Judicial Recusal Order Saves Cisco $2.75 Billion

by Dennis Crouch

Cisco has escaped its $2.75 billion patent infringement loss with a recusal order based upon the fact that the Judge’s spouse owned $5,000 in Cisco stock. 

Centripetal Networks, Inc. v. Cisco Systems, Inc. (Fed. Cir. 2022)

Judge Dyk wrote this opinion ordering the recusal of E.D. Va. Judge Henry C. Morgan based upon his spouse’s ownership of about $5,000 of Cisco stock. The order also vacates all orders and opinions in the case entered after Judge Morgan learned of her ownership.

In this situation, the (rather small) financial interest suggests tilting things in Cisco’s favor. But, here is the crazy thing: The outcome of the case was a $2.75 billion verdict for the patentee Centripetal — i.e., Cisco lost the case. When Judge Morgan learned of the ownership, he immediately notified the parties. Centripetal indicated that it had no problem with Judge Morgan continuing to hear the case.  But, Cisco concluded that the it was likely to lose the case anyway and so requested Judge Morgan recuse himself under 28 U.S.C. § 455.   The Judge denied Cisco’s motion for recusal and eventually awarded the absolutely huge judgment against Cisco.

Spousal activity and recusal has been in the news lately with Justice Thomas and his spouse’s political advocacy.  Although judicial codes of ethics provide guidance. Congress has also created a statutory regime that requires recusal in certain situations. On point for this case, the statute calls for recusal if a judge “knows that he … or his spouse … has a financial interest … in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding.”  28 U.S.C. § 455(b)(4).  This requirement to step-down is not waivable. § 455(e).

Here it is clear that Judge Morgan falls within § 455(b)(4).  However, the statute goes on to indicate that a judge who has devoted substantial judicial time to a matter can keep the case so long as they “divest [themselves] of the interest that provides the grounds for the disqualification.”  § 455(f).  Here, Judge Morgan took the step of placing the stock in a blind trust.  However, the Federal Circuit here held that the blind trust was not sufficient for the statutory requirement of “divest[ment].”

Judge Morgan had considered simply selling the stock, but was concerned about the appearance of insider training. On appeal, the Federal Circuit added a footnote concluding that it would not have been insider trading: “Selling the stock to comply with ethical obligations is not insider trading, as was made clear in the Stop Trading on Congressional Knowledge Act of 2012 (“STOCK Act”), Pub. L. 112–105, 126 Stat. 291, 298 (2012).”

Remedy for failure to recuse.  Sometimes there is no ex post remedy for a judge’s failure to recuse.  Here, as I mentioned, the financial incentive favored Cisco, but it is also Cisco that is asking for vacatur.  Centripetal argued that the failure to recuse was  thus a harmless error.  In Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 862 (1988), the Supreme Court highlighted three factors in considering whether failure to recuse was harmless:

(1) “the risk of injustice to the parties in the particular case”;

(2) “the risk that the denial of relief will produce injustice in other cases”; and

(3) “the risk of undermining the public’s confidence in the judicial process.”

Id. On appeal, the Federal Circuit suggested that all three factors weighed in favor of recusal.  The court noted that the statute is purposely designed to require recusal without proving any actual bias.

Making such a bias determination would require the sort of line drawing that the statute was designed to avoid. . . . The reason § 455(b)(4) establishes a bright-line rule and does not require a showing of prejudice is because of the great difficulty in establishing actual prejudice in any particular case.

Slip Op.  On remand, the case will be re-assigned and rolled-back to August 2020.  That will likely require a new trial in the case.

Note that Judge Morgan passed away in May 2022. He was 87 years old. RIP.

32 thoughts on “Judicial Recusal Order Saves Cisco $2.75 Billion

  1. 14

    “That will likely require a new trial in the case.”

    Oh, to be a patent litigator! Those guys will really make bonus this year!

  2. 13

    A mere $5000 is laughable, in some contexts, a de minimus amount. Even if the 5k blossomed into 50k, it’s still not life-changing. $5k seems an irrelevant amount, and not enough, but that’s just me.

    1. 13.1

      I think for a not insignificant number of people, a windfall of $45,000 could be life-changing.

      1. 13.1.1

        Yeah, I mis-wrote a little, but figure a Judge usually by the time they’re a Judge, they’ve saved up enough that $5k is really not much. Had the W owned 50k worth, it’d be more significant. I’d like to think our Judges aren’t that easily swayed by such relavitely small amounts. Although ppl have sold themselves out for less, I like to think Judges aren’t that weak. Even 1k is a fortune if you need it and don’t have it.

  3. 12

    Since there is no standard of materiality or proportionality in the recusal rules, the simple solution would be to bar Judges and their spouses from owning publicly traded securities.

    Virtually every judge likely has some form of index fund holdings, and so some stake in almost every major party that would come before them.

    Seems like a due-process failure for Centripetal more than a win for judicial ethics.

    1. 12.1

      > bar Judges and their spouses from owning publicly traded securities.

      I’d say the same wrt *all* senior government officials (GS-15, O-6, political appointees, Judges, Senators, etc.) Ditto wrt deferred compensation. And, of course, strict recusal rules if you have any financial interest (I’m looking at you NIH)

      They can transfer everything into a blind trust before their appointment is finalized.

      1. 12.1.1

        Given the limitations stated for Blind Trusts, would that even be enough?

        I could get behind a total ban — maybe make it a part of overall cleansing of Dark Money and the i l l effects of corporate influence (start with abrogating Citizens United).

  4. 11

    “upon his spouse’s ownership of about $5,000 of Cisco stock” You’ve got to be kidding me. This is absurd. 2.5 billy isn’t going to make that big of a difference in that stock price that it can even make a dent in the 5k, and 5k is practically nothing to judges making 100k+ anyway. 2.5billy being put in jeopardy (if it is, I cannot tell) over 5k is also beyond absurd.

    1. 11.1

      6,

      In its face, this snippet from the decision makes a fair enough point:

      Finally, to the extent that Centripetal argues that there is no need to vacate Judge Morgan’s rulings because his wife owned stock in the losing party (and his interests would be adversely affected, not benefited, by his decision), see Appellee’s Resp. Br. at 63, that fact does not remove the risk of prejudice. Where a judge becomes aware of a possi- ble 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. See In re Sch. Asbestos Litig., 977 F.2d at 782 (“[B]ias c[an] manifest itself in a number of ways.”). Congress did not make recusal obligations contingent on which party’s stock was owned, and we are aware of no case suggesting that this is a relevant factor.

      Of course, it would be a (thoughtless) mistake to leave this ON its face and and not take the facts (and perspective) of the case into the decision making process.

      It is more than a bit L A Z Y to leave it at “we are aware of no case,” as THIS could BE the case that the fact pattern reinforces an aspect of the law.

  5. 10

    What makes this rather funny (for lack of a better word) is that the President of Centripetal was sitting in front of a Congressional Committee yesterday complaining about the PTAB. His company spent years and years litigating in District Court and the Federal Circuit, yet he is complaining about the PTAB.

    1. 10.1

      Would you not complain?

      You have an entity that invested time, effort and no doubt money (even with a possible taint in a judge against you), you WIN, and now someone not only wants to take that away, but toss you into a KNOWN more-worse case system.

      I would be more concerned if they did NOT complain.

      1. 10.1.1

        Anon, I’d complain about the source of the problem, which in this case had nothing to do with the PTAB.

        1. 10.1.1.1

          count filtered…

          Your comment is awaiting moderation.

          June 24, 2022 at 9:55 am

          Your point is valid.

  6. 9

    . . . and just imagine what would happen if PTAB “judges” were held to anywhere near the high ethical standard that real, district court judges are.

    Just imagine . . .

    (THIS is one of the improvements Congress should make to the PTAB Reform Act of 2022.)

  7. 8

    Is it really clear that the STOCK act exempts “sales” from insider trading laws? The closest section I see is the “derogation of the obligations” language in Section 10…I mean, I can see how they could interpret it that way, but I can also see alternative interpretations, particularly given the overall intent of the STOCK ACT was to end such exemptions.

    SEC. 10. RULE OF CONSTRUCTION.
    Nothing in this Act, the amendments made by this Act, or
    the interpretive guidance to be issued pursuant to sections 3 and
    9 of this Act, shall be construed to—
    (1) impair or limit the construction of the antifraud provisions of the securities laws or the Commodity Exchange Act
    or the authority of the Securities and Exchange Commission
    or the Commodity Futures Trading Commission under those
    provisions;
    (2) be in derogation of the obligations, duties, and functions
    of a Member of Congress, an employee of Congress, an executive branch employee, a judicial officer, or a judicial employee, arising from such person’s official position; or
    (3) be in derogation of existing laws, regulations, or ethical
    obligations governing Members of Congress, employees of Congress, executive branch employees, judicial officers, or judicial
    employees.

  8. 7

    Part of the backdrop of this case was that the WSJ broke a huge story a year ago where many judges were violating judicial ethics by ruling on patent cases where they had stock in a party. Judge Gilstrap of the EDTX was the main offender. The Chief Justice commented on the scandal (and it is a legitimate scandal).

  9. 6

    Hard to believe that this isn’t being driven by the anti-patent biases of the CAFC and Dyk in particular.

    We really have reached a two-tier system. One set of laws for the infringers and another for the patentees. Third-world country status.

    1. 6.1

      And did this have the slightest effect on the outcome of a multi-million dollar trial where 10’s of thousands of hours of human life were expended? No.

      Could the CAFC have figured out a fair way to have rule the other way? Yes.

  10. 5

    87 years old and still on the bench. hmm.

  11. 4

    Good grief. The story would have been more interesting if Judge Morgan’s wife had a 5k SHORT position on Cisco. Can you even own a market index – that doesn’t have Cisco in it?

    1. 4.1

      There is a fair enough point in the decision that either shorting or benefitting MAY invoke a concern (see my post above), but the Court here went L A Z Y and turned that “may” into a “must.”

  12. 3

    There was a blind trust here, but the decision says “The Judicial Conference’s Committee on Codes of Conduct has ruled, well before the events of this case, that “[a] judge’s use of a blind trust does not obviate the judge’s recusal obligations.” But surprised the amount of stock compared to the total amount of the trust was not discussed or considered relevant.

  13. 2

    Is Justice done in this case? Clearly the intent was to prevent bias FOR a particular party.

    Let’s play the Devil’s Advocate and suggest that because the judge WAS influenced, he tilted the scales towards that influencing party.

    But the decision was against that influencing party.

    What should have been the result is that the result should not be affected – but perhaps the level of the penalty should be reviewed.

    If this indeed results in a benefit for the influencing party — where none previously existed — then it would be fair to characterize this as a MIScarriage of justice.

    1. 2.1

      Centripetal made this argument and the opinion answers it

      1. 2.1.1

        Thanks dcl – my comment above to 6 was inspired by your reply.

    2. 2.2

      >What should have been the result is that the result should not be affected – but perhaps the level of the penalty should be reviewed.

      Even there, given that the actual aggrieved party waived the issue, then from a justice perspective, the Fed Circuit should have called it a harmless error. At most, maybe give notice that future such cases will result in censure for ‘sloppiness.’

      tbh, I’m not a litigator, but I’m surprised Cisco had standing on these facts.

  14. 1

    “ Judge Morgan had considered simply selling the stock, but was concerned about the appearance of insider training. ”

    What the …?

    1. 1.1

      From the decision (you may want to read before you leap):

      Additional info

      “On September 9, 2020, Judge Morgan heard oral argument on the motion. At the hearing, Judge Morgan stated that at the time he learned of his wife’s ownership of the Cisco stock, he had already completed a 130-page draft of his opinion, though he had not “decided 100 percent of it.” J.A. 18580. He told the parties that although he recognized “the simplest thing would be to sell the stock,” he had “al- ready strongly indicated that [he] might be considering awarding damages in the case” by “ask[ing] for additional evidence on damages” at trial, “and that might mean that [the final] judgment would have an adverse effect upon Cisco’s stock.” J.A. 18577. Selling the stock in light of that possibility, he said, “would defeat the very purpose of the Rules,” implying concern about insider trading. Id.”

      1. 1.1.1

        that is why he then had to RECUSE. Simple. Not remotely a tough call; the Federal Circuit got it right.

        1. 1.1.1.1

          That just does not seem right then — as that neuters even the ability to correct.

          There is a difference between getting something right in a wooden manner and only to the letter, and missing for violating the reason why the rule is there in the first place.

          This is NOT one to “celebrate” for getting it right (even as I concede that you may have the better position).

        2. 1.1.1.2

          >that is why he then had to RECUSE.

          Yes, but he didn’t do so before trial. So now we need to ask whether throwing out the existing jury verdict (in favor of the aggrieved party here) is a just remedy for the Judge’s negligence. Vs. censure and/or impeachment.

          >That will likely require a new trial in the case.

          1. 1.1.1.2.1

            OC – the fact pattern here is a bit different on a number of fronts.

            – this was not a “before trial” situation, as the matter at point came to light well past the 80% point.

            – the relative degree of impact is a part of the fact pattern

            – remedy of censure and/or impeachment (which is unduly extreme to begin with) are off the table (as Crouch provides, the judge has died); and

            – your (foregone) conclusion of a total new trial is more than a bit tone deaf to the situation.

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