Brief Re Relief From Injunction For Method Patent

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF IOWA CEDAR RAPIDS DIVISION LINCOLN NATIONAL LIFE INSURANCE COMPANY, Plaintiff, vs.

CASE NO. 1:06-CV-00110-MWB

TRANSAMERICA LIFE INSURANCE COMPANY, WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO and TRANSAMERICA FINANCIAL LIFE INSURANCE COMPANY,

ORAL ARGUMENT REQUESTED

Defendants.

BRIEF IN SUPPORT OF MOTION FOR RELIEF FROM AND MODIFICATION OF PERMANENT INJUNCTION AND REFUND OF ROYALTY PAYMENTS MADE UNDER PROTEST

TABLE OF CONTENTS I.

INTRODUCTION...............................................................................................................1

II.

BACKGROUND.................................................................................................................3

III.

IV.

V.

A.

‘201 Patent Litigation ................................................................................................3

B.

Transamerica’s Attempts to “Reasonably Satisfy” Lincoln ......................................3

AS A RESULT OF THE SUBSTANTIAL MODIFICATIONS, TRANSAMERICA DOES NOT INFRINGE. ....................................................................5 A.

After the September Modifications, Transamerica Does Not Perform Step 35(b) and the Second Limitation of Step (d). ......................................5

B.

After the July 6, 2009 Modification, Transamerica Does Not Perform Step 35(b). .................................................................................10

C.

After the March 30, 2009 Modification, Transamerica Does Not Perform Step 35(e). .................................................................................12

ARGUMENT ....................................................................................................................14 A.

Transamerica Has Fully Satisfied the Royalty Payment Obligations in the Permanent Injunction and Payments Made Under Protest Should Be Refunded to Transamerica. ....................................................................14

B.

Application of the Permanent Injunction Is No Longer Equitable. .........................17

C.

The Permanent Injunction Should be Modified.......................................................18

CONCLUSION .................................................................................................................20

i

TABLE OF AUTHORITIES Page(s) CASES Agostini v. Felton, 521 U.S. 203 (1997).................................................................................................................19 Amado v. Microsoft Corp., 517 F.3d 1353 (Fed. Cir. 2008)................................................................................................19 Bass Pro Trademarks, L.L.C. v. Cabela’s, Inc., 485 F.3d 1364 (Fed. Cir. 2007)........................................................................................19 n.16 Baumlin & Ernst, Ltd. v. Gemini, Ltd., 637 F.2d 238 (4th Cir. 1980) ...................................................................................................15 Broyhill Furniture Indus., Inc. v. Craftmaster Furniture Corp., 12 F.3d 1080 (Fed. Cir. 1993)..................................................................................................15 Carborundum Co. v. Molten Metal Equip. Innovations, Inc., 72 F.3d 872 (Fed. Cir. 1995)....................................................................................................19 Cardiac Pacemakers, Inc. v. St. Jude Med., Inc., 576 F.3d 1348 (Fed. Cir. 2009)................................................................................................12 Conte v. Gen. Housewares Corp., 215 F.3d 628 (6th Cir. 2000) ...................................................................................................15 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).................................................................................................................19 Fiskars, Inc. v. Hunt Mfg. Co., 279 F.3d 1378 (Fed. Cir. 2002)................................................................................................15 Horne v. Flores, 129 S. Ct. 2579 (2009).......................................................................................................17, 19 Humble Oil & Refining Co. v. American Oil Co., 405 F.2d 803 (8th Cir. 1969) ...........................................................................................18 n.16 In re Hendrix, 986 F.2d 195 (7th Cir. 1993) ...........................................................................................18 n.16 Int’l Rectifier Corp. v. IXYS Corp., 361 F.3d 1363 (Fed. Cir. 2004)................................................................................................20 Int’l Rectifier Corp. v. Samsung Elecs. Co., 361 F.3d 1355 (Fed. Cir. 2004)..........................................................................................18, 19 ii

Joy Tech. v. Flakt, Inc., 6 F.3d 770 (Fed. Cir. 1993) .....................................................................................................12 Kaler v. Bala (In re Racing Servs.), 571 F.3d 729 (8th Cir. 2009) ...................................................................................................17 Laitram Corp. v. Cambridge Wire Cloth Co., 863 F.2d 855 (Fed. Cir. 1989)..........................................................................................19 n.16 Life Techs., Inc. v. Promega Corp., 189 F.R.D. 334 (D. Md. 1999).................................................................................................18 Muniauction, Inc. v. Thompson Corp., 532 F.3d 1318 (Fed. Cir. 2008)................................................................................................12 Newhouse v. McCormick & Co., 157 F.3d 582 (8th Cir. 1998) .............................................................................................14, 15 NTP, Inc. v. Research in Motion, Ltd., (Fed. Cir. 2005) 418 F.3d 1282 ................................................................................................................6, 10, 11 Pro Edge L.P. v. Gue, 411 F. Supp. 2d 1080 (N.D. Iowa 2006)..................................................................... 18 & n.16 Redfield v. Ins. Co. of N. Am., 940 F.2d 542 (9th Cir. 1991) ...................................................................................................15 Rufo v. Inmates of Suffolk County Jail, 502 U.S. 367 (1992).............................................................................................17, 18 n.16, 19 Sys. Fed’n No. 91 v. Wright, 364 U.S. 642 (1961).................................................................................................................19 United States v. Swift & Co., 286 U.S. 106 (1932).........................................................................................................18 n.16 W.L. Gore & Assoc. v. C.R. Bard, Inc., 977 F.2d 558 (Fed. Cir. 1992).................................................................................... 18-19 n.16 Zamani v. Carnes, 491 F.3d 990 (9th Cir. 2007) ...................................................................................................15 STATUTES 35 U.S.C. § 271(a) .....................................................................................................................6 n.4 Fed. R. Civ. P. 60(b)(5)..................................................................................................................14

iii

I. Introduction To comply with the Permanent Injunction entered in this action on June 8, 2009 (Dkt. No. 313), as modified on September 16, 2009 (Dkt. No. 338), Transamerica implemented substantial modifications to the method by which it administers variable annuity riders. In particular, Transamerica implemented substantial modifications to the administrative method that it used at the time of trial that significantly changed how it performs steps 35(b), (d) and (e) of Claim 35 of the ‘201 Patent.1 These modifications include calculations of and adjustments to scheduled payments made entirely outside the United States using a computer system owned, developed and operated by an independent third party, Citigroup Fund Services Canada, Inc. (“Citi Canada”). These modifications also include the manual processing of scheduled payments far in advance of policy account value exhaustion. For these reasons, Transamerica’s current policy administration system is outside the scope of the enjoining provisions of the Permanent Injunction. Moreover, as a result of the implemented modifications, Transamerica is now using an administrative method that does not infringe the asserted claims of the ‘201 Patent. Because of these significantly changed facts, Transamerica moves this Court (1) to relieve it from any royalty payment obligations; (2) to modify the Permanent Injunction; and (3) to order the refund of royalty payments that Transamerica made under protest solely to comply with the Permanent Injunction. In brief, starting on September 12, 2009, Transamerica has not been able to calculate and adjust the Maximum Annual Withdrawal Amount (“MAWA”) and Total Withdrawal Base 1

Transamerica has appealed the Judgment and several orders and rulings entered in this action to the United States Court of Appeals for the Federal Circuit. Transamerica continues to believe that the policy administration system that it used before the implemented modifications did not infringe the asserted claims. However, to comply with the terms of the Permanent Injunction during the appeal, and to eliminate any risk of an unfavorable appellate outcome, Transamerica implemented modifications to remove any doubt that it does not infringe the ‘201 Patent. For ease of reference, these modifications will sometimes be referred to herein as “design arounds.”

1

(“TWB”) relating to the administration of Guaranteed Minimum Withdrawal Benefit (“GMWB”) riders in the United States.2 Transamerica contracted with Citi Canada to perform all GMWB rider administration calculations and adjustments of MAWA and TWB in Canada. Earlier, as of July 6, 2009—less than one month after the entry of the Permanent Injunction—Transamerica was no longer able to calculate the first MAWAs for new riders and upgrades to riders within the United States. Transamerica transmitted the data needed to perform these calculations to an affiliated company (Transamerica Canada), which performed them in Canada. Transamerica implemented its first modification on March 30, 2009, more than two months before this Court ruled on post-trial motions and issued the Permanent Injunction. As a result of this first modification, Transamerica would manually administer any rider whose account value is reduced to less than two times MAWA. Should this unlikely event ever occur, no scheduled payments would be processed using any computerized method. Thus, after implementing these design arounds, Transamerica’s modified method for administering variable annuity riders does not perform three of the five steps limiting Claim 35 of the ‘201 Patent. If any one of the steps is not performed, the modified method is outside the prohibitions of the Permanent Injunction and does not infringe. Here, out of an abundance of caution, Transamerica modified its administrative method so that it does not perform three steps. As demonstrated below, these modifications render Transamerica’s current policy administration system more than “colorably distinct” from a claimed method and non-infringing.

2

For purposes of this Motion, “variable annuity riders” or “riders” refer to the following riders: Guaranteed Principal Solution, 5-For-Life, 5-For-Life with Growth, Income Select for Life, Retirement Income Choice and Architect. The Architect rider was not at issue at trial, but it is also a GMWB rider that is administered by the modified method.

2

II. Background A. ‘201 Patent Litigation Transamerica commenced this action on August 8, 2006, seeking a declaratory judgment that its computerized method for administering GMWB riders did not infringe the ‘201 Patent and that that Patent was invalid. Lincoln counterclaimed for infringement. On February 13, 2009, a jury found that Transamerica infringed and that the ‘201 Patent was not invalid and awarded Lincoln approximately $13 million in damages. On June 8, 2009, the Court denied Transamerica’s post-trial motions and entered a Permanent Injunction. Transamerica timely appealed. As described below, Transamerica employees have spent in excess of 5,000 hours developing and implementing substantial modifications to Transamerica’s policy administration system to design around the asserted claims of the ‘201 Patent. B. Transamerica’s Attempts to “Reasonably Satisfy” Lincoln Pursuant to paragraph 4 of the modified Permanent Injunction, Transamerica had until October 16, 2009 to attempt to “show to Lincoln’s reasonable satisfaction” that its modified method for administering riders is more than “colorably distinct” from a claimed method and that the modified method does not infringe the asserted claims. To that end, on September 8, 2009, Transamerica provided Lincoln with a written summary describing substantial modifications to the method by which it administers variable annuity riders. Felter Decl. Ex. A. Over the course of the next six weeks, in response to numerous requests by Lincoln’s counsel, Transamerica delivered over 160,000 pages of documents, including technical and functional specifications, regarding the design arounds. Id. ¶ 6. Transamerica also provided Lincoln’s counsel and Lincoln’s counsel’s consultants with a tremendous amount of computer software source code and related data and conducted live demonstrations of each design around.

3

For example, immediately after Transamerica and Lincoln jointly moved to add provisions to the Protective Order (Dkt. No. 343), on October 7, 2009, Transamerica sent to Lincoln’s counsel’s consultant by Federal Express a stand-alone computer containing all relevant source code before and after the modifications. Id. ¶ 7. Over the course of October 8 and 9, 2009, Transamerica conducted live demonstrations of Transamerica’s policy administration system and the implemented design arounds for Lincoln’s counsel and their consultant in Cedar Rapids, Iowa. During these demonstrations, seven Transamerica employees—including the three persons designated to testify on behalf of Transamerica as Rule 30(b)(6) deponents and Transamerica’s in-house counsel—were continuously available and provided complete access to Transamerica’s policy administration system, answered questions posed by Lincoln’s counsel’s consultant, and demonstrated each design around. Id. ¶¶ 8-10. On October 9, 2009, again in response to Lincoln’s counsel’s request, Transamerica provided (in Lincoln’s counsel’s words) an “[explanation of] Transamerica’s legal position as to how each attempted design around avoids infringement with specific reference to the claim limitation(s), as construed by the Court, allegedly absent after the design change.” Id. Ex. B. On October 14, 2009, in response to Lincoln’s Rule 30(b)(6) deposition notice, three of Transamerica’s information technology and operations employees were deposed on several matters relating to the implemented modifications. During the deposition, Transamerica’s designees answered every question immediately or obtained the requested information during breaks. At the conclusion of the deposition, Lincoln’s counsel identified four unanswered questions. Answers to those remaining questions were provided on October 16, 2009. Id. ¶¶ 1213. In sum, every document requested by Lincoln’s counsel has been produced, all relevant source code has been supplied to Lincoln’s counsel and Lincoln’s counsel’s consultants, and

4

every question posed about the design arounds by either Lincoln’s counsel and/or Lincoln’s counsel’s consultant has been answered. Id. ¶ 14. Notwithstanding the fact that Transamerica provided Lincoln with everything that it requested, and the overwhelming evidence summarized above and described in more detail below, on October 16, 2009, Lincoln informed Transamerica that it is not “satisfied.” III. As a Result of the Substantial Modifications, Transamerica Does Not Infringe. To design around the asserted claims of the ‘201 Patent, Transamerica’s information technology and operations employees expended in excess of 5,000 hours3 modifying Transamerica’s policy administration system and procedures. See Blankenship Decl. ¶¶ 27-34, 37-60. Transamerica implemented three separate modifications. Transamerica’s modified computerized method for administering riders, first implemented in July and then replaced and expanded starting in September 2009, cannot perform steps 35(b) and (d) within the United States. Those steps must be performed using Citi Canada’s servers in Canada. In addition, Transamerica implemented procedures on March 30, 2009 and, as a result, Transamerica’s modified method cannot perform step 35(e) by using any computerized system. The most recent modifications, implemented beginning on September 12, 2009, are the most comprehensive and are discussed first below, followed by the July and March modifications. A. After the September Modifications, Transamerica Does Not Perform Step 35(b) and the Second Limitation of Step (d). 35. A computerized method for administering a variable annuity plan . . . comprising the steps of: . . . b) determining an initial scheduled payment . . . d) . . . adjusting the amount of the scheduled payment in response to said unscheduled withdrawal . . . .

3

This number of hours does not include significant additional hours spent by Transamerica employees in other departments (e.g., legal or actuary). Transamerica does not know how many hours Citi Canada employees expended to develop and implement its calculator in Canada. See Blankenship Decl. ¶ 59.

5

After modifications implemented beginning on September 12, 2009, Transamerica does not perform step 35(b) nor the “adjusting” limitation of step 35(d) within the United States. Transamerica now “determin[es]” the initial scheduled payment in Canada, and makes all “adjust[ments]” to the amount of the scheduled payment in Canada. As this Court correctly noted, “[p]ractice of the claimed method in the United States is an essential element of infringement.” Letter from Mark W. Bennett, U.S. District Judge, to counsel in Lincoln Nat’l Life Ins. Co. v. Transamerica Life Ins. Co., No. C 06-110-MWB (N.D. Iowa Jan 20, 2009) (Dkt. No. 277), at 2 (citing 35 U.S.C. § 271(a)4) (emphasis added); see also, e.g., NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1282, 1318 (Fed. Cir. 2005) (“[A] process cannot be used ‘within’ the United States as required by section 271(a) unless each of the steps is performed within this country.”) (emphasis added). This Court reinforced this legal principle in Jury Instruction Number 7. See Jury Instruction No. 7 (Dkt. No. 272) at 18 (“Infringement must be based on performance of steps of the claimed method performed or that must necessarily be performed using computers in the United States.”). Lincoln did not (and cannot) dispute this principle of law.5

4

35 U.S.C. § 271(a) reads in full: “Except as otherwise provided in this title, whosoever without authority makes, uses, offers to sell or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” 5

Lincoln did not object to this portion of Jury Instruction No. 7, nor did it dispute that, for infringement, each step of a method patent must be performed within the United States. See, e.g., Lincoln’s Objections and Requested Addition to the Court’s Proposed Jury Instructions (01/20/09 Version), No. C 06-110-MWB (N.D. Iowa Jan 23, 2009) (Dkt. No. 237), at 2 (“Lincoln also acknowledges that ‘in the United States’ is an element of infringement under 35 U.S.C. § 271(a), and therefore, a relevant inquiry—if disputed.”). Rather, Lincoln argued that Transamerica admitted that it had—to that time—performed all steps of Claim 35 within the United States, and thus that portion of the Instruction was superfluous. Lincoln’s Objections and Requested Addition to the Court’s Proposed Jury Instructions (01/15/09 Version), No. C 06-110-MWB (N.D. Iowa Jan 20, 2009) (Dkt. No. 230), at 24. And, while it was true that Transamerica, as of the time of trial, administered its variable annuity riders within the United States, Transamerica also repeatedly informed Lincoln and the Court that, if Transamerica were found to infringe the asserted claims, Transamerica intended to modify its method of administration to perform at least some of the steps outside the United States. See, e.g., Transamerica’s Response to the Court’s January 15, 2009 Proposed Jury Instructions, No. C 06-110-MWB (N.D. Iowa Jan 20, 2009) (Dkt. No. 232), at 9; see also Letter from Mark W. Bennett, U.S. District Judge, to counsel in Lincoln Nat’l Life Ins. Co. v. Transamerica Life Ins. Co., No. C 06-110-MWB (N.D. Iowa Jan 20, 2009) (Dkt. No. 277), at 2.

6

Beginning on September 12, 2009, Transamerica exported to Canada every calculation of MAWA and Required Minimum Distribution (“RMD”) related to rider administration, and every calculation of TWB used to calculate MAWA.6 See generally Blankenship Decl. ¶¶ 61-66; Neill Decl. ¶¶ 35-91. These calculations include not only the first MAWA calculations, but every MAWA calculation performed before the first payments to rider owners. See Neill Decl. ¶¶ 35, 67-71. These offshored calculations also include every such calculation made thereafter, including those that are required to adjust scheduled payments in response to unscheduled withdrawals. Id. In other words, every calculation and adjustment made to MAWA, RMD and TWB (used to calculate MAWA)7 related to rider administration is now performed outside the United States and is, therefore, beyond the boundaries of the ‘201 Patent. Transamerica contracted with Citi Canada to perform all calculations of MAWA, RMD and TWB for rider administration in Canada. Citi Canada commenced performing these calculations on September 12, 2009. See Blankenship Decl. ¶¶ 61-62; Neill Decl. ¶¶ 35, 50, 6771; Matys Decl. ¶¶ 12-16. Citi Canada now performs all the calculations for twenty-four different transactions.8 Neill Dec. ¶¶ 72-89; Matys Decl. ¶¶ 13, 16. Citi Canada independently 6

At Lincoln’s counsel’s request, Transamerica obtained a declaration from Citi Canada attesting to the fact that all MAWA ,TWB and RMD calculations relating to rider administration are performed in Canada. See Declaration of Derek Matys filed with this Brief. 7

Lincoln has never asserted that calculation of TWB alone constitutes infringement. However, because TWB can be used to calculate MAWA, in an excess of caution, Transamerica offshored the calculations of TWB whenever it is used to calculate MAWA.

8

Transamerica offshored twenty-four transactions for the administration of riders. The transactions are: • • • • • • • • • • •

Transaction Type = '101' TWB Calculation at Rider Issue Transaction Type = '102' MAWA Calculation at Rider Issue Transaction Type = '103' TWB and MAWA Calculation at Rider Upgrade Transaction Type = '104' Life MAWA Calculation at time of Percentage Override Transaction Type = '105' TWB and MAWA Calculation - Calendar - Rider Valuation Transaction Type = '106' TWB and MAWA Calculation - Anytime - Rider Valuation Transaction Type = '107' MAWA Calc at time of Income Enhancement Activation - Nursing Home Transaction Type = '108' Principal Back MAWA and TWB calc at time of withdrawal Transaction Type = '109' Life MAWA and TWB calc at time of withdrawal Transaction Type = '110' Life MAWA and TWB at Premium Addition Transaction Type = '111' Principal Back MAWA and TWB at Excess Withdrawal

7

designed and constructed the calculator that performs these twenty-four transactions, as well as the secure interface for transfer of message requests from Transamerica.9 See Blankenship Decl. ¶¶ 63-66; Matys Decl. ¶¶ 11-12. The source code for Transamerica’s policy administration system, where these calculations were previously performed, has been deactivated (i.e., “commented out”) and replaced with instructions to call Citi Canada where the calculations are now performed. See Neill Decl. ¶¶ 39-47, 53-66. The results of the calculations from Citi Canada are then sent back to Transamerica. Each request message to Citi Canada includes all relevant data fields, while the response message includes the calculated numbers and adjustments that are then mapped into Transamerica’s policy administration system. Id. ¶¶ 53-89. Transamerica does not—and cannot—perform any of these calculations using its policy administration system. Id. This Court, in its Memorandum Opinion and Order Regarding Construction of Disputed Patent Claim Terms (“Markman Order”) (Dkt. No. 64), defined “determining an initial scheduled payment” in step 35(b) as “[c]alculating the amount of a first scheduled payment of a systematic • • • • • • • • • • • • •

Transaction Type = '112' Life MAWA and TWB at Excess Withdrawal Transaction Type = '113' Rider Anniversary Step1 Transaction Type = '114' Rider Anniversary Step2 Transaction Type = '115' Rider Anniversary Step3 Transaction Type = '116' Rider Anniversary Step4 Transaction Type = '117' Rider Anniversary Step5 Transaction Type = '118' Calendar Anniversary MAWA Transaction Type = '119' Calendar Anniversary Percentage Transaction Type = '120' Calendar Anniversary - RMD Calculation Step1 Transaction Type = '121' Calendar Anniversary - RMD Calculation Step2 Transaction Type = '122' Calendar Anniversary - RMD Calculation Step3 Transaction Type = ‘123’ Principal Back Low Value Report Transaction Type = ‘124’ Life Low Value Report

See Neill Decl. ¶¶ 72-89. Transaction Type 123 is only performed at the end of each month to generate the “Low Value Report”. Transaction Type 124 is performed each month for the “Low Value Report,” and on a daily basis for certain riders that have a particular investment feature (“OAM”). Transaction Types 123 and 124 were performed by Citi Canada beginning on September 30, 2009. Only a few of these transactions occurred between September 12, 2009 and September 30, 2009. Id. ¶¶ 87-89. 9

Transamerica does not have access to Citi Canada source code, which Citi Canada considers to be confidential and proprietary. See Blankenship Decl. ¶ 66.

8

withdrawal program based on the account value associated with the plan.” Markman Order at 152 (emphasis added). And, this Court defined “adjusting the amount of the scheduled payment in response to said unscheduled withdrawal” in step 35(d) as “[r]educing the amount of the scheduled payment in response to said unscheduled withdrawal.” Id. at 170-71 (emphasis added).10 Based on this Court’s claim construction, performance of steps 35(b) and (d) are now performed by Citi Canada outside the United States. The data is sent to Canada, where the calculations are performed, and the results returned to Transamerica. Indeed, not only does Transamerica not perform any of these calculations within the United States, no Transamericaaffiliated entity performs any of these calculations, and, moreover, Transamerica is unaware of the methods by which the calculations are performed by Citi Canada. See Blankenship Decl. ¶¶ 63-66. Real-time calculations, such as those requested by a customer on a Transamerica website, are now sent by Transamerica software applications by way of a secure channel to Citi Canada. Citi Canada receives the messages, performs the calculations—in Canada—and then returns the results back to the software applications that sent the requests. Batch-cycle calculations, such as those required for daily computations of policy values, are now sent on a nightly basis to Citi Canada by way of the same secure channel. The batch-cycle transactions are queued and sent serially. Citi Canada receives each message, performs the necessary calculations—in Canada— and returns the results back to Transamerica, and then the next transaction is sent. Id. ¶¶ 53-57. After these modifications, Transamerica does not perform step 35(b) because it does not “calculate” an initial (or any) scheduled payment; rather, the initial (and every) scheduled

10

Significantly, Lincoln has asserted that the MAWA is the “scheduled payment” required by these claim limitations. See, e.g., Felter Decl. Ex. C (‘201 Patent Trial Tr.) at 495:14-496:6, 510:17-511:5.

9

payment is calculated outside the United States by Citi Canada. See Markman Order at 152. Transamerica also does not perform the second claim limitation of step 35(d), because it does not “reduce” the amount of a scheduled payment in response to an unscheduled withdrawal; rather, all such reductions are made outside the United States by Citi Canada. See Markman Order at 17; see generally, NTP, 418 F.3d at 1318.11 B. After the July 6, 2009 Modification, Transamerica Does Not Perform Step 35(b). 35. A computerized method for administering a variable annuity plan . . . comprising the steps of: . . . b) determining an initial scheduled payment . . . Prior to offshoring the performance of all calculations that could possibly infringe steps 35(b) and (d) in September 2009, Transamerica modified its policy administration system on July 6, 2009, by exporting to Canada calculations of initial MAWAs for policies with new or upgraded GMWB riders. See generally Martin Decl. ¶¶ 54-73; Blankenship Decl. ¶¶ 27-36; Neill Decl. ¶¶ 24-34.

11

The modifications implemented beginning on September 12, 2009 are significant and complicated. Owing to the time and resources required to implement the modifications on an emergency basis, Transamerica only had time to verify that the calculations were (and are) being performed correctly; but Transamerica did not have time to test the modifications for programming errors. Immediately after the September 12, 2009 modifications were implemented, Transamerica began a thorough review of source code to ensure that all calculations and adjustments that are intended to be made in Canada are, in fact, made in Canada. See Neill Decl. ¶ 92. Upon discovering any programming error, Transamerica immediately initiated action to correct it. Id. ¶¶ 93-97. Some discovered errors involved what can be described as “vestigial” MAWA calculations. For example, Transamerica suppressed the MAWA field on customer statements. As a result, a statement issued on July 1, 2009 included a MAWA field and number, while a statement issued on October 1, 2009, did not. However, due to a programming error, the policy administration system continued to calculate MAWA “behind the scenes” between September 14, 2009 (the first business day after the September 12, 2009 modifications were implemented) and September 27, 2009 (the last business day before the error was corrected). During this time, MAWA was calculated but immediately discarded because there was no field in which to place the value. In effect, the system was simply calculating numbers without saving results. This “bug” occurred a total of 671 times. Id. ¶ 94.

Even assuming arguendo that the calculations of unused (and immediately discarded) MAWA values somehow constitute performance of step 35(b), they do not constitute performance of step 35(d). That step requires, in the Court’s construction, “[r]educing the amount of the scheduled payment” (emphasis added) as a result of the MAWA calculation. Nothing is “reduced” as a result of a calculated and discarded MAWA value. Moreover, it certainly does not constitute “[a] computerized method for administering a variable annuity plan,” as required by the preamble to the ‘201 Patent because the discarded value was never used in connection with the administration of any rider.

10

Between July 6, 2009 and September 11, 2009, the data needed to calculate the first MAWA on all new and upgraded riders entered daily into the policy administration system was placed into comma-delimited files on a nightly cycle. See Martin Decl. ¶¶ 62-63; Neill Decl. ¶¶ 27-29. The following morning, these files were converted to an Excel spreadsheet. A Transamerica employee then manually uploaded the spreadsheet to Transamerica Canada’s SharePoint site. See Martin Decl. ¶¶ 64-66; Neill Decl. ¶¶ 30-31. Transamerica Canada then calculated—in Canada—the MAWA values for these riders and populated the appropriate columns in the spreadsheet with the results the same day. These spreadsheets were then placed back onto the SharePoint site in Canada (by Transamerica Canada employees) and retrieved from the SharePoint site (by Transamerica employees). See Martin Decl. ¶¶ 67-69. Finally, the MAWA information was processed by Transamerica’s policy administration system in the next batch cycle, so that the data was in the system by the following day. Id. ¶¶ 70-71; Neill Decl. ¶ 32.12 This Court defined “determining an initial scheduled payment” in step 35(b) as “[c]alculating the amount of a first scheduled payment of a systematic withdrawal program based on the account value associated with the plan.” Markman Order at 152. As of no later than July 6, 2009, Transamerica’s policy administration system did not perform step 35(b) for new or upgraded riders because it did not “[c]alculat[e] the amount of a first scheduled payment of a systematic withdrawal program based on the account value associated with the plan.” Id. (emphasis added). Rather, since at least that date, the initial scheduled payment for these riders has been calculated outside the United States and/or by hand. NTP, 418 F.3d at 1318.

12

Additionally, starting on July 6, 2009, when new or upgrading customers requested their first-year RMD numbers, these numbers were calculated by hand using paper, pen or pencil, or a calculator. See Martin Decl. ¶¶ 7273; Neill Decl. ¶¶ 33-34.

11

C. After the March 30, 2009 Modification, Transamerica Does Not Perform Step 35(e). 35. A computerized method for administering a variable annuity plan . . . comprising the steps of: . . . e) periodically paying the scheduled payment to the owner for the period of benefit payments, even if the account value is exhausted before all payments have been made. Prior to the above modifications—and more than two months before the entry of the Permanent Injunction—on March 30, 2009, Transamerica implemented a procedure whereby it would manually calculate and process all scheduled payments for all riders more than one year before their account values would equal one MAWA. See generally Martin Decl. ¶¶ 22-49. As a result of these procedural modifications, Transamerica could not perform step 35(e) by using a computerized method. As the Federal Circuit recently reiterated, it “is axiomatic that a method claim is directly infringed only if each step of the claimed method is performed.” Muniauction, Inc. v. Thompson Corp., 532 F.3d 1318, 1328 (Fed. Cir. 2008); see also, e.g., Cardiac Pacemakers, Inc. v. St. Jude Med., Inc., 576 F.3d 1348, 1359 (Fed. Cir. 2009) (“[A] method claim is directly infringed only by one practicing the patented method.”) (quoting Joy Tech. v. Flakt, Inc., 6 F.3d 770, 775 (Fed. Cir. 1993)). The March 30, 2009 modification utilizes an existing procedure whereby Transamerica’s policy administration system runs a scan—called the “Low Value Report”—at the end of each month to identify policies with riders which have account values less than two times MAWA.13 See Martin Decl. ¶¶ 36-37. After March 30, 2009, if any policy ever appears on the “Low Value Report,” it would be immediately removed from the policy administration system and thereafter

13

Based upon customers’ historical withdrawal behavior and predictable market conditions, an account value would be reduced to less than two times MAWA at least one year before that account value would equal one MAWA. See Martin Decl. ¶¶ 34, 36-37. It is noteworthy that no account value has ever been reduced to less than two times MAWA. Id.

12

administered manually. All future calculations and scheduled payments would be performed by an individual using paper, pen or pencil, and a calculator. Id. ¶¶ 39-49. Claim 35 recites a “computerized method for administering a variable annuity plan” and, as this Court and Lincoln recognized, every step—including 35(e)—must be performed using a computer. See Jury Instruction No. 7 at 18 (“Infringement must be based upon performance of steps of the claimed method performed or that must necessarily be performed using computers in the United States.”) (emphasis added); Felter Decl. Ex. C (‘201 Patent Trial Tr.) at 220:1-4 (Lincoln’s trial representative testified that it was “clear” to him that “all of the steps of claim 35, a through e, must be performed by a computerized method.”), 553:18-24 (Lincoln’s technical expert testified: “In order to infringe, . . . [Transamerica] would have to have . . . a computerized system that would be able to perform [all five] steps.”), 582:8-10 (“Q. And [step (e) must] be performed by a computer; isn’t that right? A. Yes, yes.”). Moreover, the Permanent Injunction enjoins Transamerica only from “[u]sing and continuing to use a claimed computerized method or any computerized method that is not colorably distinct from a claimed computerized method to administer variable annuity riders . . . .” Permanent Injunction at 2 (emphasis added). This Court defined “periodically paying the scheduled payment to the owner for the period of benefit payments, even if the account value is exhausted before all payments have been made” in step 35(e) to mean “[a]t regular intervals required by the plan, paying the scheduled payment to the owner for the period of benefit payments, even if the account value is less than the scheduled payment amount or zero before all payments guaranteed under the plan have been made.” Markman Order at 180-81 (emphasis added). If an account value is ever reduced to two times MAWA, which would only happen more than one year before an account value would equal one MAWA, not only would Transamerica manually make any scheduled payments, but it would also manually calculate such payments. See Martin Decl. ¶¶ 36-49.

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Based upon this Court’s claim construction, after the modification implemented on March 30, 2009, Transamerica would not use any computerized method to make any scheduled payments to its customers “even if” their account values ever become “exhausted”, that is, would be less than one MAWA. Rather, Transamerica’s policy administration system would not process a rider once its account value became less than two times MAWA. Indeed, after that threshold is reached, all calculations and scheduled payments would be performed by hand. Transamerica therefore would not use a computerized method to perform step 35(e) because there is no computerized method for making scheduled payments or performing calculations “even if” the account value becomes less than one MAWA before all scheduled payments have been made. IV.

Argument A. Transamerica Has Fully Satisfied the Royalty Payment Obligations in the Permanent Injunction and Payments Made Under Protest Should Be Refunded to Transamerica. Transamerica implemented modifications which render its modified method more than

“colorably distinct” from a claimed computerized method. Moreover, Transamerica’s modified method does not infringe the asserted claims of the ‘201 Patent. Thus, Transamerica fully satisfied any royalty payment obligations that it might have had pursuant to the Permanent Injunction. Transamerica requests that this Court find and rule that Transamerica has no future obligation to make any additional royalty payments pursuant to the Permanent Injunction. Transamerica further requests that this Court order Lincoln to refund the royalty payments made under protest for all periods after March 30, 2009. See Fed. R. Civ. P. 60(b)(5) (first clause). Federal Rule of Civil Procedure 60(b)(5) “allows the district court to relieve a party from a final judgment if the judgment has been satisfied.” Newhouse v. McCormick & Co., 157 F.3d 582, 584 (8th Cir. 1998). “The ‘satisfied, released, or discharged’ clause of Rule 60(b)(5) is

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generally invoked when a party seeks entry of satisfaction of judgment because no acknowledgment of satisfaction has been delivered due to an ongoing dispute over the judgment amount.” Zamani v. Carnes, 491 F.3d 990, 995 (9th Cir. Cal. 2007) (citing Redfield v. Ins. Co. of N. Am., 940 F.2d 542, 544 (9th Cir. 1991); Conte v. Gen. Housewares Corp., 215 F.3d 628, 639-40 (6th Cir. 2000); Newhouse, 157 F.3d at 584; and Baumlin & Ernst, Ltd. v. Gemini, Ltd., 637 F.2d 238, 241 n.5 (4th Cir. 1980)). This clause of Rule 60(b)(5) may also be relied upon when a party seeks the return or partial return of an overpayment made pursuant to a judgment or order. See, e.g., Newhouse, 157 F.3d at 584. As the Federal Circuit explained in Broyhill Furniture Indus., Inc. v. Craftmaster Furniture Corp., “[g]enerally, in reviewing rulings under Rule 60(b), [the Federal Circuit] defer[s] to the law of the regional circuit in which the district court sits because such rulings commonly involve procedural matters that are not unique to patent law.” 12 F.3d 1080, 1083 (Fed. Cir. 1993). Where a ruling on a Rule 60(b) motion (of any variety) “turns on substantive matters that are unique to patent law,” such as those that concern infringement, however, Federal Circuit law applies to those matters. Id.; Fiskars, Inc. v. Hunt Mfg. Co., 279 F.3d 1378, 1381 (Fed. Cir. 2002) (discussing same). Transamerica implemented several modifications, both before and after this Court issued a Permanent Injunction on June 8, 2009. On March 30, 2009, Transamerica implemented a manual procedure to process and make scheduled payments that would become due on any rider if its account value is ever reduced to less than two times MAWA. If this unlikely event ever occurs, the affected rider would be removed from Transamerica’s policy administration system.14

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As stated above, based on historical data, an account value would reach this reduced level, if ever, approximately one year before the account value would reach one MAWA. The Court effectively defined “exhaustion” as one MAWA or less. See Markman Order at 180-81. The March 30, 2009 modification is triggered by the “Low Value Report”, which identifies riders with account values less than two times MAWA. Consequently, all policies approaching “exhaustion” would be detected well in advance and administered manually.

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Any and all withdrawals or scheduled payments would thereafter be administered by hand. Thus, as of at least March 30, 2009, Transamerica could not use a computerized method to administer payments for riders whose account values may become “exhausted” and its policy administration system could not perform step 35(e). At least as of that date, Transamerica had complied with the Permanent Injunction, and any right Lincoln may have had to royalty payments was extinguished. Transamerica should therefore not only be relieved of any obligation to make additional royalty payments, but also Lincoln should be required to refund all royalty payments, which were made under protest, for periods after March 30, 2009. Transamerica modified its policy administration system again on July 6, 2009, by relocating to Canada all calculations of MAWAs for all newly-issued riders and all upgrades to riders. Transamerica implemented this new method by modifying its source code so that these MAWA calculations could not be performed in the United States. The modified method required the calculations of initial scheduled payments for these riders to be performed in Canada. As of July 6, 2009, for new and upgraded riders, Transamerica had complied with the Permanent Injunction, and any rights that Lincoln may have possessed for royalty payments based on those riders ceased. Transamerica is entitled to a refund of all royalty payments based on such riders for periods after July 6, 2009. The July 6, 2009 modification was superseded and replaced by additional and more comprehensive modifications that were implemented starting on September 12, 2009. As of that date, all calculations of TWBs used for calculating MAWAs related to rider administration are now performed in Canada. Further, all calculations of MAWAs related to the administration of riders are now also performed in Canada.15 Transamerica was and is using a method for

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As it did at trial, Transamerica will argue on appeal that there can only be one “initial scheduled payment” for each rider and that that payment is determined when each rider is issued. Thus, step 35(b) is performed only once and on the date a rider is issued. That said, Transamerica’s current policy administration system requires that all

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administering riders that is more than “colorably distinct” from a claimed method and that modified method does not infringe the asserted claims of the ‘201 Patent. Transamerica has fully complied with the Permanent Injunction and it should therefore be relieved of any further obligation to make any royalty payments to Lincoln. B. Application of the Permanent Injunction Is No Longer Equitable. In any event, even if this Court does not order Lincoln to refund royalty payments to Transamerica, this Court should relieve Transamerica from prospective enforcement of the Permanent Injunction, pursuant to the final clause of Rule 60(b)(5), because it is no longer equitable to enforce it against Transamerica. See Horne v. Flores, 129 S. Ct. 2579, 2593 (2009) (“Federal Rule of Civil Procedure 60(b)(5) permits a party to obtain relief from a judgment or order if, among other things, ‘applying [the judgment or order] prospectively is no longer equitable.’”) (quoting Rule 60(b)(5)). Applying a judgment or order prospectively is no longer equitable when “‘a significant change either in factual conditions or in law’ renders continued enforcement of the judgment ‘detrimental to the public interest.’” Id. at 2596-97 (quoting Rufo v. Inmates of Suffolk County Jail, 502 U.S. 367, 384 (1992)); see also Kaler v. Bala (In re Racing Servs.), 571 F.3d 729, 734 (8th Cir. 2009) (explaining that applying order “prospectively is no longer equitable” when a critical element of the original ruling no longer exists). In light of Transamerica’s implementation of a substantially modified method for administering variable annuity riders, prospective application of the Permanent Injunction is no longer equitable due to “a significant change in factual conditions,” to wit: if it ever did, Transamerica no longer uses an infringing method to administer riders. As explained above, two of the steps ((b) and (d)) are no longer performed within the United States, and a third (step (e)) calculations of MAWA related to the administration of riders must be performed outside the United States. Therefore, even if step 35(b) was ever performed within the United States, Transamerica no longer “adjust[s] the amount of the scheduled payment in response to said scheduled payment” within the United States, as required by the limitation of step 35(d).

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is performed by hand. Quite simply, it would be inequitable to enforce a patent-based injunction where the enjoined party no longer infringes as a matter of governing law. Cf. Life Techs., Inc. v. Promega Corp., 189 F.R.D. 334, 336-37 (D. Md. 1999) (relieving enjoined party in light of changed circumstances); see also Int’l Rectifier Corp. v. Samsung Elecs. Co., 361 F.3d 1355, 1360-62 (Fed. Cir. 2004) (finding district court erred in holding defendant in contempt for extraterritorial actions which could not, as a matter of law, violate patent-based permanent injunction). For all these reasons, this Court should relieve Transamerica from any prospective application of the Permanent Injunction. C. The Permanent Injunction Should be Modified. In addition to relieving Transamerica from any prospective application of the Permanent Injunction, this Court should modify the Permanent Injunction to explicitly exempt from its scope the modified method by which Transamerica now administers its variable annuity riders. As this Court observed, “a district court has the authority to modify its injunctive decrees where changed circumstances require modification so as to effectuate the purposes underlying the initial grant of relief.” Pro Edge L.P. v. Gue, 411 F. Supp. 2d 1080, 1086-87 (N.D. Iowa 2006) (Bennett, J.) (citations omitted).16 Indeed, “[d]ue to the equitable nature of injunctive

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Pro Edge involved the proposed modification of a preliminary injunction. However, in its opinion in that case, this Court discussed permanent injunctions and cited Humble Oil & Refining Co. v. American Oil Co., 405 F.2d 803, 812-13 (8th Cir. 1969), as setting the legal standard for the modification of a permanent injunction. See Pro Edge, 411 F. Supp. 2d at 1088 (“[A] party seeking to modify a final injunctive decree must meet a heavy burden . . . .”) (emphasis original). Transamerica respectfully suggests that the standard for modification of a permanent injunction has changed since 1969, when Humble Oil was decided. In Humble Oil, the Eighth Circuit Court of Appeals based its decision on United States v. Swift & Co., 286 U.S. 106 (1932). But, in Rufo v. Inmates of Suffolk County Jail, 502 U.S. 367, 380 (1992), the Supreme Court clarified that its “decisions since Swift reinforce the conclusion that the ‘grievous wrong’ language of Swift was not intended to take on a talismanic quality, warding off virtually all efforts to modify consent decrees.” “Although, as the Court emphasized, that case, like the lower-court cases that had expressed dissatisfaction with the standard of Swift, involved institutional reform litigation, the ‘flexible standard’ adopted in Rufo is no less suitable to other types of equitable cases.” In re Hendrix, 986 F.2d 195, 198 (7th Cir. 1993) (citing Rufo, 502 U.S. at 393). Under the current standard, “a court can modify an injunction that it has entered whenever the principles of equity require it do so.” Id. (emphasis added). Cf. W.L. Gore & Assoc. v.

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relief, district courts have wide discretion to determine under what circumstances the grant of injunctive relief is appropriate, and under what circumstances the modification or dissolution of that injunction is warranted.” Amado v. Microsoft Corp., 517 F.3d 1353, 1360 (Fed. Cir. 2008) (citing eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 394 (2006); and Sys. Fed’n No. 91 v. Wright, 364 U.S. 642, 647-48 (1961)). A modification is warranted when there is “a significant change in circumstances . . . .” Rufo v. Inmates of Suffolk Jail, 502 U.S. 367, 383 (1992). As the Supreme Court explained in Rufo, the movant’s burden may be satisfied “by showing a significant change either in factual conditions or in law.” Id. at 384. A district court’s discretion is not limitless, for once a party has met its burden “of establishing that changed circumstances warrant relief . . . a court abuses its discretion ‘when it refuses to modify an injunction or consent decree in light of such changes.’” Horne, 129 S. Ct. at 2593 (citing Rufo, 502 U.S. at 383; and quoting Agostini v. Felton, 521 U.S. 203, 215 (1997)). The determination of whether a patent-based injunction should be modified should be made after applying Federal Circuit law. Int’l Rectifier Corp. v. Samsung Elecs. Co., 361 F.3d 1355, 1359 (Fed. Cir. 2004) (citing Carborundum Co. v. Molten Metal Equip. Innovations, Inc., 72 F.3d 872, 881 (Fed. Cir. 1995)). The Federal Circuit’s decision in Int’l Rectifier Corp. v. Samsung Elecs. Co., is instructive. There, the enjoined party continued to manufacture the adjudged devices in South Korea, and then sold the devices to an unrelated company in Germany, which subsequently imported the devices into the United States. After the patent

C.R. Bard, Inc., 977 F.2d 558, 561 (Fed. Cir. 1992) (“The court may modify an injunction when it is ‘satisfied that what it has been doing has been turned into an instrument of wrong.’”) (quoting Swift, 286 U.S. at 114-15). In this case, the standard applied is academic because governing patent law dictates the result: “Absent infringement, there cannot be contempt for violating an injunction.” Bass Pro Trademarks, L.L.C. v. Cabela’s, Inc., 485 F.3d 1364, 1368 (Fed. Cir. 2007) (quoting Laitram Corp. v. Cambridge Wire Cloth Co., 863 F.2d 855, 867 (Fed. Cir. 1989)). Transamerica does not perform steps (b) and (d) of Claim 35 within the United States, and does not perform step (e) by using a computerized method. Transamerica simply does not infringe the claimed method. Thus, this Motion only asks this Court to take notice of the significantly changed facts and to determine the legal effect of those changes.

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holder filed a motion for contempt, the German company filed a motion to clarify, modify or vacate the permanent injunction, seeking to exclude the extraterritorially-manufactured devices from the scope of the injunction. Id. The district court that entered the permanent injunction denied the motion and held both the enjoined party and the German company in contempt. Id. at 1358-59. On appeal, the Federal Circuit held that the permanent injunction could not apply to the extraterritorial activity as a matter of law and vacated the contempt order. Id. at 1359-63. Cf. Int’l Rectifier Corp. v. IXYS Corp., 361 F.3d 1363, 1378 (Fed. Cir. 2004) (vacating injunction). Here, Transamerica does not infringe the asserted claims of the ‘201 Patent because it has designed around three steps of Claim 35. In light of these significant changes, and to provide the parties with guidance (and to avoid further litigation), Transamerica respectfully requests that this Court modify the Permanent Injunction by adding the following language to the end of paragraph 1 of the Permanent Injunction: However, the Court finds that Transamerica’s current method used to administer variable annuities, including those with Guaranteed Principal Solution, 5 for Life, 5 for Life with Growth, Income Select for Life, Retirement Income Choice and/or Architect riders, is colorably distinct from a claimed computerized method and does not infringe Claims 35 through 39 and 42 of the ‘201 Patent because steps (b) and (d) of independent Claim 35 are not performed within the United States, and step (e) of Claim 35 is not performed by a claimed computerized method. V.

Conclusion For all of the above reasons, Transamerica moves the Court to relieve it from any future

obligation to make any additional royalty payments pursuant to the Permanent Injunction; to modify the Permanent Injunction (as described above); and to order Lincoln to refund all royalty payments made by Transamerica under protest for all periods after March 30, 2009. Upon request of this Court, Transamerica will promptly file an accounting of the royalty payments that should be refunded.

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Dated: October 18, 2009

Respectfully submitted,

/s/John Kenneth Felter John Kenneth Felter (pro hac vice) ROPES & GRAY LLP One International Place Boston, MA 02110 PHONE: (617) 951-7000 FAX: (617) 951-7050 [email protected] James R. Myers (pro hac vice) ROPES & GRAY LLP 700 12th Street, N.W., Suite 900 Washington, DC 20005 PHONE: (202) 508-4600 FAX: (202) 508-4650 [email protected] ATTORNEYS FOR TRANSAMERICA LIFE INSURANCE COMPANY, WESTERN RESERVE LIFE ASSURANCE CO. of OHIO and TRANSAMERICA FINANCIAL LIFE INSURANCE COMPANY

Copy to: D. Randall Brown, Esq. Gary C. Furst, Esq. BARNES & THORNBURG LLP 600 One Summit Square Fort Wayne, IN 46802-3119 Denny M. Dennis, Esq. Todd A. Strother, Esq. BRADSHAW, FOWLER, PROCTOR & FAIRGRAVE, P.C. 801 Grand Avenue, Suite 3700 Des Moines, IA 50309-5848

CERTIFICATE OF SERVICE The undersigned hereby certifies that a copy of this document was served upon counsel of record for each party to the action in compliance with FRCP 5 on October 18, 2009 by:

[X] Electronically via ECF for ECF registrants [ ] U.S. Mail __________________ [ ] Fax ________________________ [ ] Fed Ex _____________________ [ ] Hand Delivered _____________ [ ] other ______________________

/s/John Kenneth Felter