Stock Ownership Leads to Vacatur of $2.75B District Court Judgment

Fitch, Even, Tabin & Flannery LLP

On June 23, in Centripetal Networks, Inc. v. Cisco Systems Inc., the Federal Circuit vacated judgment of the district court because stock held by the judge’s wife violated the recusal statute and was not harmless error. The Federal Circuit held that placing Cisco stock owned by the wife of the district court judge into a blind trust was not divestment of the stock under 28 U.S.C. § 455(f), and therefore the judge was required to recuse himself under § 455(b)(4). But the judge did not recuse himself, and instead, continued to hear the action over objection by Cisco, and entered judgment against Cisco amounting to more than $2.75 billion.

Judge Henry C. Morgan, Jr. heard the case through a bench trial, post-trial proceedings, and had already completed a 130-page draft of his final judgment when he learned that his wife owned Cisco stock valued at $4,687.99. He immediately notified both parties that he had discovered his wife’s ownership of Cisco stock. Cisco then filed a motion for recusal under § 455(b)(4), which disqualifies a judge from hearing a matter where the judge or his spouse has a “financial interest … in a party.” Judge Morgan then placed his wife’s Cisco stock in a blind trust and denied the motion for recusal. He reasoned that § 455(b)(4) “did not apply in this case because he had not discovered his wife’s interest in Cisco until he had decided “‘virtually’ every issue and ‘mostly drafted [the] opinion.’” He also reasoned that even if § 455(b)(4) did apply, placing the stock in a blind trust was divesture under § 455(f). Judge Morgan subsequently entered a 167-page final opinion holding that Cisco willfully infringed the patents and awarding damages, interest, and a running royalty that totaled in excess of $2.75 billion. Cisco appealed.

On appeal, the Federal Circuit held that placement of stock into a blind trust does not satisfy the divesture requirement of § 455(f). Because the statute does not define “divest,” the court referred to a dictionary definition defining the term as “dispossess or deprive” of ownership which the court concluded is “possible only if the interest is sold or given away.” The Federal Circuit noted that the Judicial Conference’s Committee on Codes of Conduct has ruled that “[a] judge’s use of a blind trust does not obviate the judge’s recusal obligation.” The court thus concluded that “placing the stock in a blind trust removed [Judge Morgan’s wife’s] control over the stock, [but] it did not eliminate her beneficial interest in Cisco.” Placing the stock into the blind trust therefore did not satisfy the divesture requirement.

The Federal Circuit then analyzed the three factors for determining harmless error as set forth in the Supreme Court’s Liljeberg decision, namely: (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.” The Federal Circuit concluded that all three factors weighed against a finding of harmless error and therefore vacatur was the proper remedy for the § 455(b) violation. The court reversed the district court’s denial of Cisco’s motion for recusal, vacated the judgment and all rulings made after Judge Morgan discovered that his wife owned Cisco stock, and remanded the case for further proceedings.

The Centripetal decision is significant because it clarifies that a blind trust does not constitute divestment of a judge’s financial interest under § 455, for example stock ownership in one of the parties. Further, the decision makes clear that a judge’s violation of §455 is reversible error and requires vacatur of all decisions rendered after the judge learns of his or her financial interest in one of the parties.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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