Paying The Premium (Part I)

// By now, IP lawyers should know that sneaking a billion-dollar patent verdict past a Federal Circuit panel carries with it a degree of difficulty that approximates asking me to replicate a Simone Biles floor routine. Or you, if we all want to be honest about our collective lack of ability to match the maneuverings of a gold-medal-winning Olympic gymnast. The point is a simple one. Winning a big verdict in a patent case is a challenge. Getting it affirmed in the Federal Circuit is a near impossibility. The difficulty becomes amplified when the focus of the case — and flexibility in terms of crafting a winning settlement — is limited by circumstance or the whims of the patent owners to a binary “pay us as much money as possible because we have patents you infringe” patentee case strategy.

A big part of the problem for patent owners, of course, is that there are so many ways to lose a patent case. Add in that, for many patent owners, the length of the litigation process is not their friend, especially when considering appeal timing, and even a remand of a case back to the trial court can feel like a huge loss. One closely watched Federal Circuit case illustrates these two challenges for patent owners very well. That case, Centripetal Networks v. Cisco, only involves one of the biggest pre-appeal patent awards ever, with a near billion-dollar award against Cisco enhanced post-trial to nearly three billion by the now-deceased Eastern Virginia trial judge, Henry Coke Morgan Jr. Under the circumstances, we might expect that the Federal Circuit appeal would revolve around questions of Cisco’s loss on the merits, or even whether enhancement was correct, both in terms of the decision to enhance as well as the measure of enhancement. But that was not the issue decided in a widely reported decision issued on June 23 of this year.

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Instead, one of the biggest patent verdicts of all time was waylaid by the purchase of less than $5,000 of Cisco stock by the late judge’s wife. As things turned out, Cisco was saved by the fact that it had timely lodged an objection to the judge not recusing himself from the case. But that was not enough. In order for the Federal Circuit to determine that the judge was disqualified from hearing the case once he became aware of his wife’s stock purchase, it had to pass judgment on whether the judge’s placing of the Cisco stock in a blind trust met the statutory requirement of divestiture of a disqualifying financial interest in a party. The panel concluded it did not, for two reasons. First, because allowing the judge to sit on a case even with a blind trust in place would conflict with the purpose of the recusal statute — as the judge would be aware he or she had an interest in one of the parties. Second, the existence of a blind trust would conflict with the requirement that a judge “‘keep informed’ about financial interests” under the ethical canon on which the recusal statute is based.

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Having determined that recusal was appropriate under the circumstances, it was a simple next step for the Federal Circuit panel to further find that none of the exceptions to disqualification applied under the circumstances. Indeed, the panel found most significant that refusing to vacate the judgment rendered by a judge subject to disqualification “would strike at the heart of what the statute was designed to protect” namely to “promote public confidence in the integrity of the judicial process.” To Cisco’s delight, therefore, the judgment was vacated in its entirety, with the case remanded for further proceedings.

In effect, Cisco was awarded a full do-over in the case, aided by the unfortunate passing of the trial judge, the Hon. Henry Coke Morgan Jr., earlier this spring. In perhaps the best bit of news for Cisco, the case was remanded “for further proceedings before a newly appointed judge, who shall decide the case without regard for the vacated opinions and orders.” What an epitaph for what had formerly been one of the blockbuster patentee successes up to that point. While finding a saving grace for Centripetal in the ensuing delay to getting a payday from Cisco may be a difficult task — especially since other prospective licensees continue to file IPRs against Centripetal’s patents — they can perhaps take solace from the fact that the Eastern District of Virginia remains one of the quickest courts to trial in the nation. But I suspect before the case ends up back in Virginia, we will see a round of rehearing and en banc appeals in the Federal Circuit, perhaps followed by a request for Supreme Court review. Any way you look at things, it appears that unless Centripetal is willing to cut its expectations and cash out for a quicker settlement, this case will stretch on for quite some time to come.

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Ultimately, the Federal Circuit’s decision highlights the random risks that can derail a patentee’s train ride to riches. And how well-resourced defendants like Cisco can afford to avoid panic settlements, even in the face of outsized damages awards at trial. The latter is perhaps most true when there is a reasonable case-winning defense that can be pressed by the defendant, where that argument has the ability to upset the entire result if accepted on appeal. Whether that is a written description in a big-ticket pharma royalty dispute, or an equitable argument like unclean hands, or even a disqualification attempt aimed at the trial judge — recent history has shown us that mega-verdicts in patent cases face significant appellate risks. With those risks sometimes threatening to undercut the patent owner from unexpected angles. What the implications of those risks are — for patent owners, funders, and everyone’s new best friends in the patent monetization game, insurers, is something I will discuss next week.

Please feel free to send comments or questions to me at [email protected] or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.

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Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at [email protected] or follow him on Twitter: @gkroub.

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Centripetal Networks v. Cisco, Gaston Kroub, Henry Coke Morgan Jr., Intellectual Property