Nantkwest, Inc. v. Matal, No. 2016-1794 (Fed. Cir. June 23, 2017).
In a 2-1 panel decision, the U.S. Court of Appeals for the Federal Circuit has held that an applicant for patent who pursues an appeal to the U.S. District Court for the Eastern District of Virginia under 35 U.S.C. §145 must pay the USPTO’s legal fees in defending the appeal, win or lose. The decision is likely to make most appeals under Section 145 a far less attractive option than appeals directly to the Federal Circuit.
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. An appeal by district court civil action is sometimes referred-to as a “quasi de novo” proceeding, because the applicant may expand the administrative record by introducing additional expert testimony and taking discovery that would not be available in a direct appeal to the Federal Circuit. See Hyatt v. Kappos, 625 F.3d 1320 (Fed. Cir. 2010) (en banc).
Section 145, however, provides that, “All the expenses of the proceedings shall be paid by the applicant.” In Nantkwest, Inc. v. Matal, the Federal Circuit considered whether an applicant pursuing a district court appeal must pay all legal expenses of the USPTO in connection with the appeal, or only costs (which normally are limited to fees and some expenses, such as expert witness fees). The USPTO sought $111,696.39 in expenses, including $78,592.50 in attorneys’ and paralegal fees and $33,103.89 in expert witness fees following the applicant’s district court appeal. The applicant argued that the “American Rule” that all parties in litigation bear their own attorneys’ fees applies to Section 145 actions, and the statute does not provide an explicit exception to that rule.
In a decision written by Chief Judge Prost, the Federal Circuit ruled that Section 145 requires the applicant to pay the USPTO’s attorneys’ fees, regardless of the outcome of the district court action. Although the court expressed doubt that the American Rule applied to Section 145, it assumed that the rule governed for purposes of the decision. The court 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. In part, this results from the origin of the provision:
To deter applicants from exactly the type of procedural gaming that concerns the Director, Congress imposed on the applicant the heavy economic burden of paying “[a]ll the expenses of the proceedings” regardless of the outcome.
Slip op. at 5, quoting Hyatt, 625 F.3d at 1322.
In addition, the court rejected the applicant’s argument that the fee-shifting provision does not apply where the USPTO uses salaried government personnel, but only if the USPTO hires outside counsel. The court noted that:
Logically, the meaning of “of the proceedings” cannot turn on the type of attorneys retained to defend the government’s interests. As we previously observed, we must equally regard salaried attorneys’ time and “tak[e] into account the opportunity costs involved in devoting attorney time to one case when it could be devoted to others.” We thus conclude that § 145 entitles the USPTO to compensation for the diversion of its resources in the defense of § 145 appeals.
Slip op. at 15.
Circuit Judge Stoll dissented, relying on 19th Century dictionaries defining “costs” and “expenses,” and a score of other federal statutes specifically providing for awards of attorneys’ fees. In addition, Judge Stoll was persuaded by the fact that the Patent Office for 170 years did not seek an award of its attorneys’ fees under the statute.
An appeal by district court action under Section 145 formerly was an attractive action for applicants who felt a need to supplement the prosecution history, such as by submitting addition technical evidence or expert declarations. The USPTO’s attorneys’ fees associated with the district court proceedings are likely to be significant, however, especially when compared to the cost of an appeal to the Federal Circuit. The obligation to pay the Office’s attorneys’ fees, expert witness fees, and other expenses is likely to dissuade applicants from filing district court appeals under Section 145 is all but the most extreme cases.