En Banc Federal Circuit: § 145 Appellants Generally Not Liable for PTO Attorneys' Fees
The en banc US Court of Appeals for the Federal Circuit reversed a panel decision and held that 35 USC § 145 does not require applicants appealing to the US District Court for the Eastern District of Virginia to pay the USPTO’s attorneys’ fees.
The en banc US Court of Appeals for the Federal Circuit reversed a panel decision and held that 35 USC § 145 does not require applicants appealing to the US District Court for the Eastern District of Virginia to pay the United States Patent and Trademark Office’s (PTO) attorneys’ fees. After a sua sponte decision to review the panel decision en banc, the court in a 7-4 decision affirmed the district court’s decision, despite a spirited dissent authored by Chief Judge Sharon Prost. NantKwest, Inc. v. Iancu, Director of the USPTO (No. 16-1794) (Fed. Cir. July 27, 2018) (en banc) (Stoll, J., joined by Newman, Lourie, Moore, O’Malley, Wallach and Taranto, JJ) (Prost, CJ, dissenting, joined by Dyk, Reyna, and Hughes, JJ).
There are two ways to appeal adverse Patent Trial and Appeal Board decisions arising out of patent prosecution. First, under 35 USC § 141, dissatisfied applicants may appeal directly to the Federal Circuit, the most routinely used path for appeal. Second, applicants may use § 145, and instead seek review in the Eastern District of Virginia through the filing of a civil action. In such an action, the parties can conduct full discovery and introduce new evidence, including oral evidence that was not presented to the PTO during prosecution. These § 145 actions are resolved under the same methods as traditional district court proceedings, such as motion practice and a trial on the merits.
A trade-off to an applicant’s ability to expand the record under § 145 proceedings is that “[a]ll the expenses of the proceedings shall be paid by the applicant.” Ever since the predecessor statute of § 145 was passed in the mid-1800s, these expenses included, travel, expert fees and document production costs, but never attorneys’ fees. In the underlying NantKwest district court proceedings, however, the PTO, for the first time in more than 170 years, demanded that it be paid its attorneys’ fees incurred during the action win or lose.
Two major distinctions separated the majority and dissenting opinions in this case. First, the majority emphasized the statutory language, “expenses,” rather than the term “all,” which was a focus of the dissent. The majority also determined that the statute itself was not “specific and explicit,” whereas the dissent considered the provision so clear that no additional clarity was required to ascertain its purpose. Neither the majority nor the dissent, however, seemed particularly concerned with the PTO’s prior 170-year practice, which would initially appear to indicate how the PTO has viewed the meaning of this provision for more than a century.
The en banc majority started its attorneys’ fees analysis with the American Rule as a “bedrock principle” of American jurisprudence: that each party pays its own attorneys’ fees, win or lose. The American Rule is rooted in fair access to the legal system for the poor, as well as the difficulty of litigating the reasonableness of fees. That is, the American Rule—unlike the presumption in England—allows less-wealthy litigants to contest a case rather than ensure that a prevailing party avoids any loss whatsoever from litigation. As the majority noted, however, Congress has, from time to time, chosen to establish a presumption in certain cases that a prevailing litigant will recover attorneys’ fees so long as the statutory language demonstrates “specific and explicit” congressional intent.
The majority first considered whether the presumption of the American Rule applied under § 145. The Patent Office argued that it should not, because it relates only to cases in which fees are shifted from a losing party to a prevailing party. The Patent Office relied heavily on a US Court of Appeals for the Fourth Circuit case, Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015), in which language from the Lanham Act, nearly identical to § 145, was held not to require consideration of the American Rule in compelling an appellant’s payment of the PTO's attorneys’ fees in trademark cases. The majority in NantKwest chose to reject the Shammas holding, finding that it “cannot be squared with the Supreme Court’s line of non-prevailing party precedent applying the American Rule.”
The Patent Office also relied on Sebelius v. Cloer, 569 US 369 (2013), which interpreted a statute that allows prevailing “Vaccine Court” petitioners to recover reasonable attorneys’ fees, but also permits a discretionary award of fees for unsuccessful petitions “brought in good faith [with] a reasonable basis for the claim.” Characterizing the underlying statute in Sebelius as a straightforward instance of a specific and explicit intent by Congress to overcome the presumptive American Rule, the majority disagreed with the Patent Office that Sebelius provides a reason to avoid applying the presumption of the American Rule.
The majority thus started with the presumption of the American Rule and considered whether § 145’s requirement that the applicant pay “all the expenses of the proceedings” showed a specific and explicit intent to overcome the American Rule. In doing so, it viewed the key question as whether attorneys’ fees would be considered “expenses” in the context of § 145, which meant an investigation of the meaning of the term in 1839. The majority found that most contemporaneous dictionary definitions would not consider expenses to included attorneys’ fees. Similarly, other statutes’ use of “expenses” generally did not include attorneys’ fees. In some cases, the statutes identified expenses and attorneys’ fees as different categories, some others explicitly included attorneys’ fees in expenses. And where the Patent Act discusses fee awards (specifically, § 285), it does so explicitly, with language quite different from the more general term “expenses” used in § 145. Furthermore, judicial decisions from the 1800s through the present day view expenses and attorneys’ fees as two separate categories. Finally, the majority considered that the Patent Office’s interpretation would require a prevailing appellant to pay the losing Patent Office’s attorneys’ fees, and such an extraordinary departure from the American Rule should require extraordinary clarity. As such, the majority found no “specific and explicit” intent to depart from the Rule.
The majority then examined additional policy arguments raised by the PTO and the dissent. First, examining the legislative history of § 145 and its predecessor, finding it opaque when changing the statutory language from “costs” capped at $25 to uncapped “expenses.” Certainly, the majority agreed, this was intended to broaden the recoverable amounts, but it provided no guidance as to whether attorneys’ fees was intended to be one of the recoverable categories. The majority also rejected the dissent’s reliance on the Patent Office’s 1836 budgetary provisions (which included salaries of employees as one of the ‘expenses of the Patent Office’) as being such a different context as to be uninformative. Finally, it rejected the dissent’s suggestion that § 145 actions would be a scourge on the patent system as a whole if the Patent Office were required to pay its own attorneys’ fees. The majority noted that only a handful of § 145 actions are filed per year and the Patent Office’s attorneys’ fees can be spread over hundreds of thousands of applications, resulting in a cost per application that is less than $2. Thus, the majority found that each party must bear its own attorneys’ fees in § 145 actions, finding the PTO’s arguments unpersuasive and the PTO’s reliance on Shammas to be reliance on an incorrect interpretation of the law.
Chief Judge Prost’s dissent focused on the plain meaning of § 145 and the provision’s legislative history. Prost noted that Congress understood salaries to be within the scope of expenses in 1836 as evidenced by an 1830’s dictionary as including “employment and compensation” within the scope of “expenses” and that the dictionaries cited by the majority also support a finding that “expenses” should include an employee’s compensation. The dissent also distinguished the majority’s argument regarding § 285, explaining that “Congress intended a broader compensation scheme under § 145 than under § 285” by comparing “all of the expenses” with “reasonable attorneys’ fees.” The dissent also focused on the term “all” modifying “expenses” as demonstrating congressional intent to “comprehensively capture anything fairly regarded as an ‘expense,’ resolving any lingering doubt in favor of the inclusion” of the PTO’s attorneys’ fees. The dissent further noted the legislative history of § 145 as evidencing a congressional intent that “all of the expenses associated with § 145 proceedings [should] be borne by the applicants who elect them” and not the taxpayers of the overall user base of the PTO.
Prost endorsed the holding in Shammas stating that the American Rule does not even apply in this context because the “expenses” are to be paid by the applicant regardless of which party prevails.
(1) The decision in NantKwest creates a circuit split between the 4th Circuit and the Federal Circuit in the interpretation of similar statutes (15 USC § 1071 (b) and 35 USC § 145) as to whether the American Rule applies and what is included in “all the expenses of the proceeding(s)” for appeals to a district court in statutes with similar language. Currently, an appeal to a district court from an adverse decision of the Director or the Trademark Trial and Appeal Board requires payment of the PTO’s attorneys’ fees, win or lose (4th Circuit in Shammas holding whether or not the American Rule applies, payment of the PTO’s attorneys’ fees is included in “all the expenses of the proceeding” under 15 USC § 1071 (b); and Federal Circuit in NantKwest holding the American Rule does apply and payment of the PTO’s attorneys’ fees is not included in “all the expenses of the proceedings” in appeals to the Eastern District of Virginia under 35 USC 35 USC § 145.)
(2) The authors were the principal writers of an amicus brief filed on behalf of the Intellectual Property Law Association of Chicago, which agreed with the Federal Circuit’s en banc majority opinion in NantKwest.
We would also like to thank Paul S. St. Marie Jr. for his contributions to this article.