Peter v. NantKwest, Inc.

Issues 

Does the term “expenses” under 35 U.S.C. § 145 read broadly enough that prospective litigants must cover the United States Patent and Trademark Office's attorneys’ fees when challenging a rejected patent application?

Oral argument: 
October 7, 2019

This case asks the Supreme Court to determine whether the term “expenses” in 35 U.S.C. § 145 should be interpreted to include attorneys’ fees. To appeal a denied patent application under § 145, the patent applicant must be willing to pay the United States Patent and Trademark Office’s (“PTO”) “expenses” related to the litigation. The PTO contends that its attorneys’ fees incurred from litigating § 145 appeals should count as reimbursable “expenses.” NantKwest counters that the American Rule, a presumption that each party in litigation will pay its own attorneys’ fees unless there is explicit and specific statutory language allowing fee-shifting, is not defeated by the vague § 145 language regarding “expenses,” and that accordingly the PTO must pay its own attorneys’ fees in § 145 actions. The outcome of this case has important implications for the future of the American Rule, the interpretation of the term “expenses” in other statutes, and the cost of making a § 145 appeal from a rejected patent application.

Questions as Framed for the Court by the Parties 

Whether the phrase “[a]ll the expenses of the proceedings” in 35 U.S.C. § 145 encompasses the personnel expenses the United States Patent and Trademark Office incurs when its employees, including attorneys, defend the agency in § 145 litigation.

Facts 

In 1839, Congress passed  35 U.S.C. § 145’s predecessor which set forth the modern framework for reimbursing the United States Patent and Trademark Office (“PTO”) for the expenses it incurs from litigating rejected patent claims. NantKwest, Inc. v. Iancu at 1180–81. When the PTO denies a patent application, the denied applicant may seek judicial review through one of two means: via a direct appeal to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”), or, under 35 U.S.C. § 145, via an action in the United States District Court for the Eastern District of Virginia (the “District Court”). Id. at 1180. When a denied applicant seeks judicial review in the District Court, § 145 compels the applicant to pay for “all expenses of the proceeding.” 35 U.S.C. § 145.

Dr. Hans Klingemann initially applied for a patent relating to the use of certain immune cells for cancer treatment. Iancu at 1183. The patent application was later assigned to NantKwest, Inc. (“NantKwest”). Id. Upon review, the PTO examiner rejected the patent, reasoning that the particular use of immune cells would have been “obvious to a person of ordinary skill in the art.” NantKwest, Inc. v. Lee at 4. NantKwest sought an appeal with the Board of Patent Appeals and Interferences (the “Board”), which affirmed the PTO examiner’s finding that NantKwest’s patent claim failed for obviousness. Id.  NantKwest then filed a complaint in the District Court under § 145 seeking to overturn the Board’s decision. Iancu at 1183. However, the District Court granted summary judgment in the PTO’s favor, agreeing with the Board that NantKwest’s claim was obvious. Id.

The PTO then moved to have NantKwest reimburse the PTO’s “expenses of the proceedings” pursuant to § 145. Id. Specifically, the PTO sought reimbursement for $111,696.39, which included $78,592.50 in attorneys' fees and $33,103.89 in expert witness fees. Id. The District Court granted the PTO’s motion with respect to the expert witness fees but denied the request for attorneys’ fees. Id. In so ruling, the District Court pointed to the “American Rule” under which each party pays its own attorneys’ fees. Id. While recognizing that the term “expenses” in § 145 is ambiguous, the District Court concluded that Congress likely did not contemplate the term to be so broad as to capture attorneys’ fees. Id.

The PTO appealed the District Court’s ruling to the Federal Circuit, which held that the District Court erred in denying the PTO attorneys’ fees. Id. In reversing the District Court, the Federal Circuit relied on a decision from the United States Court of Appeals for the Fourth Circuit (the “Fourth Circuit”) that held the American Rule inapplicable to 15 U.S.C. § 1071(b)(3), the trademark equivalent to § 145. Id. However, the Federal Circuit then voted sua sponte to rehear the appeal en banc where it ruled in favor of NantKwest. Id. at 1184, 1196. In doing so, the Federal Circuit this time rejected the Fourth Circuit’s interpretation of “expenses” under 15 U.S.C. § 1071(b)(3) and held that the American Rule controls unless clear statutory intent provides for a party to recover attorneys’ fees. Id. at 1184–85.

On December 21, 2018, the PTO petitioned the Supreme Court of the United States for a writ of certiorari, which the Court granted on March 4, 2019. Orders and Proceedings, 18-801.

Analysis 

THE MEANING AND PURPOSE OF “ALL THE EXPENSES” LANGUAGE

Petitioner Laura Peter, Deputy Director of the PTO, argues that the ordinary and plain meaning of the word “expenses” in § 145 is broad enough to encompass personnel expenses, such as attorneys’ fees, and that Congress understood “expenses” in that manner when it enacted the Patent Act of 1836 (the “Patent Act”). Brief for Petitioner, Laura Peter at 17­–19, 22. To support this assertion, the PTO cites to the Black’s Law Dictionary definition of “expense” as an “expenditure of money, time, labor, or resources to accomplish a result,” id. at 18, as well as an 1828 dictionary definition of “expenses” as “the disbursing of money, or the employment and consumption, as of time or labor.” Id. at 22. The PTO additionally points to a civil procedure treatise that defines “expense” as “all the expenditures actually made by a litigant in connection with [an] action” and Federal Rule of Civil Procedure 37, which includes attorneys’ fees as part of a party’s “reasonable expenses.” Id. at 19–20. The PTO also draws attention to Supreme Court precedents that include attorneys’ fees within the broad category of “litigation expenses” as compared to “costs,” which the Court has defined more narrowly as “relatively minor, incidental expenses.” Id. at 20–21. The PTO further notes that the use of the qualifier “all” when referring to “expenses” in § 145 means that challengers must pay all, not part, of the expense of a § 145 proceeding, including attorneys’ fees. Id. at 23–24.

The PTO also argues that the Patent Act’s “structure and purpose” reinforces the understanding that “expenses” includes attorneys’ fees for § 145 proceedings. Id. at 24. As the PTO explains, the Patent Act provides applicants with two means for seeking judicial review of a PTO decision: (1) a direct appeal to the Federal Circuit under § 141, or (2) an appeal in a civil action in district court under § 145. Id. at 24–25. The PTO states that Congress included the requirement that applicants pay for “[a]ll the expenses of the proceedings” because § 145 appeals are more comprehensive and allow the rejected applicant to present new evidence, while § 141 appeals to the Federal Circuit are limited to the administrative record. Id. at 25. According to the PTO, this makes § 145 appeals more expensive to defend than § 141 appeals, as § 145 appeals may entail extensive discovery, use of expert witnesses, and significant motion practice. Id. at 25–26.

Respondent NantKwest counters that the terms “expenses” and “fees” have distinct meanings, and that “expenses” is not generally understood to include attorneys’ fees. Brief for Respondent, NantKwest at 15–16. According to NantKwest, “attorneys’ fees” refers to compensation paid for legal services, while “expenses” refers to litigation costs such as filing court documents, copying, and court reporter expenses. Id. at 16. NantKwest continues that courts have historically granted awards for “attorneys’ fees” and “expenses” separately and that this practice existed when Congress first enacted § 145. Id. 16–17. NantKwest also cites an 1839 law dictionary that defines “expenses of the suit” as “the costs which are allowed to the successful party” while pointing out that this same dictionary excludes attorneys’ fees from its separate definition of “costs.” Id. at 17. NantKwest goes on to cite various other statutes that expressly authorize recovery of both “attorneys’ fees” and “expenses” to demonstrate that Congress uses explicit language when it intends to provide for their reimbursement. Id. at 17–18. NantKwest furthermore claims that the PTO has identified only two statutes—§ 145 itself and its trademark counterpart—where the term “expenses,” without additional language referring specifically to “fees,” has been interpreted to encompass both regular litigation expenses and attorneys’ fees. Id. at 19. NantKwest also asserts that including attorneys’ fees in expenses would be contrary to long-standing state and federal judicial precedent. Id. at 21–22.

NantKwest further argues that because Congress uses the term “attorneys’ fees” elsewhere in the Patent Act, Congress intentionally omitted “attorneys’ fees” from § 145. Brief for Respondent at 26. NantKwest accordingly maintains that this shows that Congress did not intend for “expenses” to include attorneys’ fees. Id. This was also Congress’s intent, NantKwest asserts, when it first passed the Patent Act of 1836. Id. at 27. While the 1836 Congress defined “expenses of the Patent Office” to include “salaries of the officers and clerks,” explains NantKwest, the Patent Office did not employ any attorneys or paralegals at that time. Id. NantKwest furthermore argues that even if Congress originally intended for “expenses” to include attorney salaries in 1836, this intent changed in 1839 when Congress altered the relevant language in the Patent Act to the “expenses of the proceeding” language that remains in place today. Id. at 27–28. Because salaries are fixed, continues NantKwest, they are payed regardless of whether there any “proceedings” and thus cannot be “expenses of the proceeding.” Id. at 28.

APPLICABILITY OF THE AMERICAN RULE

The PTO argues that § 145 does not trigger the American Rule, the default presumption under which each party in litigation pays its own attorneys’ fees. Brief for Petitioner at 32–33. According to the PTO, the American Rule’s presumption applies only to fee-shifting statutes that require one party to prevail over the other. Id. 34–35. The PTO thus concludes that because § 145’s fee-shifting is not conditioned on the success of either the challenging party or the PTO, the American Rule does not apply to § 145 cases. Id. at 35. The PTO also points out that, unlike typical fee-shifting statues which calculate attorneys’ fees based on a prevailing market rate, the PTO calculates its reimbursable expenses under § 145 actions based on the actual amount of expenses that it incurs. Id. at 36. According to the PTO, this further distinguishes § 145’s fee-shifting from the fee-shifting statutes to which the American Rule has traditionally applied. Id.

Even if the American Rule applies, argues the PTO, the language in § 145 is clear enough to overcome the presumption that each party must pay its own attorneys’ fees. Id. at 39. According to the PTO, a court may overcome the American Rule and award attorneys’ fees only if there is clear statutory authority that demonstrates an intent to provide attorneys’ fees, and that an explicit reference to such fees is not actually required to show this intent. Id. The PTO contends that the language in § 145 requiring applicants to pay “all the expenses of the proceeding” indicates an “express statutory authority” to transfer litigation expenses, such as attorneys’ fees, to the patent applicants who initiate the § 145 proceedings. Id. The PTO points out that because the term “expenses” has always been sufficient to shift expert witness fees to the patent applicant, it should also be sufficient statutory authority to shift attorneys’ fees. Id. at 41.

In response, NantKwest argues that the American Rule should apply to § 145 proceedings. Brief for Respondent at 11–12. According to NantKwest, departures from the American Rule must be explicit in order to ensure that litigants are on notice that they may have to pay attorneys’ fees. Id. NantKwest further asserts that, because the American Rule dates back to the late 18th century, its presumption against shifting attorneys’ fees had long been in force when Congress passed the first Patent Act decades later. Id. at 12–13. When Congress alters this presumption, explains NantKwest, it does so explicitly by including in statutes specific language such as the word “fees.” Id. at 13. While NantKwest concedes that there are no “magic words” that Congress must include to overcome the American Rule, NantKwest claims that the weight of precedent makes clear that a statute must include unambiguous language indicating that attorneys’ fees could be shifted. Id. at 14. Merely using the word “expense,” continues NantKwest, is too ambiguous to escape application of the American Rule’s presumption. Id. at 14.

NantKwest also argues that the American Rule applies whenever a litigant may have to pay an opposing party’s attorneys’ fees, regardless if the statue shifts those fees to a non-prevailing party. Id. at 34, 36. To support this assertion, NantKwest points to Hardt v. Reliance Standard Life Ins. Co. and Ruckelshaus v. Sierra Club, where the American Rule’s presumption applied even though the relevant statutes in both cases did not condition the awarding of attorneys’ fees on a particular party prevailing. Id. at 36–37. NantKwest also points to the lack of precedent authorizing the PTO to collect expert witness fees under § 145. Id. at 40–41. Even if the PTO is entitled to expert witness fees, argues NantKwest, it does not necessarily follow that attorneys’ fees are also reimbursable, given the precedent distinguishing attorneys’ fees from expert witness fees. Id. at 41.

Discussion 

ACCESS TO JUSTICE

The R Street Institute (the “Institute”), arguing in support of the PTO, claims that patent applicants can appeal rejected applications through administrative proceedings that are just as effective as a § 145 action. Brief of Amicus Curiae the R Street Institute (“R Street”), in Support of Petitioner at 4. The Institute asserts that filing a continuation application or requesting a continued examination—the two main administrative proceedings available to applicants—largely entail the same benefits of bringing a § 145 action. Id. at 4–6. For example, explains the Institute, applicants can introduce new evidence and expert testimony in continuation applications. Id. at 7–8. In addition, asserts the Institute, the administrative processes provide mechanisms for addressing problems presented by difficult examiners. Id. at 13. The Institute explains that applicants can call on supervisory examiners for assistance or utilize the PTO Ombudsman program “when normal channels are not providing satisfactory results.” Id. at 13–14. The Institute maintains that these procedures are analogous to the forum-shopping “benefit” associated with § 145 suits. Id. at 13. The Institute moreover argues that patent applicants have “no right to a judicial determination of patentability.” Id. at 15. As the Institute explains, the granting of a patent is a matter of “public rights” and thus both the legislature and the executive are competent to review patent applications. Id. The Institute furthermore claims that even if a right to judicial determination exists, the availability of § 141 actions fulfills that right. Id. at 16.

The Intellectual Property Owners Association (the “IPO”), in support of NantKwest, responds that § 145 affords applicants a unique opportunity to have their claim heard by a live tribunal, unlike § 141 appeals, continuation applications, or continued examinations. Brief of Amicus Curiae Intellectual Property Owners Association (“IPO”), in Support of Respondent at 26–27. The IPO thus contends that requiring applicants to pay the PTO’s attorneys’ fees in exchange for the opportunity to present live testimony infringes on inventors’ Due Process rights. Id. at 27–28. The American Bar Association (the “ABA”) expands on this argument, noting that the First Amendment includes a right to access the judicial system. Brief of Amicus Curiae The American Bar Association (“ABA”), in Support of Respondent at 9–10. The ABA thus asserts that Congress enacted §145 as a means for applicants to seek redress through the judicial system, and that a mandatory reimbursement of attorneys’ fee would “erect a roadblock” to the courts for many applicants. Id. at 11. The Association of Amicus Counsel (the “Association”) agrees, arguing that §145 provides applicants with a more meaningful review because it permits applicants to introduce evidence that may have been unavailable in an administrative review. Brief of Amicus Curiae the Association of Amicus Counsel, in Support of Respondent at 14. A § 145 action, continues the Association, also provides a more meaningful review than a direct review via the Federal Circuit under § 141, because a § 141 appeal is constrained to the administrative record. Id. at 10.

A FAIR ALLOCATION OF COSTS?

In support of the PTO, The Institute contends that, because it is predominantly well-financed applicants who bring § 145 actions, reimbursing the PTO’s attorneys’ fees would not affect most applicants’ decision on whether to invoke § 145. Brief of R Street at 17–19. The Institute claims that an applicant’s own attorneys’ fees in a § 145 suit “will likely be in the hundreds of thousands,” and as such small inventors almost never opt for a § 145 action. Id. at 21. Indeed, claims the Institute, applicants have brought only a handful of colorable § 145 appeals since 2011, and all of these appeals involved high-value patents. Id. at 17. The Institute explains that small inventors tend to pursue administrative review, which is an adequate substitute for § 145 litigation. Id. at 20–21. The PTO agrees, adding that preventing recovery of its attorneys’ fees would adversely impact all inventors because the PTO is “entirely fee-funded.” Brief of Petitioner, Laura Peter at 27. The PTO explains that defending § 145 actions is highly costly, and an inability to recover attorneys’ fees would have the effect of passing on additional costs to all inventors through increased PTO fees. Id. 

The ABA, in support of NantKwest, counters that requiring applicants to reimburse the PTO’s attorneys’ fess will make it prohibitively expensive for many applicants to bring § 145 actions. Brief of ABA at 9. The ABA argues that individual inventors and small business would be the most disadvantaged, because those groups typically do not have the means to reimburse “tens of thousands of dollars” worth of PTO attorneys’ fees. Id. The ABA furthermore asserts that granting the PTO a guaranteed reimbursement for its attorneys’ fees disincentives the PTO from minimizing its own expenses. Id. As such, continues the ABA, applicants who bring a § 145 action would “essentially write the government a blank check.” Id. Also arguing in support of NantKwest, the Institute of Electrical and Electronics Engineers (“IEEE”) questions the PTO’s claim that, absent reimbursement for attorneys’ fees, the PTO would pass additional costs onto inventors. Brief of Amicus Curiae Institute of Electrical and Electronics Engineers (“IEEE-USA”), in Support of Respondent at 30–31. According to the IEEE, the PTO’s costs of defending § 145 suits amounts to only 0.009% of the PTO’s total annual expenses. Id. at 30. The IEEE thus concludes that it would be immaterial were the PTO to pass these costs onto inventors, because a “0.009% incremental fee . . . would be so small as to be within the rounding error of pennies.” Id. at 30–31.

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