DCT

1:19-cv-04792

Island IP LLC v. StoneCastle Cash Management LLC

Log In

I. Executive Summary and Procedural Information

  • Parties & Counsel:
  • Case Identification: 1:19-cv-04792, S.D.N.Y., 05/24/2019
  • Venue Allegations: Venue is alleged to be proper in the Southern District of New York because Defendant StoneCastle Cash Management LLC (SCCM) has allegedly committed acts of infringement in the district and maintains a regular and established place of business there. All defendants are alleged to be residents of New York.
  • Core Dispute: Plaintiff alleges that Defendants’ cash management services infringe five patents related to computerized systems for managing and allocating large deposits across multiple banking institutions to maximize federal deposit insurance coverage.
  • Technical Context: The technology operates in the financial technology (FinTech) sector, providing automated cash management systems that distribute large client deposits among a network of banks to keep balances at each institution below the FDIC insurance limit.
  • Key Procedural History: The complaint is heavily predicated on a pre-existing License Agreement between Plaintiff and an entity later acquired by Defendant StoneCastle Insured Sweep LLC (SCIS). Plaintiff alleges that another StoneCastle entity, SCCM, is practicing the patented inventions without obtaining a required "Affiliate License," and that SCIS breached the agreement by allowing this unlicensed use and refusing to permit an audit.

Case Timeline

Date Event
2003-01-27 Earliest Priority Date for ’766, ’267, ’911, and ’157 Patents
2011-10-13 Earliest Priority Date for ’689 Patent
2012-02-11 Island IP and Intermedium (SCIS's predecessor) enter License Agreement
2012-04-03 U.S. Patent No. 8,150,766 Issues
2012-07-16 SCCM alleged to have actual notice of the ’766 Patent
2013-01-22 U.S. Patent No. 8,359,267 Issues
2014-02-18 U.S. Patent No. 8,655,689 Issues
2014-04-29 U.S. Patent No. 8,712,911 Issues
2014-05-06 U.S. Patent No. 8,719,157 Issues
2017-01-26 SCCM alleged to have actual notice of ’267, ’911, ’157, and ’689 Patents
2017-04-12 SCIS acquires Intermedium and assumes the License Agreement
2019-05-24 Complaint Filed

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

U.S. Patent No. 8,150,766 - System and Method for Investing Public Deposits, Issued April 3, 2012

The Invention Explained

  • Problem Addressed: Banks that accept large public deposits (e.g., from municipalities) often must secure those funds by pledging government securities as collateral, which typically earn a lower rate of return than commercial loans. This requirement can reduce the profitability of holding such deposits (Compl. ¶15; ’766 Patent, col. 1:32-46).
  • The Patented Solution: The invention describes a computerized network of financial institutions that solves this problem through a system of reciprocal deposits. When a first bank receives a large public deposit, the system allocates portions of that deposit to other banks in the network, ensuring the funds remain under federal insurance limits at each institution. In return, the first bank receives reciprocal deposits from other banks in the network, which it can then use for higher-yield investments without needing to pledge its own assets as collateral (Compl. ¶16-17; ’766 Patent, Abstract; ’766 Patent, col. 4:3-14).
  • Technical Importance: This system allows banks to attract and manage large governmental deposits more profitably by freeing up capital that would otherwise be tied up in low-yield collateral (Compl. ¶16).

Key Claims at a Glance

  • The complaint asserts at least independent Claim 1 (Compl. ¶51).
  • Essential elements of Claim 1 include:
    • Accessing electronic databases with aggregated and client account information across a plurality of financial institutions.
    • Obtaining data for governmental funds sourced from a first financial institution to be deposited in others.
    • Allocating the governmental funds from the first institution to a first set of other institutions to obtain government-backed deposit insurance or collateralization.
    • Allocating funds from a second set of institutions back to the first financial institution, such that the amount of the reciprocal deposit is "approximately equal to or greater than" the amount of the original governmental funds.
    • Generating instructions to transfer the funds and updating the databases.
  • The complaint does not explicitly reserve the right to assert dependent claims.

U.S. Patent No. 8,655,689 - System, Method and Program Product for Modeling Fund Movements, Issued February 18, 2014

The Invention Explained

  • Problem Addressed: Computerized deposit sweep systems that distribute funds across multiple banks can be inefficient if they do not account for the varying "excess capacity" available at each depository institution (Compl. ¶27). A simple allocation may not make the most efficient use of the network.
  • The Patented Solution: The invention provides a method for more efficiently allocating funds by using a sophisticated model. The system forms "client account stratifications" based on account balances (e.g., high, medium, and low balance tiers). It then calculates the excess capacity at each depository institution and modifies allocation parameters to optimize fund transfers based on this available capacity, thereby improving the overall efficiency of the sweep system (Compl. ¶27-29; ’689 Patent, Abstract).
  • Technical Importance: This technology represents an improvement over prior art sweep systems by introducing a modeling approach that actively manages and optimizes for the excess deposit capacity within the network of institutions (Compl. ¶29).

Key Claims at a Glance

  • The complaint asserts at least independent Claim 1 (Compl. ¶95).
  • Essential elements of Claim 1 include:
    • Accessing databases with aggregated account, client account, and depository institution information, including a "capacity cap" for each institution.
    • Obtaining, for each depository institution, a balance for a "high stratification," a "second stratification," and a "lowest stratification" of client accounts, where each stratification corresponds to a different range of balances.
    • Calculating a total balance for each depository institution based on the balances from the different stratifications.
    • Calculating the "respective excess capacity" for each institution based on the difference between its capacity cap and its total balance.
    • Modifying one or more system parameters based on the calculated excess capacities.
  • The complaint does not explicitly reserve the right to assert dependent claims.

Multi-Patent Capsule: U.S. Patent No. 8,359,267, 8,712,911, and 8,719,157

  • Patent Identification: U.S. Patent No. 8,359,267 (Issued Jan. 22, 2013); U.S. Patent No. 8,712,911 (Issued Apr. 29, 2014); U.S. Patent No. 8,719,157 (Issued May 6, 2014). All are titled System and Method for Investing Public Deposits.
  • Technology Synopsis: These patents, identified collectively with the ’766 Patent as the "Reciprocal Deposit Patents," address the technical problem of enabling banks to profitably accept large public deposits that require collateralization (Compl. ¶15). The patented solution is a computerized system that allocates such deposits across a network of banks to maintain FDIC insurance and provides reciprocal deposits back to the originating bank, freeing up capital (Compl. ¶16-17).
  • Asserted Claims: Claim 1 of each patent is asserted (Compl. ¶62, 73, 84).
  • Accused Features: The accused features are those of SCCM’s FICA program, which allegedly provides for reciprocal deposits among a network of financial institutions (Compl. ¶20, 24).

III. The Accused Instrumentality

Product Identification

  • The accused instrumentality is Defendant SCCM's "Federally Insured Cash Account" (FICA) program (Compl. ¶20).

Functionality and Market Context

  • The FICA program is a cash management service offered to institutional clients, including local government entities, to protect large deposits by placing them in a network of FDIC-insured accounts at multiple "Insured Depositories" (Compl. ¶21, Ex. E). The program allegedly uses "aggregated accounts" to hold funds from multiple participants (Compl. ¶21). For participating banks, the FICA program offers "Reciprocal Deposits," which involves receiving deposits from the network in return for placing customer funds into the network (Compl. ¶20, 24).
  • The complaint alleges that the FICA program uses "SCCM proprietary algorithms" to allocate customer deposits to ensure full deposit insurance and that as of March 2018, FICA products represented $5.4 billion in assets under management for SCCM (Compl. ¶20, 32, Ex. I).

IV. Analysis of Infringement Allegations

8,150,766 Patent Infringement Allegations

Claim Element (from Independent Claim 1) Alleged Infringing Functionality Complaint Citation Patent Citation
(A) accessing, using one or more computers, one or more electronic databases, ... comprising: (1) aggregated account information ... (2) client account information... SCCM's FICA program uses "aggregated accounts" holding funds from multiple participants at a plurality of FDIC insured depositories. SCCM maintains this information in its database and provides monthly client account statements. ¶21 col. 9:55-67
(B) obtaining into the one or more computers, transfer data comprising an amount of governmental funds... SCCM, acting as an agent for its customers (including government entities), receives customer funds and instructions to deposit them into the FICA program. ¶22 col. 10:4-11
(C) allocating the amount of governmental funds sourced from the first financial institution...to one or more of a first set of the financial institutions other than the first financial institution... SCCM, as agent, selects the "Insured Depositories" and directs its custodian to allocate and deposit customer funds across its network of banks to ensure full FDIC insurance. ¶23 col. 10:12-23
(D) allocating, using the one or more computers, to the first financial institution...an amount of funds from one or more of a second set of the financial institutions...so that an amount of funds sourced from the second set...is approximately equal to or greater than the amount of the governmental funds sourced from the first financial institution SCCM offers banks "Reciprocal Deposits," described as receiving deposits back from the network in return for placing deposits into the network. The complaint includes a flowchart depicting a 'TWO-WAY' system where a bank allocates customer deposits to a network of FICA Program Banks and, in turn, receives reciprocal deposits back into the bank (Compl. ¶24, p. 10). ¶24 col. 10:24-34
(E) generating and communicating data...to transfer funds...and (F) using the one or more computers, to update at least data... SCCM uses its "proprietary systems" to arrange for fund transfers between financial institutions and maintains this information in its databases. ¶25 col. 10:35-50

Identified Points of Contention

  • Scope Questions: Claim 1(D) requires the reciprocal deposit amount to be "approximately equal to or greater than" the original outbound deposit. The complaint's evidence describes the reciprocal amount as "plus or minus original funds" (Compl. ¶24, p. 10). This raises the question of whether a system that allows for a reciprocal deposit that is less than the original amount falls within the scope of the claim. The construction of "approximately equal to" will be a central issue.
  • Technical Questions: What evidence does the complaint provide that the FICA program's allocation is specifically "based at least in part on obtaining government backed deposit insurance and/or collateralization by government securities," as required by Claim 1(C), versus being based on other optimization factors like available capacity or interest rates?

8,655,689 Patent Infringement Allegations

Claim Element (from Independent Claim 1) Alleged Infringing Functionality Complaint Citation Patent Citation
accessing, using one or more computers, one or more electronic databases, ... comprising: (i) aggregated account information... (ii) client account information... (iii) depository institution information...comprising a capacity cap... SCCM's FICA program accesses and maintains databases of government-backed insured accounts, client accounts, and information on its network of depository institutions. The complaint does not explicitly allege a "capacity cap" feature. ¶32 col. 13:1-20
obtaining, using the one or more computers, for a high stratification...a current or an adjusted total high stratification balance... The complaint alleges that SCCM's "FICA® For Advisors" program offers insured deposits up to $25 million or $50 million, suggesting it handles clients with very large balances that would require stratification. ¶33
obtaining, using the one or more computers, for a second stratification...a current or an adjusted total second stratification balance... The complaint alleges that while SCCM caters to high net worth individuals, not all customers have large deposits, suggesting the existence of multiple tiers or stratifications of account balances. ¶16, 33 col. 13:39-53
calculating or having calculated...a respective excess capacity for each of the respective depository institutions... The complaint alleges that SCCM practices a method for allocating funds based on "excess capacity present in each depository institution" and that it "performs modeling and determines allocation." ¶31 col. 14:8-14
modifying, based at least in part on the respective excess capacities...one or more of parameters... The complaint alleges that SCCM is using the proprietary model embodied in the '689 Patent to address modeling problems related to allocating funds across its network of over 800 banks. ¶16, 31 col. 14:15-24

Identified Points of Contention

  • Technical Questions: The complaint's infringement allegations for the '689 Patent are substantially more conclusory than for the '766 Patent. It alleges SCCM uses "proprietary algorithms" (Compl. ¶32) but fails to provide specific evidence showing that these algorithms perform the distinct three-tiered "high," "second," and "lowest" stratification steps required by Claim 1. A primary point of contention will be whether the accused system actually implements this claimed multi-level stratification or uses a different, non-infringing model to manage capacity.
  • Scope Questions: Does the general marketing statement that the FICA program handles deposits "up to $25 million" (Compl. ¶33) provide sufficient factual support for the claim limitation of a "high stratification client account...having a total balance...that may be fully insured...through an allocation across a first number of depository institutions"? The link between the marketing material and the specific claim language may be a point of dispute.

V. Key Claim Terms for Construction

Term from ’766 Patent, Claim 1: "approximately equal to or greater than"

  • Context and Importance: This term defines the quantitative requirement for the reciprocal deposit. The infringement analysis for the Reciprocal Deposit Patents may depend on whether SCCM's FICA program, which is alleged to provide reciprocal deposits "plus or minus original funds" (Compl. ¶24, p. 10), meets this limitation. Practitioners may focus on this term because if "approximately" is construed narrowly, a system that systematically returns less than the original amount might be found non-infringing.
  • Intrinsic Evidence for Interpretation:
    • Evidence for a Broader Interpretation: The specification describes the invention's goal as providing funds to the originating bank that can be used for profitable investment in place of holding low-yield collateral ('766 Patent, col. 1:41-46). An argument could be made that any commercially reasonable reciprocal amount that achieves this goal satisfies the "approximately equal" requirement.
    • Evidence for a Narrower Interpretation: The claim uses the specific words "equal to or greater than," which sets a floor at a 1:1 ratio. The word "approximately" modifies "equal to," suggesting only minor, incidental deviations below a 1:1 ratio are permitted, not a systematic option for a lesser return.

Term from ’689 Patent, Claim 1: "high stratification," "second stratification," and "lowest stratification"

  • Context and Importance: The claim requires a specific, three-tiered method of categorizing client accounts by balance ranges. The viability of the infringement allegation depends on whether SCCM's accused "proprietary algorithms" actually perform this method. Practitioners may focus on these terms because if SCCM can show its allocation model does not use this particular structure—for instance, if it uses a single continuous algorithm or a different number of tiers—it could defeat a literal infringement claim.
  • Intrinsic Evidence for Interpretation:
    • Evidence for a Broader Interpretation: The patent's detailed description may frame the three specific stratifications as an exemplary embodiment, which could support an argument that other forms of multi-level stratification fall within the claim's scope.
    • Evidence for a Narrower Interpretation: The independent claim explicitly recites three distinct "obtaining" steps, one for each of the "high," "second," and "lowest" stratifications. This structure suggests that all three tiers, with their defined relationships (e.g., "the second range has a lower upper limit than the highest range"), are required elements of the claimed method.

VI. Other Allegations

  • Indirect Infringement: The complaint alleges that SCCM induced and contributed to the infringement by others for all five patents-in-suit (Compl. ¶52, 63, 74, 85, 96). The factual basis alleged is SCCM's operation of the FICA program, which is offered to its customers and network of participating banks, thereby allegedly causing them to use the patented methods.
  • Willful Infringement: Willfulness is alleged for all five patents based on pre-suit knowledge (Compl. ¶54, 65, 76, 87, 98). The complaint alleges SCCM had actual notice of the ’766 Patent since at least July 16, 2012, and of the remaining four patents since at least January 26, 2017 (Compl. ¶53, 64, 75, 86, 97). The allegations surrounding the pre-existing license agreement with affiliate SCIS and SCCM's hiring of a named inventor on one of the patents-in-suit may be used to support the claim of willful misconduct (Compl. ¶35, 40, 43).

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

  • A core issue will be one of contractual context and corporate conduct: Given that Defendant SCIS holds a license, can Plaintiff demonstrate that Defendant SCCM is a distinct, non-licensed entity that improperly gained access to and practiced the patented technology? The case may turn on evidence of information sharing and operational overlap between the StoneCastle affiliates, weighed against the specific terms of the License Agreement's "Affiliate License" clause.
  • A key evidentiary question will be one of algorithmic equivalence: Does the accused FICA system's "proprietary algorithm" practice the specific, multi-tiered "stratification" method required by the '689 patent, or is there a fundamental mismatch in technical operation? The Plaintiff will need to produce evidence moving beyond general allegations of "modeling" to show that the accused system performs the particular sequence of stratification, capacity calculation, and parameter modification recited in the claim.
  • A central claim construction dispute will likely focus on the quantitative scope of reciprocity: Can the term "approximately equal to or greater than," as used in the Reciprocal Deposit Patents, be construed to cover a system that offers reciprocal deposits that may be less than the original amount ("plus or minus")? The outcome of this construction could determine infringement for four of the five asserted patents.