When a patent applicant challenges the U.S. Patent and Trademark’s rejection of her patent application, and in particular takes that challenge into federal district court rather than straight to the Federal Circuit—in order, for example, to introduce new evidence and obtain de novo review—must the applicant pay the USPTO’s personnel expenses of the district court proceeding? Indeed, must the applicant pay those expenses, including attorneys’ fees, regardless of whether the applicant wins or loses in court? Those are questions the Supreme Court will consider Monday, when it holds oral argument in Peter v. NantKwest, Inc., the first of six Federal Circuit cases the Supreme Court has agreed to hear during the 2019 Term.
In 2013, the USPTO began seeking to recover its personnel expenses (including its attorneys’ fees) when a patent or trademark applicant challenged a rejection of an application by electing to file suit in federal district court. This change ultimately impacted NantKwest, the respondent in this case.
On December 20, 2013, NantKwest, the assignee of a patent application claiming an invention related to treating cancer, sought to challenge a rejection of its patent application. NantKwest filed suit in federal district court, which allowed NantKwest to supplement the evidence it had used in front of the USPTO and enjoy the benefit of a de novo hearing before an Article III judge.
During the examination at the USPTO, NantKwest had relied solely upon inventor testimony. By electing to go to federal district court, however, NantKwest was able to introduce expert testimony in an attempt to show the USPTO’s Patent Trial and Appeal Board had made a mistake. The USPTO, not surprisingly, responded with its own expert testimony. Both NantKwest and USPTO attorneys then engaged in discovery, motion practice—including summary judgment motions and motions in limine—and an oral hearing. In the end, the district court granted summary judgment to the USPTO, and the Federal Circuit affirmed the judgment that NantKwest was not entitled to a patent.
The litigation, however, was not over. At the district court, the USPTO sought to recover over $110,000 in expenses, including over $78,000 in personnel costs based on the work of two attorneys and a paralegal. The district court denied the request for reimbursement of the USPTO’s personnel costs. The Federal Circuit, in turn, initially reversed in a split, 2-1 panel decision. But the en banc Federal Circuit sua sponte granted rehearing and then, by a vote of 7-4, affirmed the district court’s denial of the request for reimbursement of the USPTO’s personnel costs.
The Supreme Court subsequently granted the USPTO’s petition for certiorari asking the following question: “Whether the phrase ‘[a]ll the expenses of the proceedings’ in 35 U.S.C. 145 encompasses the personnel expenses the USPTO incurs when its employees, including attorneys, defend the agency in Section 145 litigation.” (In an interesting turn of events, if only because it was strange, the Director of the USPTO, Andre Iancu, recused himself from participation in this case, but only after the petition was granted. As a result the named petitioner is the Deputy Director of the USPTO, Laura Peter.)
In its opening merits brief, the Solicitor General (representing Peter, the USPTO’s named representative) first focuses on the statutory language at issue. Section 145 of the patent statute states that “[a]ll expenses of the proceedings shall be paid by the applicant.” According to the government, “[t]he term ‘expenses’ includes the expenses the agency incurs when its personnel, including attorneys, devote their time to a Section 145 proceeding.” The government argues the ordinary meaning of “expenses” encompasses personnel expenses, “expenses” in the context of litigation and the patent statute include personnel expenses, and the historic use of the term in the patent statute includes the salaries of agency personnel. The government goes on to argue that the “statutory structure and purpose confirm that the term ‘expenses’ as used here includes expenditures for agency personnel.” It contends that the “unusual opportunity to present new evidence in judicial review of the agency’s decision” presents a greater financial burden on the USPTO, and that Section 145 “protects the USPTO from those additional burdens” as well as “other fee-paying users” who would otherwise supplement this additional cost. The USPTO wraps ups its first argument by pointing out how it is consistent with the tradition of funding patent application proceedings with user fees, including personnel expenses.
The Solicitor General then turns to the Federal Circuit’s basis for rejecting the government’s position, the idea that “Congress must use more explicit language to displace the American Rule, under which each party to litigation is ordinary responsible for its own attorney’s fees.” According to the government, the Federal Circuit’s reasoning is unsound. “Section 145 does not implicate the American Rule,” argues the government, “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.” Even if the American Rule applies, the USPTO contends that the “language of Section 145 is sufficiently specific and express” to displace it.
NantKwest, represented by Morgan Chu of Irell & Menella LLP, in its response on the merits maintains that the Federal Circuit correctly concluded that the USPTO cannot recover attorneys’ fees under Section 145. It argues that the statutory language is not sufficiently “specific and explicit” to deviate from the American Rule’s presumption that each party must bear its own attorneys’ fees. According to NantKwest, “[v]ague or open-ended phrases that could be construed broadly in some context to encompass attorneys’ fees will not suffice.” It argues “all expenses” standing alone is not sufficient to displace the American Rule because “the history of judicial and statutory usage as well as contemporaneous legal dictionary definitions demonstrate that the terms ‘expenses’ and ‘attorneys’ fees’ have historically been treated as distinct concepts.” Moreover, it points out that “numerous courts have held that the term ‘expenses’ does not include ‘attorneys’ fees.” NantKwest highlights that “the PTO has never even sought, much less been awarded, attorneys’ fees under § 145 in the nearly two centuries since its passage.” And it contends that “the text of the Patent Act demonstrates that Congress did not intend for “expenses” to include “attorneys’ fees,” as demonstrated by numerous other statutory amendments to the Patent Act and the Lanham Act that expressly use the phrase “attorneys’ fees.”
NantKwest criticizes the government for relying on generic rather than legal definitions of “expenses.” It also rejects the government’s argument that the American Rule does not apply here, pointing to precedent indicating “that the American Rule applies to fee shifting provisions of ‘various forms,’ including provisions that do not have a ‘prevailing party’ requirement.” NantKwest says the USPTO is “taking portions of this Court’s precedents—often single sentences—out of context.” And, it says, “policy arguments and legislative history cannot provide the necessary clarity and specificity that the text of § 145 lacks.”
In its reply brief, the government rejects NantKwest’s textual arguments as unsupported by the dictionaries, statutes, and case law it cites. The government maintains its position that “[t]he text and structure of Section 145, not the American Rule, dictate the outcome of this case.” And it seeks to explain why the USPTO’s shift toward seeking reimbursement of personnel expenses was a reasonable one.
Eleven amicus briefs were filed at the merits stage. Only one amicus brief offered support for the USPTO’s position that its personnel expenses are recoverable:
- R Street Institute
The following amici all support NantKwest’s position that USPTO personnel expenses are not recoverable:
- Federal Circuit Bar Association
- New York Intellectual Property Law Association
- American Bar Association
- Intellectual Property Owners Association
- Intellectual Property Law Association of Chicago
- The Association of Amicus Counsel, InfoTech Law Offices, Isshiki & Co., and Law Offices of Hiraide & Takahashi
- The International Trademark Association
- American Intellectual Property Law Association
- Association of the Bar of the City of New York
- IEEE-USA
It is perhaps not surprising that the amici line up to support the patent applicant rather than the USPTO given the interest of many private parties, law firms, and lawyer groups in not bearing the cost of the USPTO’s attorneys’ fees. But beyond highlighting the near-universal support for NantKwest outside of the government, the amicus briefs supporting NantKwest do raise interesting issues and points.
As one example, consider how IEEE-USA responds to the government’s argument that finding for NantKwest will shift the most significant cost of Section 145 proceedings onto other users of the patent system:
Based on the salary of the relevant legal professionals that the PTO disclosed . . . its annual expenditures on such cases do not exceed $250,000 for both patent and trademark civil actions. Assuming conservatively that all such expenditures are on Section 145 actions, they amount to less than 0.009% of the PTO’s total annual expenditures on patent operations in that year. . . .Because the PTO sets user fees based on its aggregate expenses, the 0.009% incremental fee cost to all patent users would be so small as to be within the rounding error of pennies.
Several of the other amicus briefs highlight the importance of this case. Indeed, this case is important for many reasons. It is clearly important to the USPTO and the government more generally given their long term interest in the outcome—they are spending significant time and effort defending their position in this case with the obvious goal of collecting personnel expenses in the future and, perhaps, with the goal of deterring use of Section 145 proceedings. On the one hand, it is interesting, by contrast, to think about NantKwest’s interest in the case; it is fighting at the Supreme Court over a matter of $78,000. On the other hand, the amicus briefs highlight how important the resolution of this case is for future patent applicants who wish to introduce new evidence and secure de novo review of USPTO decisions to deny them patents. If the Supreme Court decides that they must bear not only their own attorneys’ fees but also the USPTO’s attorneys’ fees, regardless of whether they will win or lose at the district court, it seems likely that many patent applicants—and particularly the smaller ones with less money—will not opt to go to federal district court to challenge USPTO rejections of their patent applications.
But this case is even more important. It is not just a patent case. It is also a trademark case, in the sense that it will impact trademark applicants. In Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015), the Fourth Circuit held that the USPTO’s personnel expenses are recoverable in similar situations in trademark cases in light of similar statutory language. The Supreme Court denied certiorari in that case. Affirming the Federal Circuit’s decision here, though, would effectively end the USPTO’s attempt to require applicants to pay the USPTO’s personnel expenses in either type of case when the applicants elect to go to federal district court to challenge the USPTO’s decisions. Notably, the Fourth Circuit has reportedly stayed the mandate in another recent trademark case pending the outcome of this case, highlighting the impact of this case beyond the narrow confines of patent law.