United States: Must Patent Applicants Pay For The PTO's Attorneys In District Court?

Suppose you apply for a patent and the U.S. Patent and Trademark Office rejects your application. You go to court to challenge the PTO's decision, as is your right under the patent statute, and win. It's expensive, but you get your patent. And then the PTO hands you a bill, saying even though they were wrong to reject your application, you must pay for the time the government's attorneys spent on the case.

You might be surprised, but that's exactly what the PTO started doing a few years ago. The statute that allows patent applicants to challenge the PTO's rejections in federal district court also says that the applicant pays "all the expenses" for the proceeding.

For over 170 years, the PTO interpreted "expenses" to mean printing costs, court reporter fees, travel expenses and the like — but not attorney fees. The general rule, known as the "American rule," is that each party to a court proceeding pays for its own attorneys.

The U.S. Court of Appeals for the Federal Circuit, which has exclusive jurisdiction over patent cases, rejected the PTO's bid for attorney fees in NantKwest Inc. v. Iancu, 898 F.3d 1177 (Fed. Cir. 2018). But trademark applicants who use a similar statute to challenge the PTO in district court currently must pay for the PTO's attorneys, even if the applicants win.

Section 145 Actions

The Patent Act gives patent applicants two options if they lose before the Patent Trial and Appeal Board.¹   The applicant can appeal directly to the Federal Circuit, which is the most common procedure. The applicant can also file a civil action in the U.S. District Court for the Eastern District of Virginia under Section 145 of the Patent Act, 35 U.S.C.A. § 145. This second option is only available for original patent applications that are rejected by the PTAB — it's not available for reviews of issued patents, such as re-examinations or inter partes review proceedings.

There are significant differences between direct appeals from the PTAB to the Federal Circuit and Section 145 actions. Direct appellate review is confined to the record in the PTO,² and the scope of review is limited. The U.S. Supreme Court confirmed in Kappos v. Hyatt, 566 U.S. 431 (2012), that the PTO's factual findings are reviewed for substantial evidence; that is, the findings can be reversed or set aside only if they are unsupported by substantial evidence.

A Section 145 action is more expansive and generally more time consuming (and costly) than a direct appeal. Most significantly, patent applicants who pursue the Section 145 route are not limited to the record in the PTO. Instead, they can conduct discovery and introduce new evidence. The parties can engage in motion practice, and the case can result in a full-blown trial with live testimony.

Once the applicant submits new evidence, the District Court makes its own factual findings and doesn't adopt the PTO's findings.

There's an additional cost to this type of litigation though, beyond the applicant's own fees and expenses. The statute says that in Section 145 actions, "all the expenses of the proceedings shall be paid by the applicant." Thus, win or lose, the applicant must pay the PTO's "expenses."

'Expenses of the Proceedings' 

Congress introduced the predecessor to Section 145 in 1839, in the form of the Act of March 3, 1839, ch. 88, § 10, 5 Stat. 353. The statute required the applicant to pay "the whole of the expenses of the proceeding ... whether the final decision shall be in his favor or otherwise."

In Section 145 actions and similar litigation under prior statutes, the PTO has recovered its attorneys' travel expenses to attend depositions, printing costs, court reporter fees and expert witness fees. For more than 170 years, the PTO never tried to recover its attorney fees for these types of civil litigations. Recently, that has changed.

Starting in 2013, the PTO has claimed that the "expenses of the proceedings" include attorney fees, or what the agency calls "personnel expenses." In particular, it has sought to recover the pro rata salaries of the PTO attorneys and paralegals who work on the case.

The PTO has justified its newly minted interpretation of the statute as necessary because civil litigations under Section 145 have become more common and more expensive. The agency now says it is unfair to require other PTO users to subsidize the expenses of these proceedings.

In fact, Section 145 actions are still not that common — the PTO estimated there are only one or two Section 145 actions a year. And for the much greater number of direct appeals, which are less expensive than Section 145 actions, the PTO still incurs significant "personnel expenses" that are subsidized by other PTO users.

Nantkwest

NantKwest Inc. is the assignee of an application to patent a method for treating cancer using natural killer cells. A patent examiner rejected the application as obvious, and the PTAB affirmed the rejection.

NantKwest sued the PTO director in the Eastern District of Virginia under Section 145. After some discovery, the PTO moved for summary judgment of obviousness. The district court granted the motion. The Federal Circuit affirmed by a vote of 2-1 in NantKwest Inc. v. Lee, 686 F. App'x 864 (Fed. Cir. 2017).

The PTO filed for reimbursement of the "expenses of the proceedings" under Section 145. Consistent with its new interpretation of "expenses," it included in the amount sought approximately $80,000 in attorney fees. These fees (or "personnel expenses") were calculated based on the pro rata salaries of the two PTO attorneys and one paralegal who worked on the case.

The district court denied the PTO's reimbursement request for attorney fees, citing the American rule. NantKwest Inc. v. Lee, 162 F. Supp. 3d 540 (E.D. Va. 2016). The PTO appealed the denial of its request for attorney fees, and a 2-1 panel of the Federal Circuit reversed. NantKwest Inc. v. Matal, 860 F.3d 1352 (Fed. Cir. 2017).

The panel majority opinion expressed doubt on the application of the American rule to Section 145 because the statute imposes expenses without regard to whether the applicant is the prevailing party. The American rule that each party pays its own attorney fees may be displaced by an express grant from Congress in which fees are shifted to the winner. The majority reasoned that, because the applicant must pay expenses no matter what, the rule did not apply.

Relying on dictionary definitions, the panel majority upended 170 years of practice and concluded that the word "expenses" authorizes an award of the PTO's attorney fees in Sections 145 actions.

Trademarks and the 4th Circuit

The panel majority in NantKwest also relied on the 4th U.S. Circuit Court of Appeals' opinion in Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015). As unusual as the "win or lose" expenses provision in Section 145 may seem, there is an almost identical provision in the Lanham Act for trademark applicants.

Dissatisfied trademark applicants can appeal directly to the Federal Circuit, or they can file a civil action in a federal district court under Section 21(b) of the Lanham Act, 15 U.S.C.A. § 1071(b). If the applicant proceeds in the district court and there is no adverse party, the applicant names the PTO director as the defendant. And as with Section 145, Section 21(b)(3) of the Lanham Act, 15 U.S.C.A. § 1071(b)(3), says "all the expenses of the proceeding shall be paid by the party bringing the case, whether the final decision is in favor of such party or not."

In another 2-1 panel decision, the 4th Circuit in Shammas held that Section 1071(b)(3) is not a fee-shifting statute because it does not refer to a prevailing party. The court thus concluded that the American rule does not apply. It upheld the district court's award of the PTO's attorney and paralegal fees, finding that "all the expenses of the proceeding" is broad enough to encompass these types of fees.

Federal Circuit's En Banc Decision

About two months after the panel opinion in NantKwest, the Federal Circuit, in a surprise move, decided on its own to rehear the case en banc and vacated the panel opinion. NantKwest Inc. v. Matal, 869 F.3d 1327 (Fed. Cir. 2017). The full Federal Circuit asked for new briefs on one question: whether the term "all the expenses" in Section 145 authorizes an award of attorney fees to the PTO.

Several organizations filed amicus briefs, including the American Bar Association, the Intellectual Property Owners Association, the American Intellectual Property Law Association and the International Trademark Association. Not surprisingly, they all opposed the PTO's new reading of the statute to require reimbursement of its attorney fees regardless of the outcome.

The full Federal Circuit voted 7-4 that the PTO could not recover its attorney fees as part of its expenses in Section 145 actions. NantKwest Inc. v. Iancu, 898 F.3d 1177 (Fed. Cir. 2018). The majority opinion, written by U.S. Circuit Judge Kara Farnandez Stoll, said the PTO's fee request was contrary to the American rule. The American rule can be overcome only if Congress makes a specific and explicit directive for attorney fees to be available, the court said. The reimbursement provision in Section 145 awarding "expenses" to the PTO fell short of this stringent standard, it explained.

The Federal Circuit's majority opinion also pointed out that the PTO's position would mean that patent applicants must pay attorney fees even if they win. There are no other statutes that require a private party to pay for the government's attorneys without regard to success, the majority said. The PTO's interpretation would create a particularly unusual divergence from the American rule, and had Congress intended such an anomalous result, it would have said so in far plainer language, the majority said.

While Section 145 actions are not that common, had the en banc Federal Circuit adopted the PTO's position, as the original panel did, it would have put a real disincentive in place. If patent applicants must always pay the PTO's attorney fees, there would be a big drawback to filing in district court.

But that's exactly where trademark applicants now find themselves. Because of the Shammas decision, unlike patent applicants, trademark applicants must pay the PTO's attorney fees in the same types of civil litigations. As stated in Booking.com BV v. Matal, No. 16-cv-425, 2017 WL 4853755 (E.D. Va. Oct. 26, 2017), regardless of how the Federal Circuit rules in Section 145 actions, the law in the 4th Circuit, as reflected in Shammas, allows the PTO to recover its attorney fees in trademark cases under Section 1071(b).

What's Next?

It's now up to the U.S. Supreme Court to resolve this circuit split. The high court turned down a certiorari petition two years ago in Shammas v. Hirshfeld, 136 S. Ct. 1375 (2016), when Shammas sought review of the 4th Circuit's decision. The PTO recently obtained a month extension to file a certiorari petition in NantKwest because "the solicitor general has not yet determined whether to file a petition for a writ of certiorari in this case."³

PTO Director Andrei Iancu, who assumed that position in February 2018 after the en banc Federal Circuit argument in NantKwest but before the decision, may not be as interested as his predecessor in pursuing attorney fees in these types of cases. The PTO estimates that there are one to two Section 145 actions a year. The fees sought in NantKwest were about $80,000. If these numbers were typical, the fees would come to only $160,000 a year.⁴

If the PTO does not seek certiorari in NantKwest, then we will likely have to wait for a trademark applicant to challenge the 4th Circuit precedent. That will require the applicant — win or lose on the merits, of course — to first suffer an attorney fee award in the district court, followed by an unsuccessful appeal, before being able to raise the circuit split in the Supreme Court.

The recent Booking.com case could present that opportunity. Booking.com won on the merits, but the district court in Booking.com BV v. Matal, No. 1:16-cv-425, 2017 WL 4853755 (E.D. Va. Oct. 26, 2017), awarded the PTO its attorney fees. Booking.com's appeal to the 4th Circuit is pending.

In the meantime, the lower courts are not waiting for the Supreme Court. Shortly after the en banc decision in NantKwest, the Federal Circuit tossed out an award of attorney fees in a Section 145 action. Realvirt LLC v. Iancu, 734 F. App'x 754 (Fed. Cir. 2018).

And more recently, the court in Halozyme Inc. v. Iancu, No. 16-cv-1580, 2018 WL 5270329 (E.D. Va. Oct. 23, 2018), denied the PTO's motion to stay consideration of attorney fees in a Section 145 action until it decides whether to seek certiorari in NantKwest. Observing that the Federal Circuit's NantKwest decision is binding authority, the court found it inappropriate to stay the case any longer.

So for now, the PTO can't recover its attorney fees in civil actions filed by patent applicants, but trademark applicants who file similar district court actions must pay the PTO's attorney fees, win or lose.

Footnotes

1  35 U.S.C.A. § 141.

2  35 U.S.C.A. § 144.

3  Iancu v. NantKwest Inc., No. 18A369, opinion issued (Oct. 5, 2018) (granting extension until Nov. 23, 2018).

4  See NantKwest, 898 F.3d 1177 (Fed. Cir. 2018). Of course, the fees in some cases may be much more, such as in Halozyme Inc. v. Iancu, No. 16-cv-1580, 2018 WL 5270329 (E.D. Va. Oct. 23, 2018), where the PTO's attorney fees were estimated at close to $250,000.

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