On March 5th, 2019, the Supreme Court granted writ of certiorari in Iancu v. NantKwest Inc. The question for the Court is whether the phrase “[a]ll the expenses of the proceedings” in 35 U.S.C. §145 includes the salaries of personnel (e.g., attorneys and paralegals) employed by the U.S. Patent and Trademark Office (“PTO”) to defend against the suit.

Options for Judicial Review of the Patent Trial and Appeal Board

There are two ways for patent applicants to have an adverse decision from the Patent Trial and Appeal Board (“PTAB”) judicially reviewed.  First, they can appeal directly to the Court of Appeals for the Federal Circuit. 35 U.S.C. §141.  Second, they can file a civil action against the Director of the PTO in the Eastern District of Virginia. 35 U.S.C. §145.

There are two main advantages to pursuing district court litigation under §145.  First, as noted by the Federal Circuit, §145 allows applicants to conduct discovery and introduce new evidence.  Nantkwest, Inc. v. Iancu, 898 F.3d 1177, 1180 (Fed. Cir. 2018), cert. granted, No. 18-801, 2019 WL 1005844 (U.S. Mar. 4, 2019).  By comparison, under §141, the Federal Circuit will only review the evidence that was previously presented to the PTAB.  Therefore, §145 may be the only way to get certain kinds of evidence—like oral testimony from inventors—to be considered by the courts.  Second, litigating under §145 requires the district court to make de novo findings on disputed factual questions.  See Kappos v. Hyatt, 566 U.S. 431 at 434 (2012).  This means that the court gives no weight to the PTAB’s previous decision.  By comparison, under §141, the Federal Circuit will review PTAB decisions based on the deferential standards of the Administrative Procedures Act, effectively giving the PTAB the benefit of the doubt.

The Cost of Using §145 to Appeal Adverse Decisions

It can be time consuming and costly for the PTO to engage in district court litigation.  To discourage abuse of §145 and help defray costs, the statue requires “[a]ll the expenses of the proceedings shall be paid by the applicant.” Historically, this was understood to include costs like printing expenses, court fees, and reasonable expenses for expert witnesses. See Nantkwest at 1181.  However, Nantkwest marks one of the first times that the PTO attempted to recover attorney fees incurred during §145 litigation.  On appeal, the patent applicant pushed back, arguing that $78,592.50 in PTO personnel costs (i.e., paralegal and staff attorney time) should not be included in the expenses covered by §145.

The original Federal Circuit panel sided with the PTO, finding that attorney fees could be included in “expenses.” However, the Federal Circuit reexamined the issue en banc and reversed in a 7-4 split.  The dispositive issue for the Federal Circuit was that “all expenses” was not sufficiently “specific and explicit” to overcome the “American Rule” presumption that each party should pay its own attorney fees. See Nantkwest at 1180.  This also stood in conflict with the 4th Circuit’s analysis in Shammas v. Focarino, which found that equivalent language in 15 U.S.C. §1071(b) of the Lanham Act saddled applicants with attorney’s fees when appealing adverse decision by the Trademark Trial and Appeal Board.  See Shammas v. Focarino, 784 F.3d 219, 223 (4th Cir. 2015).  Although the original panel agreed with the 4th Circuit’s analysis, the en banc majority criticized Shammas as an “incorrect interpretation” of the Lanham Act. Nantkwest at 1191.

Arguments on Both Sides

In the case before the Supreme Court, the government argues that the PTO only started collecting “personnel-related expenses” in 2013 to comply with a new requirement under the America Invents Act to set fees necessary “to recover the aggregate estimated costs to the [PTO] for processing, activities, services, and materials relating to patents . . . and trademarks.” See Brief for Petitioner p.6.   As a policy matter, the government position is that failing to recover costs for attorneys and paralegals will result in higher fees for everyday patent filings—forcing them to “subsidize” §145 plaintiffs.  Id. p.16; Reply Brief for Petitioner p. 3.

As for the respondent, they reiterate that the American Rule’s presumption against fee shifting could only be overcome by “specific and explicit provisions for the allowance of attorneys’ fees” and it is “particularly unusual” to have a statute that could result in attorney fees being paid out to the losing party.  See Brief for Respondent p.11-12 They also harp on the fact that for the past 170 years, since the predecessor of §145 was first enacted, no court had ever awarded attorney’s fees to the PTO as part of the “expenses” of the proceeding.  Id. p.3.

What’s Really at Stake?

As things stand today, the government’s worry over subsidizing §145 litigation seems overblown.  As the en banc majority was quick to point out, §145 proceedings are exceedingly rare, with only a handful being filed every year.  Based on this, the Federal Circuit estimated the total cost of PTO attorney fees for §145 litigation to be around ~$1 million per year, which could be recovered by charging about ~$1.60 more to file each new patent application. See Nantkwest at 1196.  Given that large corporations pay upwards of $1700 in fees to simply file a new application (and total costs easily run into five-figures once attorney time is added), the added cost of “subsidizing” §145 litigation would be negligible.

The real concern is probably best expressed by the government’s contention that “proceedings under Sections 145 and 1071(b) have grown increasingly expensive, and the single largest expense to the USPTO is often the time that agency employees must devote to those matters.”  Brief for Petitioner p.7.  First, the government is concerned that even if costs are manageable right now, they could escalate in the future.  Second, there is an obvious conflict between the interpretation of “all the expenses” under §145 of the Patent Act, and the trademark equivalent under §1071(b) of the Lanham Act.  Even though the issue has not yet been put to the court, there is a looming concern that an unfavorable interpretation of the phrase “all the expenses of the proceeding” could extend to the Lanham Act as well.  It’s unclear how much weight the Supreme Court will give to these policy considerations, but the danger for the government is a slippery slope towards increased costs for the PTO as a whole and less ability to hold down fees in the future.