so situated that the
disposition of the action may as a practical matter impair or impede
his ability to protect that interest. This is not a case where a
discrete, distinguishable fund exists and where the proposed intervenor
has some presently, legally enforceable interest in that fund or where
his claim against that fund arises from the same factual basis as does
the claim in the original action. See Calvert Fire Insurance Co. v. Environs
Development Corp., 601 F.2d 851 (5th Cir. 1979). Nor is this a case where,
without intervention, it would be impossible for the proposed intervenor
to obtain in personam jurisdiction over an alien party in which it seeks
relief. See Perez v. Southern Drilling Corp., 427 F.2d 1118 (5th Cir.),
cert. denied, 400 U.s. 878 (1970).
Finally, this is not a case where if the action is decided in the
intervenor's absence, the stare decisis effect of the decision would
significantly impair the intervenor's ability to prosecute his allegations.
See Jet Traders Investment Corp. v. Tekair Ltd., 89 F.R.D. 560, 570-71
(D.Del. 1981). The legal arguments asserted by Leighton are significantly
different from those arguments asserted by Paine Webber. Any holding against
Paine Webber would not have an effect on Leighton's ability to pursue his
allegations against Merrill Lynch. Accordingly, Leighton cannot intervene
in this action pursuant to Rule 24(a)(2).
Rule 24(b)(2) authorizes a court to grant a party leave to intervene in
an action when an applicant's claim or defense and the main action have
a question of law or fact in common provided that the court, in its
discretion, shall consider whether the intervention will unduly delay
or prejudice the adjudication of the rights of the original parties.
In order to intervene pursuant to Rule 24(b)(2), an intervenor must
establish the existence of a jurisdictional basis for its claims
independent of the jurisdiction that the court has over the claims in
the principal action. See Jet Traders Investment Corp. v. Tekair Ltd.,
89 F.R.D. 560, 566 (D.Del. 1981).
Leighton's complaint has one count which alleges that the '442 patent is
invalid and unenforceable and that the use of the patent and the CMA
trademark constitutes unfair competition. Leighton asserts that
jurisdiction exists by virtue of 28 U.S.C. Sect. 1338(b) which provides
that a district court has original jurisdiction of any action asserting
a claim of unfair competition when joined with substantial and related
claims under the patent laws. As Judge Steel stated in American Security
Co. v. Shatterproof Glass Corp., 166 F.Supp. 813, 824, (D.Del. 1958):
Section 1338(b) is a reflection of the doctrine enunciated in
Hum v. Oursler [289 U.S. 238, 53 S.Ct. 586, 77 L.Ed. 1148].
. . . . There it was held in a nondiversity case that where a
single cause of action is alleged based upon both a federal ground
of copyright infringement and a common law ground of unfair
competition, jurisdiction over the non-federal ground exists if
the federal question "is not plainly wanting in substance." * * *
If it appears that a plaintiff is "not really relying upon the patent
law for his alleged rights" then the claim does "not really and
substantially involve a controversy within the jurisdiction of the
court";
Leighton, therefore, must demonstrate to the Court that he has a
substantial claim which arises under the patent law before he may assert
his claim for unfair competition.
In order to demonstrate that he has a substantial claim which arises under
the patent laws, Leighton must show that there is a genuine controversy
between Merrill Lynch and Leighton by demonstrating that Merrill Lynch
has threatened to assert its patent rights against Leighton. See, e.g.,
Enka B.V. of Arnhem Holland v. E.I. duPont de Nemours & Co., 519 F.Supp.
356, (D.Del. 1981). Although numerous cases recognized that a justiciable
controversy exists where a threat of infringement action is indirect and
unspecific, see, e.g., Simmonds Aerocessories, Ltd. v. Elastic Stop Nut
Corp. of America, 257 F.2d 485, 490, (3d Cir. 1958); Federal Telephone
& Radio Corp. v. Associated Telephone & Telegraph Co., 169 F.2d 1012,
(3d Cir.), cert. denied, 335 U.S. 859, (1948); Enka B.V. of Arnhem,
Holland v. E. I. duPont de Nemours & Co., 519 F.Supp. 356, 365,
(D.Del. 1981), Leighton has neither alleged nor demonstrated that
Merrill Lynch has made any threats to the patent law and the Court
cannot exercise its pendent jurisdiction granted by Section 1338(b).
Accordingly, the Court does not have jurisdiction and Leighton's motion
under Rule 24(b)(2) must also be denied.
An order will be entered in accordance with this opinion.
For the reasons set forth in the Court's Opinion entered in this case on
this date, it is
Ordered:
1. The motion of plaintiff, Paine, Webber, Jackson & Curtis, Inc., for
summary judgment declaring U.S. Patent No. 4,346,442 owned by Merrill Lynch,
Pierce, Fenner & Smith, Inc., invalid under 35 U.S.C. 101 because it does
not claim subject matter which can form the basis for a valid patent is
hereby denied.
2. The motion of plaintiff Paine, Webber, Jackson & Curtis, Inc., to
dismiss the defendant Merrill Lynch, Pierce, Fenner & Smith, Inc.'s
Third Party Complaint is hereby granted.
3. The motion of William Leighton d/b/a Option Advisory, Inc., to join
Leighton as a party plaintiff in this action is hereby denied.
FOOTNOTES:
{1} Jurisdiction exists by virtue of 35 U.S.C. Sect. 271 and 28 U.S.C. Sect.
1338. Venue is proper pursuant to 28 U.S.C. Sect. 1400(b).
{2} A flow chart is a graphical representation of the fundamental idea
for solving a problem, and is the first expression of the programmer's
ideas, and breaks down a given problem by determining the sequence the
data is to be operated upon by the computer. 21 Cath. U.L.R. 181, 182 (1971).
The fundamental idea represented by the flow chart is known as an algorithm
and is capable of being expressed in differing forms and by differing
symbolizations. The flow chart is not literally a computer program, but
a diagram of the logical operations that will be performed by the computer.
11 Hofstra L.R. 329, 341 (1982).
The flow chart, thus, is only the first step in the development of the
computer program. The second step in the development of a computer program
is the creation of the source program. The source program is generally
regarded as the alphanumeric translation of the flow chart idea into the
problem-oriented computer language; that is, FORTRAN, COBOL, or ALGOL, and
may be punched on a deck of cards or imprinted on discs, tapes or drums.
The final step in the completion of a computer program is the development
of the object program. In this step, the programmer completes the
translation of the flow chart idea into the machine language. Object
programs stored in a Read Only Memory ("ROM"), or other memory device,
are manifested by a binary representation composed of electrical or
magnetic bits (abbreviation for Binary digIT) which are either on (1) or
off (o). It is impossible for a skilled person, unaided by a machine, to
read this program. With a proper machine, however, the program statements
can be "read out" in their binary/machine language form. See 30 Ala. L. Rev.
527, 530-32 (1979). The CCPA has stated that:
writing a computer program may be a task requiring the most sublime
of the inventive faculty or it may require only the droning of clerical
skill. The difference between the two extremes lies in the creation
of mathematical methodology to bridge the gap between the information
one starts with (the "input") and the information that is desired
(the "output"). If these bridge-gapping tools are disclosed [and satisfy
the tests or patentability] there would seem to be no cogent reason to
require disclosure of the several tools known to all who practice the art."
Matter of Application of Sherwood, 613 F.2d 809, 817, (C.C.P.A. 1980).
{3} For example, Claim 1 recites "brokerage account data file means for
storing current information characterizing each subscriber's margin
brokerage account", "manual entry means for entering short term investment
orders in the second institution," "data receiving and verifying means for
receiving and verifying charge card and check transactions from said first
institution and short term investment order from said manual entry means",
"means responsive to said brokerage account data file means and said data
receiving and verifying means for generating an updated credit limit for
each account," and "communicating means to communicate said updated credit
limit for each account to said first institution." Merrill Lynch argues
that each of these phrases recite language defining specific physical
apparatus to be used to implement the CMA. The Court does not address,
in this motion, whether these phrases define an apparatus claim.
{4} The Patent Act of 1952 has three sections which define the requirements
an invention must meet to be patentable. Section 101 deals with subject
matter patentability. Section 102 requires that the invention be novel
and Section 103 mandates that the invention not be obvious "to a person
having ordinary skill in the art to which said subject matter pertains."
Paine Webber moves this Court for summary judgment only on the
grounds that the subject matter of the '442 patent is not patentable
under Section 101.
{5} In Benson, the patent claimed a method of programming a general
purpose digital computer to convert signals from binary-coded decimal
form into pure binary form. The procedure set forth in the claims provided
a generalized formulation to solve the mathematical problem of converting
one form of numerical representations to another. The Court stated that the
mathematical formula was an algorithm and that an algorithm is merely
an idea if there is no application of the idea to a new and useful end.
Thus Benson established the principle that an algorithm, in the mathematical
sense of the word, cannot without a specific application to a new and
useful end be patentable.
{6} The Supreme Court in Diamond v. Diehr. 450 U.S. 175, 186 n.9, (1981),
also rejected the broad definition of algorithm. Sec also In re Pardo,
supra, 684 F.2d at 615 n.4.
{7} The Court also held that a computer program designed to translate
natural language was within the technological arts because it is a method
of operating a machine.
{8} The Court, of course, is not deciding whether the patent in Suit is
invalid under any other provision of the patent laws of the United States.
{9} No dispute exists between the parties that common questions of fact
and law exist because both Paine Webber and Dean Witter allege that the
'442 patent is invalid and unenforceable.