Cisco’s Appeal of $2.75B Award Raises Important Questions on Direct Infringement and Apportionment

When the US Court of Appeals for the Federal Circuit in early April hears arguments on the $2.75 billion judgment that Centripetal Networks won against Cisco Systems, the court only wants to hear about one issue.

It has ordered attorneys for both sides to argue solely about the district judge’s decision not to recuse himself in view of his wife’s stock ownership in Cisco. If the Federal Circuit decides recusal was not necessary, it will consider arguments on the merits of the appeal later.

The $1.9 billion jury verdict – increased to $2.75 billion with pre-judgment interest - is certainly eye-catching, but the case could have an impact beyond the magnitude of damages. If the Federal Circuit eventually reaches the merits, there are two key issues—direct infringement involving combinations of products, and apportionment in a damages computation—that will certainly attract the attention of the IP industry.

Centripetal claimed that Cisco obtained significant, sensitive information regarding Centripetal’s network security techniques while under a non-disclosure agreement. After these negotiations ended, Cisco released various products in the same area of technology and sold them individually, although the products could be used together by their purchaser. Centripetal  asserted 11 cybersecurity patents against Cisco. The case was tried virtually during the early days of the covid-19 pandemic and lasted 22 days. Despite Centripetal not asserting induced or contributory infringement at trial, the district court found that a collection of Cisco products, when used together, infringed four of the 11 patents.

On the merits, two of the appealed issues are of particular interest:

1. Whether the patents are directly infringed when Cisco sells the accused products separately but are combined by end-users;
2. Whether the district court properly calculated damages given that the accused products have features beyond those accused of infringement.

According to Cisco, the district court erroneously found infringement despite no indirect or contributory infringement claim at issue. Cisco also argues that even if the patents are directly infringed by a collection of Cisco products, the damages award lacked proper apportionment.

At the oral argument, Cisco will argue that US District Judge Henry Morgan of Virginia should have recused himself due to his wife’s ownership of Cisco stock. Cisco contends that he was required under 28 U.S.C. § 455(b) to recuse himself, and that his refusal to do so undercuts public confidence with the judiciary’s statutory obligations. Centripetal counters that the amount of stock in question—100 shares, valued at less than $5,000—is de minimus and that the district court already decided the issues in the case by the time that stock came to light.

Centripetal claims that Cisco’s arguments give no deference to the district court’s substantial factual findings and that nothing decided by the district court should be considered clear error sufficient to warrant vacating the infringement judgment. Centripetal also argues that the apportionment finding does not constitute clear error or abuse of discretion. Further, Centripetal contends that the district court’s findings were not improper and its various decisions on infringement and willfulness were appropriate.

Direct or Indirect Infringement

In the litigation, it was undisputed that no single Cisco product alone infringed. As a result, Centripetal argued—and the district court agreed—that Cisco’s sales of products that collectively practiced four of Centripetal’s patents constituted infringement.

But in this case, Centripetal did not pursue a theory of indirect infringement. Rather, Centripetal argued that its evidence proved Cisco knowingly and willfully engaged in infringement following its negotiations with Centripetal.

The Federal Circuit’s assessment of direct infringement in this context may be informative for many future cases, including cases involving patents on cybersecurity inventions and other technologies. As companies increasingly develop products intended to be interconnected and work in concert, there is risk that those products could give rise to direct infringement when used together, as in Centripetal.

This is of interest because indirect infringement has its own unique requirements as a form of liability: induced infringement requires, for example, knowledge of and intent to cause infringement by another; and contributory infringement requires, for example, that a part being sold be especially made or especially adapted for use in infringement and have no substantial non-infringing use. How the Federal Circuit addresses direct infringement in this setting may thus be impactful in many cases where indirect infringement is not present.

Apportionment

Regarding the damages issue on appeal, the size of the judgment is significant. At $2.75 billion, the judgment in Centripetal joins the top 10 largest awards for patent infringement, and the largest involving cybersecurity technology. While the magnitude of the award may garner more attention from the Federal Circuit, it cannot be said to play a role in the ultimate decision on appeal. Instead, how the Federal Circuit addresses the apportionment issue underlying the damages award is of interest.

In Centripetal, the district court based its damages calculations on a comparable licence between Centripetal and Keysight as a “baseline”. Centripetal sued Keysight in 2017, and the parties settled that case during trial. Rather than determining what amount of apportionment applied, the district court applied a royalty rate based on that settlement agreement to Cisco’s revenues from the infringing products, apportioning Cisco’s infringing revenues based on a “conservative estimate”.

Because of the unique nature of the case, involving multiple products found to infringe collectively, the damages calculation and its premise on high-level groupings of Cisco’s revenues is a focal point of Cisco’s appeal.

Since the 4 April oral argument will focus solely on the trial judge’s family stock ownership, it remains to be seen whether the Federal Circuit will reach these merits issues. But if they do, the patent bar eagerly anticipates the Federal Circuit’s guidance on the apportionment issue and the direct infringement distinction for future litigation.