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Leveraged Innovations, LLC v. Nasdaq Omx Group

September 14, 2012

LEVERAGED INNOVATIONS, LLC,
PLAINTIFF,
v.
NASDAQ OMX GROUP, INC., NASDAQ OMX BX, INC., NASDAQ OMX BX EQUITIES LLC, NASDAQ OMX PHLX, INC., THE NASDAQ STOCK MARKET LLC, PROSHARE ADVISORS LLC, PROSHARES TRUST I, AND PROSHARES TRUST II,
DEFENDANTS.



The opinion of the court was delivered by: Katherine B. Forrest, District Judge:

DOCUMENT

OPINION AND ORDER (MARKMAN) ELECTRONICALLY FILED

DOC #:

In May 2011, plaintiff Leveraged Innovations, LLC ("Leveraged" or "plaintiff") sued a variety of NASDAQ-related entities (set forth in the caption and referred to collectively as "NASDAQ"), and ProShares Advisors LLC, ProShares Trust I and ProShares Trust II (referred to collectively as "ProShares," or, together with the NASDAQ defendants, as "defendants") for patent infringement. (Compl., ECF No. 1.) Defendants counterclaimed for invalidity and declarations of non-infringement. (NASDAQ Answer, ECF No. 25; ProShares Answer, ECF No. 38.) On April 20, 2012, this Court dismissed the claims against the ProShares defendants. (Mem. & Order, ECF No. 74, 2012 WL 1506524.) The remaining parties have now asked the Court to construe certain terms relevant to ultimate determinations of infringement and validity. Accordingly, this Opinion construes those terms.

I. THE INVENTION

Plaintiff has asserted that NASDAQ has infringed claims in

two related patents: U.S. Patent No. 7,698,192 (filed Apr. 20, 2001) ("'192 Patent") and U.S. Patent No. 7,917,422 (filed Dec. 31, 2009) ("'422 Patent"). The patents share a single specification and claim priority back to an application first filed on October 12, 1995: App. No. 08/542,431, which eventually issued as U.S. Patent No. 5,806,048.*fn1

Both patents-in-suit relate generally to systems for creating and exchanging leveraged exchange-traded products ("ETPs"). Both are entitled "Open End Mutual Fund Securitization Process." '192 Patent at [54]; '422 Patent at [54]. The '192 Patent claims systems for creating and for exchanging leveraged ETPs, '192 Patent cols.8-14; the claims of the '422 Patent relate only to systems for exchanging leveraged ETPs, '422 Patent cols.8-10. The NASDAQ defendants are accused of infringing the exchange-related claims in both patents. (See Compl. ¶ 4, ECF No. 1.)

The patents-in-suit sought to address an inability to trade open-ended mutual funds on an intra-day basis. See '192 Patent col.2 l.65-col.3 l.4. While at the time of the invention there were thousands of mutual funds, they could not be traded intraday on a national securities exchange (nor could any index of open end mutual funds, or any linked derivative). See id. col.1 l.16-col.2 l.61 (Background of the Invention). This limitation was due to the legal requirement that open end funds sell or buy back their shares at "net asset value" or "NAV." See id. col.1 ll.16-37. It was simply too difficult to determine an exact value of the funds on a real-time, intra-day basis. Id. As a result, ninety-nine percent of all open ended funds allowed end of day trading only. Id. col.1 ll.31-40. (The other one percent were sector funds, and were typically valued on an hourly basis. Id.) Mutual fund portfolio managers had created open end funds of funds -- open end funds that invest in other open end mutual funds. Id. col.1 ll.44-49. In addition, a Standard and Poors Depository Receipt ("SPDR") was also created and was traded on the American Stock Exchange. Id. col.1 ll.50-58. The SPDR represents a fractional share of a basket of stocks comprising the Standard and Poors 500 index. Id. The SPDR is not a mutual fund; it is a basket of stocks set up as a unit investment trust. Id.

In 1992, a bank created a basket of stocks which attempted to replicate the performance of a few, select open end sector funds. Id. col.1 ll.59-63. This basket traded intra-day. Id.

There were problems with spreads (the price the buyer was willing to buy and seller willing to sell), due to the inability to calculate NAV more frequently than once per hour. Id. col.1 ll.63-67. In addition, a brokerage firm called Jack White & Co. provided a computerized system and private market to allow investors to trade "a small number (less than six percent) of all open end mutual funds at a price other than the net asset value," so long as the buyer and seller could agree on a price. Id. col.2 ll.9-14. Many professional investors operated pursuant to terms that required that they purchase only at the NAV. This, in turn, limited the volume of trading activity for this product. Id. col.2 ll.14-20.

A solution to these issues, presented in the '192 and '422 Patents, was to create a "mutual fund securitization process permitting the trading of open end mutual funds and linked derivative securities on or off the floor of a National Securities Exchange." Id. at [57]; see also id. col.2 l.65-col.4 l.10 (Summary of the Invention); '422 Patent at [57] ("A computer implemented system is provided for exchanging shares in an exchange traded product."). This is accomplished through the creation of a new, separate security -- "preferably a 'closed end fund of funds' and linked derivative securities." '192 Patent at [57]. The concept of the invention is that this new security will synthetically replicate the "statistical relationship of the defined individual or group of open end mutual funds." Id. For the first time, the invention would provide a way for the "intra-day trading of an unlimited number of mutual fund indexes comprised of open end funds," and "intraday trading of derivative securities linked to open end funds and indexes of open end funds." Id. col.2 l.65-col.3 l.4.

The invention would allow, inter alia:

* "Any open end fund, when securitized, [to be] listed on a stock exchange and traded at any [time] . . . regardless of the open end fund NAV," id. col.3 ll.21-23;

* Investors to "determine what price will be paid before an order is placed," id. col.3 ll.24-25;

* National securities exchanges ("NSEs") "to list derivatives on the securitized open end funds," id. col.3 ll.27-28; and

* Investors "to sell shares short [more quickly] and with greater liquidity," id. col.3 ll.51-52.

Finally, the invention could "act as a hedge for market makers who wish to lay off their risk of making markets in options on the underlying securities." Id. col.3 ll.30-32.

II. CLAIMS FOR CONSTRUCTION

Before the Court are the parties' requests for claim construction. Defendants and plaintiff have requested that this Court construe eleven terms or phrases used in the patents*fn2

1. "leveraged [exchange traded product/portfolio]";

2. "[leveraged] portfolio of securities";

3. "leveraged exchange traded portfolio";

4. "leveraged exchange traded computer";

5. "representing";

6. "configured for trading [of] shares of the leveraged exchange traded product at a real time determined price of the shares related to the underlying price of each of the selected securities comprising the leveraged exchange traded product and related to the respective weightings of the selected securities";

7. "trading";

8. "securities [ . . . ] satisfy[ing]";

9. "securities/derivatives . . . hav[e/ing]";

10. "open ended"; and

11. "exchange clearing computer." (Claim Terms in Dispute as of July 30, 2012 and Agreed-Upon Definitions for Terms Initially Identified for Construction ("Terms in Dispute"), ECF No. 138.) The Court construes these terms as set forth below.

III. THE TEMPORAL COMPLEXITY IN THIS MATTER

As discussed below in section IV.A, terms in a claim, and ultimately the claims themselves, are to be construed as of the time of the invention. See, e.g., Phillips v. AWH Corp., 415 F.3d 1303, 1313 (Fed. Cir. 2005) (en banc). In particular, the court must determine how one skilled in the art -- at the time of the invention -- would have understood the term at issue.

Id. Regardless of how a particular term was understood, however, the Court cannot construe claims to be broader than the actual invention. See Retractable Techs., Inc. v. Becton, Dickinson & Co., 653 F.3d 1296, 1305 (Fed. Cir. 2011).

Here, both patents-in-suit claim priority back to 1995 through a series of continuation applications. Under standard principles of claim construction, this Court must, then, determine how one skilled in the art of the invention would have understood the terms at issue as of that time. See Phillips, 415 F.3d at 1313.

Herein lies the problem: defendants contend that many of the terms and phrases that they have asked the Court to construe had no meaning in 1995; that, in 1995, "leveraged exchange traded funds" ("leveraged ETFs") did not exist; that they only came into existence when ProShares introduced its first leveraged ETF in 2008. Thus, defendants' expert has anchored his understanding of the meaning of certain terms at issue in definitions dating from 2008. Of course, even if ProShares were the first to introduce a commercially available leveraged ETF (a determination this Court need not make), plaintiff may still have invented a system relating to leveraged ETFs at an earlier point in time. The two are not necessarily inconsistent.

At the Markman hearing, the Court raised the issue of this temporal disconnect between the 1995 application (to which the patents-in-suit claimed priority) and the 2008 ProShares ETF, posited by defendants' expert as determining the relevant time period for analysis. (See Markman Hr'g Tr. 4:9-5:8.) Defendants have not offered alternative meanings for these claims as of 1995, except, by implication, to urge that they were meaningless as of that time. This Court warned that if it disagreed with defendants' legal position, and maintained its view that the law requires the Court to ask what terms meant as of the priority date, then defendants would be left without expert support in this proceeding. (See id. 72:13-76:3.) Defendants did not ask to make additional submissions and clearly, as experienced counsel, understood the risk. The Court also asked whether counsel was aware of a single instance in which a similar position had succeeded: that a party had urged that terms had no meaning as of the time of the invention and that the Court was therefore required to look ahead in time to construe them. Neither party was able to offer such an instance. (See id. 73:4-15, 75:9-12.)

This Court does not find a principled basis upon which to make 2008 the relevant time period in which to anchor the construction of any claim in this matter.

IV. LEGAL STANDARDS

A. Claim Construction

Claim construction is a question of law for the Court. Markman v. Westview Instruments, Inc., 52 F.3d 967, 979 (Fed. Cir. 1995), aff'd, 517 U.S. 370 (1996). Determining the meaning of terms within a claim assists a fact finder in making subsequent and ultimate decisions as to whether an invention has in fact been infringed, or is in fact valid. In construing the meaning of a term, the issue is not what that term would mean to an average lay person, but what that term or phrase would have meant to one "of ordinary skill in the art in question at the time of the invention." Phillips v. AWH Corp., 415 F.3d 1303, 1313 (Fed. Cir. 2005). A court's job is, then, to try and place itself in the position of one of ordinary skill in the art of the invention(s) at issue.

A court may use intrinsic -- and, if necessary, extrinsic -- evidence in construing claims. See Nazomi Commc'ns, Inc. v. Arm Holdings, PLC, 403 F.3d 1364, 1368 (Fed. Cir. 2005) (instructing courts to look to intrinsic evidence first). Intrinsic evidence includes the claims and specifications in the patent itself, as well as the patent's file history (or wrapper). See, e.g., All Dental Prodx, LLC v. Advantage Dental Prods., Inc., 309 F.3d 774, 780 (Fed. Cir. 2002). The single most important source for the meaning of a term is the language of the claim itself, which defines the scope of the patent holder's exclusive rights. See Phillips, 415 F.3d at 1312. In patents with multiple claims using similar terms, such as the patents-in-suit, it is well accepted that terms in a claim should be construed consistently across claims. Southwall Techs., Inc. v. Cardinal IG Co., 54 F.3d 1570, 1579 (Fed. Cir. 1995) ("[C]laim terms must be interpreted consistently.").

One skilled in the art is "deemed to read the claim term not only in the context of the particular claim in which the disputed term appears, but in the context of the entire patent, including the specification." Phillips, 415 F.3d at 1313. The specification is the "single best guide to the meaning of a disputed term." Id. at 1315; see also On Demand Mach. Corp. v. Ingram Indus., Inc., 442 F.3d 1331, 1338, 1340 (Fed. Cir. 2006) ("[T]he scope and outer boundary of claims is set by the patentee's description of his invention," id. at 1338, and "the claims cannot be of broader scope than the invention that is set forth in the specification," id. at 1340.). However, although specifications contain one or more examples of the embodiment of an invention, they need not contain every possible embodiment. Therefore, courts should not read into the claims limitations based on the embodiments in the specification. See Phillips, 415 F.3d 1323; Innogenetics, N.V. v. Abbott Labs., 512 F.3d 1363, 1370 (Fed. Cir. 2008) ("[The defendant] argues that a patent can never be literally infringed by embodiments that did not exist at the time of filing. Our case law allows for after-arising technology to be captured within the literal scope of valid claims that are drafted broadly enough.").

Extrinsic evidence includes dictionaries used by one of ordinary skill in the art, treatises and expert testimony in the form of affidavits. Phillips, 415 F.3d at 1317.*fn3

B. Expert Witnesses

With respect to expert witnesses, courts apply Rule 702 of the Federal Rules of Evidence and evaluate whether the testimony is helpful. Courts should also evaluate the credibility of the witness and consider whether the proffered opinions meet the standards set forth in Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993). Rule 702 provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case.

Fed. R. Evid. 702. In addition, a court should not consider an expert's mere conclusory statements without analytical basis. Country Rd. Music, Inc. v. MP3.com, Inc., 279 F. Supp. 2d 325, 330 (S.D.N.Y. 2007).

Here, plaintiff has put forward an opinion by Peter Vinella. Vinella is "currently a Director at the Berkeley Research Group ("BRG"), an expert services and advisory firm." (Vinella Decl. ¶ 3, ECF No. 99.) He has worked in the financial services industry for over twenty-five years, including as a "senior executive in large financial institutions" and as the owner of a consultancy firm. (Id.) Vinella's career in finance began in the early 1980's in a risk management firm. (Raskin Decl. Ex. 3, at 1, ECF No. 100.) He has experience in "trading and investment management, risk management, quantitative analyses, operations, trading and investment-related accounting, [and] technology (including software development)." (Id.) He also has experience in a variety of investment products including "equities, debt instruments, repo and sec lending, [and] listed and [over-the-counter] derivatives." (Id.) During 1995 and prior, he was a trading manager and arbitrage trader at Smith Barney Shearson, the Chief Information Officer for the same firm, and he co-founded and managed Berkeley Investment Technologies, an independent consultancy that later became a part of Drexel Burnham Lambert. (See id. at 6-7.) The Court finds that Vinella has relevant and useful experience during the period applicable to the construction of the terms at issue here.

Defendants' have proffered Gary L. Gastineau as an expert in this Markman proceeding. Gastineau also has relevant financial industry experience for the period 1995 and prior: in 1994 and 1995 he was employed by S.G. Warburg & Co. as a Senior Vice President/Head of Global Equity Derivatives Research. (Gastineau Decl. App'x 1, at 1-2, ECF No. 97.) He also held a variety of positions in which he worked in risk management and portfolio trading prior to 1995. (Id. at 2.) Gastineau is currently employed at ETF Consultants LLC where he provides specialized ETF consulting services to ETF issuers, exchanges and other markets, market makers, research organizations and investors. (Gastineau Decl. ¶ 3, ECF No. 97.) According to Gastineau, "a person of ordinary skill in the art of the patents-in-suit [would be] a person with a master's degree in finance, financial engineering, or an equivalent field . . . and at least 3-4 years of recent experience in designing financial products." (Id. ¶ 13.) The Court disagrees with Gastineau's view regarding the pertinent qualifications: the priority date for the invention to which the claims relate is 1995. The most relevant experience for this particular proceeding is how one of ordinary skill in the art as of 1995 would have understood the terms at issue.

While Gastineau notes that ETFs were first introduced in the United States in 1993 (id. ¶ 15), "leveraged" ETFs did not appear commercially until much later, (see id.). Gastineau specifically states that because he does not believe leveraged ETFs existed prior to 2008, his opinions as to the meaning of "leveraged exchange traded product" and "leveraged portfolio of securities" is tied to the 2008 time period. (See id. ¶¶ 24-28.) For other terms, such as "representing," "weighting the selected securities within the exchange traded product," "a real time determined price," "trading," and "open ended," he grounds his opinion in 1995. (See id. ¶¶ 40-74.) The Court declines to consider Gastineau's opinions as to the meaning of terms in 2008. Those opinions are irrelevant to the task at hand.

C. EVIDENCE RELEVANT TO THE CONSTRUCTIONS AT ISSUE

In connection with construing the claims at issue in this matter, the Court has referred to both intrinsic and extrinsic evidence. The Court's primary tool was, as the law requires, the language in the claims and specifications of the patents-in-suit. The Court has used extrinsic evidence only when these primary ...


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