The Price to Pay for De Novo Review of PTO Decisions

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.

Conclusion

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 newsletter's Board of Editors. © Jonathan E. Moskin, 2018.