“[C]onsidering ‘the sound legal principles underlying the history of enhanced damages,’ the Court found that this was ‘an egregious case of willful misconduct beyond typical infringement.’”
Earlier this week, the United States District Court for the Eastern District of Virginia (the Court) entered what is believed to be one of the highest damages awards ever issued in a patent case, following a 22-day bench trial in Centripetal Networks, Inc. v. Cisco Systems, Inc. In an opinion authored by Senior U.S. District Judge Henry Coke Morgan, Jr., the Court found that Cisco willfully infringed four out of five of Centripetal’s asserted patents and awarded enhanced damages in an amount of $755,808,545 (enhanced by a factor of 2.5X), and prejudgment interest in an amount of $13,717,925, which resulted in a total past damages award amount of $1,903,239,288. In addition, Judge Morgan ordered Cisco to pay Centripetal a running royalty of 10% on the apportioned sales of the accused products and their successors for a period of three years, followed by a second three-year term wherein the running royalty will be 5% on such sales. The royalties would bring the total to a minimum of $2.65 billion and could make it as high as $3.25 billion.
In February 2018, Centripetal Networks, Inc. (Centripetal) filed a Complaint against Cisco Systems, Inc. (Cisco) alleging infringement of 11 of Centripetal’s U.S. Patents. Cisco filed numerous petitions for inter partes review (IPR) against nine of those patents. The PTAB has invalidated claims of several of the patents subject to IPR. In September 2019, the Court issued an order lifting a stay with respect to patents and claims not currently subject to IPR proceedings, including U.S. Patent Nos. 9,137,205 (the ‘205 Patent), 9,203,806 (the ‘806 Patent), 9,500,176 (the ‘176 Patent), 9,686,193 (the ‘193 Patent), 9,917,856 (the ‘856 Patent) (the Asserted Patents), which were directed to systems that engage in complex computer networking security functions. Centripetal accused Cisco of using its solutions in a variety of its network devices and of infringing the Asserted Patents.
The Court found that Centripetal sufficiently proved direct infringement of each element of the asserted claims in the ‘856 Patent, the ‘176 Patent, the ‘493 Patent, and the ‘806 Patent by a preponderance of the evidence. Each patent was addressed in turn. During trial, the ‘856 Patent was informally referred to as the Encrypted Traffic Patent. In an in-depth analysis, the Court determined that Cisco’s technical documents, as well as its own engineers, confirmed that the Cisco system filters packets as required by the asserted claims of the ‘856 Patent and, therefore, the accused Cisco products literally infringed the asserted claims of the ‘856 Patent. The Court also explained that Cisco failed to present clear and convincing evidence that the ‘856 Patent was invalid for anticipation or obviousness because the prior art did “not disclose the functionality to identify encrypted packets and then make determinations based on unencrypted information within those packet headers and flows.”
With respect to the ‘176 patent, i.e. the “Correlation patent,” the Court noted that Centripetal has proven by a preponderance of the evidence that “Cisco’s Catalyst 9000 series switches, the Aggregation Services Router 1000 series routers and Integration Services Router 1000 and 4000 series routers in combination with Cisco’s Stealthwatch literally infringe” the asserted claims of the ‘176 Patent. The Court explained that Cisco’s Stealthwatch performed “the exact type of correlation and provisioning of rules in response to correlations required by the ‘176 Patent” and that Cisco failed to present clear and convincing evidence that the prior art did not render the asserted claims anticipated or obvious.
Throughout the trial, the ‘193 Patent was informally referred to as the “Forward or Drop / Exfiltration Patent.” The asserted claims were generally directed to a packet filtering system and computer readable media. After considering the factual findings, the court noted that Centripetal has proven by a preponderance of the evidence that “the Cisco’s Catalyst 9000 series switches, the Aggregation Services Router 1000 series routers and Integration Services Router 1000 and 4000 series routers” literally infringed the asserted claims of the ‘193 Patent.
The ‘806 Patent was informally known throughout the trial as the “Rule Swap Patent” and its claims were directed to a system and computer readable media claim. According to an inventor of the ‘806 Patent, the ‘806 Patent defines a “process by which a network device could perform a live swap of rules without sacrificing any security concerns or dropping packets.” Based on the factual findings, the Court concluded that Centripetal has proven by a preponderance of the evidence that several of Cisco’s products, including the Cisco’s Catalyst 9000 series switches and Cisco’s Adaptive Security Appliance 5500 series with Firepower services, literally infringe the asserted claims of the ‘806 Patent.
However, with respect to the ‘205 patent, the Court found no infringement. Following a review of the relevant documents and testimony, the Court concluded that there was “no compelling evidence to show that the accused products have rules that possess both a SIP URI and a network address, as required by the claims” of the ‘205 Patent.
Using the reasonable royalty method to determine the appropriate amount of damages, the Court considered each of the factors laid out in Georgia-Pacific v. U.S. Plywood Corp. to guide its determination of a proper reasonable royalty rate. For example, the Court initially addressed the first two Georgia-Pacific factors, noting that Centripetal entered into a comparable license with Keysight to settle the patent claims at issue in a litigation, wherein similar patents were asserted as in the present case and Keysight was granted a three year “worldwide, non-transferable, irrevocable, non-terminable, non-exclusive license to Centripetal’s worldwide patent portfolio in exchange for a $25 million-dollar lump-sum payment and a 10% royalty of directly competing products and a 5% royalty on non-competing products.” Citing ResQNet.com, Inc. v. Lansa, Inc., the Court noted that since the Keysight case provides the only comparable license in the form of a settlement agreement it must “consider the license in its proper context within the hypothetical negotiation framework to ensure that the reasonable royalty rate reflects “the economic demand for the claimed technology.”
The court also considered the third Georgia-Pacific factor, noting that “the scope and nature of the Keysight license weighs in favor of reducing the baseline royalty percentage, because the license presented to Cisco would be limited to the infringing patents instead of a full patent portfolio that was granted in Keysight.” Further, in considering Georgia-Pacific factor nine, the Court explained that “Cisco’s technical and marketing documents, as well as previous business acquisitions, support a higher royalty rate, as the addition of the infringing technology greatly improved Cisco’s sales and the profitability of its new infringing versions of the products over older models.” After considering both Cisco’s technical documents, marketing representations and the sales data, the Court found that the patented functionality added very significant value to older technology and, thus, supported a substantially increased royalty figure.
The Court explained that the weight of the Georgia-Pacific factors as a whole strongly favored Centripetal. Thus, the Court found that the Keysight royalty rate of 10% of the apportioned value of its infringed technology was a reasonable royalty rate to compensate Centripetal for Cisco’s past infringement because it was “supported both by the comparable factors in the Keysight license and the weight of the Georgia-Pacific factors.” The Court determined that, before the adjustments for enhanced damages, the total past damages award was $755,808,545 million (10% royalty rate applied to $7,558,085,447 million royalty base).
In considering whether to award enhanced damages, the Court weighed the factors laid out in Read Corp. v. Portec, Inc. The Court initially noted that Centripetal and Cisco engaged in a series of under a Non-Disclosure Agreement (NDA), and that, following the meetings, Cisco released its “network of the future” products, which incorporated Centripetal’s patented technology. Thus, the facts illustrated that Cisco had pre-suit knowledge of Centripetal’s asserted patents and the functionality of the claims. Therefore, the Court stated that “the fact that Cisco’s system mirrors the functionality of the Centripetal patents is compelling evidence that damages should be enhanced for copying.”
In considering another of the Read factors, the Court considered the size and financial condition of Cisco. The Court explained that since Cisco “represents itself as the largest provider of network infrastructure and services in the world,” an enhanced damages award would not “unduly prejudice [Cisco’s] non infringing business.” With respect to Read factor five, i.e. closeness of the case, the Court noted that its findings that the four patents were infringed and valid were “clear and not a close call.”
Thus, considering “the sound legal principles underlying the history of enhanced damages,” the Court found that this was “an egregious case of willful misconduct beyond typical infringement.” The Court acknowledged that Cisco prevailed as to one of the asserted patents. Accordingly, the Court’s found that enhancing the past damages award of $755,808,545 by a multiple of 2.5 times was appropriate. Thus, the lump sum past damages amount was $1,889,521,362.50.
Prejudgment Interest and Injunction
The Court also awarded prejudgment interest in an amount of $13,717,925. Thus, the final total past damages award was $1,903,239,287.50. With respect to an injunction, the Court noted that the accused products are components of both civilian and military networks and “granting an injunction on the infringing products will likely cause massive adverse effects on the functional capabilities of Cisco’s customers and have an adverse ripple effect on national defense and the protection of the global internet.” Thus, the Court concluded that the evidence and arguments presented at trial led to a finding that a permanent injunction is not appropriate relief for the infringement of the ‘856 Patent, the ‘176 Patent, the ‘193 Patent, or the ‘806 Patent, but that an ongoing, future royalty should be imposed for all four Patents.
Paul Andre, part of a Kramer Levin team of counsel for Centripetal, said: “With this judgment, the Court rejected the primitive doctrine that might makes right. This is a significant win for all small, innovative companies.”
In an official statement, Cisco said it is “disappointed with the trial court’s decision given the substantial evidence of non-infringement, invalidity and that Cisco’s innovations predate the patents by many years.”
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