Southern District Of New York Grants Motion To Dismiss Patent And Trade Secret Claims, Finding Patents Ineligible Under Section 101 And That Trade Secret Claim Failed To Identify A Protectable Secret
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  • Southern District Of New York Grants Motion To Dismiss Patent And Trade Secret Claims, Finding Patents Ineligible Under Section 101 And That Trade Secret Claim Failed To Identify A Protectable Secret

    On May 29, 2020, the U.S. District Court for the Southern District of New York issued an opinion granting defendant StoneCastle Cash Management LLC’s motion to dismiss related to plaintiff Island Intellectual Property, LLC’s patent infringement, misappropriation of trade secrets, and related state law claims.  Island Intellectual Property, LLC v. StoneCastle Asset Management LLC, No. 19-CV-4792 (JPO) (S.D.N.Y. May 29, 2020).  The Court first ruled that the two groups of asserted patents, directed towards computer-implemented, multibank reciprocal-deposit systems, failed the Supreme Court’s two-step Alice test, and were therefore unpatentable under 35 U.S.C. § 101.  The Court also ruled that Island’s misappropriation of trade secrets claims were too generalized to survive a motion to dismiss. 

    In 2017, a subsidiary of StoneCastle acquired a company which was a licensee of Island’s intellectual property.  Under this agreement, StoneCastle and its corporate affiliates and subsidiaries (other than the purchaser) agreed not to use Island’s intellectual property without additional licenses.  In October 2018, Island grew suspicious that StoneCastle was employing its intellectual property without additional licenses, and filed the present suit.  The allegedly infringed patents fall into two categories—the “Reciprocal Deposit Patents,” which include four patents that share a single specification, and the “Allocation Model Patent.”

    The Court first addressed the two-step Alice test for determining patent eligibility under 35 U.S.C. § 101:
    1. determine whether the claims at issue are directed to one of the patent-ineligible concepts (such as an abstract idea); and if so, then 
    2. determine whether the elements of the claim, considered both individually and as an ordered combination, recite an “inventive concept”—i.e., an element or combination of elements that is sufficient to ensure that the practice amounts to significantly more than a patent upon the ineligible concept itself. 
    Alice Corp. v. CLS Bank Int’l, 573 U.S. 208, 217–18 (2014).

    First, the Court considered the Reciprocal Deposit Patents, which disclose “a method and system by which banks can earn greater returns on their investment of public deposits.”  Banks are often required to accept “public deposits” from certain federal, state, and municipal entities.  This may cause banks to lose money, as the interest rates paid to public depositors are typically higher than the interest rates earned on government securities.  The Reciprocal Deposit Patents allegedly solved this problem by giving banks the means, through a multibank depository system which divides and transfers funds to a number of larger banks, to stay within insurance limits.

    At Alice Step One, the Court ruled that “the idea of dividing and transferring funds to stay within insurance limits is a fundamental economic practice.”  The Court found unpersuasive Island’s argument that the claims are directed to a particular application of the allegedly abstract idea (by “improve[ing] the way computers operate through ‘logical structures and processes’”), as Island did not explain how the claims actually cause such improvement.  The Court further found unpersuasive Island’s attempt to analogize its claims to other patents that the CAFC has found eligible under Alice, ruling that more closely analogous patents have been found invalid.  Turning to Alice Step Two, the Court held that “Island has articulated no specific innovation or improvement over prior art,” as Island did not identify “what ‘difficult technological problem’ [the patents] solve, or what inventive concept their ‘practical combination of steps’ offers.”

    The Court further rejected Island’s argument that other authorities had already found the disclosed invention patent-eligible.  Among other “misleading” citations, the Court found unpersuasive a District of Delaware consent judgment wherein the parties agreed that the patents were eligible.

    Second, the Court turned to the Allocation Model Patent, which “is … essentially … a scheme for computerized management of account balances across a multi-bank, multi-account depository system [like the systems disclosed in the Reciprocal Deposit Patents].”  At Alice Step One, the Court ruled that the Allocation Model Patent “merely recites execution on a computer of a bookkeeping process that could be executed by humans manually,” and that the patent seeks to “automate ‘pen and paper methodologies.’”  The Court found particularly persuasive that “the specification explicitly discloses that several steps of the claimed invention can be performed over the phone or in person.”  Accordingly, the Court ruled that the Allocation Model Patent is directed to an abstract idea.  Similarly, the Court found no inventive concept at Alice Step Two, ruling that the patent “is merely a verbose recitation of otherwise quotidian and manually executable bookkeeping practices.” 

    Accordingly, the Court ruled that both groups of patents failed under the two-step Alice test.
    Next, the Court considered Island’s misappropriation of trade secrets claims under 18 U.S.C.
    § 1831.  To survive a motion to dismiss, the Court noted that plaintiff’s pleadings must identify, in some detail, the trade secret that defendant is alleged to have misappropriated.  The Court ruled that Island failed to meet this standard, as the pleadings merely stated that StoneCastle misappropriated “‘certain proprietary, secret and confidential information relating to cash management and money regulation systems and, in particular, to the implementation of the inventions set forth in’ the asserted patents.”  Such allegations “identify only at the highest level of generality the subject matter of the secrets and do not even describe the type of information allegedly misappropriated.”  Accordingly, Island’s claims could not survive the motion to dismiss.  Citing this level of generality, the Court did not consider Island’s claims relating to StoneCastle’s alleged copying of products.

    The Court granted Island’s request to amend its trade secrets claims, but denied leave to amend the infringement claims, “as amendment would be futile.”

    Although recent decisions have made it easier for patent owners to create issues of fact to defeat Section 101 motions (and district courts have become more reluctant to grant such motions), this case is an example showing that it is still possible for accused infringers to ultimately succeed on Section 101 grounds on the papers.  On the trade-secret side, the case illustrates the importance of carefully defining the asserted trade secrets before filing a lawsuit.