In basic terms, GRQ alleges that Financial Engines, in delivering computer-based 401(k) plan advice services, violated U.S. Patents numbered 7,120,600 (the ‘600 Patent) and 8,229,825 (the ‘825 Patent)—both entitled “Systems and Methods for Improving Investment Performance.” GRQ describes itself as a firm “formed to monetize the inventions of the late Brian Tarbox and Mark Greenstein.” Complaint documents show Tarbox and Greenstein are listed as inventors on the ‘600 and ‘825 patents. The late Tarbox is referred to in the complaint as “a leading adviser in the field of retirement planning and financial services.”
Financial Engines is accused of “infringing and continuing to infringe the ‘600 Patent in the State of Texas … and/or elsewhere in the United States by, among other things, making, using, selling, offering to sell, and/or importing, without license, directly or through its customers, managed account services, such as its Personal Asset Manager Program or customer programs such as the Vanguard Personal Online Advisor, Vanguard Managed Account Programs.” Another potentially infringing service from Financial Engines listed in the complaint is the Financial Engines’ Income+ product, which provides a computer-based method of providing distribution recommendations from an investment account to a retirement plan investor.
The compliant suggests these and other Financial Engines products and services fall within the scope of at least one claim of the ‘600 and ‘825 patents, as evidenced by Financial Engines and its client’s service descriptions.
Background materials included in the complaint show that, in 1996, Tarbox assisted William Sharpe, the founder of Financial Engines, by providing him with guidance on an initial business model for an independent advisory firm. Tarbox is also said to have explained this business model to at least one third-party, so that Sharpe could obtain funding during the initial stages of Financial Engines’ development. Specifically, Tarbox participated in Financial Engines’ initial meeting with venture capital investors, who collectively put up $5 million to launch Financial Engines.
The complaint alleges that, in 2001, after building upon and further developing the initial business model for Financial Engines, Tarbox was “instrumental in obtaining ERISA Advisory Opinion 2001-09A, more commonly known in the industry as the SunAmerica Opinion.” One consequence of this far-reaching opinion, the complaint says, is that independent financial advisers were permitted to team up with money managers to offer one-stop investment management services using an independent financial expert to provide the advice and asset-allocation decisions on a client’s behalf.
The opinion also helped establish the regulatory framework necessary for managed accounts. Before the SunAmerica opinion, advisers lacked key protections and many hesitated to offer true investment “advice” to retirement plan participants covered by the Employee Retirement Income Security Act (ERISA)—opting instead to provide non-discretionary “education.”
To provide computer-based discretionary managed accounts, complaint documents suggest, Financial Engines had to confirm that it operates in accordance with the SunAmerica Opinion. In September 2004, Financial Engines made such confirmation and offered its first managed accounts to Motorola and J.C. Penny employees, and by December 2004 the firm had $1 billion in assets under management. As of the start of 2014, Financial Engines' existing contracts cover 7.9 million workers with $824 billion in their 401(k) plans, and the firm is directly managing $92 billion of those assets, according to the complaint.
The complaint suggests Financial Engines' admission that it complies with the SunAmerica Opinion further suggests patent infringement, based on the opinion's requirements around the delivery and integration of independent financial advice and plan participant data.
Additionally, according to the complaint, Financial Engines violated the patents in that it “provides means, operatively connected to the data storage means, for automatically implementing discretionary investment allocation decisions utilizing the discretionary asset-allocation program, wherein the discretionary investment allocation decisions are automatically implemented using a process that reduces or eliminates the at least one conflicted person’s ability to self-deal, and wherein the discretionary investment allocation decisions are implemented, developed, or maintained by the at least one substantially independent person.”
GRQ filed the patent infringement complaint with the United States District Court for the Eastern District of Texas, Marshall Division. The relevant action, according to the text of the compliant, is being filed under Title 35 of the United States Code. The complaint documents show Financial Engines was active in the Texas region between 2007 and 2011, especially regarding services rendered to the J.C. Penny Company and Texas Instruments Incorporated.
For example, J.C. Penny paid Financial Engines some $15.6 million for its asset management and investment advisory services related to the company’s 401(k) plans during the time period. Texas Instruments paid another $5.7 million for similar services, according to the text of the complaint.
GRQ claims that it has suffered “monetary damages in an amount not yet determined” from these alleged infringements, “and will continue to suffer damages in the future unless Financial Engines’ infringing activities are enjoined by this court.”
Financial Engines officials tell PLANADVISER that the firm has not yet been served with the complaint.
“We had received no prior communication from the plaintiff prior to the filing, and in fact, had to pull the complaint ourselves,” explains David Weiskopf, Financial Engines' senior director of corporate communications. “These types of suits are not uncommon, and we intend to vigorously defend these allegations.”
The full text of the complaint is here.