LINCOLN Nat'l LIFE Ins.Co. V. TRANSAm. LIFE Ins. Co., 2009-1403, -1491

LINCOLN NATIONAL LIFE INSURANCECOMPANY, Plaintiff-Appellee,

v. TRANSAMERICA LIFE INSURANCE COMPANY, WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO, AND TRANSAMERICA FINANCIAL LIFE INSURANCE COMPANY, Defendants-Appellants.

2009-1403,-1491

United Stateg Court Of Appeals For The Federal Circuit

Decided: June 23, 2010

D. Randall Brown, Barnes & Thornburg LLP, of Fort Wayne, Indiana, argued for plaintiff-appellee. With him on the brief was Gary C. Furst.

Steven M. Bauer, Proskauer Rose LLP, of Boston, Massachusetts, argued for defendants-appellants. With

him on the brief were Kimberly A. Mottley, Sandra J. Badin; and Charles S. Sims, of New York, New York. Of counsel on the brief were James R. Myers, Ropes & Gray LLP, of Washington, DC, and John Kenneth Felter, of Boston, Massachusetts.

Before, Mayer, Clevenger, and Moore, Circuit Judges.

Opinion for the court filed by Circuit Judge Moore.

Concurring opinion filed by Circuit Judge Clevenger.

Moore, Circuit Judge.

Transamerica Life Insurance Company, Western Reserve Life Assurance Company of Ohio, and Transamerica Financial Life Insurance Company (collectively, Transamerica) appeal from a final decision of the district court denying Transamerica's motion for judgment as a matter of law that it does not infringe claims 35-39 and 42 of U.S. Pat. No. 7, 089, 201 (the '201 patent). Because the evidence of record does not support the jury's verdict of infringement, we reverse and remand.

I. Background

Lincoln National Life Insurance Company (Lincoln) is the assignee of the '201 patent, which is entitled "Method and Apparatus for Providing Retirement Income Benefits." The '201 patent relates to computerized methods for administering variable annuity plans. An annuity is a contract that guarantees the payment of money to an annuitant upon certain intervals. Annuities are typically used to provide individuals with long-term economic protection against the risk of outliving their assets. '201 patent col.1 ll.30-34.

Although a number of different types of annuities exist, the annuities relevant to this case are variable de-ferred annuities. Administration of a deferred annuity begins with an "accumulation phase," during which the annuity owner deposits money into an account controlled by the insurer. Id. col.1 ll.36-42. For variable annuities, the deposits are invested in one or more funds representing a particular asset class, such as U.S. corporate bonds or money market instruments. Id. col.2 ll.10-20. The overall account value varies according to the performance of the funds in which the deposits are invested. Id. col.2 ll.22-26. The accumulation phase is followed by a "distribution phase," during which the insurer uses the account to periodically make benefit payments to the annuitant. The dollar amount of each benefit payment depends on the current value of the account and, consequently, also varies according to the performance of the underlying funds. Id. col.3 ll.18-33. Thus, given sufficiently poor fund performance, the dollar amount of an annuitant's benefit payments could theoretically decrease to zero under a variable annuity option. Id. col.3 ll.43-44.

The uncertainty associated with these benefit payments may cause an annuitant to be apprehensive about choosing a variable benefit option, even if a variable option is in his long-term best interest. Id. col.3 ll.41-43. The '201 patent discloses that insurers may therefore find it valuable to offer annuitants a minimum benefit feature that guarantees a minimum payment regardless of market activity. Id. col.3 ll.41-51. The asserted claims of the '201 patent are directed to computerized methods for administering a variable annuity plan that has such a guaranteed minimum payment feature.

Transamerica sells and administers Guaranteed Minimum Withdrawal Benefit (GMWB) riders¹ thatguarantee its policy owners the right to receive a minimum payment regardless of market performance. On August 8, 2006, Transamerica filed a complaint seeking declaratory judgment that its method of administering GMWB riders does not infringe any claim of the '201 patent. Transamerica also sought declaratory judgment that the '201 patent was invalid under 35 U.S.C. § 102, § 103, and § 112. Transamerica did not allege invalidity under 35 U.S.C. § 101. Lincoln filed a counterclaim for infringement, and the court issued an order realigning Lincoln and Transamerica as plaintiff and defendant, respectively, for trial.

Claim 35, the only independent claim at issue, reads as follows:

35. A computerized method for administering a variable annuity plan having a guaranteed minimum payment feature associated with a systematic withdrawal program, and for periodically determining an amount of a scheduled payment to be made to the owner under the plan, comprising the steps of:

a) storing data relating to a variable annuity account, including data relating to at least one of an account value, a withdrawal rate, a scheduled payment, a payout term and a period of benefit payments;

b) determining an initial scheduled payment;

c) periodically determining the account value associated with the plan and making the scheduled payment by withdrawing that amount from the account value;

d) monitoring for an unscheduled withdrawal made under the plan and adjusting the amount ofthe scheduled payment in response to said unscheduled withdrawal; and

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.

'201 patent col.25 ll.12-33 (emphasis added). The applicants added the final "even if" clause during prosecution to overcome a rejection over the prior art.

The district court construed the disputed claim terms in a March 2008 order. Transamerica Life Ins. Co. v. Lincoln Natl Life Ins. Co., 550 F. Supp. 2d 865 (N.D. Iowa 2008) (Claim Construction Order). In construing step (e), the court relied on Figure 6 of the '201 patent as "most clearly show[ing] how the payment guarantee [of step (e)] works, in relation to account value." Id. at 965. Figure 6 illustrates the operation of the claimed systematic withdrawal program:

Withdrawal

Account

Withdrawal

Investment

Account

Number

Value BOY

Amount

Return

Value BOY

$100,000.00

57, 500.00

12%

$103,600.00

5103.600.00

57, 770.00

16%

3111, 162.80

S111, 162.80

56, 337.21

12%

$115,161.66

5115, 164.66

58, 637.35

-5%

5101, 200.95

S101.200.9S

58, 637.35

-10%

583.307.24

$83,307.24

38, 637.35

-21%

$58,989.21

558, 989.21

58, 637.35

5%

552, 869.45

a

552, 869.45

58, 637, 35

-14%

$38,039.61

538, 039 61

S8.637.35

1%

529.696, 28

S29.696.26

56, 637.35

-15%

317, 900.09

S 17, 900 09

58.637.35

-5%

58.799.61

S8.799.61

58, 637, 35

15%

5186.60

5186.60

58, 637.35

23%

SO.OO

50.00

58, 637.35

10%

50.00 so.oo

58, 637.35

8%

S0O0

In the example of Figure 6, the guaranteed withdrawal amount is 7.5% of the highest value attained bythe account. '201 patent col.11 ll.35-36. The account reaches its highest value, $115,164.66, in year 4. Pursuant to the guaranteed payment feature, the account owner is entitled to withdraw $8,637.35 (7.5% of $115,164.66) in years 5 through 15, regardless of the account's actual value. Thus, the scheduled payment of $8,637.35 is still made in years 13 through 15 even though the account value is exhausted, i.e., less than the guaranteed withdrawal amount. Id. col.11 ll.29-34.

The court explained that Figure 6 was "consistent with the court's suggested reading of [step (e)] as claiming, first and foremost, a guarantee that the scheduled payment will be made for the period of benefit payments in question." Claim Construction Order at 966. The court construed step (e) to mean "[a]t the 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 the payments guaranteed under the plan have been made." Id. at 967. Prior to trial, the court clarified that step (e) does not require actual exhaustion of the account value; as explained in its claim construction order, the "even if" clause simply recites one of the circumstances in which the guaranteed payment must still be made, "not a requirement that the account value be exhausted." Transamerica Life Ins. Co. v. Lincoln Natl Life Ins. Co., 597 F. Supp. 2d 897, 912-13 (N.D. Iowa 2009).

On October 30, 2008, Transamerica informed the court of the Federal Circuit's en banc decision in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008), which issued that day. The court asked the parties to file statements addressing the impact of Bilski on the case, if any, and both parties filed statements on November 18, 2008. On November 25, 2008, Transamerica filed a motion toamend its complaint to assert a claim under 35 U.S.C. § 101. The district court denied Transamerica's motion, finding that Transamerica had not diligently pursued its claim under 35 U.S.C. § 101 and thus lacked good cause for untimely asserting the claim.

The parties tried the case to a jury, which found that independent claim 35 and dependent claims 36-39 and 42 of the '201 patent were infringed and not invalid. The jury awarded Lincoln $13 million in damages. Transamerica filed motions for judgment as a matter of law (JMOL), asserting that the evidence was insufficient to support the jury's finding of infringement and that the asserted claims were invalid under 35 U.S.C. § 103 and § 112. The court denied Transamerica's motions and entered a permanent injunction against Transamerica.

Transamerica appeals. On appeal, Transamerica does not challenge the court's claim constructions, jury instructions, or denial of JMOL as to invalidity. Instead, Transamerica asserts that it was entitled to JMOL of noninfringement of the asserted claims. Transamerica also asserts that the court abused its discretion in denying leave to amend its complaint...