Peter v. NantKwest, Inc. (2019)

Supreme Court Rejects USPTO's Attempt to Recover Attorney's Fees in All District Court "Appeals" from PTAB Decisions

By Joshua Rich --

In Peter v. NantKwest, Inc., decided by the U.S. Supreme Court earlier today, the Court considered whether the U.S. Patent and Trademark Office could compel an aggrieved applicant to pay its attorney's fees in a § 145 review, regardless of who wins or loses.  The Court unanimously rejected the USPTO's arguments.  In doing so, the Court bolstered the "American Rule" on attorney's fees and preserved § 145 proceedings as a financially viable option for review of adverse Patent Trial and Appeal Board ("PTAB") decisions.  The decision expressly considered only patent reviews, but it also applies to analogous reviews of trademark decisions.  Thus, it has impact on cases far more broadly than just § 145 proceedings.

A patent applicant dissatisfied with a PTAB decision[1] has two options for review of that decision.  First, the applicant can appeal the decision to the U.S. Court of Appeals for the Federal Circuit under 35 U.S.C. § 141.  In such cases -- which are the vast majority of reviews of PTAB decisions -- the Federal Circuit considers only the record before the PTAB and reviews that record deferentially for administrative correctness.  Second, the applicant can also file a civil action in the U.S. District Court for the Eastern District of Virginia under 35 U.S.C. § 145 and introduce new evidence for consideration de novo.  One downside of the second route, however, is that "[a]ll of the expenses of the proceeding shall be paid by the applicant."  In NantKwest, Inc. v. Lee, which later became Peter v. NantKwest, the USPTO argued for the first time that those expenses included the salaries of the USPTO attorneys and paralegals trying the case, regardless of the outcome of the case.

The Supreme Court's starting point in considering the USPTO's argument was the "American Rule" on attorney's fees:  "Each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise."  The USPTO argued that the American Rule didn't apply to § 145 proceedings because fee-shifting statutes usually reward only prevailing parties, and § 145 doesn't require the USPTO to be a prevailing party in order to recover expenses.  But the Court noted that there are exceptions to the prevailing party requirement, such as cases brought under the National Childhood Vaccine Injury Act; those exceptions are—and are required to be—extremely clear in order to create an exception to the American Rule.

Here, the Court found § 145 provides no such clarity.  The word "expenses" itself is ambiguous as to whether it would include attorney's fees.  Next, the phrase "expenses of the proceeding" is similar to the term of art "expensæ litis" (Latin for expenses of the litigation), which traditionally has excluded attorney's fees.  And the word "all" preceding "expenses of the proceeding" does not broaden the type of expenses recoverable, just the extent to which appropriate expenses are recoverable.  Thus, the American Rule applies, and the USPTO cannot recover its attorney's fees as expenses as a matter of right under § 145.

To the extent that there was any question remaining as to whether the USPTO's attorney's fees were expenses under § 145, the Court considered both statutory usage of the term "expenses" in other contexts and the USPTO's history of conduct in § 145 actions.  The terms "expenses" and "attorney's fees" appear in tandem numerous times in statutes, suggesting that the former does not always include the latter.  When expenses are defined as including attorney's fees, however, the definition is clear (in a way that it is not under § 145).  Perhaps most damning to the USPTO's case, however, was its own course of conduct.  For over 170 years, until the NantKwest case, the USPTO never argued that expenses under § 145 included attorney's fees.  Thus, neither the Patent Act nor other statutes provided a basis to vary from the American Rule.  The USPTO cannot recover its attorney's fees as a matter of right as expenses in a § 145 proceeding.

Although § 145 proceedings are quite rare, the Court's decision is important in preserving them as an option under any circumstances.  Applicants often appeal under § 141 not only because the record may be complete, but also because it is quicker and less costly.  The cost distinction would be even more extreme if the applicant had to pay the USPTO's attorney's fees, which could have easily doubled the cost of "expenses" due under the law.  The financial difference would have, as a practical matter, made § 145 review financially unfeasible.

For the Court, preserving the American Rule was also a key concern.  There are circumstances in which the American Rule does not apply in patent cases but those situations almost always arise under 35 U.S.C. § 285, which clearly allows for an award of attorney's fees.[2]  To allow attorney's fees to be collected under § 145, where the entitlement to fees is far less clear, would lower the bar for the recovery of fees under other statutes as well.  The ultimate effect would be a watering down of the American Rule, and a resulting increase in collateral litigation over attorney's fees.

Finally, the Trademark Act has procedures for review parallel to §§ 141 and 145.  In fact, a trademark case decided under the statute parallel to § 145, Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015), served as the strongest, most analogous precedent for the Federal Circuit's panel decision below awarding the USPTO attorney's fees automatically.  Today's Supreme Court decision undermines the reasoning of the Shammas case, and therefore should apply with full force to district court review of Trademark Trial and Appeal Board decisions as well.

Peter v. NantKwest, Inc. (2019)
Opinion by Justice Sotomayor, joined by Chief Justice Roberts and Justices Thomas, Ginsburg, Breyer, Alito, Kagan, Gorsuch, and Kavanaugh

[1] The procedures identified here, and the holding in the NantKwest case, apply only to the review of prosecution decisions, not post-grant proceedings such as inter partes review.

[2] Section 285 provides: "The court in exceptional cases may award reasonable attorney fees to the prevailing party."  Attorney’s fees are also sometimes awarded under Rule 11 of the Federal Rules of Civil Procedure, which has a similarly clear provision on the award of fees, or the Court’s inherent sanctions power.

Comments

[James Demers]

It's not clear to me that the salaries of the PTO's attorneys, which would have been paid whether or not the plaintiff initiated a § 145 review, should be regarded as "expenses" of the litigation, unless defending the PTO in § 145 reviews is their full-time job.