Cisco Must Pay Two BILLION for Patent Infringement – Ep. 21 [Podcast]

Summery

In this episode of Stuff You Should Know About IP, Thomas Colson and Raymond Guarnieri discuss a patent infringement case between Centripetal Networks, Inc. and Cisco. Centripetal was awarded $1.9 billion, plus royalty payments of 10% for the first three years and 5% for the next three years, potentially bringing the total verdict to somewhere between $2.5 billion and $3.5 billion. This lawsuit involved five patents, and four of them were found to have been literally infringed by Cisco. The litigation spanned three years. The court ruled in favor of the plaintiff based on a preponderance of the evidence standard; in other words, the court found it more likely than not that Cisco infringed Centripetal’s patents. Actual damages were in the neighborhood of $700 million, but because Cisco willfully infringed, the court was able to award enhanced damages. A court can award up to treble damages, at its discretion, for willful infringement. In this case, Cisco learned about Centripetal’s technology under a non-disclosure agreement, but Cisco infringed anyway. A company will often perform a freedom-to-operate search before commercializing a product so that it knows whether the product might infringe an existing patent, and the company can thereby make an informed decision about whether to take the product to market. If the FTO reveals a patent and the company infringes it anyway, however, the company can be at risk of liability for enhanced damages. Literal infringement essentially consists of introducing a product into the marketplace that contains each and every element of at least one claim of someone else’s patent. It is possible to have patent protection without making any products, whereas trademark protection requires that an associated product or service be in the marketplace. It can be possible to copy a product and sell it in the marketplace without incurring liability if that product is not protected by a patent. A patent only offers protection in the nation that issued it. Infringement litigation can be expensive not only due to damage awards, but also due to legal costs.

Transcript

Raymond Guarnieri:

All right, let’s go. Cisco is ordered by the US District Court of Virginia to pay $1.9 billion to Centripetal Networks Incorporated, in what may be the largest patent infringement damages award ever. All this and more on Stuff You Should Know About IP. Okay, so Tom, please explain to me this case of Centripetal Networks Inc versus Cisco, and how did we get to $1.9 billion in damages? That’s crazy.

Thomas Colson:

It’s crazy. What a great way to start the day, right?

Raymond Guarnieri:

Oh yeah.

Thomas Colson:

A great way to start today is talking about an almost $2 billion patent verdict, right?

Raymond Guarnieri:

And a cup of Tim Horton’s coffee.

Thomas Colson:

Of course, of course. So anyway, so we have this, I’m going to sneeze. Should we start over?

Raymond Guarnieri:

Yeah, we should definitely put a copyright on that sneeze though.

Thomas Colson:

Okay. So anyway.

Raymond Guarnieri:

Well actually I think it’s trademark.

Thomas Colson:

The biggest verdict of all time, Centripetal against Cisco just occurred. Now by the way a few interesting things about this. Number one, it was $1.9 billion, right?

Raymond Guarnieri:

Billion.

Thomas Colson:

Two, there was royalty payments on top of that, which are 10% for the first three years, 5% for the next three years. So the claim is that this thing could be like a $2.5 to $3.5 billion verdict all in. So here are some interesting things about it. Number one, there’s five patents in the suit, four of them were found to be literally infringed. So that’s what gets us started, this case started in February of 2018. And a few things jump out in my mind, so it’s like almost three years, right? Imagine how many lawyers have been feeding off this case for three years, right?

Raymond Guarnieri:

Sounds like they’d be sad to see it come to a close.

Thomas Colson:

Oh yeah.

Raymond Guarnieri:

What do we do with ourselves now?

Thomas Colson:

Yeah. One side is, I don’t know whether the plaintiff’s firm took it on a contingency, if they did they’d be pretty excited. Could you imagine a third of $1.9 billion for your firm?

Raymond Guarnieri:

Do firms take cases like this on contingency? I don’t want to distract from the topic, but I never heard of that.

Thomas Colson:

No, that’s okay. Contingency cases are typically the thing of personal injury lawyers, right?

Raymond Guarnieri:

Yeah, that’s what I thought.

Thomas Colson:

But in the ’90s, and I might have my dates wrong, I might have the facts slightly off. But the concept is in the ’90s there was this law firm, a patent firm, I think it was in Chicago, that was offered to take the case on a contingency basis and they said, no. They ended up earning $3 million in fees, the verdict was $100 million. So they would have gotten $30 million in fees. So after that they switched to all contingency cases. So there are definitely firms out there that take these cases on of contingency, and this would be a great example of one that would want to.

Thomas Colson:

But the trade-off off though is, here’s the trade-off though. The nice thing about getting your fees, which in these cases are maybe $600, $700, $800 an hour, maybe $900 an hour, depending upon where the lawyers are, maybe more. The nice thing is you’re getting paid for three years. You’re getting paid, you’re paying your associates. There’s got to be a dozen people on this case. You have paralegals, you have lawyers that all need to be paid, and if your firm isn’t well heeled with big pockets, deep pockets, you’re not going to be able to support a three-year litigation with all these people not getting paid. So I mean maybe it’s bankable, maybe you could go to a bank and get loans. But anyway, the point is there’s a great value if you can do them on a contingent, but what if after three years you lose and you get no cost? Now you’re totally screwed. But anyway, so lawyers are feeding off this case.

Thomas Colson:

And here’s the sad thing for Cisco. In addition to, I mean they were willful infringers so maybe it’s not that sad, but here’s the sad thing. They spend millions on defense of this patent infringement case. Millions. And at the end of it all they lose, and they ended up paying out almost $2 billion or more when you include the royalty. So it’s this patent litigation game, it used to be referred to as the sport of Kings because it’s so expensive, which is why it doesn’t surprise you that these cases typically settle because such a high stakes game.

Thomas Colson:

I mean, you’re talking about years of litigation and yeah, it could be a $2 billion verdict which is great for one side, terrible for the other. But it could be a no-cost which that is pretty good for one side, terrible for the other. I say pretty good because if there’s a no cause and Cisco were to win and they said there was no infringement then yeah, they’re thrilled that they staved off this big ugly verdict. But they still had to pay a fortune in legal fees, still be distracted for three years, still have this black cloud hanging over their head. So if you’re a defendant in a patent case, there’s no way to win. I mean your best case scenario is to spend a shit ton of money on legal fees, and then you still have to… You win, you get to just do what you were doing before. So anyway, so that’s interesting.

Thomas Colson:

The other thing that they went out of their way to say in this article was that the court held in favor of the plaintiff by a preponderance of the evidence, which is just kind of a side note to say that these cases are not beyond a reasonable doubt. They’re a preponderance of the evidence, which is essentially more likely than not. So it’s like if you were giving in percentages it’s like 51%. So it’s not like 90%, which you would kind of assess to beyond a reasonable doubt, it’s like 51%. The other big thing in this is that they used a royalty system on top. So how do you assess a royalty when you’re talking about… If you’re buying a house it’s kind of easy to get comparables, right? I’m buying a house in a neighborhood and 10 other houses have sold in the past five years or five months, and they were all about this price, and that means mine is worth a little bit more, a little bit less.

Thomas Colson:

How do you do that when you’re assessing reasonable royalties in a patent infringement case? Luckily in this case, and I say luckily for the sake of Centripetal, they had just negotiated a deal with a company called Keysight, and that deal was a lump sum payment of $25 million plus a 10% royalty over the first three years for sales of competitive products, and then 5% for royalties based upon the sales of non-competitive products. Now the difference there was with the Keysight settlement, by the way I’m just turning this because I feel like I’m not lit up that well, but-

Raymond Guarnieri:

Yeah, it’s a little dark. If you tilt it down a little bit it might be better, tilt your camera down.

Thomas Colson:

Yeah, maybe that’s better. But anyway, so in this Keysight case the difference was Keysight took a license to the entire Centripetal portfolio, in this case it’s only four patents. And I don’t know the size of the portfolio, but let’s say it’s 50 patents or 20 patents, it’s certainly a lot more than four patents in the Cisco case. So they ended up coming up with 10% royalty for three years on all products that infringed these patents, and then 5% for the next three years. This is a lot of money.

Thomas Colson:

So the other interesting thing is yes, it’s $1.9 billion, but the damage award was not $1.9 billion. The actual damages were like $700 million or something. $700 million, but so 700 million turns into $1.9 billion, right? How does that happen? Well there’s this thing called, it used to be called treble damages based upon willful infringement, in like 2016 the US Supreme Court changed it a little bit. They call it enhanced damages and they don’t have the same restrictions that they used to have, but without boring people to death with the details, you can triple damages for willful infringement. And what’s willful infringement? You knew about it and you infringed anyway.

Thomas Colson:

So a lot of times what companies will do is they’ll get opinions of non-infringement from their legal counsel, so that they could use that to defend themselves in a case of patent infringement. Yeah, we knew about the patents maybe, but our lawyer told us we didn’t infringe. And that’s big because it just turned a $700 million damages case into almost $2 billion. Now in this case they, I just read a little bit of an article about this, and it said there were discussions between Centripetal and Cisco under NDA, where technology was disclosed by Centripetal to Cisco, and that created a situation where Cisco clearly knew about it. So they basically said that they knew about it, they infringed anyway, and that really offends courts. Because you knew about it.

Thomas Colson:

I mean there’s a zillion patents out there, right? I mean there are millions of patents out in the world, and I don’t know what the numbers are up to now but they’re pretty high. So imagine how do you know every single patent out there and whether you’re infringing it? Well good news is if you don’t know about it you can’t be hit with enhanced damages like this because you didn’t know. The bad news is regardless of whether you knew about it, if you are an infringer, you are an infringer and you’re going to pay.

Thomas Colson:

So what some companies do is they do these things called freedom to operate searches, which essentially are searches before you go to market, before you commercialize to determine whether there’s any patents out there that are going to sting you when you get to market. Whether you’re infringing any of these. So people spend a fairly large sum of money, which they should, because if you’re going to spend millions launching a new product, wherever you are in the world it’s worth it to spend five, $10, $15, $20,000 on a freedom to operate search to make sure you’re not going to be infringing someone. The downside of freedom to operate searches is if you discover a patent that you’re infringing and you do it anyway, you’re at risk of enhanced damages. The plus side of doing a freedom to operate search is if you know about it at least you can make an informed decision. Because you cannot use as an excuse, I didn’t know about it. That’s not an excuse in patent infringement.

Raymond Guarnieri:

Right. So that’s an interesting question that I had is, I mean in this case we know that Cisco knew about it because they had that information related to the patents disclosed to them by Centripetal under NDA. That’s such an egregious infringement then it’s, I can understand how the court came to the decision on the judgment. But what about other cases where willfulness is maybe assumed or even implied or inferred, but not easily provable?

Thomas Colson:

Yeah, I mean that’s a big question is can you prove it? Can you prove they knew? I was litigating a patent case once, and I’m in the deposition with the other side, so we’re suing them for patent infringement. And I didn’t even expect this, I asked the engineer, “Tell me how you develop your product.” And because he was an honest guy, he doesn’t know all about the legal ins and outs, he just said, “I found this patent and I just copied it.” And I thought, wow, he just admitted to willful infringement but he doesn’t even know he did. So I just kept my mouth shut and moved on.

Raymond Guarnieri:

Was that in a deposition did you say?

Thomas Colson:

Deposition, yeah. Luckily I was going against the non-registered patent lawyer in the litigate, and I don’t even think he knew what hit him at that point. The point is it’s usually not that obvious. And I had one case once, I had a patent infringement case and the guy didn’t say he copied the patent, but he said, “Oh, I just bought their product and I copied it.” And you know, that’s a little bit less because you don’t know if something’s patented unless it’s marked, right? Or unless you do a search. But anyway, so in this case there’s, I didn’t see the documentation on it, but there must’ve been some pretty compelling evidence to justify two and a half times the damage award to get them up to almost $2 billion.

Raymond Guarnieri:

There was something else I read in this article and then we can move on, but there was something else that’s stood out to me that I don’t think I fully understood, and maybe it’s not as much of a thing as I read it to be, but there was something about literally infringed was a term used. It was literally infringed and it was all of the claims. So that made me curious about infringement, and I guess made me ask myself the question, are there varying degrees of infringement? Like if a patent has claims and you violate one, do you have to pay less for infringing one claim as you would five claims? Is that a thing or no?

Thomas Colson:

Yeah, essentially. So imagine a patent document, right? Maybe it’s this thick, it’s like 50 pages, or 100 pages, or 20 pages. At the very end of the document are these things called claims, and the claims are essentially the inventor claiming his or her rights, defining the property right that’s being owned. My piece of property, my house is on a lot that’s 200 feet in the front, 200 feet in the back, and 500 feet along each side, that’s my property right. And if you step on it, if you come over you’re trespassing. The claim is the same way, it’s basically defining the meets and bounds of your invention. I own this, this is mine. I own a chair, you’re an apparatus for sitting comprised of a back, a seat, and one or more legs.

Thomas Colson:

So let’s say though that in my patent document I have three, or four, or five independent claims, and then I’ve got maybe a dozen dependent claims. So I have a total of like 15 or 20 claims in my patent. All you have to do is infringe one claim and you’ve infringed my patent. One claim and you’ve infringed my patent. In this case they didn’t infringe four claims of one patent, they infringed four separate patents, okay? So there was a total of five in the lawsuit. So they went and discovered at least one claim in each of those four patents that was infringed by Cisco.

Thomas Colson:

And now without getting into like too much legal, detailed, gory, ugly detail, there is something called literal infringement, which means that essentially in lay speak you are practicing. You have a product or service in the marketplace that contains each and every element of at least one claim in your patent. And let’s simplify this, an apparatus for sitting comprised of a back, a seat, and four legs. Literal infringement is if I have an apparatus for sitting, a chair in the marketplace that has a back, a seat, and four legs. If I do I’m literally infringing. And by the way, if I have a chair that has three legs, a back, a seat, and only three legs, I’m not infringing because I don’t have four legs on my chair.

Raymond Guarnieri:

But if you have five legs you’re infringing because four is part of five?

Thomas Colson:

Exactly. Yeah, because I still have four. I could have 10 legs and it might be cool, it might be a great invention, and it might be in and of itself patentable, but it doesn’t give me the right to make, use, sell, or offer to sell it in the marketplace where I have the patent because I still have four legs.

Raymond Guarnieri:

So in a sense, if I dumb this down even more, it means that [crosstalk 00:17:58]. Well hey, if I can understand it then that means it’s pretty dumb.

Thomas Colson:

I disagree with that, by the way.

Raymond Guarnieri:

Well I got into law school first. Basically it means that they copied the products? Not even with variation?

Thomas Colson:

Yeah, not exactly, and here’s what I mean, many people have patents and they also have products, right? I mean unlike a trademark, you don’t have to have a product in the marketplace to have a patent. With a trademark, as you know, trademarks go together like peanut butter and jelly. Well maybe not peanut butter and jelly, they’re even tighter than peanut butter and jelly. And that is if you do not have a product or service in the marketplace with that trademark, you don’t have a trademark. Because trademarks are all about representing a product or service. A patent though is not the same. You could have a patent and never have a product, and still sue a company for patent infringement, still get a $1.9 billion verdict. But the question though, what your thing is, did they copy the product?

Thomas Colson:

Well you could have a patent and you could have a product, and the two don’t even… Okay, so I have a patent on a chair with a back, a seat, and one or more legs, right? All I sell in the marketplace are stools, a back, and a seat, and no leg, or one leg. Because one leg doesn’t infringe four legs, right? I might have a whole product suite that is not covered by my patent. So you, even though I have a patent on chairs with a back, a seat, and four legs, you go to the marketplace and you find all my three legged chairs and you copy one, you’re not infringing even though you’ve copied by product. You can copy anyone’s product, any time, and go to market. The only thing that prevents you from doing that is intellectual property or business factors. But intellectual property is the only thing that legally prevents you from doing that.

Thomas Colson:

So what do you have? You see somebody who has a product in the marketplace, first question is, is that thing any good and do I want to copy it? And if the answer is, hell yes, that’s a great product, I can make a lot of money, then you got to ask yourself, is there some reason I can’t copy it? Beyond my physical, or mental, or financial capabilities? Is there a trademark preventing me from copying it? Well maybe if the product has a cool trademark. I can copy the product or not the trademark. Is there a trade secret protecting it? Well Jimmy Crack Corn and I don’t care. Because if I found out about it, legally if I reverse engineered it, if I discovered it legally, I can copy a trade secret of a product, because trade secrets are only as valuable as your ability to keep them secret. Three, is there a copyright? Well if it’s a product, probably doesn’t relate to copyrights. I mean maybe the marketing material or stuff around it.

Thomas Colson:

Then is there a patent? That’s then the big question. How do you know that? Go do a freedom to operate search. You find a patent, then you have to ask yourself, okay, I want a copy of their product, can I still do that? Well I look at their patent and I’m like, wow, their patent doesn’t even cover their own product. They patented a chair having a back, a seat, and four legs, all their products are one legged, two legged, and three leg. I can copy all their products to my heart’s content because you can’t infringe a product, you could only infringe patents. So that’s kind of a long-winded response to your question of, do they actually have to go out and copy the product, then that doesn’t mean infringement.

Raymond Guarnieri:

Yeah. No, that’s really interesting. I’m actually glad I asked the question, because my way of thinking about it was like inverted. So that’s really interesting.

Thomas Colson:

Yeah. So anyway, so that is Cisco and Centripetal. And I’m sure Centripetal is celebrating and Cisco is doing something less than celebrating.

Raymond Guarnieri:

Yeah. Well that’s another really big question I have is, it’s not so much a question as it is a statement. This kind of settlement, or it’s not a settlement, but a damages award could totally cripple even a business the size of Cisco. I mean, it could do really big damage to a big company.

Thomas Colson:

Yeah. Now Cisco though, I think they generate what, didn’t you take a quick look before-

Raymond Guarnieri:

It was like $49 billion in revenue.

Thomas Colson:

Right. And then what what’s their profits?

Raymond Guarnieri:

Google told me it was $0.1 billion in, let me Google it again.

Thomas Colson:

Yeah. So that’s the thing is that, if you’re a medium sized company and you get hit with a billion dollar verdict, you could be out of business. If you’re a gigantic company yeah, it’s going to hurt, your stock price might price my dip for a little while when the marketplace finds out about it. But ultimately Centripetal probably got, I don’t know how big Centripetal is, but they probably got a bigger upside in terms of their value from this than the hit Cisco took. I’m just guessing.

Raymond Guarnieri:

So it says 2018 numbers reported earnings of $0.1 billion with an annual revenue of $49.3 billion. So you have to assume those numbers have gone up, it was a 2.8% increase over 2017. But I mean-

Thomas Colson:

You can look at their revenues though. If they have $50 billion in revenues and you’re paying out $2 billion, that’s like 4% of your total revenues.

Raymond Guarnieri:

Right. I mean that’s a lot, that can eat into your profit almost entirely, right?

Thomas Colson:

Yeah, it can effect your bottom line. Yeah, that’s pretty ugly. But imagine though now you’re a small or medium size company and you’re hit with a 10, or 15, or 20, and forget the verdict, forget that for a moment. You’re a small or medium sized company and you get sued, you don’t even get an adverse verdict-

Raymond Guarnieri:

Right. Well imagine it was the other way around.

Thomas Colson:

Yeah, but you get sued. I mean, just getting sued is going to be crippling to you. Because even if you win… So I tried a case once with a client, they were sued for false patent marketing. Kind of a weird case. But anyway-

Raymond Guarnieri:

What’s patent marketing?

Thomas Colson:

They were alleged to have put patent markings on products and brochures that weren’t [inaudible 00:24:56] the products. But anyway, they probably spent a half a million fees with us, and at the end of it all we won, we won a jury verdict. And after the summation my client came up and he gave me this big hug, he was all excited. He kept calling me Tom Cruise, he kept saying, “You’re Tom Cruise.” From the movie, I think A Few Good Men. But anyway, Tom had more hair, was way better looking than I was, believe it or not was taller.

Raymond Guarnieri:

But you both have the same name, first name.

Thomas Colson:

Yes, at least I had that going for me. But anyway, he was all excited. But then after it kind of settled in, he realized that even though he won he lost, because we spent like two years on this. He was totally distracted, the senior executive we were working with, and they spent like half a million dollars, and all it enabled them to do was keep doing what they were doing. So if you’re a small or medium sized company, patent infringement can be crippling. In some ways it’s more important if you’re in that area, that if you’re launching new products, you want to make sure you don’t infringe patents that are out there wherever you’re selling your products.

Thomas Colson:

And remember, patents they cover, there’s different patents in different parts of the world. If you have a Chinese patent you could only infringe it in China. If you have a US patent, you could only infringe it in the US. So you have to do freedom to operate searching wherever you are going to do business, or it could be some pretty ugly responses. It could yield some seriously damaging damages. And it’s not just patents, I mean it’s also trademarks.

Thomas Colson:

You build a whole thing around your brand, right? You got a new brand. I think we did a podcast once on that young girl that is one of my kids’ friends who [crosstalk 00:26:49] lunacy. I mean poor girl starts crying because there’s some other company that might have trademark priority over her. That’s a 19 year old girl, but it could happen to anybody because the damages could be millions with those. And if you’re a company that only generates five, $10, $15, $20 million a year in revenues, that’s pretty ugly. That’s painful, because you have all your regular legal costs. I mean you have legal issues all over the place when you’re generating any kind of meaningful or hopeful amounts of revenues, you have all kinds of legal issues. You don’t want something like this on top of that, when there’s such an easy solution, which is freedom to operate searching. It’s not that expensive as compared to the pain you’re going to suffer downstream if you step into one of these landmines.

Raymond Guarnieri:

Well you just mentioned a second ago a topic for another podcast which I want to talk about, which is international patent law, and how countries react to other countries businesses infringing on intellectual property that originated in their country.

Thomas Colson:

Yeah, we could do one on that.

Raymond Guarnieri:

A topic on international trade, so I’m just very curious to know.

Thomas Colson:

Yeah, because there’s also the issue of, I mean patenting and preventing infringement of patents is so expensive. You need to have a plan, you can’t just go into patenting or even developing new products willy nilly, or I should say no one goes into developing new products willy nilly, you have to have the same mentality when it comes to patenting. It could be very, very expensive. Even one patent filed in 10 countries and you’re going to spend a lot of money. But that’s for another day, that’s definitely for another day.

Raymond Guarnieri:

Well this was an awesome topic. I mean all kidding aside, I was actually really excited when I read this article, because when is the next time that $1.9 billion is going to be beaten in damages?

Thomas Colson:

I don’t know. I remember when the first billion dollar verdict-

Raymond Guarnieri:

When was that?

Thomas Colson:

It was a few years ago there was a billion, and it was either a settlement or verdict. And I thought, wow, a billion. That’s insane. And now there’s like a $2 billion, and when you throw in the royalties it’s more like $2.5 to $3.5.

Raymond Guarnieri:

Well we’ll come back here in a few years and we’ll do another podcast, and we’ll reflect back in the days when the biggest damage was only $1.9 billion.

Thomas Colson:

You got it. All right, Ray-

Raymond Guarnieri:

All right, thanks everyone. Hey, if you enjoyed the podcast, please don’t forget to share this on LinkedIn. Leave us a comment, let us know what you think about this case. And if you’re on YouTube, hit the like button, and subscribe, and hit that bell icon so that you get notifications whenever we post a new video. Thanks everyone.

Thomas Colson:

Thank you.