United States: Federal Circuit: USPTO Loses Bid For Win-Or-Lose Fees

NantKwest Inc. v. Iancu, 898 F.3d 1177 (Fed. Cir. 2018)

In July 2018, the Federal Circuit rejected the U.S. Patent and Trademark Office's ("USPTO") argument that it was entitled to recover attorneys' fees, win or lose, when defending the Patent Trial and Appeal Board's (the "Board") decisions under Section 145 of the Patent Act, 35 U.S.C. §145. In a 7-4 en banc decision, the Federal Circuit reversed its own ruling a year ago that the USPTO was entitled to those fees.

Section 145 of the Patent Act

When the Board affirms an examiner's rejection of a patent application, the Patent Act provides applicants two avenues of appeal: (i) appeal directly to the Federal Circuit under Section 141 or (ii) file a civil action against the Director of the USPTO in the United States District Court for the Eastern District of Virginia under Section 145. The Federal Circuit then has jurisdiction over appeals from the District Court. The Section 145 route is more expansive, and thus more time consuming and costly than a direct appeal to the Federal Circuit. Applicants who invoke Section 145 are required by statute to pay "[a]ll the expenses of the proceedings" incurred by the USPTO in defending its decision in court. 35 U.S.C. § 145.

Up until 2013, the USPTO had interpreted this provision to cover agency travel costs and expert fees, but never attorneys' fees, which can typically reach six figures. Seemingly out of nowhere, the USPTO began asking for such fees, arguing that other patent applicants should not have to "subsidize the expenses of these optional proceedings." Brief of Appellant at 30, Nantkwest, Inc. v. Matal, No. 2016-1794 (Fed Cir. Nov. 15, 2017).

NantKwest v. Iancu

After the Board affirmed the examiner's rejection of NantKwest's patent application, NantKwest appealed the decision to the Eastern District of Virginia. After the USPTO prevailed again, the Office sought reimbursement of its litigation expenses, including attorneys' fees amounting to $78,000. The district court denied the USPTO's motion in-part with respect to attorneys' fees. A split Federal Circuit panel overturned the decision in 2017 and ordered NantKwest to pay the attorneys' fees. In August 2017, however, without a request from the parties, the full Federal Circuit vacated its June 2017 decision and chose to rehear the case en banc.

After considering extensive legislative history and consulting multiple dictionary definitions of "expenses," the full Federal Circuit affirmed the district court's ruling denying the USPTO's motion for attorneys' fees. First, the Court held that the American Rule that litigants pay their own attorneys' fees, win or lose, applies to Section 145. Next, the Federal Circuit addressed whether Section 145 displaces the American Rule. The Court explained that exceptions to the American Rule require "specific and explicit" Congressional authorization. The Court stated that the "specific and explicit" requirement demands "more than language that merely can be and is sometimes used broadly to implicitly cover attorneys' fees." Nantkwest, Inc. v. Iancu, 898 F.3d 1177, 1187 (Fed. Cir. 2018) (emphasis in original).

In conducting its analysis, the Court considered two categories of Congressional statutes: (i) statutes that list expenses and attorneys' fees as separate items of recovery and (ii) statutes that define expenses to include attorneys' fees, but do so explicitly. The Court decided that both categories demonstrated that Congress understood "expenses" to mean something other than "attorneys' fees" unless expressly specified. Finding that Section 145's use of "expenses" was at best "ambiguous," the Court held that it could not overcome the standard American Rule for shifting attorneys' fees. Essentially, the Court concluded that if Congress had wanted "expenses" in Section 145 to cover attorneys' fees, it would have said so.

The majority was also persuaded by the fact that there is no other statute that requires a private litigant to pay the government's attorneys' fees without regard to outcome. Thus, it noted that the USPTO's interpretation would result in a "particularly unusual divergence" from the American Rule, one that the Court was not inclined to create absent more explicit language in the statute.

Finally, the majority addressed the USPTO's concern about other patent litigants "subsidizing" these appeals by calculating that the cost of financing these proceedings per applicant would have amounted to $1.60 per application in 2018—hardly the burden asserted by the USPTO.

Effect of the Decision

Had the Federal Circuit ruled in favor of the USPTO, it would have effectively closed off an entire avenue of appeal to applicants that is a Congressionally-created right. For now, applicants who invoke Section 145 are not required to pay the USPTO's attorneys' fees. But the Federal Circuit is unlikely to have the last word on this topic. With this decision, there is now a circuit split with the Fourth Circuit, which endorsed the fees-no-matter-what policy in the Lanham Act (trademark law) context in 2015. Our report of the Fourth Circuit's decision can be viewed here. This issue may well work its way to the Supreme Court, so stayed tuned!

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