Lincoln Nat'l Life Ins. Co. v. Jackson Nat'l Life Ins. Co.

LINCOLN NATIONAL LIFE INSURANCE COMPANY Plaintiff, v. JACKSON NATIONAL LIFE INSURANCE COMPANY AND JACKSON NATIONAL LIFE

INSURANCE COMPANY OF NEW YORK, Defendants.

JACKSON NATIONAL LIFE INSURANCE COMPANY AND JACKSON NATIONAL LIFE INSURANCE

COMPANY OF NEW YORK, Counterclaim Plaintiffs, v. LINCOLN NATIONAL LIFE INSURANCE COMPANY, Counterclaim Defendant.

CASE NO.: 1:07-CV-265-JVB-RBC

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF INDIANA HAMMOND DIVISION

SO ORDERD: October 30, 2013

OPINION AND ORDER

A. Introduction

Plaintiff Lincoln National Life Insurance Company ("Lincoln") alleges that Jackson National Life Insurance Company and Jackson National Life Insurance Company of New York (collectively, "Jackson") infringed upon three of its patents: U.S. Patent No. 6,611,815 ("the '815 Patent"), U.S. Patent No. 7,089,201 ("the '201 patent"), and U.S. Patent No. 7,376,608 ("the '608 patent"). The '201 and '608 patents are in the same family. They both, in somewhatdifferent languages, disclose a computerized method to administer variable annuity that has a guaranteed minimum payment feature regardless of market activities. The '815 patent teaches a data processing method that provides liquidity while guaranteeing lifetime payments.

In front of this Court, Lincoln and Jackson seek construction on claims 35-39, and 42 of the '201 patent; claims 1-3, 5, 7-10, 14, 15, and 17-19 of the '608 patent, and claims 1, 21, 28, and 32 of the '815 patent.

B. Background of the Inventions

All three patents in this case relate to methods of administering annuity products. Annuities are insurance contracts where a party pays an insurance company a principal in exchange for a series of payments over time. Annuitants select benefit options that determine the length of the benefit payments. Some contracts offer a lifetime income regardless of how long the annuitant lives. Others guarantee payments for a number of years. ('815 patent, col. 1, lns. 46 - 51.) In this way, annuities protect retired individuals and their spouse against the risk of outliving their accumulated assets. (See '815 patent, col. 1, lns. 29 - 33.)

(1) Classifications of Annuities

There are two kinds of classifications for annuities. One categorization is based on the timing of when the insurer starts making payments to annuitant. Immediate annuities and deferred annuities belong to this category. An immediate annuity is a policy where the insurer instantly begins to distribute a series of payments according to contractually agreed terms when annuitants pay the insurer a lump sum of principal. A deferred annuity is essentially two-phased. During the accumulation phase, customers deposit into or withdraw assets from their accounts. Later, the contract holders annuitize the account, which converts the accumulated value to a series of futureincome payments by the insurer. ('815 patent, col.2, lns. 42-46.) Then, while the annuitants receive regular disbursement from the insurance company, they can no longer withdraw in excess of monthly payments. ('815 patent, col. 3, lns. 57- 60.) Although this traditional type of policy guarantees income, it poses liquidity problems. As a result, the contract holders may choose not to annuitize, and instead make systematic withdrawals from their annuity while maintaining the account in its accumulation phase. ('815 patent, col. 3, lns. 62 - 67.) The systematic withdrawal program, however, also has its risks. If the annuitant withdraws too much money early on, the account value will be depleted later in life. Alternatively, if the withdrawals are maintained as a percentage of account value, and such percentage level is set too high, most of the account value will be distributed out in the early years, leaving too small of an account base to achieve meaningful income later in life. ('815 patent, col. 4, lns. 1-21.)

Besides grouping annuities by the timing of the initial payment, annuities are also classified based on who bears the investment risk. In a fixed annuity, the insurer bears the investment risks. The insurer guarantees a rate of interest applicable to each annuity deposit. ('201 patent, col.2, lns. 3-5.) Hence, the account value during the accumulation phase can only increase with time. ('201 patent, col.2, lns. 21-22.) The amount of payment during the distribution phase is known to the annuitant when the account value is exchanged for an annuity benefit option. ('201 patent, col.2, lns. 36 - 39.) In a variable annuity, the policy holder bears the investment risks. ('201 patent, col. 2, lns. 10-13.) During the accumulation phase, the account value may or may not increase with time, depending on the investment markets. ('201 patent, col. 2, lns. 22-25.) In the distribution phase, the dollar amount to be paid is unknown when the asset deposit is exchanged for future payments. Instead, the accumulated account value is used to purchase annuity units.The amount of annuity units usually doesn't change in the distribution phase, but the value of each annuity unit changes with investments. (See '201 patent, col. 2, lns. 50-65.)

(2) Summary of Plaintiff's Inventions

Patents '201 and '608 are in the same family. They both disclose a computerized method of providing a guarantee for the systematic withdrawal program, which only applies to the pre-annuitization phase. ('201 patent, col. 5, lns. 17-20; col.10, lns. 57-59.) During the accumulation phase, the contract holder chooses a liquidity period to receive this benefit option, which provides full accessibility of account value. The liquidity period chosen can be lifetime. (See '201 patent, col. 5, lns. 21-25.) If the contract holder's withdrawal rate does not exceed a predetermined percentage, the insurer guarantees the ability of continuous withdrawal for the contractually agreed period, even if the account value reaches zero due to poor investment performance. (See '201 patent, col.11, lns. 19-34.) If the annuitant makes additional deposits or withdrawals in excess of the designated withdrawal amount, the current withdrawal amount will be adjusted accordingly. ('201 patent, col. 12, lns. 51-59.) At the end of this liquidity period, the remaining account value is annuitized, and thus liquidity is given up as in traditional annuitization. ('201 patent, col. 5, lns. 4-8.)

Patent '815 addresses liquidity problem after annuitization by allowing contract holders to access the account value even after annuitization. ('815 patent, col.4, lns. 35-37.) Besides receiving regular payments, account owners are free to withdraw from their accounts. When the account value is exhausted due to poor investment performance, for example, the insurance company will continue making guaranteed payments for the remaining life of the annuitant. ('815 patent, col. 4, lns. 29-33.) Owner initiated transactions such as withdrawals and depositswill change the account value. In the meantime, the insurer establishes a variety of charges for providing lifetime guarantee. Account value is reduced by these charges and optional benefit payments. ('815 patent, col.12, lns. 58-61.) Future periodic payments will be adjusted accordingly based on changes to the account value. ('815 patent, col.13, lns. 41-43; Figure 3-4.)

C. Previous Constructions by Other District Courts

Of the three patents at issue, two of them ('201 patent and '815 patent) have previously been interpreted. In March 10, 2008, Judge Bennett in the Northern District of Iowa construed independent claim 35 and dependent claims 36, 37, and 38 of the '201 patent. Transamerica Life Ins. Co. v. Lincoln Nat'l Life Ins. Co., 550 F. Supp. 2d 865 (N.D. Iowa 2008) ("the '201 Markman Order"). The parties then tried the case in front of a jury, which found that that Transamerica infringed upon claims 35, 36-39, and 42 of the '201 patent.¹ Unhappy with the verdict, Transamerica filed motion for judgment as a matter of law ("JMOL"), contending that the evidence was insufficient to support the jury's verdict. The Iowa court denied the motion. On appeal to the Federal Circuit, Transamerica did not challenge the court's claim constructions, but rather argued that it was entitled to JMOL that the asserted claims did not infringe on plaintiff's patent. Lincoln Nat. Life Ins. v. Transamerica Life Ins., 609 F.3d 1364, 1367 (Fed. Cir. 2010). The Federal Circuit reversed Iowa court's decision in denying the motion for JMOL. Id at 1370. In reaching this decision, the Federal Circuit used Iowa court's claim construction.² Specifically,the Federal Circuit reiterated that step (e) of claim 35 does not require actual exhaustion of account value. Rather, it guarantees payment regardless of account value.

In a separate litigation between Lincoln National and Transamerica, Judge Springmann in this district interpreted independent claim 1, and dependent claims 21 and 28 of the '815 patent. Lincoln Nat'l Life Ins. Co., v. Transamerica Financial Life Ins. Co., 2007 WL 710119 (N.D. Ind. filed March 6, 2007) ("the '815 Markman Order"). Among other things, Judge Springmann limits the term "account value" to the post-annuitization period. She defines the word "annuitization" to mean "the point when the annuitant starts to receive regularly scheduled payments from the annuity." Id. at *10-11. In addition, the '815 Markman Order interprets "withdrawal" to have a different meaning as "payment". Id. at *12. Soon after the claim construction order, parties settled the litigation.

(1) Issue Preclusion Does Not Apply

After reading the parties' briefs, this Court finds that several issues in dispute overlap with the ones already decided in previous Iowa and Indiana litigations. Thus, the Court will address the doctrine of issue preclusion before getting into claim interpretations.

Issue preclusion (also called collateral estoppel) requires a court to honor the prior court's adjudication on the same litigated issue. Chi. Truck Drivers v. Century Motor Freight, 125 F.3d 526, 530 (7th Cir. 1997) (internal citation...