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Patent Appeals to the District Court: Win or Lose, You Pay Attorneys’ Fees?

Posted in Articles, Law Suits, Mixed Bag of Nuts, Patents, Squirrelly Thoughts, Trademarks, USPTO

Recently, the Federal Circuit Court of Appeals (the federal appellate court that primarily hears appeals in patents cases) heard arguments in NantKwest Inc. v. Matal, No. 16-1794 on the issue of attorneys’ fees (a timely topic) in certain patent cases.

Credit: PatentlyO

Attorneys’ fees are a necessary and inescapable cost of enforcing one’s rights and, as often is the case, can be astronomical in intellectual property cases. Under what is known as the “American Rule,” parties to a case usually must shoulder their own attorneys’ fees and costs–even if they win. Some statutes alter this general rule, allowing those who win in court (known sometimes as “prevailing parties”) to recover fees and costs. But reimbursement is the exception, rather than the rule.

The issue on appeal in NantKwest is unique and far more exceptional than prevailing party statutes. As clearly explained in a recent Law360 article, the case has to do with a previously-neglected section of the Patent Act, which provides that parties who “appeal” USPTO decisions directly to a district court (as opposed directly to the Federal Circuit) must pay “all expenses” incurred by the USPTO, win or lose. The full language can be found in 35 U.S.C. § 145, which provides:

An applicant dissatisfied with the decision of the Patent Trial and Appeal Board…may, unless appeal has been taken to the United States Court of Appeals for the Federal Circuit, have remedy by civil action against the Director in the United States District Court….The court may adjudge that such applicant is entitled to receive a patent for his invention….All the expenses of the proceedings shall be paid by the applicant.

For more than 100 years, the USPTO interpreted the “all expenses” language to apply only to travel expenses, expert fees, and miscellaneous costs. But in 2014, the USPTO argued that similar language in the Lanham Act (at 15 U.S.C. § 1071) entitled the USPTO to not only traditional costs, but also the USPTO’s attorneys’ fees. A district court agreed, and the Fourth Circuit Court of Appeals affirmed.

It wasn’t long until the similarly-worded language in the Patent Act came to bear on patent applicant NantKwest. Citing § 145, the USPTO argued that NantKwest should pay over $78,000 in attorneys’ fees. But the district court disagreed, stating that the word “expenses,” American Rule presumption, and over 100-year history of the Government’s position on this provision in the Patent Act, together required a narrow construction of the term. But the Federal Circuit reversed the district court in a 2-1 decision. Months later, the entire Federal Circuit agreed to hear the case en banc (to be considered by all of the judges, rather than a three-judge panel).

Numerous third-parties filed briefs with the Federal Circuit in anticipation of the rehearing. The American Bar Association is against an expansive interpretation, asserting that such would serve as a “roadblock to justice.” The International Trademark Association, which has interests given the similar language in the Lanham Act, and the American Intellectual Propertly Law Association agree.

The Federal Circuit recently heard oral argument in NantKwest and has not issued its opinion. But as I have chronicled before, the questions posed at oral argument may provide clues as to what may result. Here are some of the questions judges asked during the Government’s oral argument:

  • “[The USPTO] says there is no meaningful dispute with respect to whether ‘expenses’ covers attorneys fees or not. Isn’t there enough in the record to establish there is some ambiguity in terms of the coverage of ‘expenses’?”
  • “[The USPTO previously] hired independently counsel?” This references outside fee arrangements from the 1800s, perhaps establishing a factual basis for distinguishing attorneys’ fees from expenses.
  • “If it’s so clear, why did it take the PTO until the last couple years to tumble onto this supposedly unambiguous reading?”
  • “So, time out, [is the USPTO] saying that when the taxpayers were paying [the USPTO’s] fees, [the USPTO] had no obligation to seek them, but when the applicants would be paying [the USPTO’s] fees, now [the USPTO] suddenly need[s] to go seek them? You just said that [the USPTO] turned into a self-funded agency. Fefore that, who was paying the expenses of the agency?”
  • “So the statute has said for 170 years all expenses of the proceeding shall be paid by the applicant. That is not discretionary, correct? So the PTO did not have the discretion if the statute included attorneys’ fees…to not seek attorneys’ fees because the statute is mandatory, not discretionary?”
  • “Didn’t the agency become user-funded in the 80s?”
  • “Do you agree that since it wasn’t mandatory…the agency was in error for the last 170 years when it failed to seek attorneys’ fees?”
  • “What I don’t understand…if the AIA mandates that [the USPTO] be completely user-funded, why isn’t the cost of a patent examiner, or the cost of Xeroxing, or the cost of parking part of the fees pro-rata that [the USPTO is] seeking in this case?”
  • “Can you cite to any other provision…in which a loser can recoup its attorneys’ fees?”
  • “How are the salaries that are paid to the staff attorneys treated within the PTO budget? Are they an operating cost? Are they expensed out? Is there any profit margin factored into any of those costs?”
  • “Did counsel ever receive bonuses during a fiscal year? Counsel can get a bonus, isn’t that correct? Why aren’t they expensed in? Or in this particular instance?”
  • “Do you all keep detailed time sheets? Day-by-day, every [6] minute break? At the time that it is spent, or at the time in retrospect after the case is over? Are contemporaneous time sheets kept for every item that every lawyer works on?”
  • “What was the hourly rate?” The attorney for the USPTO responded that the value of USPTO attorney time is “roughly $100 per hour.”
  • “There’s no dispute in this case, at least, that expert fees are included in the statutory provision? And does the PTO contract with outside providers?”
  • “What about the access-to-courts issue?” This references a due process argument and the concern that requiring the payment of the USPTO’s attorneys’ fees would be prohibitive to small inventors and businesses.
  • “Is it your view that the expenses of this appeal should be payable, including the salaries of PTO employees who might be sitting here?”
  • “So you’re saying that the language in the statute that says ‘this proceeding,’ is not limited to the action in the district court, but also includes this appeal and maybe a Supreme Court appeal?” The USPTO responded yes, but that it wasn’t seeking such fees, prompting one judge to ask, “Why?…You don’t have discretion to request…or waive them.”
  • “Are you aware of any other statute that shifts the salaries of an agency’s attorneys onto the party who brought proceedings challenging the agency’s decision?”

Question to the other side, NantKwest:

  • “What is the purpose of the expense provision in section 145? Why did Congress adopt this unusual provision?” The answer? “We don’t know” because the legislative history doesn’t provide an answer.
  • “How are attorneys’ fees accounted for in a law firm? Are they profit? Income? Expense?”
  • “So your theory is that ‘expenses’ means traditional costs?”
  • “If you’re sitting there in Congress, and you’re trying to craft an unambiguous provision that would allow for the personnel expenses, would it be sufficient in this provision to say, ‘all of the expenses of the proceeding, including the personnel expenses’?” This spawned a great deal of back-and-forth about how Congress could have been more explicit without using the words “attorneys’ fees.”
  • “Is it your position that the ‘all expenses’ language is clear and doesn’t include attorneys’ fees? Or that it’s ambiguous, and, therefore, under Supreme Court precedent…doesn’t include attorneys’ fees?”
  • “My understanding is that nobody has identified any statute that uses generic language…without a parenthetical stating ‘including attorneys’ fees’ that has been interpreted to cover time for lawyers?”
  • “Are we really dealing with attorneys’ fees here?…In your experience as a practitioner…does that include a profit margin?”
  • “Do private law firms follow the government model? In which people who bill less hours…get to charge more per hour?” This was a somewhat lighthearted question.

On rebuttal:

  • “When did the Government determine that this provision included attorneys’ fees? For 170 years did [the USPTO] believe that it was entitled to seek them, but didn’t have to?”
  • “What about when the Government said that the possibility that the Government would try to seek fees was so remote that it could not be taken seriously?”

After listening to the oral argument, one is left with the distinct impression that the Federal Circuit was more critical of the Government’s newfound position and more accepting of NantKwest’s arguments. Yet, as shown above, the questions the judges asked the Government far exceeded those directed to NantKwest. As a recent Star Tribune article reported, if the case was being heard by the Supreme Court, this could suggest that the judges actually support the Government’s position. But given the entire tone of the oral argument–especially that of the rebuttal, in which the judges specifically asked the Government to address arguments raised by NantKwest–I cannot help but think the Federal Circuit will rule against the Government, creating a circuit split with the Fourth Circuit and ultimately setting up an appeal to the Supreme Court. Stay tuned!

UPDATE: The Federal Circuit rejected the USPTO’s arguments, stating “the American Rule prohibits courts from shifting attorneys’ fees from one party to another absent a ‘specific and explicit’ directive from Congress. The phrase ‘[a]ll the expenses of the proceedings’ [in 35 U.S.C. § 145] falls short of this stringent standard.”