Centripetal Networks, Inc. (“Centripetal”), one of the fastest growing innovators in the cybersecurity space, leveraged its patent portfolio against Cisco Systems, Inc. (“Cisco”) and was recently awarded  an estimated $2-3 billion in damages by the Eastern District of Virginia following a 22 day video bench trial. This represents one of the largest patent infringement damages awards in U.S. history,[i] indeed dwarfing average patent infringement damage awards 1,000-fold.  [ii]

This ruling may not be an anomaly.  Over the past year, there has been a spike in patent infringement damages awards exceeding $100 million, with early 2020 having the highest quarterly total in recent years.[iii] Companies appear to have become bolder in their strategies for dealing with patented technologies and more willing to take on the risk of infringement rather than licensing the technologies.

Despite this potential trend, the Cisco case, however, is also a stark reminder that failure to properly approach and manage a competitor’s patent rights can result in catastrophe, particularly because infringement damage awards may be increased up to three times if the infringement is found to be willful. [iv]

In this case, Cisco met with Centripetal in 2016 for demonstrations and detailed explanations of Centripetal’s patented system.  The meeting took place after the arties entered into a nondisclosure agreement (“NDA”) requiring Cisco to keep Centripetal’s confidential, proprietary or non-public information “strictly confidential” and “not use any Information in any manner . . . other than solely in connection with its consideration of” a possible partnership. After a demonstration of detailed, highly sensitive, confidential and proprietary information about Centripetal’s patented technology and products, a Cisco engineer sent an internal email stating the team should “look at these algorithms” and “study their [patent] claims.” Another employee posted on a Cisco blog, “I found this tool to be a pretty cool new approach to leveraging threat data.” Within a year of meeting with Centripetal, Cisco then released a system that “mirrors the functionality of the Centripetal patents.” Notably, Cisco did not present evidence of investigating the scope of the patents to form a good-faith belief that the patents were invalid or not infringed.  The court also noted that Cisco continually gathered information from Centripetal as if it intended to buy the technology from Centripetal. Cisco, then, appropriated the information gained in these meetings to learn about Centripetal’s patented functionality and embedded it into its own products.

In view of this course of conduct, the court found compelling evidence of copying by Cisco and increased the total damage award by 2.5 times for willful infringement bringing the damages award from the millions to the billions, specifically $755,808,545 to $1,889,521,362.50.  The court noted that Cisco increased sales by approximately $5.575 billion dollars over three years by adding the infringing functionality to the predecessor non-infringing product lines.  Interestingly, while Centripetal sought an injunction, the court declined to issue an injunction because “Cisco’s switches, routers, and firewalls make up large portions of the global internet infrastructure. . . . 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.” Cisco recently requested a new trial, and given the large sum of awarded damages, further developments in this case will likely follow.

In any case, what lessons can be learned here?

From a patent holder’s perspective, it is important to enter into a carefully crafted NDA before divulging confidential information to a third party, to document each piece of confidential information that is provided to the third party, and to monitor the third party’s activities and products after the disclosure for any indications of improper disclosure or copying.  It is also important for the patent holder to be prepared to defend the validity of its patent(s) because the third party may seek to challenge the validity of the patents rather than entering into a license agreement or otherwise acquiring the patent rights.  To the extent possible, the patent holder should also continue to expand its patent portfolio to cover any aspects of the technology that a third party may use to design around the patented claims.  Finally, upon identifying credible information of improper disclosure or use of the confidential information or infringement of patent rights, the patent holder should seek the advice of patent litigation counsel to take appropriate steps to prepare for legal action.

Because an emerging company’s confidential information, technology, and patent rights are its lifeblood, it is important to carefully protect these assets before communicating with third parties, particularly large companies and to subsequently continue to monitor the activities of parties that have obtained such confidential information.

From the infringement perspective, upon becoming aware of a related patented technology, it is important to have and follow an established set of procedures for addressing the patented technology in order to reduce the likelihood of liability for willful infringement.  Such awareness may arise as a result of an internal patent search by legal counsel or independent searching by employees, or may arise externally, either due to a license offer or cease and desist letter from the patentee or due to citation of one or more patents by a patent examiner during prosecution of a company’s own patent applications covering related technology.

First, the procedures should indicate how to communicate about another company’s products or processes. It is important to be cognizant that employee communications about the relevant products or processes may be discoverable and could be used as evidence of copying during litigation.  Ideally, it is best practice to avoid or at least minimize communications about patents or patented technologies and to limit such communications to privileged communications between an authorized company official seeking legal advice from an attorney.  When such communications cannot be avoided, communications should demonstrate that copying is not intended.  It is imperative to avoid creating emails, text messages, social media comments, or blog posts that can becomes evidence of knowledge and intent to use or copy patented technologies.

Second, as soon as possible after becoming aware of relevant patented technology, a company has a responsibility to investigate the possibility of infringement.  Procedures for timely consultations with internal counsel or outside patent counsel should be clearly defined.  It may be necessary to obtain a legal opinion on topics such as non-infringement of the claims of a patent, invalidity of the patent, unenforceability of the patent, and/or the date of expiration of the patent.  By obtaining such a legal opinion at an early stage, evidence of a good-faith belief that the patents were invalid, unenforceable or not infringed can be presented at trial to rebut an allegation of willful infringement.  Subsequent legal opinions on efforts to design around the claimed elements of patent may also help build solid evidence of a good-faith belief of non-infringement.

Because an emerging company’s reputation, cash balance, and survival are at stake, it is important to carefully craft procedures for avoiding inadvertent creation of discoverable evidence of an intent to infringe and to consult with legal counsel upon becoming aware of a related patented technology.

[i] Centripetal Networks, Inc. v. Cisco Sys., Inc., No. 2:18-cv-94, 2020 WL 5887916 (E.D. Va. Oct. 5, 2020).

In view of the Covid-19 pandemic, the court conducted the trial via video conference over Cisco’s objections. The court highlighted the importance of the technologies to the national defense context and explained that “it would not be in the public interest to delay the trial until the unknown time when courtrooms would open for traditional civil trials.”  Id. at *9. Centripetal is one of the more complex trials conducted on a video platform and both parties “joined in congratulating the Court’s staff on its efficient handling of the trial.” Id. at *69.

 

[ii] Landan Ansell et al., 2018 Patent Litigation Study 6 (2018), https://www.ipwatchdog.com/wp-content/uploads/2018/09/2018-pwc-patent-litigation-study.pdf.

 

[iii] Matthew Bultman, Investors Eye Patents After ‘Extraordinary’ Damage Awards Run, Bloomberg Law (Nov. 6, 2020, 6:00 AM), https://news.bloomberglaw.com/ip-law/investors-eye-patents-after-extraordinary-damage-awards-run?campaign=14DB6EEA-220C-11EB-A25C-39F34F017A06&utm_source=twitter&utm_medium=lawdesk.

 

[iv] To determine willfulness, the courts look to a list of factors referred to as the Read factors:

(1) deliberate copying;

(2) defendant’s investigation and good faith-belief of invalidity or non-infringement;

(3) litigation behavior;

(4) defendant’s size and financial condition;

(5) closeness of the case;

(6) duration of the misconduct;

(7) remedial action by the defendant;

(8) defendant’s motivation for harm; and

(9) attempted concealment of the misconduct.

Read Corp. v. Portec, Inc., 970 F.2d 816, 827 (Fed. Cir. 1992).