By Pamela C. Maloney, J.D.
The Director of the USPTO was not entitled to an award of attorney fees after prevailing in an appeal by patentee NantKwest from an adverse decision by Patent Trial and Appeal Board, the en banc U.S. Court of Appeals for the Federal Circuit has ruled, concluding that the provision in 35 U.S.C. §145 which requires a patent applicant to pay "all expenses of the proceedings" fell short of the American Rule’s stringent standard prohibiting courts from shifting attorney fees from one party to another absent a specific and explicit directive from Congress (NantKwest, Inc. v. Iancu, July 27, 2018, Stoll, K.).
In 2001, Dr. Hans Klingemann filed a patent application directed to a method of treating cancer by administering natural killer cells. The USPTO rejected the application on the grounds of obviousness. The Patent and Trial Appeal Board affirmed the examiner’s rejection, and NantKwest, as assignee of the application, appealed to the district court under 35 U.S.C. §145. In September 2015, the federal district court in Alexandria, Virginia, entered summary judgment in favor of the USPTO. The USPTO then sought $111,696.39 from NantKwest as "expenses" of the proceeding under Section 145. Several months later, the district court awarded the USPTO $33,103.89 for expert witness fees, but denied USPTO’s request for $77,592.50 in attorney fees on the ground that Section 145’s language requiring a plaintiff to pay for the USPTO’s "expenses" did not encompass the payment of the USPTO’s attorney fees. On appeal, a Federal Circuit panel reversed and remanded that decision, holding that that the USPTO Director was entitled to fees because Section 145’s requirement that an applicant pay "[a]ll the expenses of the proceedings," included the pro-rata share of attorney fees that were incurred by the USPTO while defending the applicant’s appeal. Two-months later, the appellate court vacated the panel decision and reinstated the original appeal.
Application of the American Rule. As an initial matter, the Federal Circuit rejected the USPTO’s arguments that the American Rule should not apply to litigation under Section 145. The USPTO first argued that the American Rule only governed the interpretation of statutes that shift fees from a prevailing party to a losing party. According to the USPTO, because Section 145 imposes all the expenses on an applicant regardless of the outcome, it is not a fee-shifting statute that fell within the purview of the American Rule. However, the Federal Circuit opined that given the primary purpose of the American Rule—protection of access to courts—the American Rule would be even more strongly implicated when attorney fees would be imposed on a winning applicant.
The Federal Circuit also rejected the USPTO’s reliance on the trademark case of Shammas v. Focarino, 784 F.3d 219 (2015), in which a divided panel of the Fourth Circuit examined the USPTO’s fee petition under the Lanham Act’s similar provision, 15 U.S.C. §1071(b)(3), and concluded that the term "all expenses of the proceeding" was sufficiently broad to include attorney fees and paralegal fees incurred by the USPTO on appeal. The Supreme Court declined to review the Shammas decision. The holding in Shammas could not be "squared" with the U.S. Supreme Court’s line of non-prevailing party precedent applying the American Rule. The Federal Circuit also found that the Fourth Circuit’s reliance on the Supreme Court’s decision in Ruckelshaus v. Sierra Club, 463 U.S. 680 (1983) to support its conclusion that the American Rule did not apply to statutes lacking a success requirement was misplaced. Although the Ruckleshaus Court acknowledged that the vast majority of fee-shifting provisions imposed a success requirement, the Supreme Court, in upholding an award of attorney fees to a party that had achieved no success on the merits, made it clear that the absence of a "success" requirement in the statute did not render the American Rule inapplicable. The underlying statute in Ruckleshaus authorized reasonable attorney fees when the court determined that such an award was appropriate. The Federal Circuit went on to cite numerous cases that applied the American Rule to a variety of statutes that did not mention a "prevailing party."
Displacement of American Rule. Having concluded that the American Rule applied the USPTO’s request for attorney fees, the Federal Circuit went on to explain that in order for the USPTO to prevail on its contention that Section 145 displaced the American Rule, the court must be able to discern from Section 145’s text that there was a specific and explicit Congressional directive to make an award of attorney fees available. However, in the opinion of the Federal Circuit, Section 145’s statement that "all expenses of the proceedings shall be paid by the applicant" lacked the specific and explicit congressional authorization required to displace the American Rule. The section’s text contained no reference to attorney fees; reasonable compensation for actual, necessary services rendered by an attorney; USPTO attorney salaries; or any other equally clear language. In addition, the cases and definitions relied on by the USPTO to show that the "all expenses of the proceedings" language of Section 145 specifically and explicitly included attorney fees demonstrated, at most, that the language implied that attorney fees were covered. The Federal Circuit emphasized that the American Rule and the "specific and explicit requirement" demanded more than language which could be read to imply that attorney fees were covered.
Moreover, other statutory provisions enacted by Congress have demonstrated that a statutory right to "expenses" ordinarily did not include an implicit authorization to award attorney fees. This conclusion by the Federal Circuit was supported by current court cases and other statutory provisions in the Patent Act. In providing for recovery of the USPTO expenses in Section 145, Congress did not include the USPTO’s attorney fees even though attorney fees were made available under another section of the Act. The Federal Circuit presumed that the omission of attorney fees from Section 145 was a deliberate decision not to authorize such awards.
Finally, the Federal Circuit noted that the USPTO’s interpretation of Section 145 would force a patent applicant to pay the USPTO’s attorney fees even when the applicant succeeded on the merits of its appeal. Other than what the Federal Circuit believed to be an incorrect interpretation of the trademark analogue in Shammus, the court was not aware of, nor did the USPTO identify, any statute that required a private litigant to pay the government’s attorney fees without regard to the party’s success. Further, the Supreme Court’s reluctance to endorse statutory interpretations that would create sweeping departures from the American Rule served as additional support for the Federal Circuit’s conclusion that Section 145 did not displace the American Rule.
Dissent. Claiming that the majority’s opinion created an unfortunate and unnecessary conflict between the circuits, the dissent, written by Chief Judge Sharon Prost, concluded that when Congress said, "[a]ll the expenses," it meant all the expenses of the proceedings, including the USPTO’s personnel expenses—more specifically, the expense of diverting agency attorney and paralegals from other matters to the Section 145 action. In order to determine whether the phrase "[a]ll the expenses" included the USPTO’s personnel expenses, the dissent looked to the common meaning of "expenses," which it argued encompassed expenditures for personnel.
The dissent also distinguished the "all expenses" language of Section 145 from the attorney fees authorization in another section of the Patent Act, which defined fees recoverable in traditional patent litigation and limited them to attorney fees, concluding that Section 145’s language provided a broader compensation scheme. The dissent further argued that the legislative history and purpose of Section 145 supported its reading that the language of the section evidenced Congress’s "specific and explicit" intent to depart from the American Rule and to impose upon the applicant payment of all the expenses of the proceedings, including the USPTO’s personnel expenses.
Finally, the dissent noted that the majority had made much of fact that the USPTO had refrained from seeking reimbursement for its personnel expenses until recently, despite the provision’s 170-year existence. Acknowledging that the USPTO historically had refrained from seeking reimbursement of these expenses, the dissent found that it had never affirmatively disclaimed that authority. Given that Section 145 proceedings had become more common and expensive, and in light of Congress’s mandate that the USPTO fund itself exclusively through fees, the dissent found that it was not surprising that the USPTO felt compelled to change its historical strategy of not seeking reimbursement for attorney fees.
The case is No. 2016-1794.
Attorney: Morgan Chu (Irell & Manella LLP) for NantKwest, Inc. Jaynie Randall Lilley, U.S. Department of Justice, for Andrei Iancu.
Companies: NantKwest, Inc.
MainStory: TopStory Patent FedCirNews
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