En Banc Federal Circuit Finds § 145 Appellants Generally Will Not Be Liable for Patent Office's Attorneys' Fee

By Kevin E. Noonan & Josh Rich —

The Federal Circuit handed down its en banc decision on Friday regarding the question of whether under 35 U.S.C. § 145 an applicant must pay attorneys' fees as part of the "expenses" the statute mandates, in NantKwest, Inc. v. Iancu (Fed. Cir. 2018) (en banc).  Generally, under the "American Rule," parties in U.S. litigation are responsible for their own fees regardless of the outcome of the case.  In NantKwest, Inc. v. Iancu, the U.S. Patent Office sought to turn that rule on its head for appeal from adverse patent decisions, wherein the Patent Office would recover its attorneys' fees — along with all other expenses — regardless of whether the applicant won or lost the case.  The District Court rejected the Patent Office's argument, and a divided panel of the Federal Circuit reversed the District Court's decision and ordered payment of the Patent Office's fees.  The Federal Circuit chose to review the panel's decision sua sponte.  The en banc Federal Circuit affirmed the District Court's decision, over a spirited dissent, holding that the Office was not entitled to its attorneys' fees in appeals under § 145.

There are two ways to appeal an adverse Patent Trial and Appeal Board decision arising out of patent prosecution (§ 145 appeals are not available for reexamination, post-grant and inter partes review, or derivation proceedings).  First, under 35 U.S.C. § 141(a), a dissatisfied applicant can pursue an appeal to the Federal Circuit as a routine appeal of an agency decision under the Administrative Procedure Act.  In such an appeal, the review is confined to the record before the Patent Office.  Second, under 35 U.S.C. § 145, the applicant can bring a civil action in the U.S. District Court for the Eastern District of Virginia.  In such an action, the parties can conduct full discovery and introduce new evidence, including oral evidence, that was not presented to the Patent Office in prosecution.  The § 145 action is resolved by the same methods generally used in other district court cases, including motion practice and trial on the merits.

One downside of appealing under § 145 has always been financial:  the statute provides that "[a]ll the expenses of the proceedings shall be paid by the applicant."  Ever since the predecessor to the current statute was enacted in 1839, the Patent Office had required a § 145 appellant to pay expenses including travel expenses, expert fees, and document reproduction costs, but not attorneys' fees.  That changed with the NantKwest case, where the Patent Office — for the first time in over 170 years — demanded that NantKwest pay the Patent Office's attorneys' fees incurred in the § 145 action, win or lose.

The majority and dissent reached opposite conclusions based on two major distinctions.  First, the majority placed the emphasis on the statutory language "expenses," not "all"; the dissent focused on "all" rather than "expenses."  The majority also considered the language somewhat vague, not "specific and explicit," whereas the dissent considered it so clear as to not need further consideration as to clarity.  Surprisingly, however, neither the majority nor the dissent placed much emphasis on the Patent Office's 170 years of conduct under the statute, which would seem to be the clearest indication of what it believed the statute to mean at the time of enactment and many years thereafter.

The en banc majority started its attorneys' fees analysis with the American Rule as a "bedrock principle" of American jurisprudence:  that each party pays its own attorneys' fees, win or lose.  The American Rule is rooted in fair access to the legal system for the poor, as well as the difficulty of litigating the reasonableness of fees.  That is, the American Rule — unlike the presumption in England — chooses to value allowing less wealthy litigants to contest a case over demanding that a prevailing party avoid any loss whatsoever from litigation.

The American Rule does not apply in all cases, however; Congress has, from time to time, chosen to establish a presumption in certain cases that a prevailing litigant will recover attorneys' fees.  No magic words are required for fee-shifting, but for a law to do so, according to the Supreme Court, Congress's intent must be "specific and explicit"; see, Runyon v. McCrary, 427 U.S. 160, 185 (1976).

The majority first considered whether the presumption of the American Rule applied under § 145.  The Patent Office argued that it should not, because it relates only to cases in which fees are shifted from a losing party to a prevailing party.  The Patent Office relied heavily on a Fourth Circuit case, Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015), in which language from the Lanham Act nearly identical to § 145 was held not to require consideration of the American Rule in compelling an appellant's payment of the Patent and Trademark Office's attorneys' fees in trademark cases.  The majority chose to reject the Shammas holding, finding that it "cannot be squared with the Supreme Court's line of non-prevailing party precedent applying the American Rule."  The Patent Office also relied on Sebelius v. Cloer, 569 U.S. 369 (2013), which interpreted a statute that allows prevailing "Vaccine Court" petitioners to recover reasonable attorneys' fees, but also permits a discretionary award of fees for unsuccessful petitions "brought in good faith [with] a reasonable basis for the claim."  The majority did not dispute or reject the Supreme Court's Sebelius holding, but found that the underlying statute was a straightforward instance of a specific and explicit intent by Congress to overcome the presumptive American Rule.  As a result, the majority found no reason to avoid the presumption of the American Rule in determining whether § 145 required an applicant to pay the Patent Office's attorneys' fees.

The majority thus started with the presumption of the American Rule and considered whether § 145's requirement that the applicant pay "all of the expenses of the proceedings" showed a specific and explicit intent to overcome the American Rule.  In doing so, it viewed the key question as whether attorneys' fees would be considered "expenses" in the context of § 145, which meant an investigation of the meaning of the term in 1839.  While one dictionary definition would support a meaning that would include attorneys' fees, the majority found that most contemporaneous dictionary definitions would not.  Similarly, other statutes' use of "expenses" generally did not include attorneys' fees.  In some cases, the statutes identified expenses and attorneys' fees as different categories, some others explicitly included attorneys' fees in expenses.  And where the Patent Act discusses fee awards (specifically, § 285), it does so explicitly, with language quite different from the more general term "expenses" used in § 145.  Furthermore, judicial decisions (both from the mid-1800s and more recently) in relation to expenses and attorneys' fees have viewed the two as separate categories.  Finally, the majority considered that the Patent Office's interpretation would require a prevailing appellant to pay the losing Patent Office's attorneys' fees.  Such an anomalous departure from the presumption of the American Rule would require extraordinary clarity in the statute; the majority did not find it.  Thus, the majority did not find the specific and explicit intent to overcome the American Rule and refused to award the Patent Office its attorneys' fees as part of "all of the expenses of the proceedings" in a § 145 case.

Having reached a conclusion based on its analysis of the statutory language, judicial decisions, and contemporaneous interpretation, the majority dealt with additional policy and legal arguments raised by the Patent Office and dissent.  It discussed the Patent Office's citations to Supreme Court cases, finding the language did not support the Patent Office's arguments when read in context.  It then dealt with the dissent's citation of the legislative history of the 1870 amendment to § 145's predecessor.  First, honoring the legacy of Justice Scalia, the majority questioned whether legislative history should even be considered.  But even so, it found that the legislative history was opaque in changing the statutory language from "costs" capped at $25 to uncapped "expenses."  Certainly, the majority agreed, that was intended to broaden the recoverable amounts, but it provided no guidance as to whether attorneys' fees was intended to be one of the recoverable categories.  The majority also rejected the dissent's reliance on the Patent Office's 1836 budgetary provisions (which included salaries of employees as one of the "expenses of the Patent Office") as being such a different context as to be uninformative.  Finally, it rejected the dissent's suggestion that § 145 actions would be scourge on the patent system as a whole if the Patent Office were required to pay its own attorneys' fees.  There are only a handful of § 145 actions per year — if that many — and the Patent Office's attorneys' fees can be spread over hundreds of thousands of applications.  As the majority calculated it, the attorneys' fees from § 145 actions adds up to less than $2 per application, scarcely a disabling imposition.

Thus, having rejected the Patent Office's arguments, the majority found that the general American Rule should apply and parties to § 145 actions should pay their own attorneys' fees.  It demanded specific and explicit evidence of a Congressional intent to deviate from the American Rule and found none, either in the statutory language or other evidence.  While the Fourth Circuit came to the opposite conclusion in the Shammas case (in the trademark context), the Federal Circuit concluded that Shammas's interpretation of the governing law (both statutory language and case law) was wrong.  There was insufficient evidence to overcome the American Rule and a dissatisfied applicant's payment of "all of the expenses of the proceedings" in a § 145 action does not require it to pay the Patent Office's attorneys' fees.

The dissent

Chief Judge Prost's dissent (joined by Judges Dyk, Reyna, and Hughes) makes the more straightforward (if not better) argument.  Its straightforwardness comes from the plain language of the statute, that an applicant who avails herself of the provisions of § 145 must pay "all expenses of the proceedings."  Expenses according to the dissent would include attorneys' fees (despite the long history to the contrary), and use of the word "all" further supports this construction of the statute.  The Fourth Circuit employed a similar construction to 15 U.S.C. § 1071(b)(3) (having language regarding expenses "almost identical" to the language of § 145) in Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015), and another reason put forth in the dissent was the perceived (unnecessary) circuit split that the majority's decision raises.

The dissenting opinion notes that a disappointed applicant has two options for appeal:  direct appeal to the Federal Circuit and recourse to the district court at issue in this appeal.  "Litigation in district court is expensive and time-consuming, much more so than direct appeals to this court limited to the administrative record," the opinion reminds us (although in view of the difference between the resources of the Federal government and most applicants this seems not particularly relevant to the statutory construction issue before the Court).  Citing Hyatt v. Kappos, 625 F.3d 1320, 1337 (Fed. Cir. 2010) (en banc), aff'd and remanded, 566 U.S. 431 (2012), the opinion emphasizes that an applicant must pay "all expenses of the proceedings" and this responsibility attaches "regardless of the outcome," i.e., whether the district court rules for or against the applicant.  The dissent then points out PTO outlays in this case, for expert witnesses (which payments are not at issue) and agency attorneys (which are) and that the Office did not employ outside counsel.  The significance (insofar as there is any) of this arrangement was that the "expenses" for using these lawyers stemmed from "the time they devoted to this case was not available for other work," citing Wis. v. Hotline Indus., Inc., 236 F.3d 363, 365 (7th Cir. 2000), as precedent for these considerations.  As evidence of the PTO's frugality and absence of overreach, the dissent noted that "the PTO is not seeking reimbursement for its lawyers' time at market rate" but rather for "personnel expenses it actually incurred in these proceedings."

Regarding how the term "expenses" should be construed, the dissent looks at the meaning of the term when the Patent Act of 1836 was enacted (and the district court option first became available to applicants), specifically:

[T]he applicant shall pay into the Treasury of the United States, or into the Patent Office, or into any of the deposit banks to the credit of the Treasury . . . the sum of thirty dollars . . . .  And the moneys received into the Treasury under this act shall constitute a fund for the payment of the salaries of the officers and clerks herein provided for, and all other expenses of the Patent Office, and to be called the patent fund.  Patent Act of 1836, ch. 357, § 9, 5 Stat. 117, 121 (emphasis added).

While acknowledging that "expenses of the Patent Office" and "expenses of the proceedings" is not exactly the same language, the dissent relied upon this language to establish that Congress (perhaps) in 1836 'understood salaries to be within the scope of 'expenses.'"  But the dissent relies less on this citation and more on the "plain meaning" of the term, citing Taniguchi v. Kan Pac. Saipan, Ltd., 566 U.S. 560, 566 (2012), for the rubric that plain meaning should be used when Congress has not defined a term with particularity.  Again harkening back to the 1830's, the dissent quotes Webster's original American Dictionary of the English Language as including "employment and compensation" to fall with the scope of "expense" and states that the dictionary definitions cited by the majority actually support its definition of "expenses" to include personnel expenditures and out-of-pocket attorneys' fees.  In addition, the dissent cites Taniguchi (albeit not a Section 145 case or even a patent case) for including attorneys' fees as "expenses."  And the dissent criticizes the majority's reliance on other statutes on the grounds that these statutes were enacted after (and in most cases significantly after) the 1836 Patent Act and the Supreme Court's practice of using contemporaneous statutes in these instances, citing W. Va. Univ. Hosps., Inc. v. Casey, 499 U.S. 83, 88 (1991).

Next, the dissent distinguishes the majority's argument that other sections of the Patent Act (specifically, § 285) expressly recite attorneys' fees as meaning that failure to do so in § 145 is meaningful for statutory construction here.  The dissent notes its opinion that "Congress intended a broader compensation scheme under § 145 than under § 285" by comparing "[a]ll the expenses of the proceedings" with "reasonable attorneys' fees," saying that "Congress can certainly employ a broad word over other narrower alternatives if it so chooses."  Additionally, the "overhead" aspect of agency attorneys' compensation from which the fees at issue here were calculated is persuasive to the dissenting judges that such fees should be considered expenses.  The difference in the "setting" of the two sections (district court litigation versus agency proceedings) are significant to the dissent because "§ 145 proceedings are, 'in fact and necessarily, a part of the application for the patent'" for the dissenters, citing Gandy v. Marble, 122 U.S. 432, 439 (1887).  In this reading of the statute, expenses under §145 "are a direct counterpart to the application fees that are designed to reimburse the PTO's examination expense[s]," for which there is little argument that they are the responsibility of an applicant.

Once having established that for Chief Judge Prost and her brethren the term "expense" should include agency attorneys' fees, the dissent then considers the use of "all" as emphasizing that the term should be construed broadly (see similar arguments by Chief Justice Burger in Diamond v. Chakrabarty and Justice Scalia in Merck v. Integra).  In Chief Judge Prost's view, the majority's construction would "leave[] little work for 'all' to do" because "simply saying 'the expenses' would seem to do just as well."  According to Chief Judge Prost, "Congress used the word 'all' to broadly and comprehensively capture anything fairly regarded as an 'expense,' resolving any lingering doubt in favor of inclusion [of the PTO's attorneys; fees as part of the Office's "expenses"]."

Finally, the dissenting opinion sites the legislative history (from the 1836, 1839, and 1870 Patent Acts), justifying this analysis by Supreme Court practice in assessing fee shifting in the context of the American Rule; see Ruckelshaus v. Sierra Club, 463 U.S. 680, 686–91 (1983), and Summit Valley Indus., Inc. v. Local 112, United Bhd. of Carpenters & Joiners of Am., 456 U.S. 717, 723–24 (1982).  According to the dissent, review of this record shows that "Congress intended all of the expenses associated with § 145 proceedings to be borne by the applicants who elect them—not by taxpayers or other PTO users whose fees fund the agency's operations.  Section 145 proceedings are an optional extension of the application process."  Further:

An applicant's choice to proceed under § 145 diverts the agency's resources from the PTO's principal mission of examining patent and trademark applications at the agency.  The purpose of § 145's expense-reimbursement provision is to ensure that these expenses fall on the applicants who elect the more expensive district court proceedings over the standard appeal route [emphasis added].

Regarding the role of the American Rule in the dissenting opinion, Chief Judge Prost reviewed the Fourth Circuit's Shammas decision contrary to the majority here.  The American Rule does not apply, either under Shammas or, in the dissent's view, here because expenses are assessed against an applicant regardless of whether the application prevails or does not.  And the dissent states that these judges disagree with the majority even if the American Rule was held to apply.

The dissent concludes with a discussion of various policy considerations, including applicant "choice" between appeal to the Federal Circuit and district court (neglecting to consider the procedural necessities that may influence an applicant's choice); that any "special solicitude" extended by the majority over the financial burden on "small businesses and individual inventors" is "entirely speculative," citing Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2169 (2015) (quoting Lamie v. United States Tr., 540 U.S. 526, 538 (2004)), for the principle that "'[the Supreme Court's] unwillingness to soften the import of Congress'[s] chosen words even if [the Court] believe[s] the words lead to a harsh outcome is longstanding.'"  Concern over such costs is also lessened by the cost of experts and other expenses not at issue here that can themselves be considerable, according to the dissent.  Acknowledging these costs implicates who should pay them, which is an easy choice for the dissent:

[W]hile it may be true that the PTO's personnel expenses in some cases might amount to a significant sum for applicants who choose to proceed down the optional § 145 route, those expenses have to be paid by someone.  As the PTO observes, at Congress's direction, the PTO now must operate entirely as a user-funded agency.  All applicants pay a number of fees throughout the patent-examination process to cover the PTO's expenses of operation.  Thus, in asking this court to exclude personnel expenses from "[a]ll the expenses of the proceedings," NantKwest asks this court to require other PTO applicants to pay the PTO's personnel expenses incurred in response to its §145 complaint, rather than NantKwest itself.  This contravenes Congress's intent [references to PTO brief omitted].

That the Office has never demanded applicants to pay attorneys' fees is another aspect of this case having no weight to the dissenting judges.  "Given how dramatically the patent and litigation landscapes have changed since the provision was first enacted, it is hardly surprising that the PTO would have felt compelled in recent years to change its strategy," based in part on applicants purportedly using §145 proceedings more frequently and their costs becoming greater in recent years.

These questions of policy, while outside the scope of the question before the Court or the Court's purview in making these judgments, are in the dissent's view relevant as evincing Congress's choices in enacting § 145 to require an applicant to pay "all expenses of the proceedings" including the PTO's attorneys' fees.

NantKwest, Inc. v. Iancu (Fed. Cir. 2018) (en banc)
Panel: Chief Judge Prost and Circuit Judges Newman, Lourie, Dyk, Moore, O'Malley, Reyna, Wallach, Taranto, Hughes, and Stoll; Circuit Judge Chen did not participate.
Opinion by Circuit Judge Stoll, joined by Circuit Judges Newman, Lourie, Moore, O'Malley, Wallach, and Taranto; dissenting opinion by Chief Judge Prost, joined by Circuit Judges Dyk, Reyna, and Hughes