CAFC Sends Centripetal Back to Drawing Board in Case with Cisco Due to Judge’s Stock

Centripetal Networks will have to start from square one in its long-running case against Cisco after the U.S. Court of Appeals for the Federal Circuit (CAFC) on Thursday vacated a judge’s decision awarding Centripetal enhanced damages and royalties exceeding $2.75 billion. The CAFC ruled that Judge Henry C. Morgan, Jr. of the United States District Court for the Eastern District of Virginia was disqualified from hearing the case after becoming aware of his wife’s ownership of $4,687.99 in Cisco stock, ultimately reversing the district court’s denial of Cisco’s motion for recusal and vacating all orders and opinions of the court, including the final judgment in favor of Centripetal.

In February 2018, Centripetal filed a Complaint against Cisco, alleging infringement of 11 of Centripetal’s U.S. Patents. Cisco filed numerous petitions for inter partes review (IPR) against nine of those patents – some claims were upheld and others invalidated. In September 2019, the district court issued an order lifting a stay with respect to patents and claims not subject to IPR proceedings, including U.S. Patent Nos. 9,137,205 (the ‘205 Patent), 9,203,806 (the ‘806 Patent), 9,500,176 (the ‘176 Patent), 9,686,193 (the ‘193 Patent), 9,917,856 (the ‘856 Patent) (the Asserted Patents), which were directed to systems that engage in complex computer networking security functions. Centripetal accused Cisco of using its solutions in a variety of its network devices and of infringing the Asserted Patents.

Cisco Stock

The court ultimately found in favor of Centripetal, but while the case was still pending, Judge Morgan learned that his wife owned Cisco stock while preparing his 2019 financial disclosure report to the judiciary. He sent an email notifying the parties of this on August 12, 2020, stating that “at the time he was informed of the existence of the stock, a ‘full draft of [his] opinion [on the bench trial] had been prepared’ and ‘[v]irtually every issue was decided prior thereto’ and that the “shares did not and could not have influenced [his] opinion on any of the issues in th[e] case.’”

Centripetal said it had no objection to the judge continuing to preside, but Cisco filed a motion for recusal. The judge heard oral arguments on the motion, during which he explained that he did not sell the stock because he had “’already strongly indicated that [he] might be considering awarding damages in the case’ by ‘ask[ing] for additional evidence on damages…and that might mean that [the final] judgment would have an adverse effect upon Cisco’s stock.’” Instead, he placed the stock in a blind trust and was to be notified when the trust assets had been completely disposed of or when their value became less than $1,000. He ultimately denied Cisco’s motion for recusal, arguing that because “a reasonable person would not conclude that [he had known] of th[e] interest [in Cisco] and yet heard the case[,] . . . [§] 455(a) d[id] not warrant recusal.”

28 U.S.C. § 455 says: “(a) Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” As for Section 455(b)(4), which says a judge shall be disqualified if “[h]e knows that he, individually or as a fiduciary, or his spouse or minor child residing in his household, has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding,” Judge Morgan found it did not apply “because he had not discovered his wife’s interest in Cisco until he had decided ‘virtually’ every issue and ‘mostly drafted [the] opinion.’ Id. at 623. He also said that the blind trust “cured” any conflict as it constituted “divestiture,” as laid out in Section 455(f).

Blind Trust is Insufficient

In their discussion, the CAFC panel explained that the blind trust did not satisfy the requirements of Section 455(f), according to the ordinary meaning of “divest” at the time Congress enacted the statute, which was defined as “to dispossess or deprive.” The court explained: “While placing the stock in a blind trust removed [the judge’s wife’s] control over the stock, it did not eliminate her beneficial interest in Cisco.” The panel went on to cite authority suggesting a blind trust does not constitute divestiture (The Judicial Conference’s Committee on Codes of Conduct) and noted that it was undisputed that there is no case law holding that a blind trust does constitute divestment. Ultimately, the judge was disqualified from further proceedings in the case under § 455(b)(4).

In deciding on the appropriate remedy, the court found vacatur was warranted mainly because, despite the judge’s and Centripetal’s arguments that the case had been mostly decided prior to learning about the stock, he was not 100% finished writing the opinion and could have revised the opinion and he also sat on post-trial motions after learning about the stock. And as far as Centripetal’s assertion that there was no need to vacate because the stock ownership was in the losing party, thereby adversely affecting the judge’s interests rather than benefiting him, the court said: “Where a judge becomes aware of a possible appearance of impropriety, there is a substantial risk that he or she might bend over backwards to rule against that party to try to prove that there is no bias.”

Most importantly, said the CAFC, vacatur was necessary in order to preserve public confidence in the judiciary:

“[T]he denial of vacatur here risks “undermining the public’s confidence in the judicial process.” Liljeberg, 486 U.S. at 864…. The failure to vacate here would strike at the heart of what the statute was designed to protect. The Supreme Court in Liljeberg explained that the purpose of § 455 is to “promote public confidence in the integrity of the judicial process.”… It is seriously inimical to the credibility of the judiciary for a judge to preside over a case in which he has a known financial interest in one of the parties and for courts to allow those rulings to stand.

Starting Over

The case was ultimately remanded “for further proceedings before a newly appointed judge, who shall decide the case without regard for the vacated opinions and orders.”

In a House IP Subcommittee hearing held last week, Centripetal’s Chief Operating Officer, Jonathan Rogers, lamented the progress on this case and said the parallel Patent Trial and Appeal Board proceedings Centripetal has had to endure have already added about one year and significant expense to the litigation. Of the CAFC’s ruling here, Rogers said, “we will have to do it all again.”

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