United States Court of Appeals for the Federal Circuit
2008-1152
ADVANCED SOFTWARE DESIGN CORPORATION
and CALIN A. SANDRU,
Plaintiffs-Appellants,
v.
FEDERAL RESERVE BANK OF ST. LOUIS,
FEDERAL RESERVE BANK OF PHILADELPHIA,
FEDERAL RESERVE BANK OF ATLANTA,
and FISERV, INC.,
Defendants-Appellees.
Keith A. Rabenberg, Senniger Powers LLP, of St. Louis, Missouri, argued for
plaintiffs-appellants.
William H. Levit, Jr., Godfrey & Kahn, S.C., of Milwaukee, Wisconsin, argued for
defendants-appellees. With him on the brief was Michael B. Apfeld.
Susan L.C. Mitchell, Attorney, Commercial Litigation Branch, Civil Division, United
States Department of Justice, of Washington, DC, argued for amicus curiae. With her on
the brief was John J. Fargo, Director. Of counsel on the brief was Stephen T. Middlebrook,
Senior Counsel, Financial Management Service, United States Department of the
Treasury, of Washington, DC.
Appealed from: United States District Court for the Eastern District of Missouri
Judge Catherine D. Perry
United States Court of Appeals for the Federal Circuit
2008-1152
ADVANCED SOFTWARE DESIGN CORPORATION
and CALIN A. SANDRU,
Plaintiffs-Appellants,
v.
FEDERAL RESERVE BANK OF ST. LOUIS,
FEDERAL RESERVE BANK OF PHILADELPHIA,
FEDERAL RESERVE BANK OF ATLANTA,
and FISERV, INC.,
Defendants-Appellees.
Appeal from the United States District Court for the Eastern District of Missouri in Case
No. 4:07-CV-185, Judge Catherine D. Perry.
___________________________
DECIDED: September 30, 2009
___________________________
Before NEWMAN, PROST and MOORE Circuit Judges.
NEWMAN, Circuit Judge.
Plaintiffs Advanced Software Design Corporation and its founder, Calin A.
Sandru, (collectively “Advanced Software”) appeal the summary judgment of the United
States District Court for the Eastern District of Missouri, dismissing certain counts of
their patent infringement suit on the ground that the acts relevant to this appeal were “by
or for the United States” and thus could only be pursued in the Court of Federal Claims
under 28 U.S.C. §1498(a). 1 Final judgment was entered pursuant to Federal Rule of
Civil Procedure 54(b). Because the allegedly infringing activity was for the United
States and with its authorization and consent, the dismissal of the relevant counts is
affirmed.
BACKGROUND
Advanced Software brought this suit against Fiserv, Inc. and three regional
Federal Reserve Banks, charging them with infringement of three patents owned by
Advanced Software relating to a method for detecting fraudulent bank checks. The
patents are U.S. Patent Nos. 6,792,110; 6,549,624; and 6,233,340 (“the Sandru
patents”). Issues of the scope, validity, and infringement of these patents were not
reached by the district court, and are not before us on this appeal.
The technology charged with infringement is called “seal encoding” technology,
whereby certain check identifying data such as the check number, payee, date, and
amount payable are encoded, using appropriate software, in a “seal” on the face of the
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 this decoded information to the information that appears on the check.
Any discrepancy will alert the bank to a possible altered or counterfeited check.
Because the procedure involves both encoding, which takes place when the checks are
issued, and decoding and verification, the technology depends upon participation by
1
Advanced Software Design Corp. v. Fed. Res. Bank of St. Louis, No.
4:07CV185 CDP, 2007 WL 3352365 (E.D. Mo. Nov. 9, 2007).
2008-1152 2
both 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
use of this system with checks of the United States Treasury.
Before the Treasury adopted the seal encoding system, when a United States
check was deposited at a bank of first deposit, it would be transferred to the Reserve
Bank of which that bank was a member, and paid from Treasury funds held by that
Reserve Bank. The check would then be forwarded to the Treasury, and its Financial
Management Service (FMS) would conduct a reconciliation process to identify
fraudulent checks. FMS would verify information on the check and, if a discrepancy
appeared, FMS would investigate further. The Treasury has up to sixty days to identify
an altered or counterfeit check, and receives a refund of any funds that had been
transferred to pay a fraudulent check, if identified within this period. Meanwhile the
perpetrator will have received the funds from the bank of first deposit, and the system is
such that the member bank or the Reserve Bank generally bears the loss. See
generally Indorsement and Payment of Checks Drawn on the United States Treasury,
69 Fed. Reg. 17,272, 17,273 (April 1, 2004) (explaining amendments to 31 C.F.R. Part
240 relating to the 60-day period for FMS investigation and reconciliation). Now, with
the seal encoding technology, the detection system can detect fraudulent checks
promptly at the Reserve Bank, notifying the bank of first deposit to freeze the funds
before they are withdrawn by the perpetrator. 2
The seal encoding technology reached the Treasury by way of employees of
2
The district court reported that with the seal encoding technology the
Federal Reserve Banks caught altered or counterfeit checks of nearly $4 million in
2004, over $28 million in 2005, and over $13 million in the first three months of 2006.
Advanced Software, 2007 WL 3352365 at *2.
2008-1152 3
Reserve Banks who learned of the technology, which was developed by a British
company and acquired by Fiserv, Inc. A pilot project based on Treasury checks was
conducted by Fiserv and the Philadelphia Reserve Bank, under a contract entered
between them in July 2001. The United States was not a party to this contract, although
the Treasury participated in the pilot program by printing checks with encoded seals. In
reviewing a draft of the contract between the Reserve Bank and Fiserv, the Treasury
requested that the following draft recital be modified:
WHEREAS, the Reserve Bank, acting on behalf of the Financial
Management Services (“FMS”), a bureau in the Department of the
Treasury (“Treasury”), desires to evaluate the use of certain seal encoding
technology.
(Draft contract appended to email from Blake Prichard of the Philadelphia Reserve
Bank, to Fiserv, July 26, 2001, at J.A. 273). Treasury requested rewording, as reflected
in an email from Mr. Prichard that quoted the following passage from an earlier
message from an unnamed Treasury official:
First paragraph under Background: “acting on behalf of the FMS” . . . since
it is a joint project, I wonder if it should be “in conjunction with” or similar
wording. My concern is that Procurement has concerns when they think
the Fed is simply doing a procurement for us, as opposed to doing a
procurement simply as an element of a project they are doing for or with
us.
(Email from Blake Prichard to Fiserv, July 31, 2001, at J.A. 284). Accordingly, “on
behalf of” was changed to “in conjunction with” in the final contract. The significance of
this change was debated in the district court, for the Reserve Banks pressed the
defense that they could not be sued for patent infringement because their activity was
for the United States. In turn, Advanced Software pointed to deposition testimony of a
Treasury official stating that the Treasury does not view the Reserve Banks as its
2008-1152 4
contractors in connection with arrangements between the Banks and other entities. The
official explained:
When we instruct the Federal Reserve to do something on our behalf and
they choose to do a procurement, it is their contract. We will often have
conversation with them about what the contract will include, what the
contractor will do compared to what the Federal Reserve will do, but the
contract is between the Federal Reserve Bank and the vendor. We don’t
sign off on those contracts. We don’t consider them our contractors.
(Dep. of Judith Tillman, Deputy Commissioner of FMS, at J.A. 507, undated in
Appendix.)
After the pilot program was successfully completed, further contracts were
entered between the Reserve Banks and Fiserv, on terms that included Fiserv’s
agreement to indemnify the Banks for any patent infringement.
On motion of the defendants, the district court dismissed the infringement claims
that were based on U.S. Treasury checks, ruling that the alleged acts of infringement
were “for the United States” and could be litigated only in the Court of Federal Claims
pursuant to 28 U.S.C. §1498(a). The statute is as follows:
28 U.S.C. §1498(a). Whenever an invention described in and covered by
a patent of the United States is used or manufactured by or for the United
States without license of the owner thereof or lawful right to use or
manufacture the same, the owner’s remedy shall be by action against the
United States in the United States Court of Federal Claims for the
recovery of his reasonable and entire compensation for such use and
manufacture. . . .
For the purposes of this section, the use or manufacture of an invention
described in and covered by a patent of the United States by a contractor,
a subcontractor, or any person, firm, or corporation for the Government
and with the authorization or consent of the Government, shall be
construed as use or manufacture for the United States.
****
2008-1152 5
In the district court the United States had moved to intervene and had also moved for
summary judgment on the ground that the accused acts of infringement were for the
United States. The district court denied these motions of the United States as moot,
upon granting the defendants’ motion for dismissal on the ground that §1498(a) applied
insofar as Treasury checks were concerned.
Advanced Software appeals the dismissal, referring to the government’s absence
as a party to any contract. Advanced Software points out that the Reserve Banks are
private banks and Fiserv is a private corporation, and stated its concern that if this
action against these defendants cannot be brought in district court, the asserted
infringement involving Treasury checks may be without a remedy. Advanced Software
expresses skepticism about whether, despite the district court’s belief that the United
States is subject to suit under 28 U.S.C. §1498(a), the government might later persuade
the Court of Federal Claims otherwise. Advanced Software also states its concern
about the time and expense of conducting duplicative trials in different forums, for the
district court retained jurisdiction of the counts of the complaint that relate to
infringement by other banks and customers of Fiserv not involving Treasury checks.
DISCUSSION
Section §1498(a) was first enacted in 1910, and was subsequently broadened in
order to aid the government’s procurement efforts during World War I. As the Court
explained in Richmond Screw Anchor Co. v. United States, 275 U.S. 331, 345 (1928):
“The intention and purpose of Congress in the act of 1918 was to stimulate contractors
to furnish what was needed for the war, without fear of becoming liable themselves for
infringements to inventors or the owners or assignees of patents.” This court has
2008-1152 6
further explained that “[t]he coverage of §1498 should be broad so as not to limit the
Government’s freedom in procurement by considerations of private patent
infringement.” TVI Energy Corp. v. United States, 806 F.2d 1057, 1060 (1986).
The statute has the effect of removing the threat of injunction, although it
provides for “reasonable and entire compensation” for infringing use. See Motorola, Inc.
v. United States, 729 F.2d 765, 768 n.3 (Fed. Cir. 1984) (injunctive relief is unavailable
against the United States under §1498); Leesona Corp. v. United States, 599 F.2d 958,
968-69 (Ct. Cl. 1979) (distinguishing recovery permitted under §1498(a) from the patent
infringement remedies of Title 35).
As the Court explained in Richmond Screw Anchor, the statute “is more than a
waiver of immunity and effects an assumption of liability by the government.” 275 U.S.
at 344; see also Madey v. Duke Univ., 307 F.3d 1351, 1359 (Fed. Cir. 2002) (“[Section
1498(a)] relieves a third party from patent infringement liability, and it acts as a waiver of
sovereign immunity and consent to liability by the United States.”). When raised
between private parties, reliance on §1498(a) is deemed an affirmative defense. See
Toxgon Corp. v. BNFL, Inc., 312 F.3d 1379, 1381 (Fed. Cir. 2002).
Precedent has considered, under various factual situations, the scope and
applicability of the phrase “for the United States” in §1498(a). When the alleged
infringement is by a non-government entity (“a contractor, a subcontractor, or any
person, firm, or corporation”), the statute states that the accused activity is “for the
United States” if it is conducted “for the Government” and “with the authorization or
consent of the Government.” §1498(a) ¶2; see also Sevenson Envtl. Servs., Inc. v.
Shaw Envtl., Inc., 477 F.3d 1361, 1365 (Fed. Cir. 2007) (stating the two criteria for
2008-1152 7
application of §1498(a) to activity of private parties); Hughes Aircraft Co. v. United
States, 534 F.2d 889, 897-98 (Ct. Cl. 1976) (same).
The district court found that these two criteria were met and that the Reserve
Banks and Fiserv were acting “for the United States” and with its “authorization and
consent,” in the sense of §1498(a). Advanced Software argues that the United States is
not a party to any contract with any of the defendants relating to this technology, and
that during the pilot program and later contracts between the Reserve Banks and
Fiserv, the Treasury continued to require that it not be a party to any contract.
Advanced Software states that the district court erred in viewing the defendant Reserve
Banks as operating “for the United States,” as required by §1498(a), for a Treasury
official testified that the Reserve Banks cannot make commitments or enter contracts
“for the Government.”
On this appeal the parties continue to debate the role and responsibility of the
government, Advanced Software stressing that throughout the litigation the government
did not provide unequivocal authorization or consent, as in the FAR clause prescribed
for use in government contracts. We have reviewed the applicability of 28 U.S.C.
§1498(a), and agree with the district court that the proper forum is the Court of Federal
Claims with respect to infringement based on use of this technology with Treasury
checks. The communications from the United States to the Federal Reserve Banks,
reinforced by the request by the United States to intervene in the district court and its
representations to this court that the accused activities are “for the United States” and
with its authorization or consent, established the applicability of §1498(a).
The district court found that the government had not provided an explicit written
2008-1152 8
“authorization or consent,” but recognized that no specific contract or explicit
“authorization or consent” clause is required by §1498(a). The district court held that
the Treasury’s agreement to participate with the Reserve Banks in testing and then in
using the Fiserv system and software constituted authorization or consent to use the
technology and accept liability for patent infringement if such should be present. The
court found that the Treasury “unambiguously communicated that it was consenting to
work being done for government benefit. The fact that Treasury was not a party to the
contract, or that Fiserv agreed to indemnify the bank against any infringement suit is
irrelevant.” Advanced Software, 2007 WL 3352365 at *7. Alternatively, the district court
found that the government consented “post hoc” by seeking to intervene on the
defendants’ behalf during this litigation; the court stated that this “seeking of intervention
itself (and not the arguments) unambiguously demonstrates that the government
authorizes and consents post hoc to any infringement that may have occurred on the
government’s behalf.” Id.
In its appellate brief Advanced Software stresses that the United States had not
unequivocally provided “authorization or consent” for the Reserve Banks or Fiserv to act
on behalf of the government, because no correspondence from Treasury officials
contained the language of authorization or consent that typically accompanies
government procurement and because Treasury specifically requested that contracts
between the Reserve Banks and Fiserv not state that the contracts were “on behalf of”
the United States. The defendant Reserve Banks respond that despite this absence of
explicit language, authorization or consent to use the seal encoding technology was
achieved by the participation of Treasury in adopting the technology, as reflected
2008-1152 9
throughout the correspondence between officials at Treasury and at the Reserve Banks.
The government, in its brief as amicus curiae on this appeal, points specifically to a
letter from Richard Gregg, then Commissioner of Treasury FMS, to the Federal Reserve
Bank of St. Louis, which states:
This letter is to advise you that, as a result of the successful outcome of a
pilot test of seal encoding technology, the Financial Management Service
intends to establish a Check Fraud project to implement this technology in
the production of checks that we issue.
(Letter from R. Gregg, August 18, 2003, at J.A. 195.) The government states that this
letter constitutes express “authorization or consent to the Banks to make use of the
Fiserv software and seal encoding technology,” and that this authorization was
confirmed by the testimony of Judith Tillman, Deputy Commissioner of FMS, in her
declaration in the district court, which states:
With the decision to formally implement the check fraud prevention
processes developed from the pilot program, FMS authorized and
consented to the use of those processes by the Federal Reserve Banks in
the processing of U.S. Treasury checks. FMS’s authorization and consent
was intended to include, and included, the use of Fiserv software in
connection with the processing of U.S. Treasury checks.
(Decl. of Judith R. Tillman, March 8, 2007, at J.A. 126-27.) Advanced Software
responds that Deputy Commissioner Tillman also testified at deposition that FMS does
not authorize the Reserve banks to contract on its behalf, and that this negates
authorization. See Tillman Dep., quoted ante. Thus the plaintiffs argue that ambiguity
and uncertainty remain.
We agree with the district court that authorization or consent was achieved by
Treasury’s correspondence with the Reserve Banks, including the Gregg letter cited
above, and by the unequivocal statements on behalf of the Treasury concerning their
2008-1152 10
use of this technology. See TVI Energy, 806 F.2d at 1060 (authorization and consent
can be either express or implied); Hughes Aircraft, 534 F.2d at 901 (“Nor . . . is there
any requirement that authorization or consent necessarily appear on the face of a
particular contract. On the contrary, ‘authorization or consent’ on the part of the
Government may be given in many ways other than by letter or other direct form of
communication . . . .” (footnote omitted)).
While the United States’ motion to intervene in the district court was denied as
moot, and the government thus has not appeared as a party to this case, its
representations as amicus curiae are fully in accord with the conclusion of the district
court. In moving to participate in oral argument in this appeal, the government stated:
“The government would like to participate in oral argument because the government has
an interest in preventing any interference with its fiscal agent, the Federal Reserve
Banks, in performing work for the government and is in a unique position as principal of
the agency relationship to address the authorization or consent issues under 28 U.S.C.
§1498. Richmond Screw Anchor Co. v. United States, 275 U.S. 331, 343 (1928).” The
motions to file a brief and to participate in oral argument were granted, and at oral
argument the government unequivocally confirmed its position in the following colloquy:
Court: Ms. Mitchell, do you authorize, if it wasn’t heretofore
authorized, do you do it right now?
U.S. Counsel: Yes, your Honor.
****
Court: Just to make clear, the government is waiving any objection
to the “reasonable and entire compensation” if it is found that
these patents are infringed?
U.S. Counsel: We will accept liability under 1498, your Honor.
2008-1152 11
Oral Arg. 23:44–24:12, Oct. 10, 2008, available at
http://oralarguments.cafc.uscourts.gov/mp3/2008-1152.mp3. These statements
conform to precedent that holds that when the requirements of §1498(a) are met, it
functions not only as a waiver of sovereign immunity but also as consent to liability.
See Madey, 307 F.3d at 1359 (section 1498(a) “relieves a third party from patent
infringement liability, and it acts as a waiver of sovereign immunity and consent to
liability”); see also Richmond Screw Anchor, 275 U.S. at 344 (the statute “is more than a
waiver of immunity and effects an assumption of liability by the government”);
Bereslavsky v. Esso Standard Oil Co., 175 F.2d 148, 150 (4th Cir. 1949) (§1498 is both
a waiver of sovereign immunity and an assumption of liability on the part of the
government).
We also affirm the district court’s rulings that the Fiserv dealings with the
Reserve Banks and their actions with respect to Treasury checks are “for the
Government” in the sense required by §1498(a). The district court correctly ruled that
§1498(a) does not require that the government be party to any contract, but may apply
to activities by “any person, firm, or corporation” for the benefit of the government. 28
U.S.C. §1498(a). For example, in Hughes Aircraft the court found that the government’s
participation in the Skynet II satellite program was “for the Government” although the
satellites would be owned by the United Kingdom, because the program was vital to the
military defense and security of the United States. See 534 F.2d at 898.
Advanced Software questions whether the government is “a principal beneficiary”
of the accused infringement, since it was not the Treasury, but the bank of first deposit,
that almost always bore the loss upon identification of a fraudulent Treasury check. It is
2008-1152 12
not necessary to be the sole beneficiary, however, in order to be a beneficiary for the
purposes of §1498(a). See Sevenson, 477 F.3d at 1365-66 (rejecting notion that
§1498(a) imposes a “primary purpose” condition). The defendants point to the national
interest in averting fraud in Treasury checks, and to the resources Treasury has saved
by adopting this efficient technology. See Indorsement and Payment of Checks Drawn
on the United States Treasury, 69 Fed. Reg. at 17773 (discussing resources expended
to discover and investigate fraudulent Treasury checks). We agree with the district
court that these are significant benefits to the United States, along with the financial
benefits accruing to the member banks and the Reserve Banks. All benefit from the
detection of fraudulent Treasury checks.
Advanced Software directs attention to the fact situations and reasoning in two
cases that held that incidental benefit to the government is insufficient to satisfy the
requirements of §1498(a). In Riles v. Amerada Hess Corp., 999 F. Supp. 938 (S.D.
Tex. 1998), the district court held that royalties paid to the government for off-shore
drilling rights under a federal lease were too remote a government benefit to provide a
defense to the charge of infringement of a patent for a method of offshore platform
installation; the court found that the purpose of the drilling was not “for the Government,”
but for the private oil driller’s profit. Advanced Software also cites Larson v. United
States, 26 Cl. Ct. 365 (1992), where the patentee sought application of §1498(a) in
order to invoke government liability for private medical providers’ use of infringing
splints, arguing that the use was “for the Government” because the government
reimbursed the cost through Medicare and other federal programs. The Court of
Federal Claims rejected this reasoning, holding that “[a]ny use of plaintiffs’ casts and
2008-1152 13
splints was for the benefit and convenience of the patient and provider, with no benefit
to the government. The fact that the government has an interest in the program
generally, or funds or reimburses all or part of its costs, is too remote to make the
government the program’s beneficiary for the purposes underlying §1498.” Id. at 369.
Advanced Software suggests that this case is similar to Riles and Larson in that
the private actors—the Reserve Banks and Fiserv—are acting primarily for their own
economic benefit although the Treasury may receive some tangential benefits in
efficiency or cost-avoidance. The district court was not persuaded, finding that the
benefits to the government of using the seal encoding technology on Treasury checks
are not incidental effects of private interests. We agree, for the seal encoding
technology for Treasury checks requires the Treasury’s participation in every encoded
Treasury check, as distinguished from Riles and Larson where the government’s
participation was to receive or pay money but with no relation to the benefits of the
technology.
The district court discussed whether the Reserve Banks, in their limited role as
“fiscal agents” for the Treasury pursuant to 12 U.S.C. §391, acted in an agency capacity
when they entered into the contracts with Fiserv. Advanced Software pointed out that
the Treasury had requested that the Reserve Banks in their contracts with Fiserv avoid
stating that the subject activity was “on behalf of” the Treasury, thereby apparently
negating any intent to authorize acts of an agent. Advanced Software also pointed out
that 12 U.S.C. §391 provides that the Reserve Banks serve as fiscal agents for the
Treasury only for specified limited purposes, and that this statute does not grant the
2008-1152 14
Reserve Banks power to enter procurement contracts on behalf of the Treasury. 3
However, we need not resolve this issue, for an agency relationship need not exist in
order for §1498(a) to apply.
We discern no error in the district court’s ruling that the Reserve Banks acted “for
the Government” when they contracted to adopt technology designed to detect
fraudulent Treasury checks. The ruling that §1498(a) applies to the counts involving
Treasury checks is affirmed.
AFFIRMED
3
Advanced Software has asked this court to take judicial notice of its bid
protest with the Government Accounting Office. We take notice of the proceeding.
See, e.g., Opoka v. Immigration & Naturalization Serv., 94 F.3d 392, 394-95 (7th Cir.
1996) (“[I]t is a well-settled principle that the decision of another court or agency,
including the decision of an administrative law judge, is a proper subject of judicial
notice.”). We state no view on the merits.
2008-1152 15