DCT

3:15-cv-01595

Peralta v. California Franchise Tax Board

Log In

I. Executive Summary and Procedural Information

  • Parties & Counsel:
  • Case Identification: 3:15-cv-01595, N.D. Cal., 04/08/2015
  • Venue Allegations: Venue is alleged to be proper because the defendants, as statewide agencies and employees, are deemed to reside in the district and have allegedly committed acts of infringement throughout California, including within the Northern District.
  • Core Dispute: Plaintiff alleges that the California Franchise Tax Board’s method for recovering governmental tax revenues infringes a patent related to an escrow-based process for settling tax liens against third-party lienholders.
  • Technical Context: The technology concerns financial methods for public revenue collection, specifically a process integrated into real estate escrow transactions to identify and collect outstanding tax debts from creditors who are not the property owner.
  • Key Procedural History: The complaint alleges a long history between the parties, beginning with a 2006 non-disclosure agreement under which Plaintiff disclosed her then-patent-pending invention to the California Franchise Tax Board (FTB). Plaintiff alleges that after the FTB stated it could not use her method, she later discovered its unauthorized use on the FTB website in 2011. The complaint also asserts that California waived its Eleventh Amendment sovereign immunity by accepting a federal grant related to prosecuting intellectual property theft, a central issue to establishing federal jurisdiction. A prior state court action filed in 2014 was dismissed before the filing of this federal case.

Case Timeline

Date Event
2005-05-02 Earliest Priority Date for '129 Patent
2005-05 Provisional Patent Application filed
2006-01 Regular Patent Application filed
2006-12 Plaintiff discloses invention to FTB under NDA
2007-11-16 Plaintiff meets with FTB personnel
2008-04 FTB allegedly represents it cannot use Plaintiff's method
2009-09-01 U.S. Patent No. 7,584,129 issues
2011-09-05 Plaintiff alleges discovery of infringement on FTB website
2014-08-29 Plaintiff files related action in state court
2015-04-08 Complaint filed in N.D. Cal.

II. Technology and Patent(s)-in-Suit Analysis

U.S. Patent No. 7,584,129 - Escrow Method for Settlement of Tax Liens (“EMSTL”™) (Federal, State, Local) of Lienholders Against Real Property (Residential, Commercial, Other)

  • Patent Identification: U.S. Patent No. 7,584,129, Escrow Method for Settlement of Tax Liens (“EMSTL”™) (Federal, State, Local) of Lienholders Against Real Property (Residential, Commercial, Other), issued September 1, 2009.

The Invention Explained

  • Problem Addressed: The patent’s background section identifies a "very real shortcoming" in conventional real property escrow procedures: while they identify and settle liens against the property owner, they do not check for tax delinquencies owed by other third-party lienholders (e.g., judgment creditors) who are due to receive funds from the transaction. This allows a party who owes back taxes to receive a payout from an escrow, resulting in lost revenue for governmental taxing authorities ('129 Patent, col. 4:38-56).
  • The Patented Solution: The invention proposes a new step in the escrow process: a "non-title related" and "previously unperformed" tax lien search conducted on any non-institutional lienholder involved in the transaction ('129 Patent, Abstract). If the search reveals that the lienholder owes taxes, the method diverts all or part of the escrow proceeds that would have been paid to that lienholder and remits the funds directly to the relevant taxing authority to satisfy the debt ('129 Patent, col. 6:1-28). The patent’s flowchart, FIG. 1, illustrates this process of identifying a delinquent lienholder and diverting their expected payout to a governmental taxing authority.
  • Technical Importance: The method creates a new mechanism for governments to recover otherwise "undetectable and therefore uncollectable" tax revenues by leveraging the specific point in time when a delinquent taxpayer is scheduled to receive funds through a real estate closing ('129 Patent, col. 4:51-56).

Key Claims at a Glance

  • The complaint specifically alleges infringement of "Claim 2 of Plaintiff's patent, if not all claims" (Compl. ¶86). The '129 patent contains three independent claims and no dependent claims.
  • The essential elements of asserted independent Claim 2 are:
    • performing a computerized tax lien search during a real property escrow process, wherein such tax lien search is performed on a party who has recorded a lien against the subject property in escrow, which party is other than a regulated financial institution, and which party has no real property ownership relationship or interest in the subject property with the subject property owner, which search results in a return of tax lien information as to the existence or non-existence of any outstanding governmental tax lien against said party;
    • withholding, by computer, and upon discovery of said outstanding governmental tax lien, the amount of tax lien due by said party against said party's payoff demand made against subject property in escrow by said financial institution, settlement agent, or other authorized party, for diversion to said at least one governmental taxing authority.

III. The Accused Instrumentality

Product Identification

  • The accused instrumentality is the "tax revenue recovery method" allegedly used by the Defendant California Franchise Tax Board (FTB) and allegedly discovered by the Plaintiff on the FTB's website (Compl. ¶48, ¶87).

Functionality and Market Context

  • The complaint alleges that the FTB is using a "patented method for revenue recovery" that operates over the internet (Compl. ¶48, ¶65). The functionality is described in general terms as being for the same purpose as the patented invention—recovering tax revenues—and constituting an unauthorized use of Plaintiff's intellectual property (Compl. ¶48, ¶50). The complaint does not provide specific technical details about how the FTB's system operates, but alleges it is a "direct" infringement of the patented method (Compl. ¶65, ¶86).

IV. Analysis of Infringement Allegations

The complaint does not provide a formal claim chart. The infringement theory is based on narrative allegations that the FTB has implemented and is using the patented method.

No probative visual evidence provided in complaint.

'129 Patent Infringement Allegations

Claim Element (from Independent Claim 2) Alleged Infringing Functionality Complaint Citation Patent Citation
a) performing a computerized tax lien search during a real property escrow process, wherein such tax lien search is performed on a party who has recorded a lien against the subject property in escrow, which party is other than a regulated financial institution, and which party has no real property ownership relationship or interest in the subject property with the subject property owner, which search results in a return of tax lien information as to the existence or non-existence of any outstanding governmental tax lien against said party; The complaint alleges that the FTB is using Plaintiff's "patented method for revenue recovery" via its website, which constitutes an unauthorized use of the invention. ¶48, ¶65 col. 5:32-44
b) withholding, by computer, and upon discovery of said outstanding governmental tax lien, the amount of tax lien due by said party against said party's payoff demand made against subject property in escrow by said financial institution, settlement agent, or other authorized party, for diversion to said at least one governmental taxing authority. The complaint alleges that the FTB's use of the "patented method" constitutes direct infringement, implying that the FTB's system performs the required withholding and diversion of funds. ¶48, ¶50, ¶86 col. 6:1-10

Identified Points of Contention

  • Technical Questions: A central evidentiary question is what proof the Plaintiff can offer that the FTB's system performs the specific steps of the asserted claims. The complaint makes conclusory allegations that the FTB uses the "patented method" but does not describe the actual operational steps of the accused system, such as how it performs a "computerized tax lien search on a... lienholder" in an escrow context or how it computationally "withholds" funds from a "payoff demand" for "diversion."
  • Scope Questions: The infringement analysis may focus on whether the FTB's accused system operates within a "real property escrow process" as required by the claims. The defense could argue that its tax collection activities, even if automated, are distinct from the specific escrow-integrated process described and claimed in the patent, raising a question about a potential mismatch in scope between the claims and the accused system.

V. Key Claim Terms for Construction

  • The Term: "a party who has recorded a lien against the subject property in escrow, which party is other than a regulated financial institution"

  • Context and Importance: This term is foundational to the invention, defining the specific entity targeted by the novel search. The infringement analysis will depend entirely on whether the FTB's accused system is shown to perform a search on this particular type of third-party creditor within the context of a live real estate escrow. Practitioners may focus on this term because it links the invention to a specific transactional environment.

  • Intrinsic Evidence for Interpretation:

    • Evidence for a Broader Interpretation: The specification describes the target in general terms as "certain parties who are other than the property owner of record" ('129 Patent, col. 4:50-52) and gives non-limiting examples such as a "judgment lien creditor" or a "promissory note holder" ('129 Patent, col. 5:45-46), which could support construing the term to cover a wide range of non-bank creditors.
    • Evidence for a Narrower Interpretation: The entirety of the patent, from the title and abstract to the claims and detailed description, frames the invention within the "real property escrow process" ('129 Patent, Abstract, col. 5:32-34). This context may support a narrower construction requiring the "party" to be a formal lienholder in an active real estate escrow, as opposed to any third party from whom the FTB might collect an outstanding debt through other means.

  • The Term: "withholding, by computer... against said party's payoff demand"

  • Context and Importance: This phrase defines the mechanism of action for recovering the tax revenue. The viability of the infringement claim will depend on evidence that the accused FTB system performs this specific computational function of intercepting and offsetting funds from a formal "payoff demand" within an escrow.

  • Intrinsic Evidence for Interpretation:

    • Evidence for a Broader Interpretation: A plaintiff might argue that "withholding... against said party's payoff demand" should be construed broadly to cover any automated governmental process that intercepts or levies funds that were otherwise designated to be paid to a creditor.
    • Evidence for a Narrower Interpretation: The patent’s detailed description and flowchart (FIG. 1) depict a specific sequence where a "payoff demand of lienholder 28" is "offset by amount due" and "diverted by settlement agent 16 from proceeds of escrow" ('129 Patent, FIG. 1). This could support a narrower construction requiring proof of a system that integrates with escrow agents and acts on a formal "payoff demand" document or data object.

VI. Other Allegations

  • Indirect Infringement: The complaint alleges Defendants induce infringement by third parties, with the infringing acts being "conducted by defendants via the internet" and based on "evidence right on Defendants' own website" (Compl. ¶65, ¶87). It further alleges that Defendants "retain direction and/or control over the actions of such third parties" (Compl. ¶66).
  • Willful Infringement: The complaint alleges that Defendants had knowledge of the invention and its patent-pending status as early as 2006 through a non-disclosure agreement and subsequent meetings (Compl. ¶38, ¶43). It further alleges that Defendants were notified of the infringement in writing in September 2011 but "willfully continued to infringe" and refused to cease and desist (Compl. ¶49, ¶50).

VII. Analyst’s Conclusion: Key Questions for the Case

  • A central issue will be one of evidentiary sufficiency: can the Plaintiff produce technical evidence demonstrating that the California Franchise Tax Board's actual revenue collection system performs the specific, multi-step process recited in the asserted claims, particularly the search for and diversion of funds from a third-party lienholder within a real property escrow context?
  • A key legal and factual question will be one of infringement scope: does the accused FTB system fall within the scope of the claims, which are rooted in the "real property escrow process," or is it a more general tax collection platform that operates independently of the specific escrow-based mechanism described and claimed in the '129 patent?
  • A threshold jurisdictional question will be one of sovereign immunity: will the court find that the State of California waived its Eleventh Amendment immunity from a patent infringement suit in federal court based on the complaint's theory that acceptance of a federal grant for intellectual property enforcement constitutes such a waiver?