View this email in your browser.
MBHB Sponsorship Banner
From Today: 

Supreme Court: Judicial Stock Ownership and the Requirements of Recusal

by Dennis Crouch

Back in June, I wrote about the Federal Circuit’s wild decision in Centripetal Networks, Inc. v. Cisco Sys., Inc., 38 F.4th 1025 (Fed. Cir. 2022). Dennis Crouch, Judicial Recusal Order Saves Cisco $2.75 Billion, Patently-O (June 23, 2022). The patentee has now petitioned the Supreme Court on a the question of whether the statute demands judicial recusal:

Whether placing stock in a blind trust satisfies 28 U.S.C. §455(f) and, if not, whether placing trivial amounts of stock in a blind trust, in lieu of selling it outright, constitutes harmless error under Liljeberg v. Health Services Acquisition Corp., 486 U.S. 847 (1988).

[Centripetal Petition]

Back in 2018, Centripetal sued Cisco, alleging infringement the claims of eleven cybersecurity related patents.  Some of the claims were cancelled in IPRs, but others made it through the gauntlet.  After staying the case for a year, the district court Judge Henry C. Morgan picked upon the case again in September 2019 and began moving forward with claims from five patents no longer subject to IPR proceedings.  Both parties waived their right to a jury trial and and the district court held a 22-day bench trial over a six-week period and a subsequent damages evidentiary hearing.  In his verdict, the district court generally sided with the patentee–finding claims from four of the five patents to be valid and infringed.  The judge also awarded a 10% royalty on infringing products–totaling $755 million in damages.  In addition, the court found that Cisco’s infringement was willful and enhanced the damage by 2.5x–upping the award to $1.9 billion for back damages.  The court also required a running royalty that likely takes the damages up  to above $3 billion by now.  This is apparently the largest patent-damage award in U.S. history.

On appeal, the Federal Circuit did not concern itself with the merits of the patent case.  Rather, the Federal Circuit vacated the entire trial and much of the pretrial action upon finding that the Judge Morgan should have recused himself from the entire case. To be clear, there was no indication that Judge Morgan was biased nor was there any legitimate claim questioning his impartiality–the problem is that Judge’s wife held $5k in Cisco stock.

The general rule for judicial recusal was codified by Congress in 28 U.S.C. § 455(a):

[A Judge] shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.

Id. This standards-based statute is followed by a series of express rules, including the following on ownership:

He shall also disqualify himself in the following circumstances: . . . He knows that he, individually or as a fiduciary, or his spouse … has a financial interest … in a party to the proceeding.

28 U.S.C. § 455(b).  The statute also provides an avenue for curing this situation under § 455(f).  In particular, the statute states that “disqualification is not required” in a situation where the judge has devoted “substantial judicial time” so long as the judge (or their family member) “divests himself or herself of the interest that provides the grounds for the disqualification.” 28 U.S.C. § 455(f).

The bench trial ended in June 2020.  On August 11, Judge Morgan was in the process of writing writing-up has decision when he became aware that his spouse owned 100 shares of Cisco stock (valued at $4,687.99).  He recognized at that point that he should get her to sell the shares immediately, but there was a big problem. Judge Morgan was just about to issue a multi-billion-dollar judgment against Cisco that would likely cause the stock to drop.  He had already decided most of the issues and written 130 pages of the eventual 167 page opinion.  It would look really bad if he sold the stock with that insider knowledge and, according to Judge Morgan “undermine the purpose of section 455.”  So, Judge Morgan instead placed the stock into a blind trust, with instructions for the trustee using his own decision-making to eventually sell of the Cisco stock.  Judge Morgan was supposed to be notified once the assets had been sold-off.  And, apparently the trust still held Cisco stock at the time he issued his final judgment.

Placing stock in a trust did shift the ownership: A trust is legally owned by the trustee rather than his spouse. However, § 455(b)/(f) are not tied to ownership, but rather a “financial interest.” And, it appears that the spouse was still the beneficiary of the trust.

On appeal, the Federal Circuit held that the statute required divestiture, and transferring title and control to a trustee was insufficient.  Rather, the stock needs to be either sold or donated — that “is the only cure envisioned under § 455(f).” Centripetal Networks, Inc. v. Cisco Sys., Inc., 38 F.4th 1025 (Fed. Cir. 2022).

Pause for a note on impartiality: A person’s ownership of Cisco stock would tend to make them want the stock price to go up. When Judge Morgan raised the issue, Centripetal announced that it had no problem with the Judge’s ownership; But Cisco complained.  Why did Cisco complain–because it had lost its pretrial motions and it  strongly suspected that the case was going to be decided in Centripetal’s favor.  I.e., its reason for complaint had nothing to do with partiality or bias, but only as a technical rule to allow it to escape from judgment and seek a new, potentially more favorable judge.

Is it Harmless Error: Despite this situation where the actual judgment goes against the apparent bias potential, the Federal Circuit rejected the argument of “harmless error.”  In a number of prior cases, the courts have held that “mandatory recusal does not require mandatory vacatur.”  In other words, the fact that a judge was supposed to have recused himself under the rule does not automatically require an appellate court to vacate that judgment.  The basic harmless error test outlined by the Supreme Court in Liljeberg asks three questions:

  1. What is the risk of injustice to the parties in the particular case?
  2. What is the risk that denial of relief here will result in injustice in other cases?
  3. What is the risk that denial of relief here will undermine the public’s confidence in the judicial process?

In reviewing these elements, the Federal Circuit found them to all favor vacatur in this situation.  To be clear though, the Federal Circuit’s section explaining risk of injustice to the parties reads like six pages of total BS.  The only line that sticks out as interesting is the court’s speculation that in a case like this “there is a substantial risk that [the Judge] might bend over backwards to rule against that party to try to prove that there is no bias.” Id.

In its petition for writ of certiorari, Centripetal argues that the Federal Circuit “fundamentally misconstrued and misapplied both §455(f) and harmless-error doctrine” with the result of inflicting harsh consequences against the patentee.  Particular concerns:

  1. The court focused on the word “divest” in § 455(f) and giving it a powerful meaning while “ignoring the specific context addressed” by the statute.  The court here suggests that what Judge Morgan should-have-done is sell-off the stock and create the exact appearance of impropriety that the statute endeavors to avoid.  “That is plainly not what Congress intended by expressly providing an option for judges to avoid recusal when minor financial interests are discovered after substantial judicial resources have been invested in a case.”
  2. Regarding harmless error, we can recognize that both parties agreed that the judge was not biased or partial nor did he operate with any malice or indifference.  Centripetal conjects that the Federal Circuit’s “zero-tolerance posture” was “motivated by recent public scrutiny of judicial stock ownership” rather than the specifics of this case.

[Petition].  Before the Federal Circuit, Cisco had argued that the statute demands vacatur of all judicial decisions starting from the August 11 date when Judge Morgan learned of his disqualifying financial interest. “Any other outcome would send the undesirable message that this Court does not take the disqualification statute seriously and would undermine public confidence in the judiciary.”

= = =

The Federal Circuit’s decision was authored by Judge Dyk and joined by Judges Taranto and Cunningham. Former US Solicitor General and Scalia Clerk Paul Clement is representing the patentee in the petition. Paul Andre (Kramer Levin) handled both the trial and the appeal is also on the petition.  Bill Lee (Wilmer) represented Cisco before the district court and the Federal Circuit and is likely to handle the Supreme Court briefing if a brief is requested by the Court.

Read in browser.
share on Twitter Like Supreme Court: Judicial Stock Ownership and the Requirements of Recusal on Facebook

Prior Articles:
Despite “Winning” its Appeals, Sawstop still denied Type-C Patent Term Adjustment
Canons and Canards: Recreating Prior Art
Patently-O Bits and Bytes by Juvan Bonni
Assignor Estoppel: What did the assignor “represent” as his invention?
Laser v. Dolin: Estoppel and the Billion Dollar Question of Whether an IPR Petition is filed “during” the IPR

Happy to talk through interesting cases -- Dennis Crouch

Copyright © 2022 Patently-O LLC. 
You are free to forward and share this email and its contents. 

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.