Supreme Court Rules That USPTO is Barred From Seeking Reimbursement of Legal Fees in Section 145 Appeal

Friday, December 13, 2019

In a unanimous decision, the U.S. Supreme Court ruled on December 10, 2019, that Section 145 of the Patent Act, which permits the United States Patent and Trademark Office (“USPTO”) to recover “all expenses of the proceedings” in a Section 145 appeal, does not include the salaries of USPTO lawyers and paralegals who work on a matter.

Background

A patent applicant losing an ex parte appeal to the USPTO Patent Trial and Appeal Board has two options for seeking federal court review of the adverse result. First, the applicant may appeal directly to the Federal Circuit. 35 U.S.C. §144. Alternatively, the applicant may file a civil action in the Eastern District of Virginia, seeking an order compelling the Director of the USPTO to issue a patent. 35 U.S.C. §145. Section 145 provides that, “All the expenses of the proceedings shall be paid by the applicant.”

In this case, after the USPTO denied NantKwest, Inc.’s patent application, NantKwest filed a complaint against the USPTO Director in the Eastern District of Virginia under Section 145. The District Court granted summary judgment to the USPTO, and the U.S. Court of Appeals for the Federal Circuit affirmed. NantKwest, Inc. v. Lee, 686 Fed. Appx. 864 (2017). The USPTO then moved for reimbursement of expenses that included the pro rata salaries of USPTO attorneys and a paralegal who worked on the case.

The District Court denied the PTO’s motion to recover its legal fees as “expenses” of the Section 145 proceeding. In a 2-1 panel decision, the Federal Circuit reversed, holding that an applicant for a patent who pursues an appeal to the U.S. District Court for the Eastern District of Virginia under Section 145 must pay the USPTO’s legal fees in defending the appeal, win or lose.

Although the Federal Circuit expressed doubt that the “American Rule”—a presumption against fee shifting—applied to Section 145, it assumed that the rule governed for purposes of the decision. The Federal Circuit held that the term “expense” in Section 145 is a specific statement that Congress intended an applicant to bear the USPTO’s costs, including attorneys’ fees, incurred in the appeal.

The en banc Federal Circuit then voted sua sponte to rehear the case and reversed the panel over a dissent. NantKwest, Inc. v. Iancu, 898 F. 3d 1177, 1184 (2018). After examining the issue, the Federal Circuit majority concluded that “[a]warding ‘[a]ll the expenses’ simply cannot supply the ‘specific and explicit’ directive from Congress to shift attorneys’ fees, and nothing else in the statute evinces congressional intent to make them available.”

The government then appealed to the Supreme Court.

The Supreme Court Ruling

In unanimously ruling in favor of NantKwest, the Supreme Court rejected the USPTO’s argument that the American Rule presumption only applies to prevailing-party statutes. The term “expenses of the proceedings” in Section 145 does not include the salaries of the USPTO’s in-house lawyers and paralegals because, among other reasons, that language does not clearly evidence congressional intent to overcome the presumption against fee shifting.

Writing for the majority, Justice Sotomayor explained, “[T]he term ‘expenses’ alone has never been considered to authorize an award of attorney’s fees with sufficient clarity to overcome the American Rule presumption.” The Court noted that Congress would have had to provide “specific and explicit” indication of its intent to override the presumption. In addition, the Court made reference to other statutes that include both “expenses” and “attorneys’ fees,” which indicates that Congress views those terms as distinct and not inclusive of one another. Finally, the Court pointed to the history of the Patent Act, which further reinforces the argument that Congress did not intend to shift attorneys’ fees in Section 145 actions.

Practical Implications

The Court’s ruling means that challengers under Section 145 of the Patent Act will not be required to pay the legal fees of USPTO lawyers and legal staff. This will likely lead more unsuccessful patent applicants to pursue appeals. In addition, because Section 1071(b) of the Lanham Act contains similar language allowing the USPTO to collect expenses from applicants challenging the denial of trademark registration, the government will be barred from trying to collect attorneys’ fees in those proceedings as well.