Advanced Software Design Corp. v. Federal Reserve Bank of St. Louis

Communications from the Government, Reinforced by Its Representations to the Federal Circuit, Can Establish the Applicability of § 1498(a)


September 30, 2009

Capron, Aaron J.


Last Month at the Federal Circuit - October 2009

Judges: Newman (author), Prost, Moore

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

In Advanced Software Design Corp. v. Federal Reserve Bank of St. Louis, No. 08-1152 (Fed. Cir. Sept. 30, 2009), the Federal Circuit affirmed the district court’s grant of SJ dismissing certain counts of a patent infringement suit brought by Advanced Software Design Corporation and its founder, Calin A. Sandru (collectively “Advanced Software”). The Court determined that the allegedly infringing acts relevant to this appeal were for the United States, and with its authorization and consent, and thus could only be pursued in the Court of Federal Claims under 28 U.S.C. § 1498(a).

Advanced Software sued Fiserv, Inc. (“Fiserv”) and three regional Federal Reserve Banks, alleging infringement of U.S. Patent Nos. 6,792,110, 6,549,624, and 6,233,340, all of which relate to a method for detecting fraudulent bank checks.

The technology charged with infringement is called seal encoding technology, which places check identifying data in a seal on the face of a check when the check is printed. Using software programmed with the encryption system, a bank at which the check is processed after its deposit can decode the seal and compare the decoded information to the information on the check. Any discrepancy will alert the bank to a possible altered or counterfeit check. Because the procedure involves both encoding, which takes place when the checks are issued, and decoding and verification, the technology depends on participation by the check issuer and the bank that processes the check after its deposit. As concerns the involvement of the United States, the assertions of infringement arise from the use of this system with checks issued by the U.S. Department of the Treasury (“Treasury”).

Prior to adoption of the seal encoding system, the Treasury and its Financial Management Service (“FMS”) would have to verify each deposited Treasury-issued check. By the time a fraudulent check was identified by the Treasury, a perpetrator would already have received the funds from a bank of first deposit, leaving the bank or Federal Reserve Bank to bear the loss. With the seal encoding system, Federal Reserve Banks, without any verification by the Treasury, could detect fraudulent checks, thereby preventing funds from being transferred to the perpetrator.

Fiserv and one of the Federal Reserve Banks negotiated a contract to conduct a pilot project using the seal encoding technology. While not a party to the contract, the Treasury participated in the pilot program by printing the encoded checks and had discussions with the Federal Reserve Bank to modify the language of the contract to reflect the joint project.

Based on these facts, the district court granted defendants’ SJ motion, dismissing the infringement claims that were based on Treasury checks and ruling that the alleged acts of infringement were “for the United States” and could only be litigated in the Court of Federal Claims. Based on this dismissal, the district court also denied as moot the United States’ motions to intervene and for SJ on the grounds that the accused acts were for the United States.

On appeal, the Federal Circuit first observed that the coverage of § 1498 should be broad so as not to limit the government’s freedom. While the statute removes the threat of an injunction, it requires the government—not a third party—to be liable for an infringing use. When the alleged infringement is by the third-party nongovernment entity, the statute states that the accused activity is “for the United States” if it was conducted (1) for the government, and (2) with the authorization or consent of the government.

The Federal Circuit first considered the second prong—whether the accused activity was conducted with the authorization or consent of the government. While failing to include an explicit contractual authorization or consent of the government, the record provided a correspondence between officials at the Treasury and the Federal Reserve Banks regarding the participation of the Treasury in adopting the seal encoding technology. In correspondence to one of the Federal Reserve Banks, the Commissioner of Treasury FMS stated that, depending on the outcome of the pilot program, the FMS intended to implement the seal encoding technology in their production of checks. The government, in its brief as amicus curiae on this appeal, stated that this correspondence constitutes express authorization or consent to the Federal Reserve Banks to make use of the seal encoding technology. The government pointed out that the Deputy Commissioner of FMS confirmed this authorization in a declaration to the district court. Relying on precedent holding that “‘authorization or consent’ on the part of the [g]overnment may be given in many ways,” the Federal Circuit agreed with the district court that authorization or consent by the government was achieved based on the Treasury’s correspondence and unequivocal statements in the declaration. Slip op. at 11 (quoting Hughes Aircraft Co. v. United States, 534 F.2d 889, 901 (Ct. Cl. 1976)).

The Federal Circuit also noted that the United States made several representations in its amicus curiae brief, its motion to participate in oral argument before the Court, and during oral argument, which were fully in accord with the conclusion of the district court. In the motion to participate, the government stated that it “has an interest in preventing any interference with its fiscal agent, the Federal Reserve Banks, in performing work for the government.” Id. Further, during oral argument, the government provided authorization, if it had not done so already, for the allegedly infringing acts of the third parties and consented to liability under § 1498, relieving the third parties of any liability.

The Court next considered the first prong—whether the accused activity was conducted for the government. First, the Court noted that § 1498 does not require the government to be a party to any contract, but may apply to activities by “any person, firm, or corporation” for the benefit of the government. The Court also stated that, to be a beneficiary for the purpose of § 1498, it was not necessary to be the sole beneficiary. Acknowledging national interest in averting fraud using Treasury checks and saving Treasury resources by adopting this efficient technology, the Federal Circuit agreed with the district court that there were significant benefits to the United States.

The Court, disagreeing with Advanced Software’s arguments that the government only received an incidental benefit, held that the benefits to the government of using the seal encoding technology on Treasury checks were not mere incidental effects. It reasoned that the seal encoding technology for Treasury checks required the Treasury’s participation in every encoded Treasury check. Accordingly, because of the significant benefits received by the Treasury, the Court determined that the accused activity was conducted for the government.

Accordingly, the Federal Circuit discerned no error in the district court’s ruling that the Federal Reserve Banks acted for the government when they contracted to adopt technology to detect fraudulent Treasury checks. Thus, the Court affirmed the district court’s ruling that § 1498 applies to the counts involving Treasury checks.

Summary authored by Aaron J. Capron, Esq.