USPTO Continues to Demand Attorneys' Fees for District Court Appeals

Section 145 of the U.S. Patent Act (35 U.S.C. §145) and §21(b) of the Lanham Act covering trademarks (15 U.S.C. §1071(b)) provide for two types of challenges from the decisions of the U.S. Patent and Trademark (USPTO) internal appeals boards — the Patent Trial and Appeal Board (PTAB) and the Trademark Trial and Appeal Board (TTAB). Applicants in cases where there are no adverse third parties can bring a new civil case in the U.S. District Court for the Eastern District of Virginia or the USPTO decision refusing to register a patent or trademark can be directly appealed to the U.S. Court of Appeals for the Federal Circuit. Further appeals from the district court's decisions are to the U.S. Court of Appeals for the Fourth Circuit in trademark cases or to the Federal Circuit in patent cases. Parties in the district court action are allowed to submit new evidence not considered by the TTAB, but parties in direct appeals to the Federal Circuit are not.

In district court patent cases, §145 provides that “all the expenses of the proceedings shall be paid by the applicant.” In the district court trademark cases, §21(b) provides that “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.” Neither statute defines “expenses.” Prior to 2013, the USPTO did not request reimbursement for the salaries of its attorneys and paralegals who worked on the case, only for more common costs, such as filing fees, photocopying expenses, and the like. However, starting in 2013, the USPTO has been requesting reimbursement for the time spent by its attorneys and paralegals on district court challenges to PTAB and TTAB decisions.

Fourth Circuit: USPTO Gets Expenses, Regardless of Outcome

In 2009, Milo Shammas applied to register the trademark PROBIOTIC for fertilizer. The Trademark Examining Attorney made a final refusal to register in 2011, concluding that the mark was either generic for fertilizer or was merely descriptive and had not acquired distinctiveness. Shammas appealed that decision to the TTAB, which in 2012 affirmed the refusal to register for the same reasons. Shammas then sought district court review of the TTAB decision. The district court entered summary judgment for the USPTO, concluding that the TTAB's factual findings were entitled to deference and the TTAB decision was supported by substantial evidence not contradicted by Shammas' new evidence. See, Shammas v. Rea, 978 F. Supp.2d 599, 605 (E.D. Va. 2013).

The USPTO then requested reimbursement from Shammas under §21(b) for its expenses in defending against his action, including attorneys' and paralegals' salaries. The district court awarded the USPTO $36,320.49 for those salaries and photocopying expenses. See, Shammas v. Focarino, 990 F. Supp.2d 587 (E.D. Va. 2014). The district court found it to be a “straightforward case of statutory interpretation with the analysis beginning and ending with the plain language of the statute” and used Black's Law Dictionary and Merriam-Webster Dictionary to determine that the plain meaning of the term “expenses” under §21(b) clearly includes attorneys' fees, particularly as the statute reads “all expenses.” The court also cited a number of other statutes where “expenses” explicitly included the subset of attorneys' fees, concluding that it was “pellucidly clear” that Congress intended the trademark applicant to pay for all resources” the USPTO expended in the litigation, including attorneys' fees.

On appeal to the Fourth Circuit, Shammas argued that the fee award was contrary to the “American Rule” under which each party bears its own attorneys' fees unless the statute explicitly provides otherwise. He contended that §21(b) was not sufficiently clear to reverse the presumption created by that Rule that “the prevailing party may not recover attorneys' fees as costs or otherwise” from the losing party. See, Alyeska Pipeline Service Co. v. Wilderness Soc'y, 421 U.S. 240, 245 (1975). The appeals court disagreed, concluding that §21(b) is “an unconditional compensatory charge imposed on a dissatisfied applicant who elects to engage the PTO in a district court proceeding,” not a wrongful fee-shifting provision. See, Shammas v. Focarino, 784 F.3d 219, 221 (4th Cir. 2015).

The Fourth Circuit held that the American Rule did not apply, because the statute awards expenses to the USPTO regardless of whether it wins or loses. Even if Shammas had prevailed in the district court, he would still have been required to pay the USPTO's fees, so the American Rule is inapplicable. Giving “all the expenses of the proceeding” its ordinary meaning, Shammas was required to pay the USPTO's attorneys' fees whether he won or lost.

“Expenses” includes more than “taxable costs.” The Fourth Circuit found this to be justified because the USPTO is required to incur significantly more expense to defend a new civil action than a direct appeal to the Federal Circuit. Therefore it makes “good sense” to interpret “expenses” to include attorneys' fees, because those will be the majority of the USPTO's expenses in such a case. A dissatisfied applicant can avoid incurring the USPTO's expenses by taking a direct appeal rather than bringing a civil case. The Fourth Circuit further found §21(b) to be a straightforward funding provision designed to relieve the USPTO of the burden of the applicant's choice to pursue the more expensive district court litigation. It was derived from the parallel provision in the Patent Act arising from an 1839 amendment funding the Patent Office, where the term “expenses” included the salaries of the officers and clerks.

Shammas then petitioned for a rehearing, arguing that the Supreme Court's decision in the bankruptcy case of Baker Botts LLP v. ASARCO LLC, 135 S.Ct. 2158 (2015), implicitly overruled the Fourth Circuit's decision. But the Fourth Circuit denied the petition for rehearing. Shammas then applied to the Supreme Court for a writ of certiorari, but it too was denied. Shammas v. Hirschfeld, cert den. 136 S.Ct. 1376 (Mem.) (2016).

Obviously a believer in “never say die,” Shammas went back to the district court seeking to vacate the fee order. He argued that in light of Baker Botts, he will be the only person ever required to pay attorney's fees under §21(b), an “extraordinary injustice.” The district court rejected that relief because: 1) it was not appropriately requested; 2) it would contravene the Fourth Circuit's decision; and 3) it was “simply wrong.” Shammas v. Lee, 1:12-cv-1462 (E.D. Va. May 9, 2016).

VA District Court: Fees Not Granted to USPTO

A few months later, a different judge in the Eastern District of Virginia came to the opposite conclusion in a patent case — that the USPTO could not obtain attorneys' fees as part of the expenses of defending a district court civil case challenging the refusal to issue a patent. The district court determined that it was not bound by the Shammas decisions because appeals from patent cases go to the Federal Circuit, not the Fourth Circuit, and denied the USPTO's attorneys' fees request.

Nankwest had applied for a patent that was rejected as obvious based on two pieces of prior art. The PTAB affirmed that rejection by the examining attorney. Nankwest filed its case in the District Court for review of the PTAB decision. Both sides engaged experts. The court granted summary judgment in favor of the USPTO. See, Nankwest, Inc. v. Lee, 1:13-cv-1566 (E.D. Va., Sept. 2, 2015). The USPTO then requested an expense award, including more than $78,000 in attorneys' fees and about $33,000 in expert witness fees under §145. The court denied the attorneys' fees and granted the expert fees. See, Nankwest, Inc. v. Lee, 162 F.Supp.3d 540 (E.D. Va. 2016). Relying on the American Rule, the court determined that an attorneys' fee award was forbidden because §145 did not contain explicit statutory authority for such an award and in that provision's “entire two-hundred-year existence, it has never been interpreted as including attorneys' fees in 'expenses.'” The word “all” in “all expenses,” noted the court, merely refers to a collection of the expenses incurred, “commonly understood to encompass … printing, travel, and reasonable expert witness expenses.” In Baker Botts, the statute in question specifically authorized payment of attorneys' fees because it included “actual, necessary services rendered,” which undisputedly included attorneys' fees.

Contrary to the Shammas rulings, the court found that the American Rule still applies when the statute allows the non-prevailing party to receive fees. A court must determine if the statute in question specifically and explicitly authorizes attorneys' fees. Section 145, the court found, does not. The USPTO has appealed this decision to the Federal Circuit, where oral argument was held Feb. 9, 2017. No decision has issued.

In light of the Nankwest decision, Shammas once again asked the Fourth Circuit to vacate the fee award. The Fourth Circuit again refused, stating: “We have reviewed the record and find no reversible error. Accordingly, we affirm for the reasons stated by the district court.” Shammas v. Lee, No. 16-1656 (4th Cir. Mar. 31, 2017).

Conclusion

The possibility of paying tens of thousands of dollars in USPTO expenses in addition to an applicant's own suit expenses, win or lose, is likely to be a powerful deterrent to patent or trademark applicants filing District Court challenges. If the Federal Circuit upholds the Nankwest decision, it will create a conflict among the circuits that may provide the U.S. Supreme Court with a reason to consider the issue. Otherwise, applicants will have to look to Congress for a remedy in the form of amendments to the Patent and Lanham Acts, which are likely to be difficult to obtain in the current political climate.

*****
Judith Grubner is a partner in the IP Group of Arnstein & Lehr and a member of this publication's Board of Editors. She can be reached at [email protected].

Section 145 of the U.S. Patent Act (35 U.S.C. §145) and §21(b) of the Lanham Act covering trademarks (15 U.S.C. §1071(b)) provide for two types of challenges from the decisions of the U.S. Patent and Trademark (USPTO) internal appeals boards — the Patent Trial and Appeal Board (PTAB) and the Trademark Trial and Appeal Board (TTAB). Applicants in cases where there are no adverse third parties can bring a new civil case in the U.S. District Court for the Eastern District of Virginia or the USPTO decision refusing to register a patent or trademark can be directly appealed to the U.S. Court of Appeals for the Federal Circuit. Further appeals from the district court's decisions are to the U.S. Court of Appeals for the Fourth Circuit in trademark cases or to the Federal Circuit in patent cases. Parties in the district court action are allowed to submit new evidence not considered by the TTAB, but parties in direct appeals to the Federal Circuit are not.

In district court patent cases, §145 provides that “all the expenses of the proceedings shall be paid by the applicant.” In the district court trademark cases, §21(b) provides that “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.” Neither statute defines “expenses.” Prior to 2013, the USPTO did not request reimbursement for the salaries of its attorneys and paralegals who worked on the case, only for more common costs, such as filing fees, photocopying expenses, and the like. However, starting in 2013, the USPTO has been requesting reimbursement for the time spent by its attorneys and paralegals on district court challenges to PTAB and TTAB decisions.

Fourth Circuit: USPTO Gets Expenses, Regardless of Outcome

In 2009, Milo Shammas applied to register the trademark PROBIOTIC for fertilizer. The Trademark Examining Attorney made a final refusal to register in 2011, concluding that the mark was either generic for fertilizer or was merely descriptive and had not acquired distinctiveness. Shammas appealed that decision to the TTAB, which in 2012 affirmed the refusal to register for the same reasons. Shammas then sought district court review of the TTAB decision. The district court entered summary judgment for the USPTO, concluding that the TTAB's factual findings were entitled to deference and the TTAB decision was supported by substantial evidence not contradicted by Shammas' new evidence. See , Shammas v. Rea , 978 F. Supp.2d 599, 605 (E.D. Va. 2013).

The USPTO then requested reimbursement from Shammas under §21(b) for its expenses in defending against his action, including attorneys' and paralegals' salaries. The district court awarded the USPTO $36,320.49 for those salaries and photocopying expenses. See , Shammas v. Focarino , 990 F. Supp.2d 587 (E.D. Va. 2014). The district court found it to be a “straightforward case of statutory interpretation with the analysis beginning and ending with the plain language of the statute” and used Black's Law Dictionary and Merriam-Webster Dictionary to determine that the plain meaning of the term “expenses” under §21(b) clearly includes attorneys' fees, particularly as the statute reads “all expenses.” The court also cited a number of other statutes where “expenses” explicitly included the subset of attorneys' fees, concluding that it was “pellucidly clear” that Congress intended the trademark applicant to pay for all resources” the USPTO expended in the litigation, including attorneys' fees.

On appeal to the Fourth Circuit, Shammas argued that the fee award was contrary to the “American Rule” under which each party bears its own attorneys' fees unless the statute explicitly provides otherwise. He contended that §21(b) was not sufficiently clear to reverse the presumption created by that Rule that “the prevailing party may not recover attorneys' fees as costs or otherwise” from the losing party. See , Alyeska Pipeline Service Co. v. Wilderness Soc'y , 421 U.S. 240, 245 (1975). The appeals court disagreed, concluding that §21(b) is “an unconditional compensatory charge imposed on a dissatisfied applicant who elects to engage the PTO in a district court proceeding,” not a wrongful fee-shifting provision. See , Shammas v. Focarino , 784 F.3d 219, 221 (4th Cir. 2015).

The Fourth Circuit held that the American Rule did not apply, because the statute awards expenses to the USPTO regardless of whether it wins or loses. Even if Shammas had prevailed in the district court, he would still have been required to pay the USPTO's fees, so the American Rule is inapplicable. Giving “all the expenses of the proceeding” its ordinary meaning, Shammas was required to pay the USPTO's attorneys' fees whether he won or lost.

“Expenses” includes more than “taxable costs.” The Fourth Circuit found this to be justified because the USPTO is required to incur significantly more expense to defend a new civil action than a direct appeal to the Federal Circuit. Therefore it makes “good sense” to interpret “expenses” to include attorneys' fees, because those will be the majority of the USPTO's expenses in such a case. A dissatisfied applicant can avoid incurring the USPTO's expenses by taking a direct appeal rather than bringing a civil case. The Fourth Circuit further found §21(b) to be a straightforward funding provision designed to relieve the USPTO of the burden of the applicant's choice to pursue the more expensive district court litigation. It was derived from the parallel provision in the Patent Act arising from an 1839 amendment funding the Patent Office, where the term “expenses” included the salaries of the officers and clerks.

Shammas then petitioned for a rehearing, arguing that the Supreme Court's decision in the bankruptcy case of Baker Botts LLP v. ASARCO LLC , 135 S.Ct. 2158 (2015), implicitly overruled the Fourth Circuit's decision. But the Fourth Circuit denied the petition for rehearing. Shammas then applied to the Supreme Court for a writ of certiorari, but it too was denied. Shammas v. Hirschfeld, cert den. 136 S.Ct. 1376 (Mem.) (2016).

Obviously a believer in “never say die,” Shammas went back to the district court seeking to vacate the fee order. He argued that in light of Baker Botts, he will be the only person ever required to pay attorney's fees under §21(b), an “extraordinary injustice.” The district court rejected that relief because: 1) it was not appropriately requested; 2) it would contravene the Fourth Circuit's decision; and 3) it was “simply wrong.” Shammas v. Lee, 1:12-cv-1462 (E.D. Va. May 9, 2016).

VA District Court: Fees Not Granted to USPTO

A few months later, a different judge in the Eastern District of Virginia came to the opposite conclusion in a patent case — that the USPTO could not obtain attorneys' fees as part of the expenses of defending a district court civil case challenging the refusal to issue a patent. The district court determined that it was not bound by the Shammas decisions because appeals from patent cases go to the Federal Circuit, not the Fourth Circuit, and denied the USPTO's attorneys' fees request.

Nankwest had applied for a patent that was rejected as obvious based on two pieces of prior art. The PTAB affirmed that rejection by the examining attorney. Nankwest filed its case in the District Court for review of the PTAB decision. Both sides engaged experts. The court granted summary judgment in favor of the USPTO. See , Nankwest, Inc. v. Lee, 1:13-cv-1566 (E.D. Va., Sept. 2, 2015). The USPTO then requested an expense award, including more than $78,000 in attorneys' fees and about $33,000 in expert witness fees under §145. The court denied the attorneys' fees and granted the expert fees. See , Nankwest, Inc. v. Lee , 162 F.Supp.3d 540 (E.D. Va. 2016). Relying on the American Rule, the court determined that an attorneys' fee award was forbidden because §145 did not contain explicit statutory authority for such an award and in that provision's “entire two-hundred-year existence, it has never been interpreted as including attorneys' fees in 'expenses.'” The word “all” in “all expenses,” noted the court, merely refers to a collection of the expenses incurred, “commonly understood to encompass … printing, travel, and reasonable expert witness expenses.” In Baker Botts, the statute in question specifically authorized payment of attorneys' fees because it included “actual, necessary services rendered,” which undisputedly included attorneys' fees.

Contrary to the Shammas rulings, the court found that the American Rule still applies when the statute allows the non-prevailing party to receive fees. A court must determine if the statute in question specifically and explicitly authorizes attorneys' fees. Section 145, the court found, does not. The USPTO has appealed this decision to the Federal Circuit, where oral argument was held Feb. 9, 2017. No decision has issued.

In light of the Nankwest decision, Shammas once again asked the Fourth Circuit to vacate the fee award. The Fourth Circuit again refused, stating: “We have reviewed the record and find no reversible error. Accordingly, we affirm for the reasons stated by the district court.” Shammas v. Lee, No. 16-1656 (4th Cir. Mar. 31, 2017).

Conclusion

The possibility of paying tens of thousands of dollars in USPTO expenses in addition to an applicant's own suit expenses, win or lose, is likely to be a powerful deterrent to patent or trademark applicants filing District Court challenges. If the Federal Circuit upholds the Nankwest decision, it will create a conflict among the circuits that may provide the U.S. Supreme Court with a reason to consider the issue. Otherwise, applicants will have to look to Congress for a remedy in the form of amendments to the Patent and Lanham Acts, which are likely to be difficult to obtain in the current political climate.

*****
Judith Grubner is a partner in the IP Group of Arnstein & Lehr and a member of this publication's Board of Editors. She can be reached at [email protected].