“[T]he Board pointed to language in cases cited by Centripetal indicating that recusal is only required when the financial interest is ‘substantial…’ [B]ecause APJ McNamara’s financial interests met the de minimis exception, they were ‘remote’ and ‘inconsequential’ and therefore could not have been ‘substantial.’”
Late last week, the Patent Trial and Appeal Board (PTAB) issued an order denying a motion for recusal and vacatur filed by patent owner Centripetal Networks, which had previously alleged that an administrative patent judge (APJ) on the PTAB panel had an improper financial interest in Cisco. Centripetal had previously obtained a $1.9 billion damages verdict ($2.7 billion including the royalty award) in U.S. district court against Cisco for infringement of the patent at issue in the PTAB action. The strongly worded order, which also denied in part Centripetal’s motions for rehearing, found that the APJ’s financial interests did not violate the executive branch employee ethics rules to which APJs are subject during PTAB proceedings.
Different Ethical Rules for Judges, Executive Employees Leads to Different Outcome
Centripetal Networks’ motion for recusal and vacatur, filed in late December, had raised ethical issues surrounding APJ Brian McNamara, who allegedly owned between $1,001 and $15,000 in Cisco stock and receives a profit share from the law firm Foley & Lardner LLP, including fees received from Cisco in exchange for lobbying efforts. APJ McNamara withdrew from the IPR proceedings within a week of the motion for recusal, although the official withdrawal notice denied Centripetal’s allegations.
The $1.9 billion infringement verdict entered in U.S. district court was overturned last June by the U.S. Court of Appeals for the Federal Circuit. The appellate court ruled that a $4,000 interest in Cisco stock owned by the wife of the trial judge required the trial judge to disqualify himself from the proceedings under 28 U.S.C. § 455. The Federal Circuit further found that placing the wife’s stock in a blind trust did not meet the divestiture requirements under Section 455(f) for judges who discover financial interests after substantial time has been devoted to a judicial matter. Last December, the U.S. Supreme Court denied a petition for writ of certiorari filed by Centripetal, which had asked the nation’s highest court to reconsider whether moving the Cisco stock into blind trust met the Section 455(f) divestiture requirements.
Different ethical rules for executive branch employees and federal judges led the PTAB to a different outcome regarding recusal requirements based on an APJ’s financial interests. While Section 455 applies to the federal judiciary, executive branch employees are required to recuse under 5 CFR § 2635.402 only if the matter in which the employee is involved will have a “direct and predictable effect on that interest.” In a footnote, the PTAB also maintained that APJs are entitled to “a presumption of honesty and integrity” under the Federal Circuit’s 2016 decision in Ethicon Endo-Surgery, Inc. v. Covidien LP.
More ‘Frivolous’ and ‘Baseless’ Arguments Will Result in Sanctions For Centripetal
Further de minimis exceptions issued by the Office of Government Ethics (OGE) and codified at 5 CFR § 2640, specifically Section 2640.202(a), allows an executive branch employee to participate in a particular matter involving parties in which the disqualifying interest lies if the securities are publicly traded, and the aggregate holdings of the employee, spouse and any minor children do not reach $15,000. The PTAB’s order cited examples included with Section 2640.202(a) illustrating the exemption working in public bidding and drug market approval contexts. Under Section 2640.202(b), the de minimis threshold is raised to $25,000 when the financial interest lies in an entity that is not a party to a matter, but will be financially affected by the matter.
In dismissing Centripetal Networks’ charges that APJ McNamara should have recused himself from the institution decision for owning Cisco stock, the PTAB noted that Cisco was joined to the IPR after the institution decision. Therefore APJ McNamara’s alleged holdings fall well below the $25,000 threshold for financial interests in entities who are not a party to the instant proceeding. The PTAB also highlighted several “fatal flaws” with Centripetal’s arguments based on APJ McNamara’s profit share from Foley & Lardner, including no evidence that APJ McNamara knew Cisco was a Foley client and no evidence that a patent validity decision would have any impact on Foley’s work for Cisco, which did not appear to involve intellectual property matters at all.
In return for questioning whether APJs should be held to similar recusal standards as Article III judges, Centripetal Networks now faces the increased risk of sanctions if it makes “further baseless arguments directed at the Board, its members, or its process.” This is because Centripetal’s arguments were so “frivolous” and “lacking in substance,” which “is especially concerning given their aim.” It was “the gravity of the allegations” that led the PTAB to even consider briefing on the issue, according to footnote 2 of the order, especially considering that Centripetal’s motion was signed by an attorney who has not yet been registered to practice before the USPTO nor has been admitted pro hac vice.
Even With a Conflict of Interest, Centripetal’s Unjustified Delay Excuses Disqualification
The PTAB’s order also dismissed Centripetal’s constitutional due process arguments raised in the motion for recusal. While the PTAB agreed that patent owners have the right to have their cases heard by a disinterested decision maker, the Board pointed to language in cases cited by Centripetal indicating that recusal is only required when the financial interest is “substantial.” Acknowledging that the term “substantial” is highly subjective, the PTAB again turned to the OGE’s promulgated rules on de minimis financial interests and other language in Section 2635.402 noting that such interests are exempted because they are “too remote or too inconsequential to affect the integrity of the services of employees.” Thus, because APJ McNamara’s financial interests met the de minimis exception, they were “remote” and “inconsequential” and therefore could not have been “substantial.”
In addressing Centripetal Networks’ actual bias allegations based on discrepancies in institution rates on PTAB panels including APJ McNamara, the PTAB noted that adverse rulings against a single party does not itself establish bias against Centripetal. In assessing Centripetal’s bias claim, the PTAB noted that the IPRs involving APJ McNamara cited in its institution rate argument mainly involve patents that have not been asserted against Cisco, and Centripetal hasn’t advanced an argument why APJ McNamara would be personally biased against Centripetal instead of financially biased in Cisco’s favor. This argument is further undercut by APJ McNamara’s presence on panels denying institution of IPRs on two of three challenged Centripetal patents supporting the $1.9 billion district court verdict, the PTAB found.
Even had there been a conflict requiring recusal, the PTAB found that Centripetal Networks engaged in unjustified delay by waiting three months after learning about APJ McNamara’s alleged conflicts before filing its motion for recusal and vacatur. “[A] matter as serious as a conflict requiring recusal of multiple APJs should have been raised immediately, not held for strategic reasons,” the PTAB ruled, finding that Centripetal’s delay suggested that it was waiting to receive a favorable decision from the original panel or on the petition filed at the Supreme Court. The PTAB also pushed back on Centripetal’s allegations that further undisclosed conflicts led to the withdrawal of both APJs McNamara and Steven Amundson, which the Board said wasn’t true because the panel change order listed the withdrawal reason as “unavailability” instead of “recusal.”
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