This article appeared in The Intellectual Property Strategist, an ALM/Law Journal Newsletters publication that provides a practical source of both business and litigation tactics in the fast-changing area of intellectual property law, including litigating IP rights, patent damages, venue and infringement issues, inter partes review, trademarks on social media – and more.
The 1952 Patent Act, 35 U.S.C. §§1 et seq. permits parties dissatisfied with decisions of the United States Patent and Trademark Office (PTO) to seek de novo review in the United States District Courts. 35 U.S.C. §145. Section 145 provides in relevant part that in such cases for de novo review, “[a]ll the expenses of the proceedings shall be paid by the applicant” (the Expenses Provision). Similar language first appeared in the Patent Act of 1836. The Trademark Act of 1946 (Lanham Act) contains a virtually identical provision. 15 U.S.C. §1071(b)(3) (“unless the court finds the expenses to be unreasonable, 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 NantKwest, Inc. v. Iancu, Slip Op. No. 16-1794 (Fed. Cir. July 27, 2018), the Federal Circuit sitting en banc reversed its own prior ruling in NantKwest, Inc. v. Matal, 860 F.3d 1352 (Fed. Cir. 2017), and held that “all expenses of the proceeding” does not include attorneys’ fees. Two weeks later, the Federal Circuit vacated a contrary holding in Realvirt LLC v. Iancu, No. 2017-1159 (Fed. Cir. Aug. 14, 2018), and remanded for resolution in light of NantKwest. Awaiting oral argument in the Fourth Circuit is Booking.com, B.V. v Iancu, No. 17-2458; 17-2459, in which the author is representing the appellee in a cross-appeal concerning the essentially identical phrase under the Lanham Act following an initially successful de novo review of a TTAB proceeding.
Attorneys’ Fees As Expenses
In 2018 (and 2017) the issue whether “expenses” includes “attorneys’ fees” has generated considerable interest, with the publisher Law360 (for instance) identifying NantKwest and Booking.com as among the most consequential cases of the time. See, “The Next 4 Big Copyright And Trademark Rulings Are …,” Law360 (June 26, 2018); “The Top 10 Trademark Rulings of 2017,” Law360 (Dec. 12, 2017). However, for 175 years, when the PTO sought recovery from intellectual property owners of any of “the expenses of the proceedings,” it never sought to include among such claimed expenses attorneys’ fees, but instead (at most) sought on occasion limited expenses, such as travel costs or expert witness fees. Four years ago, however, the PTO began to seek recovery of attorneys’ fees as expenses in such de novo proceedings. The first such decision, Shammas v. Focarino, 990 F. Supp. 2d 587 (E.D. Va. 2014), aff’d, 784 F.3d 219 (4th Cir. 2015), cert. denied, 136 S. Ct. 1376 (2016), applying the Lanham Act provision, 15 U.S.C. §1071(b)(3), adopted the PTO’s new interpretation that “expenses” does include attorneys’ fees. A key part of the Fourth Circuit decision (relied on by the PTO in NantKwest but rejected by the Federal Circuit) is that the American Rule only concerns shifting of fees to prevailing parties, whereas the relevant language in the patent and trademark statutes applies regardless which party wins.
However, two months after Shammas, the Supreme Court, in Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158 (2015), analyzed the breadth of the so-called “American Rule,” prohibiting fee-shifting in the absence of “specific and explicit” authority from Congress. Id. at 2161. Moreover, the Supreme Court summarized the American Rule more categorically than in Shammas: “Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.” 135 S. Ct. at 2164. Soon thereafter, the district court in NantKwest held that Shammas was irreconcilably at odds with Baker Botts and declined to follow Shammas (even nominally in its own circuit — although the appeal in a patent case such as NantKwest was destined for the Federal Circuit). NantKwest, Inc., 162 F. Supp. 3d at 545-46. The case itself arose after the PTO rejected NantKwest’s application as obvious, leading the company to seek de novo review in the Eastern District of Virginia — a case that was itself unsuccessful on the merits. The Federal Circuit affirmed the decision on the merits in NantKwest, Inc. v. Lee, 686 F. App’x 864, 865 (Fed. Cir. 2017), leading to the PTO’s fee application. The Federal Circuit initially reversed the Virginia district court’s denial of the PTO’s request for attorneys’ fees before vacating its own decision sua sponte, and granting rehearing en banc one year ago, 2017 WL 3747354 (Fed. Cir. Aug. 31, 2017), leading to the July 27 decision.
In parting company with the Fourth Circuit, NantKwest rejected the PTO’s argument that by imposing all expenses on the applicant, win or lose, Section 145 should not be considered a fee-shifting statute within the scope of the American Rule at all. Said the court: “Given the primary purpose of the American Rule — protection of access to courts — the PTO’s alleged distinction makes little sense. We submit that the policy behind the American Rule would be even more strongly implicated where attorneys’ fees would be imposed on a winning plaintiff.” Slip Op. at 13. The Federal Circuit went on to say:
We respectfully submit that Shammas’s holding cannot be squared with the Supreme Court’s line of nonprevailing party precedent applying the American Rule. Although Alyeska Pipeline [Serv. Co. v. Wilderness Soc’y, 421 U.S. 240 (1975)] does refer to the American Rule in the context of a “prevailing party,” the rule is not so limited. Rather, the Supreme Court has consistently applied the rule broadly to any statute that allows fee shifting to either party, win or lose.
Slip Op. at 13.
Having determined that the American Rule does apply, the Federal Circuit majority went on to assess whether the phrase “all expenses of the proceeding” satisfied the requirement of “specific and explicit” instruction from Congress, concluding that “the cases and definitions relied on by the PTO demonstrate that, at most, this language is merely capable of implicitly covering attorneys’ fees.” Id. at 17. The court reviewed both the historical record (finding no dispositive contemporaneous dictionary definitions) and Congress’s usage of the terms “expenses” and “attorneys’ fees” in other statutes, as well as in the Patent Act itself. NantKwest thus explains: “The existence of several Patent Act provisions awarding ‘attorneys’ fees’ demonstrates Congress’s use of ‘specific and explicit’ language in the Patent Act to shift fees when it so desired.” Slip Op. at 23.
Underscoring the difficulty of adopting the PTO’s proposed construction, NantKwest made clear that Section 145 would be unique in American jurisprudence in requiring even the prevailing party to pay attorneys’ fees:
Finally, we emphasize that the PTO’s interpretation of §145 would have a patent applicant pay the government’s attorneys’ fees even when the patent applicant succeeds. Other than what we believe to be an incorrect interpretation of the trademark analogue in Shammas, we are aware of no statute that requires a private litigant to pay the government’s attorneys’ fees without regard to the party’s success in the litigation. Indeed, the PTO could not identify any statute that shifts the salaries of an agency’s attorneys onto the party bringing suit to challenge the agency’s decision.
Slip Op. at 26.
Meaning of ‘All Expenses’
What is perhaps most striking about the contrast between the majority and dissenting opinions in NantKwest were their focuses on differing specific words of the phrase “all expenses of the proceeding.” The majority focused on the word “expenses,” finding that it was not a sufficiently specific and explicit reference to attorneys’ fees to justify an exception from the American Rule, interpreted in Baker Botts to mean that “[e]ach litigant pays his own attorney’s fees, win or lose,” 135 S. Ct. at 2164 (2015). The conclusion was bolstered by analysis of other provisions of the Patent Statute that do specifically and explicitly provide for awards of attorneys’ fees as well as other statutes that use the term “expenses” distinct from “attorneys’ fees.” By contrast, the dissent focused on the word “all,” indicating that even if the word “expenses” was not a specific or explicit fee authorization, the modifier “all” sufficed to bring within the scope of Section 145 the PTO’s attorneys’ fees from the proceeding. Slip Op. (Dissent) at 1, 10. However, the majority rejected this reasoning as (essentially) circular, explaining: “But the word ‘all’ sheds no light on the breadth of ‘expenses’ vis-à-vis attorneys’ fees — the crux of the dispute — and serves only to clarify that, whatever the ‘expenses’ are, all of them must be paid by the applicant.” Slip Op. at 30.
Curiously, neither the majority nor the dissent addressed the remaining words of the phrase “of the proceeding.” By contrast, the cross-appellee in Booking.com argues that, because the PTO calculates its claimed fees simply by taking its attorneys’ annual salaries and dividing this by the percentage of hours worked on the given de novo appeal, they are not “of the proceeding.” Applying basic accounting principles, the attorneys’ salaries are “fixed costs” of the U.S. government that would have been paid anyway. Because the attorneys would have been paid the same amount regardless of whether they had worked on the case, they are arguably no more “of the proceeding” than are utility expenses.
Booking.com has also argued that to require even successful litigants to pay the government to correct its own errors abridges the First Amendment right to petition the government for redress of grievances. For instance, BE&K Construction Co. v. NLRB, 536 U.S. 516, 524-25 (2002), applied the “right to petition” clause to the National Labor Relations Act, holding that the NLRB’s standard for imposing liability, under which it could penalize unsuccessful but reasonably-based suits brought for retaliatory motive, unconstitutionally burdened this fundamental First Amendment right. BE&K Construction thus reversed an award of attorneys’ fees. 536 U.S. at 524, 532-33. The Supreme Court there explained:
[E]ven unsuccessful but reasonably based suits advance some First Amendment interests. Like successful suits, unsuccessful suits allow the “‘public airing of disputed facts,’” Bill Johnson’s [Restaurants, Inc. v. NLRB, 461 U.S. 731, 743 (1983)] (citation omitted), and raise matters of public concern. They also promote the evolution of the law by supporting the development of legal theories that may not gain acceptance the first time around. Moreover, the ability to lawfully prosecute even unsuccessful suits adds legitimacy to the court system as a designated alternative to force.
536 U.S. at 532.
BE&K thus noted that courts must give adequate “‘breathing space’ essential to the fruitful exercise” of the right to petition. Id. at 531 (quoting Gertz v. Robert Welch, Inc., 418 U.S. 323, 342 (1974)). Arguably, in seeking attorneys’ fees under 35 U.S.C. §145 or 15 U.S.C. §1071(b), the PTO reaches even further than the NLRA in penalizing even successful litigants and chilling the right of all to seek redress from questionable or incorrect PTO decisions.
Cost to PTO
One of the issues the PTO has pressed extensively in the cases in which it has sought reimbursement of attorneys’ fees is the financial burden the cases present to the PTO — as opposed to the less costly direct route of direct appeal to the Federal Circuit (without the opportunity for de novo review of new evidence). Booking.com has thus argued that to require the payment of attorneys’ fees is a form double counting: because the PTO is self-funding from registration fees, and because applicants have already paid such fees in full before seeking de novo review, it could be viewed as an unfair double-recovery. Without addressing this specific argument, the majority in NantKwest nonetheless gave the back of its hand to this notion with a “back of the envelope” financial calculation:
A back-of-the-envelope calculation elucidates the minuscule impact of these proceedings on the overall cost of a patent application. Although neither party could provide an exact tally of the §145 proceedings, at the panel stage the PTO estimated that there were four to five of these proceedings in the last three years. … If we were to take a conservative estimate of ten §145 actions per year (five times the rate estimated by the PTO) and assume that the PTO expended $100,000 in attorneys’ fees defending each action ($20,000 more than the amount the PTO incurred in this case), the total expense for fiscal year 2018 would be $1 million. The PTO estimates that it will receive more than 627,000 patent applications during this same time period. When spread amongst the 627,000+ applications, the $1 million price tag amounts to less than $1.60 per application.
Slip Op. at 33-34.
Because of the current conflict between the Federal Circuit’s en banc decision in NantKwest and Fourth Circuit’s prior ruling in Shammas (a conflict the dissent specifically laments, Slip Op. (Dissent) at 2), there has already been speculation that the Supreme Court will have to resolve the matter. See, “With Sharp Split, USPTO Fee Rule Could Head To High Court,” Law360 (July 30, 2018). It is of course premature to say whether the Fourth Circuit will continue to follow Shammas in Booking.com, where various arguments have been raised that could resolve the current split between circuits. For the moment, however, parties seeking de novo review in patent cases face no threat of attorneys’ fees, whereas parties appealing to the district courts from TTAB decisions have no such assurances.
Jonathan Moskin is a partner in the New York office of Foley & Lardner LLP and a member of this Board of Editors of The Intellectual Property Strategist.