Are PTO attorney fees expenses under Section 145?

The U.S. Patent and Trademark Office appealed the U.S. Court of Appeals for the Federal Circuit's en banc decision in NantKwest, Inc. v. Iancu, denying the recovery of attorney fees under 35 U.S.C. Section 145. 898 F.3d 1177 (Fed. Cir. 2018). Upon receiving a Patent Trial and Appeal Board decision affirming an examiner's rejection, an unsatisfied patent applicant has two options. The applicant may: (1) appeal the decision directly to the Federal Circuit, pursuant to 35 U.S.C. Section 141; or (2) file a civil action against the director in the Eastern District of Virginia pursuant to Section 145. Under Section 141, applicants are limited to the record developed before the PTO. By contrast, review under Section 145 is de novo and provides the applicant an opportunity to introduce new evidence, but requires the applicant to pay "all the expenses of the proceedings." 35 U.S.C. Section 145. That requirement applies "regardless of the outcome" of the suit. No analogous expense-recoupment provision applies when an unsuccessful applicant pursues a direct appeal to the Federal Circuit under Section 141.

How We Got Here

NantKwest filed suit under Section 145 in the Eastern District of Virginia. NantKwest, Inc. v. Lee, 162 F. Supp. 3d 540, 541 (E.D. Va. 2016). Following entry of judgment, the PTO filed a motion seeking $111,696.39, including $78,592.50 in attorney fees. Id. at 541, 546. These fees were calculated based on a "pro-rata share of the salaries" of the PTO attorneys and paralegal assigned to the matter. NantKwest, Inc. v. Matal, 860 F.3d 1352, 1354 n.1 (Fed. Cir. 2017). The district court concluded that the PTO was "not entitled to attorneys' fees because the American Rule specifically forbids it." Id. at 542. The PTO appealed.

A divided panel of the Federal Circuit reversed, holding that Section 145 authorized an award of the "prorata share of the attorneys' fees the [PTO] incurred to defend applicant's appeal." Matal, 860 F.3d at 1360. The panel "assum[ed] the [American] Rule applies" but held that "the expenses at issue here include the USPTO's attorneys' fees." Id. at 1355. The panel explained that "[c]ourts uniformly recognize an exception" to that rule: "when the statute itself specifi[cally] and explicit[ly] authorizes an award of fees." Id. at 1356. In purported agreement with Shammas, the panel concluded, "that 'expenses' here includes attorneys' fees." Id.; Shammas v. Focarino, 784 F.3d 219, 223-24 (4th Cir. 2015).

Judge Kara Stoll dissented, finding that "Supreme Court precedent makes clear that the American Rule marks the starting point for any analysis that shifts fees from one litigant to another." Id. at 1360 (Stoll, J., dissenting). Because Section 145 provides no "express authority" to award attorney fees, Judge Stoll reviewed "the ordinary meaning of 'expenses' [and] §145's legislative history," but found no authorization for an award of attorney fees. Id. at 1361-62.

The Federal Circuit sua sponte decided to consider this issue en banc. NantKwest, Inc. v. Matal, 869 F.3d 1327, 1327 (Fed. Cir. 2017). Writing now for a seven-member majority, Judge Stoll held that Section 145's text could not support an award of attorney fees. The majority noted that the American Rule -- under which each litigant pays his own attorney fees, win or lose -- "serves as the 'basic point of reference' whenever a court 'consider[s] the award of attorney's fees.'" NantKwest, Inc. v. Iancu, 898 F.3d 1177, 1181 (Fed. Cir. 2018) (en banc) (quoting Hardt, 560 U.S. at 252-53). "Because the PTO contends that §145 should be construed to shift its attorneys' fees to the patent applicants," the majority held that "the American Rule necessarily applies." Id. at 1184. In reaching this decision, the majority explicitly rejected Shammas. The majority then asked whether Section 145 contained specific and explicit language sufficient to displace the presumption against fee shifting. Id. at 1186. It did not. Id. at 1187.

Chief Judge Sharon Prost, joined by three members of the court, dissented, reasoning that the statutory language "[a]ll the expenses of the proceedings" was sufficient to overcome the American Rule's presumption. Id. at 1203 (Prost, C.J., dissenting). "Expenses" -- as defined contemporaneously with the enactment of Section 145's predecessor statute and used by this court and Congress -- was "broad enough to cover the PTO's personnel expenses." Id. at 1199. And, "Congress's use of the word 'all' indicated its desire to broadly and comprehensively include all of the expenses as it commonly nderstood them." Id. at 1201.

What's Next

The issue before the Supreme Court is: Whether the phrase "[a]ll the expenses of the proceedings" in Section 145 encompasses the personnel expenses the PTO incurs when its employees defend the agency in Section 145 litigation. In order to overcome the American Rule's presumption that "[e]ach litigant pays his own attorney's fees, win or lose," the court must determine whether the language "[a]ll the expenses of the proceedings," contains "specific and explicit provisions for the allowance of attorneys' fees" demonstrating a clear congressional intent to deviate from the American Rule's presumption.

The PTO argues the term "expenses" includes the expenses the agency incurs when its personnel devote their time to a Section 145 proceeding. The ordinary meaning of "expenses" encompasses the expenditure of time and money on personnel to accomplish a result. The statutory structure and purpose confirm that the term "expenses" as used here includes expenditures for agency personnel. Since Section 145 affords disappointed applicants an unusual opportunity to present new evidence in judicial review of the agency's decision, those proceedings can subject the PTO to greater financial burdens than would a direct appeal limited to the record before the PTO. The statutory history reinforces that the term "expenses" in Section 145 includes personnel expenses. Congress has long paired the disappointed applicant's right to introduce new evidence in a trial-court proceeding with the requirement to pay all the expenses of that proceeding. Those trial-court proceedings have traditionally been viewed as part of the patent-application process, which has long been funded by user fees to cover the agency's expenses. Moreover, Section 145 does not implicate the American Rule because it requires a disappointed patent applicant who elects district-court review to pay all the expenses of the proceedings without regard to the outcome of the suit. In determining the scope of that unusual requirement, the plain text of the statute -- not the American Rule -- is the appropriate starting point. In any event, the language of Section 145 is sufficiently specific and express that it would displace the American Rule.

The respondent's position is the Federal Circuit properly analyzed the PTO's request under the American Rule. Hardt, 560 U.S. at 252-53 (quotation marks omitted). As the Supreme Court's recent decision in Baker Botts v. ASARCO LLC makes clear, the American Rule applies whenever a litigant seeks to have another pay his attorney fees. 135 S. Ct. 2158, 2164 (2015). Indeed, the American Rule's demand for clarity is actually at its strongest when a statute is argued to shift fees regardless of who prevails. Id. at 2166. "Expenses," whether or not modified by "all," did not provide the "'specific and explicit' congressional authorization" necessary to displace the American Rule's presumption. NantKwest, 898 F.3d at 1187.

Given the current makeup of the Supreme Court, the literalist, strict constructionist, majority will probably decide that "all of the expenses of the proceedings" does not include attorney fees. The rationale for such decision would be based on the fact that Congress did not explicitly provide for recovery of attorneys' fees. No other agency in the U.S. government has such tool.

The court hears arguments in the case on Monday. 