Conflict Ruling That Toppled $2.7B Judgment Ripples Through Other Litigation

  • January 27, 2023
  • Category: Patent Litigation Feature

Last June, the Federal Circuit overturned a bench trial infringement ruling that had led to a $2.7B judgment in Centripetal Networks v. Cisco. The appellate court held that the district judge was disqualified to hear the case after he learned that his wife owned of $5K in the stock of defendant Cisco but then failed to recuse himself. That decision now appears to be having a broader ripple effect: plaintiff Centripetal Networks has raised a similar issue before the Patent Trial and Appeal Board (PTAB), asserting that an inter partes review (IPR) against one of the tried patents has been “tainted” by an administrative patent judge’s (APJ’s) ownership of Cisco stock and other purported financial interests in the company. Meanwhile, in another campaign, plaintiff CellSpin Soft, Inc. has argued that a June 2022 summary judgment of noninfringement should be overturned due to a Northern District of California district judge’s alleged interest in Google, the parent of defendant Fitbit. The Centripetal decision has also been invoked in a closely watched fight over transparency in the courtroom of Delaware Chief Judge Colm F. Connolly, under which certain amici have contended that patent litigants must disclose their ownership/management and funding sources to allow judges to perform a proper conflicts check.

The Federal Circuit’s Centripetal Decision: Substantive Rulings After Discovery of Conflict Must Be Overturned

Centripetal filed the litigation below in February 2018 in the Eastern District of Virginia; later that year, the original presiding judge, Mark S. Davis, reassigned the case to District Judge Henry C. Morgan Jr., now deceased (2:18-cv-00094). The complaint alleged the infringement of ten patents, with an eleventh later added via amended complaint, through the provision of various Cisco networking devices and network management products, as well as a variety of other products, services, and features related to cybersecurity. One year later, the suit was stayed pending the outcome of a series of IPRs against the patents-in-suit. That stay was lifted in September 2019 after the PTAB invalidated claims from six of the asserted patents. Yet as the case proceeded through early 2020, the court was then forced to contend with the practical implications of the COVID-19 pandemic, with both parties waiving their right to a jury trial at a March pretrial conference.

The ensuing bench trial began in May 2020, lasted 22 days, and was held entirely by Zoom. On October 5, 2020, Judge Morgan handed down a 178-page order deciding the issues from that trial, ruling that Cisco infringed four of the patents remaining in suit but concluding that it did not infringe a fifth. Judge Morgan found the infringement willful and awarded $1.9B in enhanced damages plus a running royalty, though he declined to issue an injunction. The full amount was $2.7B, as noted above, when including the total royalty amount.

That same August, Judge Morgan informed the parties that he had discovered his “spouse owned 100 shares of Cisco stock valued at $4,687.99”, purchased after a recommendation from a broker. In response, Judge Morgan created a blind trust through which to hold that stock, doing so to prevent the appearance that any stock sale was intended to avoid a loss in value in the wake of the court’s verdict against Cisco, and presided over the remainder of the case. On October 2, Judge Morgan denied Cisco’s resulting motion for recusal, explaining that he had already decided “virtually” every issue and had “mostly drafted” the bench trial opinion by the time he learned about his wife’s stock. As for whether recusal was required under the governing statute, 28 USC Section 455, “Judge Morgan concluded that placing the Cisco shares in a blind trust ‘cured’ any conflict because it constituted ‘divestiture’ under a safe harbor provided by” Section 455 (as later summarized on appeal).

The Federal Circuit disagreed and reversed that failure to recuse, holding in June 2022 that placing the stock in a blind trust did not count as a divestment as required under the statute. Agreeing with Cisco, the appellate court determined that vacatur of all subsequent rulings must follow, concluding that leaving the post-discovery rulings in place would work an injustice on the parties (Judge Morgan having made substantive rulings after the interest was discovered), would “suggest that sitting on a case in which the judge’s family has a financial interest is not a serious issue” such that the risk of injustice in other cases would rise, and, “perhaps most significantly”, would undermine public confidence in the impartiality of the federal judiciary.

As to the last prong, the court pointed to a recent investigation by The Wall Street Journal (titled “131 Federal Judges Broke the Law by Hearing Cases Where They Had a Financial Interest” and dated in September 2021), to Congress’s response to that report by enacting the Courthouse Ethics and Transparency Act requiring “judges to make more timely and accessible disclosures of their financial holdings and potential conflicts of interest”, and to the decision by US Supreme Court Chief Justice John Roberts to devote “a substantial portion of his 2021 Year-End Report on the Federal Judiciary to discussing the importance of judges complying with their ethical obligations”.

In December 2022, the US Supreme Court denied Centripetal’s petition for certiorari challenging the Federal Circuit’s decision.

Centripetal Seeks to Leverage the Federal Circuit’s Decision in Related PTAB Proceeding

As the district court case proceeds on remand as a result of the Centripetal Networks v. Cisco decision, the plaintiff in that action has cited that ruling in its own defense before the PTAB. On December 30, Centripetal filed a motion for recusal in an already-instituted IPR from Palo Alto Networks (IPR2022-00182) targeting one of the patents at issue in the district court action (9,917,856), to which Cisco had filed a motion for joinder with a pending IPR of its own (IPR2022-01151). Centripetal’s motion alleges that one of the APJs on the assigned PTAB panel, Brian J. McNamara, “has owned Cisco stock”, and that he “has been paid a significant amount of money (apparently a share of the profits) from one of Cisco’s lobbyist law firms”—referring to retirement payments that McNamara has received from his former firm, Foley & Lardner—“while he was deciding IPR petitions against patents that Centripetal has asserted against Cisco in litigation”. Though Cisco’s joinder motion had not yet been granted at that point, Centripetal argued that these alleged “financial conflicts” require recusal because they “undermine both the appearance and reality of impartial justice, including the public trust in the deliberative process leading to the institution of this IPR”, in light of the Centripetal decision. Centripetal cited higher institution rates in IPRs against its patents where McNamara has served on the panel. The company asserted that “[t]he entire panel is now tainted with APJ McNamara’s conflict; the panel therefore should be recused, and the decision to institute should be vacated”.

On January 4, the PTAB instituted trial for Cisco’s petition and granted its motion for joinder, also doing the same for another IPR filed by fellow campaign defendant Keysight Technologies. The following day, the Board issued an order noting that Centripetal had failed to “obtain (or even seek) Board authorization before filing” its motion for recusal but allowed it to proceed, also granting the petitioners’ request to file an opposition.

However, on the same day as the Board’s order authorizing that briefing, McNamara withdrew from the case, contending that Centripetal’s motion for recusal was “without merit”, but stating that he was nevertheless withdrawing “[i]n order to reduce the number of issues and simplify the briefing”. He noted that his ownership of Cisco stock was a longstanding matter of public record and falls below the $15K threshold at which recusal is required by the Office of Government Ethics. McNamara also rejected Centripetal’s claims that he is biased due to his retirement payments from Foley & Lardner, countering that the payments “are not contingent on any specific matter and [that] the firm does not provide retirees its current list of clients, which, like any large law firm, changes from day to day”. On January 18, another APJ on the panel, Steven M. Amundson, also withdrew, citing Centripetal’s argument that McNamara’s alleged conflicts “cast a shadow over the entire panel of judges in this IPR”. Amundson also argued that the patent owner’s motion was without merit on that issue but withdrew to “reduce the number of issues” and give another APJ sufficient time to “become familiar with the record”.

The following day, Acting Deputy Chief APJ Michael W. Kim appointed APJs Nabeel U. Khan and Michelle N. Wormmeester to replace McNamara and Amundson, respectively, joining the panel’s existing third APJ, Aaron W. Moore (who did not withdraw). The panel has yet to decide Centripetal’s motion for recusal, to which the petitioners have filed their opposition.

Additional details on the Centripetal campaign, including the Federal Circuit’s decision and prior briefing, can be found here and here.

CellSpin Fights Another Campaign Setback by Seeking Judge’s Recusal

As noted above, at least one other plaintiff—CellSpin Soft—has cited the Centripetal decision in its own defense after hitting a setback last year. In June 2022, Northern District of California Judge Yvonne Gonzalez Rogers granted summary judgment of noninfringement to a group of defendants sued by the inventor-controlled plaintiff back in 2017: Fitbit, Fossil, Garmin, Nike, Nikon, and Under Armour. The court ruled that the NPE had failed to “marshal the evidence necessary to defeat the defendants’ summary judgment motions”, suggesting that the failure is “perhaps a consequence of Cellspin’s decision to litigate this case with numerous defendants and accused products”. That grant was not CellSpin’s first summary judgment pickle, nor was this speculation the court’s first comment on the plaintiff’s litigation strategy—Judge Gonzalez Rogers having earlier criticized CellSpin for not having “filed a ‘test case’ before asserting its patents here” because those patents (according to the court) were “manifestly directed to an abstract idea”.

On January 20, CellSpin filed a motion for recusal in those six cases (and in another against Moov that has been stayed pending the outcome of the others) that cites Centripetal. Per CellSpin, recusal is necessary because Judge Gonzalez Rogers has invested in an index fund that includes holdings in Google, which it contends is not a divestiture as required under Section 455(f), “akin to putting Cisco stock in a blind trust” as addressed in Centripetal. The plaintiff also alleges that the judge should recuse herself because her husband allegedly benefits from Google through his work with McKinsey (which uses Google Cloud) and Ajax Strategies (through which he purportedly works with Google-backed startups). CellSpin argues that Judge Gonzalez Rogers should have recused herself at least as early as February 2021, when Google acquired Fitbit and thus “became a party to the lawsuit”. Even if those circumstances do not justify recusal, the plaintiff further argues that it would have been separately necessary as early as April 2022, when her husband began working for Ajax. Moreover, CellSpin asserts that since the court applied the same reasoning as the Fitbit case in the others also dismissed, recusal is necessary in those actions as well.

That same day, Judge Gonzalez Rogers referred the motion “for assignment to, and decision by, another judge of this court”. However, the judge then withdrew that referral on January 23 “[u]pon further reflection, and to promote transparency”.

CellSpin’s persistence here could be explained by evidence suggesting that it has received third-party litigation funding—and thus, that it may be under pressure to provide certain returns to its investors. In July 2018, several months after it kicked off this campaign, the plaintiff recorded security interests in its patent holdings, including the asserted patents, as granted to the three named inventors and nine other individuals: Ram V. Akella, Amir Khan, David C. Lin, John W. Kastelic, James Bland Kessinger, Eamonn McSweeney, Neil Silverman, Rajeev Virmani, and Donald A. Williams. Those documents filed with the USPTO indicate that each new filing is a supplement to one among an earlier set of security agreements from the 2007-2008 timeframe. UCC filings made around that same time reflect interests granted to Akella, Kastelic, Khan, and McSweeney, and show that those interests are not set to lapse until July 2023. In response to the Northern District of California’s disclosure requirements, however, CellSpin has identified no nonparties having an interest in the outcome of the litigation—and has shifted, for its most recent complaint, to the Eastern District of Texas, where disclosure rules are less demanding.

For more background on CellSpin and its prior setbacks, see “CellSpin’s Litigation Strategy Dinged Again” (June 2022).

Amici in Delaware Transparency Battle Cite Centripetal

Finally, Centripetal has also been invoked in a set of appeals stemming from a broader dispute over transparency in Delaware. Over the past several months, patent litigants have been closely watching a “Series of Extraordinary Events” that have been playing out in that district as the result of a pair of standing orders issued by Chief Judge Colm F. Connolly in April 2022: one requiring litigants in his courtroom to disclose details related to any nonrecourse funding arrangements with third parties, and the other forcing the broad disclosure of corporate management and control.

While all parties appearing before Judge Connolly must comply with these orders, perhaps the most impacted has been monetization firm IP Edge LLC. Throughout the fall, Judge Connolly repeatedly questioned a group of plaintiffs apparently connected to IP Edge over their alleged noncompliance with his standing orders—including for their failure to disclose links to IP Edge as well as an associated entity, the supposed consulting firm MAVEXAR LLC. After discovering this, Judge Connolly held a series of especially revealing evidentiary hearings and then ordered the parties to produce a wide-ranging ream of information on their ownership/control, assets, and legal representation. Judge Connolly has since rejected attempts to reconsider those orders, while a related battle is now playing out before the Federal Circuit: one plaintiff linked to IP Edge, Nimitz Technologies LLC, is fighting the recent denial of its appeal, arguing that Judge Connolly’s investigation has violated core principles of attorney-client privilege, while two related plaintiffs have challenged his authority to issue the standing orders in the first place.

A group of amici have filed briefs in those appeals that support the goals underpinning Judge Connolly’s standing orders. For instance, Intel has argued that Judge Connolly’s standing orders on litigant disclosures “serve important purposes, including helping the court screen for potential conflicts and promoting the public interest in transparency”. Intel characterizes both of these goals as “critical in an era of opaque litigation funding and hedge-fund driven litigation, in which investors gamble on inflated damages awards and serial litigation, while concealing their identities and involvement behind shell NPEs”. The company underscores the importance of identifying conflicts early to avoid the types of conflicts like what occurred in the Centripetal case, citing both that ruling and the Wall Street Journal’s report on judges’ financial conflicts—asserting that such belatedly discovered conflicts “not only create a risk of ‘injustice to the parties in the particular case,’ but also ‘risk … undermining the public’s confidence in the judicial process’”.

Another brief filed by the US Chamber of Commerce and Lawyers for Civil Justice (LCJ), which more narrowly addresses questions over the standing order related to funding disclosures, argues that such heightened disclosure requirements are necessary not just to avoid conflicts, but also to avoid the improper use of litigation, to ease settlement, and to “unearth potential threats to U.S. national and economic security to the extent that a case is being funded by foreign money—e.g., sovereign wealth funds, which are increasingly a source of lawsuit funding in this country”.

For the latest on this fight in Delaware, see “IP Edge-Tied Plaintiffs Go Zero for Four in Petitions for Writs of Mandamus” (January 2023).


Thank you for your feedback