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Chicago Board Options Exchange, Incorporated v. International Securities Exchange, LLC

United States District Court, N.D. Illinois, Eastern Division

December 10, 2014

CHICAGO BOARD OPTIONS EXCHANGE, INCORPORATED, Plaintiff,
v.
INTERNATIONAL SECURITIES EXCHANGE, LLC, Defendant.

OPINION AND ORDER

JOAN H. LEFKOW, District Judge.

International Securities Exchange ("ISE") initiated this litigation against Chicago Board Options Exchange ("CBOE") alleging infringement of United States Patent No. 6, 618, 707 ("the '707 patent"). In response, CBOE sought a declaratory judgment that the '707 patent is invalid or, in the alternative, was not infringed. ISE stipulated to non-infringement shortly before trial. The court entered final judgment in favor of CBOE on April 10, 2013 and the Federal Circuit affirmed this judgment on April 7, 2014. CBOE now moves for attorney's fees under the exceptional case doctrine arising from 35 U.S.C. § 285 and for expert fees under the court's inherent authority to issue sanctions. For the reasons stated below, CBOE's motion is granted in part and denied in part.

BACKGROUND

The facts of this case have been recited numerous times in the published decisions cited herein and need not be repeated for disposition of the pending motion. Founded in 1973, CBOE, like other securities exchanges, used open outcry to effectuate trades-a method of trading where market professionals shout and use hand gestures to communicate information about orders. Because this method of trading takes place on the exchange floor, it is also known as floor-based trading. As technology advanced, so did CBOE's trading system. In the mid-1990s, CBOE developed a screen-based trading system, where trades could be conducted electronically. In 2001, CBOE introduced CBOEdirect, the platform for this screen-based trading system. Two years later CBOE launched a new system called the Hybrid Trading System ("Hybrid"), which combines CBOEdirect's electronic trading platform with open-outcry trading.

Founded two years prior to CBOE's launch of CBOEdirect, ISE is a fully-electronic options exchange. It holds the subject '707 patent titled "Automated Exchange for Trading Derivative Securities, " which discloses a system for electronically effectuating trades of financial instruments such as options contracts without open outcry. On November 22, 2006, ISE notified CBOE that it had filed suit against CBOE because it believed "CBOE's Hybrid System and CBOE's use of that system" infringed the '707 patent. (Dkt. 1 at Exh. A).

I. Claim Construction History

One of the disputed terms in the '707 patent was "automated exchange." CBOE argued that the term should be construed as "a fully computerized exchange in which no matching or allocating is performed manually in open outcry." (Dkt. 286 at 4.) ISE pushed for a broader definition, construing the term as "[a]n exchange that includes a system that automatically matches incoming orders and quotations with stored orders and quotations." ( Id. ) Significantly, ISE's principal expert witness, Dr. Moses Ma, opined that "the term automated exchange' refers to an exchange that has implemented any form of electronic system that automates the trading of financial instruments, even if that exchange also maintains a physical trading floor where trading can occur in a more manual fashion." (Dkt. 157 at ¶ 3.)

The court adopted CBOE's position that an automated exchange was fully computerized, thus rejecting Dr. Ma's opinion and ISE's position. Ultimately, the court defined "exchange" as "a method for executing trades of financial instruments" and "automated, " when used to modify "exchange, " as "fully computerized, such that its protocol does not include matching or allocating through use of open outcry in order to execute trades." (Dkt. 300 (internal quotation marks omitted).)[1] An "automated exchange, " then, is "a method for executing trades of financial instruments that is fully computerized, such that it does not include matching or allocating through use of open outcry." ( Id. ) The court also noted that the '707 patent disavows floor-based trading. ( Id. at n.1).

CBOE moved for summary judgment of non-infringement, arguing, inter alia, that ISE could not prove that its system, Hybrid, met the court's definition of "automated exchange." (Dkt. 309.) ISE countered that Hybrid used two distinct methods for executing trades: a fully automated method and an open-outcry method, and that its infringement claims were directed at the first, CBOEdirect. (Dkt. 317.) This response represented a shift from ISE's original strategy of accusing Hybrid, presumably because the court's construction of "automated exchange" excluded Hybrid from the scope of the '707 patent. ISE contended that CBOEdirect was an automated exchange, "a fully computerized method of executing trades." Id. [2] CBOE emphasized in reply that CBOEdirect was not an exchange for trading a financial instrument and, further, that "CBOEdirect cannot operate to trade financial instruments without open outcry." (Dkt. 325 at 5, 12.)

The court concluded that ISE had raised a genuine issue of material fact as to whether, under the court's construction of "automated exchange, " CBOEdirect was its own exchange, separate from Hybrid. Chicago Bd. Options Exch., Inc. v. Int'l Sec. Exch., LLC, 776 F.Supp.2d 606, 611 (N.D Ill. 2011), vacated, 677 F.3d 1361 (Fed. Cir. 2012). If ISE could show that CBOEdirect functioned independently from Hybrid, then ISE could argue at trial that CBOEdirect infringed the '707 patent. Id. at 610-11. Nonetheless, the court granted summary judgment in favor of CBOE on other grounds. Id.

ISE appealed. (Dkt. 365.) As relevant here, ISE argued that this court had misconstrued "automated exchange." The Federal Circuit held that "automated exchange" described a system, not a method, but otherwise accepted this court's construction of the term. Chicago Bd. Options Exch., Inc. v. Int'l Sec. Exch., LLC, 677 F.3d 1361, 1371-73 (Fed. Cir. 2012) (construing "automated exchange" as a "system for executing trades of financial instruments that is fully computerized, such that it does not include matching or allocating through the use of open-outcry").

ISE also argued that, because the '707 patent does not require its system execute all trades automatically, the patent does not disavow all aspects of traditional floor-based trading systems. The Federal Circuit rejected this argument, agreeing with this court's finding that the '707 patent disavows traditional floor-based exchange systems:

The '707 Patent thus disavows the traditional open-outcry or floor-based trading systems. There is no other way to interpret the listing in the specification of the many reasons why manual and partially automated exchanges cannot sustain the growing demands of the market. Indeed, the specification goes well beyond expressing the patentee's preference for a fully automated exchange over a manual or a partially automated one, and its repeated derogatory statements about the latter reasonably may be viewed as a disavowal of that subject matter from the scope of the Patent's claims.

Id. at 1372. The Federal Circuit reversed the grant of summary judgment on other grounds and remanded the case for further proceedings. Id. at 1375. On remand, the parties prepared for trial. CBOE rests its ...


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