Nantkwest, Inc. v. Matal (Fed. Cir. 2017)

By Josh Rich --

Patent applicants dissatisfied with final outcome of patent prosecution proceedings have long had two options for court review of a Patent and Trademark Appeal Board decision:  an appeal to the Federal Circuit under 35 U.S.C. § 141 or a civil action in the Eastern District of Virginia under 35 U.S.C. § 145.  For over 175 years, applicants faced the same risk of paying the Patent and Trademark Office's fees in either proceeding.  But in the Nantkwest case, the Patent and Trademark Office asserted that it was entitled to recover attorneys' fees (and other expenses) regardless of the outcome of the case; a divided panel of the Federal Circuit affirmed that it was entitled to receive those fees.  As a result, future applicants dissatisfied with Patent and Trademark Office results are likely to think twice before filing an action under § 145.

Background

Dr. Hans Klingemann filed a patent application in 2001 directed to a method of treating cancer by administering natural killer cells.  His claims were rejected for obviousness by the examiner, and he appealed the Patent Trial and Appeal Board.  The Board affirmed the examiner's rejection.  Dr. Klingemann's assignee, Nantkwest, filed a civil action under § 145.  The District Court granted summary judgment of obviousness to the Patent and Trademark Office (which was upheld on appeal by the Federal Circuit).  The Patent and Trademark Office then sought to recover all of its expenses, including expert, paralegal, and attorneys' fees.

Section 145 permits applicants dissatisfied with the final outcome of patent prosecution proceedings to file a civil action; it also provides that "[a]ll the expenses of the proceedings shall be paid by the applicant."  Traditionally, the Patent and Trademark Office applied that provision to seek recovery of costs -- not attorney's fees -- in cases in which it had prevailed.

The Nantkwest District Court held that the Patent and Trademark Office was entitled to recover expert costs, but not attorneys' fees.  Nantkwest, Inc. v. Lee, 162 F. Supp. 3d 540 (E.D. Va. 2016).  It started with the strong presumption of the "American Rule":  that each party is required to pay its own attorneys' fees, regardless of the outcome of the case, in the absence of a clear statutory or contractual obligation to the contrary.  Id. at 542.  In doing so, the District Court relied on decades of Supreme Court decisions holding that "departures from the American Rule are authorized only when there is a 'specific and explicit provision[] for the allowance of attorneys' fees under [the] selected statute[].'"  Id. (quoting Baker Botts L.L.P. v. ASARCO LLC, ___ U.S. ___, 135 S.Ct. 2158, 2164 (2015); Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 260(1975)).  The District Court found that § 145 was not sufficiently specific and explicit to vary from the American Rule.  Id. at 543-45.  In doing so, it asserted that it was not compelled to follow the Fourth Circuit's decision in Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015), cert. denied sub nom. Shammas v. Hirshfeld, 136 S. Ct. 1376 (2016), because Shammas was erroneously decided.  Id. at 545-46.

In the Shammas case, the Fourth Circuit considered whether the Patent and Trademark Office could recover fees when a dissatisfied applicant in an ex parte trademark proceeding elected to commence a de novo action in the district court.  As with § 145, 15 U.S.C. § 1071(b) permits such an action in relation to a trademark application.  But 15 U.S.C. § 1071(b)(3) provides, "In any case where there is no adverse party, a copy of the complaint shall be served on the Director, and, 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."

The Fourth Circuit started from the proposition, admitted by Shammas, that "all the expenses of the proceeding" would generally be a broad enough term to include attorneys' fees.  784 F.3d at 222.  Shammas argued, however, that § 1071(b)(3) would have had to expressly identify attorneys' fees if it were to include them.  The Fourth Circuit recognized that the American Rule would compel such a requirement if it applied.  But it then determined that the American Rule did not apply because:

[§ 1071(b)(3)] is not a fee-shifting statute that purports to rebut the presumption of the Rule.  Rather than imposing expenses based on whether the PTO prevails, § 1071(b)(3) imposes the expenses of the proceeding on the ex parte plaintiff, "whether the final decision is in favor of such party or not."  (Emphasis added).  Thus, even if Shammas had prevailed in the district court, he still would have had to pay all of the PTO's expenses.  Because the PTO is entitled to recover its expenses even when it completely fails, § 1071(b)(3) need not be interpreted against the backdrop of the American Rule.  Therefore, even assuming that a statute must explicitly provide for the shifting of attorneys fees to overcome the presumption of the American Rule, that requirement is not applicable here.

Id. at 223-24.  Thus, the Fourth Circuit awarded attorneys' fees to the Patent and Trademark Office.

The Federal Circuit's Nantkwist Decision

Like the Fourth Circuit in Shammas, the Federal Circuit in Nantkwest started with the question of whether the American Rule was applicable to the case.  The Federal Circuit rejected Nantkwest's argument that the Supreme Court's Baker Botts precedent applied to all fee-shifting statutes.  Rather, it found that the precedent only applied when a party was "attempting to extend [a fee-shifting statute's] reach to ancillary litigation Congress never intended."  Nonetheless, the Federal Circuit decided that attorneys' fees should be assessed, regardless of whether the American Rule applied.

As the Supreme Court held in the Alyeska Pipeline case, the American Rule does not apply when a statute specifically and explicitly authorizes an award of fees.  Relying on the Shammas case and a Second Circuit case (United States v. 110-118 Riverside Tenants Corp., 886 F.2d 514 (2d Cir. 1989)), the Federal Circuit found that § 145 was sufficiently clear to authorize fees under the American Rule.  Specifically, it relied upon legal dictionaries and treatises to support the inclusion of attorneys' fees in expenses, and distinguished between costs -- which normally do not include fees -- and expenses.  The Court relied upon the belief that its conclusion was "particularly important here in the context of § 145's all expenses provision."  Unlike private attorneys, the Patent and Trademark Office relies upon the Office of Solicitor's employees, who do not bill hours individually or collect fees from a client.  Thus, it asserted that those fees were more similar to expenses for the government than a "fee."

The majority of the panel also rejected Nantkwest's argument that the Patent and Trademark Office would have had to pay the attorneys' salaries regardless of whether it had to defend against Nantkwest's suit.  The Court rejected that argument "because the litigation required the lawyers to divert their time away from other pending matters."  Notably, the Court considered the imposition of expenses under § 145 regardless of the outcome of the case to be an intentional disincentive for the bringing of such a de novo case because of the expense and difficulty imposed by a review of all issues, with discovery available to the aggrieved applicant.  Thus, it held that the Patent and Trademark Office could recover all expenses including attorneys' fees in any such case.

Judge Stoll dissented from the majority's decision, relying primarily on the American Rule.  She found that § 145 "neither mentions 'attorneys' fees' nor reflects a congressional intent to authorize them."  Unlike the majority, she relied primarily on the language of the statute and its lack of mention of attorneys' fees as a particularly telling sign.  Unlike other statutes that permit recovery of attorneys' fees, there is no discussion of fees, either as part of recoverable expenses or otherwise.  That was especially true in light of sources contemporaneous with the 1839 enactment of § 145's predecessor statute, which defined expenses as costs, and vice versa.  Finally, Judge Stoll noted that it would be particularly unusual to view § 145 as a fee-shifting statute in light of the imposition of expenses on both unsuccessful and successful litigants.

Conclusion

In light of the Federal Circuit's Nantkwest decision, applicants disappointed with Patent and Trademark Office proceedings will have to think twice before pursuing a de novo district court action.  The added cost of the Patent and Trademark Office's fees and expenses -- in this case, over $100,000 -- will have to be weighed against the greater chance of obtaining a patent.  If the pivotal issue is a question of law, rather than some fact missing from the record before the Board, it strongly suggests seeking an appeal to the Federal Circuit under § 141.  Only when additional fact-finding is required, and the patent application is especially important, will a district court action under § 145 be worth it.

Nantkwest, Inc. v. Matal (Fed. Cir. 2017)
Panel: Chief Judge Prost and Circuit Judges Dyk and Stoll
Opinion by Chief Judge Prost; dissenting opinion by Circuit Judge Stoll

Comments

[Paul F. Morgan]

Would not dissatisfied applicants usually be better off filing a continuation application with supporting declarations [rather than an expensive civil action under 35 U.S.C. § 145, in which their expert witnesses can be cross-examined] before going the Fed. Cir. anyway?

[Joshua Rich]

Usually, yes. But it depends on the posture of the case -- if the problem isn't a dearth of evidence on the applicant's behalf, but instead the Office's refusal to accept or rely on that evidence, there would be a benefit to being able to require the Office to provide evidence and being able to cross-examine the Office's experts. That being said, the costs (included the newly clarified additional costs) of a § 145 action almost always will outweigh the benefits.