By: Jennifer Pepin
One of the largest patent infringement judgments in history against the tech giant Cisco, is in jeopardy of being reversed after the Federal Circuit court discovered the judge’s wife owned 100 shares of Cisco stock. In 2020, Centripetal, a small startup company, won what eventually became a $2.7 billion patent infringement judgement. Now, Cisco is appealing the judgment for numerous issues, including the argument that Judge Morgan should have recused himself because his wife owned Cisco stock. This argument has great veracity considering the unanimously approved legislation in February that imposes stricter stock disclosure requirements on federal judges.
Centripetal obtained five patents between 2015 and 2018 for different security technologies that can detect malware encrypted inside data flowing through networks and stop hackers from stealing confidential data. Cisco implemented that patented technology which became a critical part of Cisco’s security infrastructure because it provided a new method for identifying threats in encrypted material. The startup company sued the tech giant on claims that Cisco was using its patented network protection technology. Centripetal won on four out of its five patent infringement claims against Cisco after a 22-day bench trail. The district court ruled Cisco had to pay Centripetal $755.8 million for using its inventions. After discovering Cisco’s infringement was willful and egregious the court more than doubled the damages and included additional royalties. Cisco was found to have direct knowledge of the patents. One year after the parties met and shared confidential information regarding Centripetal’s algorithms, Cisco released the “network of the future” which provides users with the same software security that Centripetal patents would provide. The court found these facts go beyond mere coincidence.
The Federal Circuit is now putting the stock disclosure issue at the center of the $2.7 billion judgement. For the month of April, the court plans to hear oral arguments looking only at whether the federal judge Morgan, whose wife owned 100 shares of Cisco stock, should have recused himself. Cisco lawyers argue “[r]uling against the party whose stock is owned cannot excuse a violation, as the motivation to deflect criticism can also skew the decision-making process.” Judge Morgan’s wife bought stock only six months before the start of the trial which Cisco argues taints the ultimate finding of the trial. Judge Morgan claims the shares did not influence his opinion on any of the issues in the case.
Lawmakers watching the court have become increasingly concerned with Supreme Court justices ruling in favor of companies that they owned stock in. The U.S. Senate overwhelmingly passed legislation to subject federal judges to stock trading reporting in order to enforce stricter transparency rules. Supreme Court justices disclose their financial holdings annually, but they are not required to report their stock trades in real time. Even when it is a justice’s spouse who own the stock, lawmakers have found the financial interwovenness that marriage evokes can lead to unacceptable biases. The issue arose after the Wall Street Journal reported more than 130 judges failed to recuse themselves from at least 950 cases in which the judges or their families owned stock. Courts use automated screening procedures to ensure judges are not assigned cases involving companies they are invested in, but screening software many conflicts of interest. According to the report, judges more often than not ruled in favor of the company that they were invested in. Stock reporting requirements have not become law yet as Senate Legislation and a similar Bill passed by the House of Representatives last December still have some differences that need to be worked out.
The unanimous decision to enforce stricter stock trading reports makes it like that Centripetal’s case will to be sent back to trial. This is extremely unfortunate for Centripetal as they had won one of the largest patent infringement awards and are now in jeopardy of having to retry the case. Patents allow emerging companies, like Centripetal, to compete in the tech industry. Without the protection of a patent, large tech companies can monopolize the tech industry. Patents protect companies but our judiciary still needs to protect our confidence in our judicial system. A judge must recuse himself when any financial conflict of interest arises because having a financial interest in a party can substantially affect the outcome of the court proceeding. Although Justice Morgan dismissed these concerns by stating he “had no knowledge of [his] spouse’s stock ownership” until the decision was “mostly drafted.” If the Centripetal judgement is overturned, the court will be setting a new precedent of strict financial disclosure.
Student Bio: Jennifer Pepin is currently a second-year law student at Suffolk University Law School and a staff member on the Journal of Hight Technology Law. Prior to law school, Jennifer received a Bachelor of Arts Degree in Business from the University of Southern Maine.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
