United States: Accused Infringer Need Not Practice Steps Recited In The Preamble Of A Method Claim When The Preamble Defines The Environment In Which The Claim Operates

This article previously appeared in Last Month at the Federal Circuit, July, 2011.

Judges:  Bryson (author), Dyk, Prost

[Appealed from E.D. Mo., Judge Perry]

In Advanced Software Design Corp. v. Fiserv, Inc., Nos. 09-1585, 10-1011 (Fed. Cir. June 2, 2011), the Federal Circuit reversed-in-part and vacated-in-part the district court's determination of noninfringement, affirmed the district court's denial of Advanced Software Design Corporation's ("Advanced Software") motion to amend the complaint, and dismissed Fiserv, Inc.'s ("Fiserv") cross-appeal on invalidity.

Advanced Software owns three patents related to check-security technology using "key-based" cryptography:  U.S. Patent Nos. 6,233,340 ("the '340 patent"); 6,549,624 ("the '624 patent"); and 6,792,110 ("the '110 patent").   Both Advanced Software and Fiserv offer competing products for preventing check fraud and forgery, which generally work by encrypting and printing selected information on a check.  When the check is cashed, the products validate the check by decrypting the encrypted information and comparing it to the unencrypted information on the check.

Advanced Software brought suit against Fiserv, alleging infringement of the '340, '624, and '110 patents.  First, the district court denied Advanced Software's motion to amend its complaint.  After initial discovery, Advanced Software submitted infringement contentions only for the '624 and '110 patents, then later moved to dismiss the infringement claims based on the '624 patent.  After cross-motions for SJ on infringement and invalidity of the remaining '110 patent, the district court granted Fiserv's noninfringement motion, finding that Fiserv did not perform the encrypting and printing steps recited in the preambles of the asserted claims, but denied Fiserv's invalidity motion on the ground that Advanced Software had pointed to genuine issues of material fact relating to invalidity.  Advanced Software appealed the district court's rulings related to infringement and denial of its motion to amend its complaint, and Fiserv cross-appealed the denial of SJ related to invalidity.

The preamble of claim 1 of the '110 patent recites "[a] process of validating a negotiable financial instrument made by a payor, in which selected information found on the financial instrument which varies for each instantiation of the financial instrument made by the same payor is encrypted in combination with key information not found on the financial instrument to generate a control code which is printed on the financial instrument along with the selected information . . . ."  Both parties agreed that the preamble limits the scope of the claim; however, the parties disagreed whether the accused infringer must perform the steps recited in the preamble.


Fiserv therefore could 'use' the method of claim 1 by validating checks even though it does not encrypt and print them.  It would infringe the method of claim 1, however, only by validating checks that have been encrypted and printed in accordance with the steps described in the preamble."  Slip op. at 9.


Drawing a parallel between this case and Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011), the Federal Circuit reaffirmed that the preamble of a method claim may "define[] the environment" of the process.  Specifically, the Court held that Fiserv could "use" the method of the asserted claims even though it did not encrypt and print the checks, but Fiserv would infringe the claims only by validating checks that have been encrypted in accordance with the steps described in the preamble.  The Court stated that it was "looking to the statement of purpose to distinguish between those limitations that describe the environment in which a claim operates from the limitations that must be performed by an accused infringer."  Slip op. at 11.  For this reason, the Court reversed the district court's finding of noninfringement. 

The Court then turned to the district court's determination that Advanced Software failed to raise its inducement theory of infringement on a timely basis and that Advanced Software failed to provide evidence of Fiserv's state of mind regarding inducement.  The Court determined that Advanced Software offered evidence that Fiserv knew of the '110 patent, sold its validating software to banks, and instructed customers in how to use the software.  Because the Court found that the district court failed to consider this evidence, it vacated the district court's SJ ruling on inducement.

Next, the Court turned to, and rejected, Fiserv's four alternative arguments for affirming the district court's finding of noninfringement.  First, the Court rejected Fiserv's argument that "control code" required a binary string of numbers because the district court construed "control code" as the "end product of the encryption process that is then printed on the check," which could be encrypted information or cipher text in any form.  Second, the Court rejected Fiserv's argument that its encryption process did not use "key information" in the encrypting step.  The Court determined that although the permutation key of Fiserv's process is applied to selected information before an XOR encryption, the permutation key is still information that is "used with" the overall cryptographic algorithm.  For this reason, the Court held that Advanced Software had provided sufficient evidence to prevent SJ for noninfringement.  Third, the Court found that Advanced Software had shown a genuine issue of material fact as to whether Fiserv's encryption algorithm can be widely distributed without compromising security, as required by the claims.  Fourth, the Court rejected Fiserv's argument that its software does not actually validate the checks because it does not provide the functionality necessary to refuse to honor a check.  The Court noted, however, that at least one claim refers to "generating a signal in response to the equality" or selected information and decrypted information, and, based on the testimony of a Fiserv employee, there was a genuine issue of material fact as to whether Fiserv satisfies this claim element.

Next, the Court turned to the district court's construction of the phrase "encrypted in combination with key information" in the preamble of the claims.  The Court noted that the district court's two-step construction of this phrase required (1) selected information from the check to be mathematically combined with the encryption key, and (2) that the combination be encrypted.  Although Advanced Software provided a joint claim construction chart seeking the same broad construction of this phrase of the '110 patent as a similar phrase in the '624 patent, the Court held that Advanced Software had not agreed that the construction of the two phrases should be the same, even if the district court adopted a narrow construction of the '624 patent and further pointed out that the '624 patent had been dismissed from the suit.

The Court clarified that the "in combination" language is necessary to explain that the selected information and the key are combined through the encryption process; otherwise, the claim would appear to mean that the encryption is performed on the key, not with the encryption algorithm.  The Court observed that a key is a necessary input to the encryption algorithm and that keys can change, but the encryption algorithm remains the same.  After examining the specification, the Court concluded that the specification supports Advanced Software's broader construction because it specifically describes an encryption algorithm that combines selected information and keys without describing an initial combining step.  The Court then reversed the district court's construction and held that "selected information . . . encrypted in combination with key information" means that the encryption algorithm combines the selected information and the key to create the control code. 

Next, the Court turned to the issue of whether the district court properly denied Advanced Software's motion to amend the complaint to add a Lanham Act count for false advertising.  The Court applied regional circuit law to the district court's scheduling order and determined that the district court's interpretation of that order was not inconsistent with the order's language.  The Court applied this interpretation to conclude that Advanced Software must show good cause under Rule 16(b) to amend the complaint.  The Court then determined that Advanced Software had not explained what occurred during the four-month period in question before moving to amend, and therefore the Court could not conclude that the district court abused its discretion by failing to consider an important factor, or that the district court committed clear error.  For this reason, the Court affirmed the district court's denial of the motion to amend.

Last, the Court turned to Fiserv's cross-appeal challenging the district court's denial of its SJ motion on obviousness and anticipation.  The Court held that it lacked jurisdiction to review the cross-appeal because Supreme Court precedent has explained that appellate courts lack jurisdiction over the denial of a motion for SJ based on disputed issues of fact because such a denial does not settle or even tentatively decide anything about the merits of the claim.

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