Cisco’s $2 Billion Loss Nixed Over Judge’s Wife Owning Stock (2)

The Federal Circuit threw out a $1.9 billion patent infringement verdict against Cisco Systems Inc., finding the judge who levied the penalty should’ve recused himself after learning that his wife had stock in the company.

Cisco and Centripetal Networks Inc., a Herndon, Va., startup, will return to the district court to litigate whether Cisco infringed Centripetal cybersecurity patents.

The ruling comes amid a push to make federal judges’ financial disclosures more transparent—an effort that led to the enactment last month of a new federal law aimed at making that information more accessible to the public

Judge Henry Morgan learned in August 2020 his wife owned 100 shares of Cisco stock, worth under $4,700, according to court documents. Because the stock wasn’t divested, Morgan was disqualified from further proceedings the U.S. Court of Appeals for the Federal Circuit ruled in a precedential opinion.

The court vacated all orders and opinions that came after Morgan learned of the stock ownership, including the judge’s October 2020 ruling finding Cisco infringed the patents and awarding Centripetal $1.9 billion.

“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,” the Federal Circuit wrote.

Morgan passed away in May, while the case was on appeal. He was 87. The case will be reassigned to another judge in the Eastern District of Virginia.

Centripetal’s chief operating officer, Jonathan Rogers, learned of the Federal Circuit’s ruling ahead of his scheduled testimony before a House subcommittee during a hearing on the patent office’s Patent Trial and Appeal Board.

“You might think this is a true David and Goliath story, but unfortunately the battle over the Cisco judgment is still raging and serial attacks on Centripetal’s patents continue even now,” Rogers told the subcommittee.

Representatives for Cisco didn’t immediately respond to a request for comment.

A Blind Trust

Centripetal sued Cisco in 2018, accusing the company of deliberately copying its patented network security technology and implementing it into various Cisco products.

Following a weeks-long bench trial held over videoconference, Morgan found Cisco willfully infringed four patents and owed $1.9 billion. Cisco has said it would owe over $2.75 billion with royalties.

Morgan’s opinion was released days after he denied Cisco’s request that he recuse himself from the case due to the stock ownership.

The judge’s wife brought the stock in 2019 on the advice of her stockbroker, according to court documents. Morgan, who had “no independent recollection of approving the transaction,” said he had already reached his conclusion on the case when he learned of the ownership, although he hadn’t finished writing the opinion.

Morgan said during a 2020 hearing the “simpliest thing” would be to sell the stock, but suggested that could raise the appearance of insider trading. Instead, the judge said he had placed Cisco’s stock in a blind trust.

Beneficial Interest

Federal law requires a judge to disqualify themselves if they, a spouse, or a minor child has a “financial interest in a party to the proceeding.”

The law, however, provides that if “substantial judicial time” has been devoted to the case, disqualification isn’t required if the judge, or their spouse, “divests himself or herself of the interest that provides the grounds for the disqualification.”

The Federal Circuit held that placing stock in a blind trust isn’t a divestment under the statute. To find otherwise, the court said, would allow a judge to continue to sit on a case, knowing they, or their spouse, has a “beneficial interest” in the outcome.

At “the time of Judge Morgan’s actions, his wife still ‘ha[d] a financial interest’ in Cisco,” the Federal Circuit wrote. “While placing the stock in a blind trust removed her control over the stock, it did not eliminate her beneficial interest in Cisco.”

Centripetal argued Morgan’s rulings shouldn’t be vacated, noting the time and money invested in the case. The Federal Circuit said those factors didn’t “significantly weigh against vacatur.” The court also brushed aside a suggestion that the rulings didn’t need to be vacated because Morgan’s wife owned stock in the losing side.

“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,” the Federal Circuit wrote.

Addressing Morgan’s concerns related to insider trading if the stock were sold, the Federal Circuit in a footnote said “no such possibility exists.” The sale of stock “to comply with ethical obligations is not insider trading,” the court said.

Courts on Notice

Transparency surrounding federal judges’ financial disclosures has come under increased scrutiny after a Wall Street Journal report last year that 131 federal judges heard cases involving a company in which they or a family member held shares.

Lawmakers have introduced several measures, including one signed into law by President Joe Biden last month to create a searchable database of judicial financial disclosures and make them available online within 90 days of their filing.

“In the aftermath of the Wall Street Journal article, the federal courts are on notice that they can’t be cavalier about financial conflicts, and it seems to me that the circuit court got it right,” said Charles Geyh, a law professor at Indiana University who writes about judicial conduct and ethics.

Ben Johnson, a Penn State University law professor, agreed that a blind trust isn’t the same as a divestment.

A blind trust introduces its own problems, he added, noting the recusal statute states a judge “should inform himself about his personal and fiduciary financial interests.” A judge can’t stay informed about his or her financial interests if the stock is in a blind trust.

“It’s another example of when judges screw up, it costs people a bunch of money,” said Johnson, who has written about judges participating in cases despite owning stock in one of the parties.

Rogers, Centripetal’s COO, told the House subcommittee that after winning one infringement trial, “we will have to do it all again.”

The company has another fight on its hands. Last month, the PTAB agreed to review the validity of one patent Cisco was found to infringe, based on a challenge brought by Palo Alto Networks Inc., a cybersecurity company. The board’s final validity decision is expected by the end of May 2023.

Judges Richard G. Taranto, Timothy B. Dyk, and Tiffany P. Cunningham served on the panel.

Wilmer Cutler Pickering Hale and Dorr LLP and Duane Morris LLP represent Cisco. Kramer Levin Naftalis & Frankel LLP, Irell & Manella LLP, and others represent Centripetal.

The case is Centripetal Networks, Inc. v. Cisco Sys., Inc., Fed. Cir., No. 21-1888, opinion 6/23/22.