George Mason University Antonin Scalia Law School

Supreme Court to Assess USPTO’s Controversial Attorneys’ Fees Position

U.S. Supreme Court buildingBy Chris Katopis & Devlin Hartline

This week, the U.S. Supreme Court agreed to hear an important case concerning patent law procedures and the American legal system in general. In Iancu v. NantKwest, the Court asks, “Does all really mean all?” Specifically, the Court will examine whether Section 145 of the Patent Act, which provides that “[a]ll the expenses of the proceedings shall be paid by the applicant,” includes the personnel expenses that the U.S. Patent & Trademark Office (USPTO) incurs when its employees and attorneys defend the agency in the proceedings.

Under U.S. patent law, a patent applicant who is disappointed with the final decision of the Patent Trial and Appeal Board (PTAB) has the right to seek judicial review through one of two options. Applicants may either appeal directly to the U.S. Court of Appeals for the Federal Circuit under Section 141, or they may file a civil action against the Director of the USPTO in the U.S. District Court for the Eastern District of Virginia under Section 145. Unlike Section 145, Section 141 mentions nothing about recouping expenses.

In the present case, NantKwest is the assignee of a patent application directed to a method for treating cancer. The examiner rejected the claims as obvious and the PTAB affirmed. NantKwest then sued the Director of the USPTO in the Eastern District of Virginia. The district court held on summary judgment that the claims were obvious, and the Federal Circuit affirmed in a nonprecedential opinion.

In the district court, the USPTO moved for reimbursement of nearly $112,000 in expenses under Section 145 to cover attorneys, paralegals, and expert witnesses. The district court granted the expert-witness expenses but denied the personnel expenses. A divided panel of the Federal Circuit reversed, finding that the personnel expenses were compensable under Section 145. The Federal Circuit then took the case en banc, with the majority affirming the district court’s holding that the personnel expenses were not “expenses” under Section 145.

The USPTO then petitioned the Supreme Court for a writ of certiorari, which NantKwest opposed. Just yesterday, the Court agreed to hear the case. The USPTO argues that when Congress enacted Section 145, it was clear that “all” meant “all” regarding any costs or expenses arising from the district court litigation. Accordingly, the USPTO argues, an applicant who initiates a civil action under Section 145 must pay all of the expenses borne by the USPTO in the proceedings, including the salaries of the government’s attorneys and paralegals.

Notably, this recent position on Section 145 by the USPTO is a sharp departure from decades of earlier practice. It also presents a potentially costly factor for patents applicants seeking to challenge adverse PTAB decisions in the Eastern District of Virginia, where they would have to pay the government’s personnel expenses even if their patent rights are vindicated by the federal courts.

In its en banc majority opinion by Judge Kara Stoll, the Federal Circuit held that “the American Rule prohibits courts from shifting attorneys’ fees from one party to another absent a ‘specific and explicit’ directive from Congress.” Under the American Rule, the opposing parties in litigation pay their own attorneys’ fees, whether they win or lose. This Rule, the majority noted, promotes “fair access to the legal system” for those who “might be unjustly discouraged from instituting actions to vindicate their rights,” especially the “small businesses and individual inventors” who seek to avail themselves of Section 145’s benefits.

Having held that the American Rule’s presumption against shifting attorneys’ fees applies to Section 145, the Federal Circuit found that nothing in the text of Section 145 rebutted it. Under Supreme Court precedent, there must be a “specific and explicit” authorization by Congress to displace the American Rule. The Federal Circuit held that Section 145’s statement that applicants must pay “[a]ll the expenses of the proceedings” was ambiguous and thus fell short of the Supreme Court’s stringent standard.

The majority emphasized the fact that, under the USPTO’s interpretation, even successful applicants would have to pay the government’s personnel expenses, and it noted that the USPTO itself could not identify any other such provision for shifting fees to the prevailing party. That sharp departure from the bedrock principle of the American Rule, the majority reasoned, made the government’s anomalous position all the more suspect since Congress would have made it more clear if it intended this odd result.

This case has significant ramifications for the American innovation economy. Patent applicants at the cutting-edge of innovation occasionally receive multiple rejections from patent examiners that are affirmed by the PTAB. Some seek to vindicate their rights in the Eastern District of Virginia, which is their right under Section 145 of the Patent Act as enacted by Congress. The shifting of attorneys’ fees to such applicants would increase the cost of inventing and commercializing new technology. It would strongly discourage dissatisfied applicants from challenging the PTAB before a federal district court.

The American Rule is grounded on the notion that those who feel they have been wronged should not be afraid to seek justice in the courts. The USPTO would flip this bedrock principle on its head, even in cases where the courts reverse the agency’s wrongful denial of patent rights to innovators. Hopefully the Supreme Court will affirm the Federal Circuit’s defense of the American innovation economy, lest our innovative entrepreneurs be forced to think twice before taking their case to the federal courts.