INTELLIGENCE

Federal Circuit Vacates $2.75 Billion Award Due to Violation of Judicial Recusal Statute

July 11, 2022

Authored by Jonathan Herstoff and Peter Kotecki

In Centripetal Networks, Inc. v. Cisco Systems, Inc., the Federal Circuit vacated a $2.75 billion judgment against Cisco, finding that the district court judge failed to cure a conflict of interest by putting his wife’s Cisco stock in a blind trust instead of recusing himself or divesting himself of the shares.1

BACKGROUND

Centripetal Networks, Inc. sued Cisco Systems, Inc. for infringement of ten patents covering “systems that perform computer networking security functions.”2  The case—originally assigned to Judge Mark S. Davis—was reassigned to Judge Henry C. Morgan, Jr.3  After hearing final arguments, Judge Morgan found out that his wife owned $4,687,99 in Cisco stock.4  Judge Morgan then notified the parties about his wife’s purchase.5  He stated that his decision in the case could not have been influenced by these shares, as he had already decided “[v]irtually every issue” prior to learning about the stock.6

In response, Cisco filed a motion requesting that Judge Morgan recuse himself.7  At the oral argument, Judge Morgan explained that he put his wife’s stock in a blind trust instead of selling it.8  Judge Morgan subsequently denied Cisco’s motion to recuse, reasoning that even if the statute governing recusal of judges applied to him, the use of a blind trust for his wife’s stock constituted a “divestiture” that “cured” any potential conflict of interest.9

The relevant recusal statute states:

(a) Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.

(b) He shall also disqualify himself in the following circumstances: . . .

(4) He knows that he, individually or as a fiduciary, or his spouse or minor child residing in his household, has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding . . .

(f) Notwithstanding the [above], if any . . . judge . . . would be disqualified, after substantial judicial time has been devoted to the matter, because of the appearance or discovery, after the matter was assigned to him or her, that he or she individually or as a fiduciary, or his or her spouse . . . has a financial interest in a party (other than an interest that could be substantially affected by the outcome), disqualification is not required if the . . . judge [or his spouse], as the case may be, divests himself or herself of the interest that provides the grounds for the disqualification.10

In an Opinion and Order issued after the order denying Cisco’s motion to recuse, Judge Morgan found that Cisco willfully infringed the patent claims at issue.11  He awarded Centripetal damages that were enhanced to a total of $1,889,521,362.50, along with $13,717,925 in pre-judgment interest and a running royalty.12

FEDERAL CIRCUIT OPINION

I. Divestment

First, the Court addressed whether Judge Morgan’s wife satisfied the divestiture exception in Section 455(f) when she put her Cisco stock in a blind trust.13  In general, federal judges cannot decide cases when they have “a known financial interest in a party.”14  The Court found that ownership of Cisco stock was clearly a financial interest in Cisco.  Additionally, “substantial judicial time ha[d] been devoted to the matter.”15  Consequently, the Court considered whether placing stock in a blind trust constitutes divestment.16

When individuals turn to blind trusts, they often seek to avoid conflicts of interest.17  In a blind trust, an independent trustee oversees assets without disclosing how they are managed.18  This process is different than selling one’s financial interest in a company, the Court concluded.19  Although Section 455 does not define “divest,” the statute requires divestment of “ownership of a legal or equitable interest, however small.”20  The Court reasoned that divestment must involve the sale or giving away of the interest.21  Otherwise, an individual cannot be “deprived or dispossesse[d]” of their interest.22

The Court concluded that the recusal statute’s purpose would be undermined if use of a blind trust constituted divestment of a financial interest.  If a trustee does not sell a party’s stock interest after creating a blind trust, a judge can stay on a case despite knowing about his or her “beneficial interest in the outcome.”23  In this case, a trustee did not sell Judge Morgan’s wife’s interest right after the blind trust was created.24  And even if a trustee had immediately sold the Cisco stock, the Court concluded that allowing use of a blind trust to constitute divestment would contradict a different part of the recusal statute.25  Under Section 455(c), a judge must “make a reasonable effort to inform himself about the personal financial interests of his spouse . . . .”26  But if Judge Morgan and his wife put the assets in a blind trust, Judge Morgan would not be able to comply with Section 455(c) because he would no longer have information about the assets.27

The Court concluded that placing one’s assets in a blind trust does not constitute divestment under the recusal statute, so Judge Morgan was disqualified from staying on the case after finding out about his wife’s Cisco stock.28

II. Remedies

Given that Judge Morgan and his wife failed to “divest” themselves of their Cisco stock, the Court addressed the proper remedy as well.  To determine whether Judge Morgan’s orders should be vacated, the Court applied the doctrine of harmless error.29  Three factors—as described in Liljeberg v. Health Services Acquisition Corp.—govern this analysis: [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.”30  The Court concluded that all three factors weighed against a finding of harmless error.31

Regarding the first Liljeberg factor, the Court distinguished this case from times courts found harmless error.32  This case did not involve a pure question of law subject to appellate review, as Cisco’s appeal on the merits focused on Judge Morgan’s use of discretion to make factual and credibility findings during a bench trial.33  Additionally, Cisco did not delay raising a ground for recusal, as it moved for Judge Morgan to recuse himself only nine days after the judge disclosed his wife’s financial interest.34  Moreover, Centripetal did not show that the evidence had become stale due to the passage of time.35  As the Court noted, a different judge could simply decide the case on remand using the previous trial’s transcript.36  And finally, neither party showed “special hardship” based on their reliance on Judge Morgan’s orders.37

The Court emphasized that Judge Morgan’s opinion was subject to change until the day it issued, and the judge admitted he had not “decided 100 percent” of the case before learning of the Cisco stock.38  In any event, Judge Morgan drafted only 130 of the issued opinion’s 167 pages before learning about his wife’s financial interest.39  After finding out about the stock, Judge Morgan still had pending post-trial motions and issued more opinions.40 While Centripetal argued that actual bias must be shown for a risk of injustice to exist, the Court disagreed.41  “Making such a bias determination would require the sort of line drawing that the statute was designed to avoid,” the Court reasoned.42  The risk of prejudice, the Court added, exists no matter which party’s stock a judge owns.43  Here, even though Judge Morgan ruled against Cisco, there was still a risk that he would “bend over backwards to . . . try to prove that there is no bias.”44

The Federal Circuit concluded that vacating Judge Morgan’s orders would not lead to injustice in different cases.45  Even if the facts in this case are unique, “they are symptomatic of an increasingly common problem,” the Court stated.46  While a vacatur would encourage other judges to comply with Section 455(f), a failure to vacate would signal that judges may sit on cases in which their family members have financial interests.47

In fact, a denial of vacatur would risk “undermining the public’s confidence in the judicial process,” the Court reasoned.48  In light of recent events, the Court noted, vacatur is particularly important when a judge sits on a case in which he or she has a known financial interest.49  In 2021, The Wall Street Journal reported that 131 federal judges remained on cases in which they had financial interests.50  A few months later, Chief Justice Roberts issued his 2021 report, where he emphasized the need for judges to comply with ethical rules.51

The Court concluded that Judge Morgan’s violation of the recusal statute was not harmless error.52  As such, the Court vacated all of the orders Judge Morgan issued after learning of his wife’s financial interest.53  Although Centripetal argued that the case did not need to be reassigned to another judge, this argument was moot, as Judge Morgan passed away in May 2022.54  The Court vacated the damages award of more than $2.75 billion and remanded the case for reassignment to a new judge.55

1 Centripetal Networks, Inc. v. Cisco Sys., Inc., No. 2021-1888, 2022 WL 2252638, at *1, *6 (Fed. Cir. June 23, 2022).
2 Id. at *1.
3 Id.
4 Id.
5 Id.
6 Id.
7 Id. at *2.
8 Id.
9 Id. at *3.
10 28 U.S.C. § 455.
11 Cisco, 2022 WL 2252638, at *3.
12 Id.
13 Id.
14 Id. at *4 (quoting Chase Manhattan Bank v. Affiliated FM Ins. Co., 343 F.3d 120, 127 (2d Cir. 2003)).
15 Id.
16 Id.
17 Id.
18 Id. (quoting Blind Trust, WEBSTER’S NEW WORLD DICTIONARY (3d ed. 1988)).
19 Id. at *4-6.
20 Id. at *5.
21 Id.
22 Id.
23 Id. at *6.
24 Id.
25 Id.
26 Id.
27 Id.
28 Id.
29 Id. at *7.
30 Id. (quoting Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 864 (1988)).
31 Id.
32 Id.
33 Id.
34 Id. at *8.
35 Id.
36 Id.
37 Id. at *9 (quoting Liljeberg, 486 U.S. at 869).
38 Id.
39 Id.
40 Id.
41 Id. at *9-10.
42 Id. at *10.
43 Id.
44 Id.
45 Id. (quoting Liljeberg, 486 U.S. at 868).
46 Id.
47 Id.
48 Id. at *11 (quoting Liljeberg, 486 U.S. at 864).
49 Id.
50 Id. (citing James V. Grimaldi, Coulter Jones & Joe Palazzolo, 131 Federal Judges Broke the Law by Hearing Cases Where They Had a Financial Interest, WALL ST. J. (Sept. 28, 2021, 9:07 AM), https://www.wsj.com/articles/131-federal-judges-broke-the-law-by-hearing-cases-where-they-had-a-financial-interest-11632834421). In response, Congress passed the Courthouse Ethics and Transparency Act to require judges to disclose their financial interests in a timely manner. Id.
51 Id. (citing CHIEF JUSTICE JOHN G. ROBERTS, JR., 2021 YEAR-END REPORT ON THE FEDERAL JUDICIARY 3).
52 Id. at *12.
53 Id.
54 Id.
55 Id.

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