Centripetal Networks v. Cisco Systems — Federal Circuit Vacates $2.75 Billion Award After Judge’s Failure to Recuse Over Spouse’s Stock Ownership

Background

Centripetal Networks sued Cisco Systems for infringing patents covering network security technology. The case was tried in the Eastern District of Virginia before Judge Henry C. Morgan, Jr. in a bench trial. During the litigation, while the case was under submission after final arguments, Judge Morgan learned that his wife held $4,687.99 worth of Cisco stock. Rather than recuse himself at that point, the judge determined that divesting the stock immediately would create the appearance of impropriety given the case’s posture. Instead, he placed the stock into a blind trust and allowed the case to proceed to judgment.

Judge Morgan ultimately found Cisco liable for willful infringement and awarded Centripetal enhanced damages and royalties totaling more than $2.75 billion — one of the largest patent verdicts in U.S. history at the time. Cisco appealed, arguing that Judge Morgan was disqualified from the case under 28 U.S.C. § 455, the federal judicial disqualification statute, and that placing assets in a blind trust did not constitute the “divestiture” required by the statute’s safe harbor provision.

The Court’s Holding

The Federal Circuit agreed with Cisco and vacated the entire judgment. The court held that once Judge Morgan became aware of his wife’s financial interest in Cisco, he was disqualified under § 455(b)(4), which mandates recusal when a judge knows that a spouse has a financial interest in a party to the proceeding. The statute provides a narrow safe harbor in § 455(f): if the judge promptly divests the financial interest after learning of it, disqualification is not required.

The court held that placing stock in a blind trust does not constitute divestiture. Divestiture requires actually transferring or selling the interest so the judge no longer has it — a blind trust merely removes the judge’s knowledge of the investment’s day-to-day performance while preserving the underlying financial stake. Because Judge Morgan’s wife still owned the Cisco stock after the blind trust transfer, the § 455(f) safe harbor was not triggered. The judge was therefore disqualified from the moment he learned of the stock, and all orders and opinions issued after that point — including the final judgment and the massive damages award — were vacated. The case was remanded for assignment to a new judge.

Key Takeaways

• Under 28 U.S.C. § 455, a federal judge must recuse when a spouse holds even a small financial interest in a party to the proceeding; there is no de minimis exception.
• The § 455(f) divestiture safe harbor requires the judge (or spouse) to actually sell or transfer the interest out of their ownership — moving stock into a blind trust is not divestiture and does not satisfy the statute.
• All judicial orders and judgments issued after the point of disqualification are subject to vacatur, regardless of how large or important they are — here, a $2.75 billion verdict was wiped out.
• The decision reinforced the importance of early financial conflict checks in patent litigation and raised the standard for what courts must do when a financial conflict is discovered mid-case.

Why It Matters

Centripetal v. Cisco is a striking reminder that procedural integrity in the courtroom can undo years of litigation and even the largest verdicts. The case drew widespread attention not only because of the size of the vacated judgment but because the underlying financial conflict was relatively minor — less than $5,000 in Cisco stock. Yet because the statute sets a strict per se rule with no materiality threshold, even that small interest required recusal once the judge became aware of it.

For litigants, the case underscored the importance of conducting thorough conflict checks at the outset of high-stakes litigation and of promptly raising any known financial conflict as soon as it comes to light. For judges and their families, it highlighted the need for robust, real-time disclosure and monitoring of financial holdings to avoid inadvertent conflicts. The Supreme Court denied certiorari, leaving the Federal Circuit’s strict interpretation of “divestiture” in place as binding precedent for future judicial disqualification disputes in patent cases.