DCT

3:18-cv-03014

Nasdaq Inc v. IEX Group Inc

Log In

I. Executive Summary and Procedural Information

  • Parties & Counsel:
  • Case Identification: 3:18-cv-03014, D.N.J., 01/25/2019
  • Venue Allegations: Venue is alleged to be proper in the District of New Jersey because Defendant IEX's primary electronic trading platform is located in Weehawken, New Jersey, and receives orders through a point of presence in Secaucus, New Jersey.
  • Core Dispute: Plaintiff alleges that Defendant’s electronic stock trading platform infringes six patents related to closing auction processes, multi-parallel order processing, matching engine performance, and data feed optimization technologies.
  • Technical Context: The dispute centers on the high-performance software architecture and methods used to operate modern electronic stock exchanges, where speed, transparency, and scalability are critical.
  • Key Procedural History: The complaint alleges that Defendant IEX was founded in 2012 and hired at least four former Nasdaq technology employees who were familiar with the patented technologies. The complaint further alleges that IEX has publicly stated its closing auction process was "designed based on extensive review of" Nasdaq's patented process, which may be relevant to the issue of willful infringement.

Case Timeline

Date Event
2002-06-05 Earliest Priority Date ('827, '622, '362 Patents)
2004-04-28 Earliest Priority Date ('264, '797 Patents)
2006-12-20 Earliest Priority Date ('609 Patent)
2010-01-12 U.S. Patent No. 7,647,264 Issues
2011-04-26 U.S. Patent No. 7,933,827 Issues
2012-02-14 U.S. Patent No. 8,117,609 Issues
2012-08-14 U.S. Patent No. 8,244,622 Issues
2012-10-02 U.S. Patent No. 8,280,797 Issues
2012-01-01 IEX is founded
2013-01-01 IEX begins operating its electronic trading platform
2013-02-26 U.S. Patent No. 8,386,362 Issues
2019-01-25 Complaint Filed

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

U.S. Patent No. 7,647,264 - “Closing in an Electronic Market”

The Invention Explained

  • Problem Addressed: In electronic markets, investors using "on-close" orders lacked a guarantee that their orders would execute at the official closing price, forcing them to rely on manual markets or broker-dealers for such guarantees (’264 Patent, col. 1:16-29). The complaint frames this as a technical problem of transparency, specifically how an electronic system can efficiently expose its internal data to client systems during high-volume periods (Compl. ¶39).
  • The Patented Solution: The invention is a system and method for conducting an electronic closing auction. It involves receiving closing orders, periodically disseminating an "order imbalance indicator" to the market before the official close, determining a final closing price based on criteria like maximizing the number of executed shares, and then executing orders in a single transaction at that price (’264 Patent, Abstract; col. 2:30-44). This process is designed to improve transparency and price discovery, allowing market participants to adjust their orders based on the disseminated imbalance information (’264 Patent, col. 2:59-65).
  • Technical Importance: This approach provided a structured, transparent, and automated mechanism for price discovery at the end of the trading day, a period often characterized by high volume and volatility (Compl. ¶9).

Key Claims at a Glance

  • The complaint asserts independent claims 1, 17, 26, 44, 47, and 50 (Compl. ¶40-87).
  • Claim 1 (System Claim) requires:
    • A server computer system with a processor and memory storing a queue for closing orders.
    • Instructions to cause the system to receive closing and other orders for a security.
    • Instructions to disseminate an order imbalance indicator showing predicted trading characteristics at the close, based on a price at which closing orders would execute at that moment.
    • Instructions to receive additional closing orders that maximize the number of shares executed at a predicted final closing price.
    • Instructions to determine a final closing price based on marketable closing orders and other orders.
    • Instructions to execute at least some closing orders at the determined final price.
  • The complaint also asserts numerous dependent claims and reserves the right to assert others (Compl. ¶40).

U.S. Patent No. 8,280,797 - “Closing in an Electronic Market”

The Invention Explained

  • Problem Addressed: The ’797 Patent, a continuation of the application leading to the ’264 Patent, addresses the same technical problem of providing guaranteed closing price execution and transparency in electronic markets (’797 Patent, col. 1:26-34).
  • The Patented Solution: The invention describes a computer-implemented method for trading a security in an electronic market. The method involves receiving closing orders, determining and disseminating an order imbalance indicator before the close of trading, determining a final closing price based on the collected orders, and executing trades at that price (’797 Patent, Abstract). The dissemination of the indicator allows market participants to see potential supply and demand at the close and adjust their trading strategies accordingly (’797 Patent, col. 2:65-col. 3:4).
  • Technical Importance: This method provided a standardized electronic process to manage the critical closing auction, aiming to improve liquidity and reduce risk for investors needing to trade at the closing price (Compl. ¶105).

Key Claims at a Glance

  • The complaint asserts independent claims 1, 12, and 17 (Compl. ¶106-123).
  • Claim 1 (Method Claim) requires:
    • Receiving, by one or more computers, closing orders and other orders for a security.
    • Determining, by one or more computers, an order imbalance indicator indicative of predicted trading characteristics.
    • Disseminating the order imbalance indicator, with the predicted characteristics based on a price at which closing orders would execute at a particular time before the close.
    • Determining a closing price for the security based on the closing orders and other orders.
    • Executing at least some of the closing orders at the determined closing price.
  • The complaint also asserts several dependent claims (Compl. ¶106).

U.S. Patent No. 7,933,827 - “Multi-Parallel Architecture and A Method of Using the Same”

  • Technology Synopsis: The patent addresses the problem of processing high-volume securities orders efficiently (Compl. ¶134). It discloses a "split engine" or multi-parallel architecture where different securities are assigned to a plurality of "securities processors" based on a unique identifier, allowing for load balancing and increased system throughput (’827 Patent, Abstract).
  • Asserted Claims: The complaint asserts independent claims 1, 34, and 67 (Compl. ¶135-148).
  • Accused Features: The complaint alleges that IEX's platform, which uses "several matching engines" where "[e]ach matching engine handles a set of symbols," infringes the '827 Patent's claims for a multi-parallel processing architecture (Compl. ¶138-140).

U.S. Patent No. 8,244,622 - “Order Matching Process and Method”

  • Technology Synopsis: This patent addresses performance limitations of "traditional file based approaches" for matching engines (Compl. ¶158). The disclosed solution involves managing the active order book in high-speed main memory with exclusive or limited access ("order book isolation") while processing other activities and storing logs in more persistent storage, which is alleged to increase throughput and reliability (’622 Patent, Abstract; Compl. ¶156).
  • Asserted Claims: The complaint asserts independent claims 1, 11, and 21 (Compl. ¶160-193).
  • Accused Features: Infringement is alleged based on IEX's use of an in-memory order book, isolation of the matching engine from other modules, and the use of a persistent log file or "master journal" to store transaction results (Compl. ¶165-172).

U.S. Patent No. 8,386,362 - “Information Distribution Process and Method”

  • Technology Synopsis: This patent addresses similar performance issues as the '622 Patent (Compl. ¶201-205). The invention involves a system where the matching processor has restricted access to an order book held in main non-transitory memory, while a log file of activities is inserted into a separate non-transitory storage medium that can be queried by users, thereby separating high-speed matching from lower-speed query and reporting functions (’362 Patent, Abstract).
  • Asserted Claims: The complaint asserts independent claims 1, 10, and 19 (Compl. ¶206-239).
  • Accused Features: The infringement allegations parallel those for the '622 Patent, focusing on IEX's in-memory order book, isolated matching engine, and use of a "master journal" and an online API for user queries (Compl. ¶211-217).

U.S. Patent No. 8,117,609 - “System and Method for Optimizing Changes of Data Sets”

  • Technology Synopsis: The patent addresses the inefficiency of distributing entire data sets over a network when only small changes have occurred (Compl. ¶249). The invention provides a method for generating an "update data set" by computationally comparing a first and second version of a data set (e.g., an order book before and after a trade), and creating a set of operators that describe only the differences, allowing for more bandwidth-efficient distribution (’609 Patent, Abstract).
  • Asserted Claims: The complaint asserts independent claims 1 and 12 (Compl. ¶250-264).
  • Accused Features: The complaint alleges that IEX's DEEP data feed, which disseminates real-time "Price Level Update Message[s]" reflecting changes to the order book rather than the entire book, infringes the '609 patent (Compl. ¶252-256).

III. The Accused Instrumentality

Product Identification

  • The accused instrumentality is Defendant IEX's "primary trading platform," also referred to as the "Accused Trading Platform" (Compl. ¶32).

Functionality and Market Context

  • The complaint describes the Accused Platform as a "fully automated electronic limit order book for orders to buy and sell...securities with a continuous, automatic matching function" (Compl. ¶137, ¶163). Its allegedly infringing functionalities include:
    • A "closing auction process" that disseminates "Auction Information" each second during a pre-close period, including an "Indicative Clearing Price," and determines an "Official Closing Price" based on orders in an "Auction Book" and a "Continuous Book" (Compl. ¶45-50). The complaint includes a timeline from an IEX guide illustrating the dissemination of auction information starting at 15:50 and continuing until the 16:00 close (Compl. ¶46, p. 12).
    • An architecture that uses "several matching engines," where "[e]ach matching engine handles a set of symbols" and "order entry gateways...forward [orders] to the appropriate matching engine" (Compl. ¶138-140).
    • A system that stores the order book in memory (Compl. ¶165, ¶177) and uses a persistent log file or "master journal" to store match information (Compl. ¶170, ¶181). A diagram from an IEX patent application shows a system architecture with a matching engine accessing an "Memory (Orders)" module separately from other components (Compl. ¶167, p. 41).
    • A data feed known as "DEEP" that "broadcasts a real-time Price Level Update Message each time a displayed price level on IEX is updated" (Compl. ¶252-254). A table from the IEX DEEP specification shows the format for these update messages (Compl. p. 62).

IV. Analysis of Infringement Allegations

'264 Patent Infringement Allegations

Claim Element (from Independent Claim 1) Alleged Infringing Functionality Complaint Citation Patent Citation
an electronic system for trading of securities, the system comprising: a processor device; a memory storing a queue, the queue storing closing orders along with other orders for a traded security IEX offers an electronic "trading platform" that stores closing orders in an "Auction Book" and other orders in a "Continuous Book." ¶42, ¶45 col. 11:32-34
disseminate an order imbalance indicator indicative of predicted trading characteristics of the security at close of trading, the predicted trading characteristics based upon a price at which those closing orders would execute at the time that the order imbalance indicator is disseminated IEX's system disseminates "Auction Information" each second before closing, which includes an "Indicative Clearing Price" that IEX states is "substantially similar to...the Nasdaq Net Imbalance Order Indicator." ¶46-48 col. 7:45-51
receive additional closing orders that maximize the number of shares executed at a predicted final closing price IEX's system is designed to accept orders within a certain price range after the dissemination of Auction Information begins. ¶49 col. 11:45-48
determine a final closing price for the security based on marketable closing orders and other orders IEX's Rule Book indicates its system is designed to determine the "Official Closing Price" based on orders in both the Auction Book and the Continuous Book. ¶50 col. 11:49-51
and execute at least some of the closing orders at the determined final closing price. The IEX system executes orders at the determined Official Closing Price. ¶50 col. 11:51-53

'797 Patent Infringement Allegations

Claim Element (from Independent Claim 1) Alleged Infringing Functionality Complaint Citation Patent Citation
a computer implemented method for trading a security in an electronic market, comprising: receiving by one or more computers closing orders and other orders for the security IEX's electronic trading platform receives and stores incoming closing orders in an "Auction Book" and other orders in a "Continuous Book." ¶108-109 col. 2:62-64
determining by one or more computers an order imbalance indicator indicative of predicted trading characteristics of the security at the close of trading IEX's system determines "Auction Information" that IEX has stated is "substantially similar to...the Nasdaq Net Imbalance Order Indicator." ¶112 col. 2:33-37
disseminating by the one or more computers the order imbalance indicator, the predicted trading characteristics being based on upon a price at which those closing orders would execute at a particular time before the close of trading IEX disseminates Auction Information each second before closing, which includes an "Indicative Clearing Price" representing the price at which orders would match at that moment. ¶110-111 col. 2:32-37
determining by the one or more computers a closing price for the security based on the closing orders and other orders IEX's system determines an "Official Closing Price" based on orders in the Auction Book and Continuous Book. ¶113 col. 2:37-40
and executing by the one or more computers at least some of the closing orders at the determined closing price. The IEX system executes closing orders at the determined Official Closing Price. ¶113 col. 2:40-43
  • Identified Points of Contention:
    • Scope Questions: A central dispute for the '264 and '797 patents will likely concern whether IEX’s disseminated "Auction Information" and "Indicative Clearing Price" constitute an "order imbalance indicator" as that term is used and defined in the patents. The analysis may turn on whether IEX's data provides all the characteristics required by the claims, such as information about the size and direction of any imbalance.
    • Technical Questions: For the '827 Patent, a question will be whether IEX's "matching engines" which "handle[] a set of symbols" are structurally and functionally equivalent to the claimed "plurality of securities processors" to which securities are "assigned." For the '622 and '362 patents, a key technical question is what evidence exists to demonstrate that other processes are "restricted" from accessing the in-memory order book during matching, as required by the "order book isolation" concept.

V. Key Claim Terms for Construction

  • The Term: "order imbalance indicator" ('264 Claim 1; '797 Claim 1)
  • Context and Importance: This term is the core of the closing auction technology patents. The infringement case for the '264 and '797 patents depends on whether the "Auction Information" disseminated by IEX falls within the scope of this term. Practitioners may focus on whether the term requires the explicit dissemination of the number of imbalanced shares, or if providing a potential clearing price alone is sufficient.
  • Intrinsic Evidence for Interpretation:
    • Evidence for a Broader Interpretation: The claim language describes the indicator as "indicative of predicted trading characteristics," which could be argued to encompass a range of data, including just a clearing price from which an imbalance might be inferred (’264 Patent, col. 11:40-42).
    • Evidence for a Narrower Interpretation: The specification provides specific examples of what the indicator includes, such as "a number of shares (ISH) corresponding to...the On-Close order imbalance, and a label (IMB) indicating 'Buy' for a buy side imbalance, 'Sell' for a sell side imbalance" (’264 Patent, col. 5:28-35). This suggests the term may require more explicit imbalance data than just a price.
  • The Term: "plurality of securities processors" ('827 Claim 1)
  • Context and Importance: The infringement theory for the '827 Patent hinges on mapping IEX's "matching engines" to this claim term. The dispute may center on whether a "securities processor" is simply any computational unit that processes trades for a given security, or if the patent requires a more specific architectural arrangement.
  • Intrinsic Evidence for Interpretation:
    • Evidence for a Broader Interpretation: The patent abstract describes the invention broadly as "Multiple securities processors each process attributable security interest messages," which may support reading the term on any system with multiple, parallel trade processing units (’827 Patent, Abstract).
    • Evidence for a Narrower Interpretation: The detailed description and figures show distinct "SP1, SP2..." blocks and an "order routing system" that uses a "configurable look-up table" to assign securities, suggesting a specific, formally partitioned architecture that may be narrower than IEX's alleged system (’827 Patent, Fig. 2; col. 5:31-40).

VI. Other Allegations

  • Indirect Infringement: No specific counts for indirect infringement are included in the complaint.
  • Willful Infringement: The complaint alleges willful infringement for all asserted patents. The basis for this allegation includes IEX's alleged pre-suit knowledge of the patents, derived from hiring at least four former Nasdaq technology employees allegedly familiar with the inventions (Compl. ¶29-31, ¶98). The complaint also points to IEX's public statements that its closing auction was "designed based on extensive review of" Nasdaq's patented process as evidence of deliberate copying (Compl. ¶35, ¶98).

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

  • A core issue will be one of definitional scope: Does IEX's "Auction Information," which provides an "Indicative Clearing Price," meet the full definition of the patents' "order imbalance indicator," or does that term require the explicit dissemination of share volume and imbalance direction as detailed in the patent specifications?
  • A second key question will be one of architectural equivalence: Does IEX's system, which uses multiple "matching engines" for different "sets of symbols" and stores its order book in memory while writing to a "master journal," embody the specific "multi-parallel" and "order book isolation" architectures required by the claims, or are there fundamental technical and structural differences?
  • A central evidentiary question will be one of causation and knowledge: To support its willfulness claims, what evidence can be presented to show not only that former Nasdaq employees had knowledge of the patented technology, but also that they used that specific knowledge to build the allegedly infringing features of the IEX platform?