United States: Differing Standards For APJ Conflicts And Article III Conflicts

In Palo Alto Networks Inc. v. Centripetal Networks Inc.,¹ the Board denied Patent Owner Centripetal's motions for (1) recusal of the instituting panel and (2) vacatur of several decisions by the panel, including the institution decision instituting the IPR challenging U.S. Patent No. 9,917,856 ("the '856 patent") and an order joining follow-on petitions by Cisco and Keysight Technologies.

Background

In a bench trial at the Eastern District of Virginia, Centripetal successfully asserted the '856 patent against Cisco and received damages of $1.9B plus royalties for six years.² The Federal Circuit, however, vacated the judgment after determining that 28 U.S.C. § 455(b)³ warranted disqualification of the presiding district court judge due to the judge's spouse's ownership of Cisco stock despite the owned stock amounting to less than $5,000 and being placed in a blind trust during litigation once the judge became aware of the issue.⁴

Subsequently, in the instant IPR, Centripetal raised a similar issue, arguing removal of one of the presiding Administrative Patent Judges (APJs) for "actual bias," and requesting vacatur of all related orders in the proceeding involving that APJ. Specifically, Centripetal argued that the APJ's ownership of Cisco stock and ongoing retirement income from a previous law firm employer that represented Cisco warranted disqualification and raised due process concerns. Comparing the district court judge's financial interests to those of the APJ, Centripetal argued that a failure to recuse and vacate would create a direct conflict with the Federal Circuit decision.⁵

Relevant Law

The ethical regulations for Article III judges and APJs fall under two different legal frameworks. The former are governed by § 455(b), while the latter must adhere to the Standards of Ethical Conduct for Employees of the Executive Branch.

Section 455(b) lists numerous instances in which Article III judges "shall" disqualify themselves, including when they, their spouse, or their child have "a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding." Moreover, Section 455(f) allows a judge to avoid disqualification when the judge learns of a conflict during litigation by "divest[ing] himself or herself of the interest that provides the grounds for the disqualification." Divestiture requires the judge to "relinquish ownership" and requires more than simply placing the stock in a blind trust.⁶

The Standards of Ethical Conduct are provided at 5 C.F.R. § 2635 and present a more flexible standard to analyze conflicts. The Standards seek to avoid the appearance of legal or ethical violations as "determined from the perspective of a reasonable person with knowledge of the relevant facts."⁷ And Section 2640 provides a set of explicit exemptions, along with codified examples as guidelines for interpretation. Under this framework, a conflict exists when an issue has a "direct and predictable effect" on an APJ's financial interest.⁸ An APJ, therefore, would not be disqualified for a financial interest that is "too remote or too inconsequential to affect the integrity" of a proceeding.

Holding

The Board denied Centripetal's motions, finding no violation of ethics or due process and characterizing Centripetal's accusations as serious allegations that lacked substance, which the Board found "especially concerning given [Centripetal's] aim."⁹ Centripetal argued that (i) failure to disqualify would conflict with the Federal Circuit decision involving Centripetal and Cisco, (ii) the APJ's stock ownership and association with a law firm warranted disqualification, and (iii) Centripetal's due process rights were violated due to the APJ's presence on the panel and evidence of actual bias. In denying the motions, the Board made five key determinations.

First, the Board emphasized the different standards that apply to executive branch employees, such as APJs, versus Article III judges. While Article III judges are subject to the inflexible rules of § 455(b), an APJ's conduct is governed by Standards of Ethical Conduct discussed above. Further, the Board cited Federal Circuit law explicitly stating that § 455 does not apply to APJs.¹⁰ The differing standards undermined Centripetal's allegations of conflict with the previous Federal Circuit decision disqualifying the district court judge in the Centripetal-Cisco matter.

Second, using the proper analysis, the Board found "no competent, good faith argument" for Centripetal's disqualification arguments based on the APJ's ownership of Cisco stock and ongoing receipt of retirement income from a law firm.¹¹ Regarding the stock ownership, the Board applied an exemption rendering a financial interest non-disqualifying when the interest is a publicly traded security in a non-party and the value is less than $25,000.¹² Here, Cisco was not a party at the time of the institution decision, and the stock value was below the required threshold.¹³ As for the law firm income, the Board deemed Centripetal's arguments "a misunderstanding (or misrepresentation)" and found no correlation between law firm's business with Cisco and the income the APJ received or the validity of the '856 patent.¹⁴ Centripetal focused on law firm statements referring to Cisco as "its most lucrative contract," but the Board minimized the weight of such evidence because the statements only described the law firm's work in the narrow category of "lobbying in Florida" in 2021.¹⁵ The Board further noted that violating § 2635.402 requires actual knowledge of a financial interest, and there was "nothing in the record to suggest" that the APJ even knew that Cisco was a firm client.¹⁶

Third, the Board rejected that the APJ's presence on the panel violated Centripetal's due process rights. Centripetal relied on two cases regarding due process concerns with judges who have a pecuniary interest in the legal proceedings. But the Board pointed out that both cases were limited to "substantial" pecuniary interests.¹⁷ The Board found nothing substantial about the APJ's ownership of a small amount of stock, or the impact of a single law firm client with a remote connection to the IPR.

Fourth, the Board rejected Centripetal's allegations of actual bias constituting a due process violation as having "absolutely no basis in fact."¹⁸ Centripetal pointed to the "discrepancy between the post-judgment institution rates for panels with and without [the] APJ" in eight proceedings. But the Board noted that, of all the matters Centripetal identified, only one involved Cisco. Moreover, the Board could not find any indication of the alleged bias, and found that adverse decisions are not a sufficient indication on their own.¹⁹

Finally, the Board determined Centripetal's untimeliness favored denial and was "highly inappropriate," especially for a matter as serious as recusal.²⁰ Centripetal waited three months from when it became aware of the pertinent facts to file its motions. The Board, however, emphasized that such motions should be made immediately and viewed Centripetal's timing as strategic in the hopes of receiving a favorable rehearing decision on its request.

Take Away

At the PTAB, a party should file recusal motions in a timely manner and ensure its positions are crafted based on the ethical requirements that APJs are subject to under the Standards of Ethical Conduct for Employees of the Executive Branch. As shown by this case, Article III judges and APJs are subject to different ethical requirements and the same set of facts could have different recusal outcomes in different jurisdictions.

Footnotes

1. IPR No. 2022-00182, Pap. 55 (PTAB Feb. 3, 2023)

2. Id. at 4-5

3. Section 455(b) lists numerous instances in which an Article III judge "shall" disqualify themselves, including when the judge knows that they, their spouse, or their child, have "a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding." Section 455(f) allows a judge who only learns of a conflict "after substantial judicial time has been devoted to the matter" to avoid disqualification by "divest[ing] himself or herself of the interest that provides the grounds for the disqualification."

4. Id. at 6 (noting the Federal Circuit found that placing the stock in a blind trust as insufficient because it did not "relinquish ownership" of the interest at issue).

5. Id. at 7-8

6. Id. at 6

7. 5 C.F.R. § 2635.101(b)(14)

8. Id. at § 2635.402

9. Pap. 55 at 14

10. Id. at 20, fn 13

11. Id. at 13

12. § 2640.202(b)

13. Pap. 55 at 11

14. Id. at 12-13

15. Id. at 13

16. Id. at 12

17. Id. at 15-16

18. Id. at 18

19. Id. at 19-20

20. Id. at 21-22

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