A 3-judge panel at the Federal Circuit Court of Appeals has overturned a lower court’s variable annuity administration method patent case decision.

Lincoln National Life Insurance Company and the defendants in the case, Transamerica Life Insurance Company and its affiliates, have been engaged in a dispute over whether the method Transamerica and sister companies use to administer deferred variable annuity conflicts that offer guaranteed minimum withdrawal benefits infringes on a patent held by Lincoln .

Lincoln is a unit of Lincoln National Corp., Radnor, Pa. (NYSE:LNC).

Transamerica and its affiliates are units of AEGON N.V., The Hague, Netherlands (NYSE:AEG).

Lincoln has a patent entitled “Method and Apparatus for Providing Retirement Income Benefits.”

One section of the patent states that Lincoln has patented:

A computerized method for administering a variable annuity plan having a guaranteed minimum payment feature associated with a systematic withdrawal program, and for periodically determining an amount of a scheduled payment to be made to the owner under the plan, comprising the steps of:

a) storing data relating to a variable annuity ac-count, including data relating to at least one of an account value, a withdrawal rate, a scheduled payment, a payout term and a period of benefit payments;

b) determining an initial scheduled payment;

c) periodically determining the account value associated with the plan and making the scheduled payment by withdrawing that amount from the account value;

d) monitoring for an unscheduled withdrawal made under the plan and adjusting the amount of the scheduled payment in response to said un-scheduled withdrawal; and

e) periodically paying the scheduled payment to the owner for the period of benefit payments, even if the account value is exhausted before all payments have been made.

The legal proceedings in the case, Lincoln National Life Insurance Company vs. Transamerica Life Insurance Company et al. (2009-1403), started in 2006, when Transamerica filed a suit in a U.S. District Court in Iowa to get a ruling declaring that its method for administering variable annuity guaranteed minimum withdrawal benefit riders does not infringe on the Lincoln patent. Lincoln filed a counterclaim.

A district court made Lincoln the plaintiff and Transamerica the defendant for a trial.

The district court jury awarded Lincoln $13 million in damages, and Transamerica filed motions for “judgment as a matter of law,” asserting that the evidence was insufficient to support the jury’s finding of infringement and that the asserted claims were invalid, Circuit Judge Kimberly Moore writes in an opinion for the 3-judge Federal Circuit panel. “The court denied Transamerica’s motions and entered a permanent injunction against Transamerica.”

Moore says the case hinges on whether Transamerica uses an automated process to do what Lincoln does in “step (e)” in its patent, and periodically pay the scheduled payment to the variable annuity owner for the period of benefit payments, “even if the account value is exhausted before all payments have been made.”

Transamerica uses a computerized system to send letters to annuity holders warning them that their contracts are being terminated due to lack of account value, but Transamerica employees produce manual checks for the withdrawal amount and send the checks to the annuity holders, Moore writes.

“Lincoln points to no evidence, and we are aware of none, showing that Transamerica uses a computerized method to make the ‘scheduled payment to the owner . . . if the account value is exhausted before all payments have been made,’” as described in the Lincoln annuity administration method patent, Moore says.

“Given that Transamerica’s computerized system is specifically configured such that it does not make a payment if an account is exhausted, we agree with Transamerica that it does not perform step (e),” Moore says.

Because Transamerica has not computerized the process of sending checks for the withdrawal amounts, it is not infringing on the Lincoln patent, and the district court was wrong to deny Transamerica’s request for a judgment as a matter of law, Moore says.

“We reverse the district court’s denial of [judgment as a matter of law] of noninfringement and vacate the permanent injunction entered against Transamerica,” Moore says. “We remand the case to the district court for entry of judgment of noninfringement in favor of Transamerica.”

Representatives for Lincoln were not immediately available to comment on the case.

A Transamerica representative has welcomed the reversal of the district court infringement judgment.

“It has been our position from the beginning that we did not infringe Lincoln’s patent,” the Transamerica representative says.