On December 11, 2019, the Supreme Court issued its decision in Peter v. NantKwest Inc. upholding the American Rule’s presumption against shifting attorney’s fees. Under Section 145 of the Patent Act, applicants “dissatisfied with the decision of the Patent Trial and Appeal Board” are afforded the opportunity to file a civil action in the United States District Court for the Eastern District of Virginia. The statute specifies that “[a]ll the expenses of the proceedings shall be paid by the applicant.” The question presented in the case is whether such “expenses” includes the salaries of attorney and paralegal employees of the United States Patent and Trademark Office (“USPTO”). The Supreme Court, in a unanimous opinion, affirmed the en banc majority opinion of the United States Court of Appeals for the Federal Circuit and held that it does not include the attorney’s and paralegal fees. The discussion of this decision will focus on the Court’s analysis and its implications.
Robert J. Rando, Founder and Lead Counsel, The Rando Law Firm P.C.
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Operator: Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Intellectual Property Practice Group was recorded on Monday, December 16, 2019, during a live teleforum conference call held exclusively for Federalist Society members.
Wesley Hodges: Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is the Courthouse Steps Decision teleforum on Peter v. NantKwest. My name is Wesley Hodges, and I'm the Associate Director of Practice Groups at The Federalist Society.
As always, please note that all expressions of opinion are those of the expert on today's call.
Today we are very fortunate to have with us Mr. Robert J. Rando, who is the Founder and Lead Counsel of the Rando Law Firm. After our speaker gives his remarks, we will have time for your questions so please keep in mind what you have for this Supreme Court case. Thank you very much for sharing this today. Rob, the floor is all yours.
Robert J. Rando: Good afternoon and thank you very much Wes and thanks to The Federalist Society for the opportunity to discuss this case with those on the call. As I mentioned during my Courthouse Steps discussion after the case was heard for oral argument, I followed this case over its history, and once again, will begin the way I always do when I present on this case.
I had thought that the most difficult aspect of the case would be figuring out how to pronounce NantKwest, and I usually say that I learned otherwise, and that pronunciation was the easy part. I now stand corrected. Since the Supreme Court rendered one of its most straightforward, easily decipherable decisions, I will now retreat to my previous position that figuring out the correct pronunciation of NantKwest was more difficult. The hard part, as I previously thought and the question at the heart of this case, is figuring out what the word “expenses” means, in the context of the provision in the patent law, 35 U.S.C. § 145 that states in part, quote, “All the expenses of the proceeding shall be paid by the applicant.”
Under Section 145, an applicant, dissatisfied with the decision of a patent trial and appeal board in an appeal under Section 134A may, unless appeal has been taken to the United States Court of Appeals for the Federal Circuit, under Section 141 of the Act, have remedy by civil action against the director in the United States District Court for the Eastern District of Virginia. So, the question before the Court is whether or not the term “expenses” includes legal costs or fees, or as commonly referred to: attorney’s fees.
Now before we get into the arguments by the government and the respondent, I will go over the background of this case. In 2001, Dr. Klingemann described a method for treating cancer and claimed it in a U.S. non-provisional patent application titled, Natural Killer Cells, Lines, and Methods of Use, which was assigned to NantKwest’s predecessor, Conquest. In October 2013, the PTAB affirmed part of the examiner’s obviousness rejection of several claims in the application. Later in 2013 in order to present additional evidence of patentability and traversal of the PTAB adverse ruling on obviousness, the applicant instituted a Section 145 civil action for the de novo review in the Eastern District of Virginia.
On September 2, 2015, in an unpublished memorandum opinion and order the district court granted the PTO’s motion for summary judgment on the substantive merits of patentability, holding that the additional evidence taken together with the administrative record did not overcome the obviousness rejection. That summary judgment was affirmed by a divided Federal Circuit on May 3, 2017.
On September 16, 2015, 14 days later, the DOJ attorneys for the PTO filed a motion for reimbursement of the government's expenses and attorney fees, totaling approximately $112,000, pursuant to the agency's interpretation of the "all the expenses of the proceedings shall be paid by the applicant" provision of Section 145. It is interesting to note, including the phrase “expense and attorney’s fees”, which suggests the implicit acknowledgement that in this context, expenses on the one hand, and attorney’s fees on the other hand, are indeed qualitatively separate and independent terms. And, as we will see when I discuss the Court's opinion and rationale, this treatment for statutory usage, as referred to by the Court, partly informs the Court’s holding.
On February 5, 2016, in a memorandum of opinion and order, the Court, in accordance with the “all the expenses” provision, granted the portion of the government's motion, seeking an award of the PTO’s litigation costs in the form of expenditures for expert witnesses in the amount of $33,000. However, the district court denied the rest of the motion as being unauthorized by Section 145 and in derogation of the common law doctrine known as the American Rule Against Shifting Attorney’s Fees. Insofar as the government sought reimbursement for its legal costs in the form of salaries of the PTO’s in-house law personnel, attributed pro-rata to two attorneys and a paralegal assistant who were, “diverted from their tasks on other matters" in order to work on the case.
The government appealed to the Federal Circuit. A divided three-judge circuit panel reversed the district court denial of the government's motion for reimbursement, insofar as it requested award of the PTO’s legal costs. The majority had been persuaded that the "all expenses" to be awarded against the plaintiff applicant under Section 145, must include the pro-rata salaries of the PTO in-house legal staff, who assisted the DOJ attorneys in the case, regardless of whether or to what extent the agency prevailed on the underlying merits of the civil action, and without any analysis of the reasonableness of those salaries attributable to the time spent on the case.
Thereafter, an eleven-member majority of the regular active judges on the Federal Circuit voted sua sponte to vacate the panel decision and reinstate and re-adjudicate the government's appeal of the district court decision. The case was set for en banc hearing with submission of numerous briefs of the parties strictly limited to the issue of whether Section 145’s “all expenses of the proceedings” provision requires shifting of the defendant PTO’s legal costs to the plaintiff applicant in all instances.
On January 27, 2018, the Federal Circuit issued a divided 7-4 en banc affirmance of the district court denial of the government's motion for legal costs. In December of 2018, the government, on behalf of the PTO, appealed the en banc ruling by filing a timely petition for a writ of certiorari to the Federal Circuit, which was granted by the Supreme Court, this March 2019.
Now before I get into the decision, a few general observations and brief notes about the party's arguments. As I stated when discussing the oral arguments, the justices might find themselves in the unfamiliar territory of agreeing with each other and agreeing with the majority of the Federal Circuit en banc opinion, although they often agree with each other on reversing the Federal Circuit and patent cases. And also, that I didn't see a right-left divide or administrative state divide from the oral argument and that if the American Rule rules the day, all puns intended, we might see a 9-0 affirmance of the Federal Circuit by the Supreme Court, which is exactly what the Court did. Also, interestingly, or perhaps not so much, the questions at oral argument, focus on the bases that the Court articulates for a unanimous decision.
So the government arguments: in their briefing and oral argument, the government articulated three principal reasons why the answer to the question of including the attorney and paralegal fees in the "all expenses" should be yes.
First, they argued that the term “expenses” unambiguously encompasses costs that is money paid to employees, or other personnel, to accomplish a particular task. And unlike the term “costs,” which has a similarly broad common meaning, the Court has not construed the term “expenses” as a legal term of art with a more limited scope. And as we will see, when we get to the Court’s opinion, the Court addresses this argument.
Second, that [inaudible 08:37] can file suit under Section 145 to pay personnel expenses of the PTO, is consistent with the overall statutory scheme, that Congress has directed the PTO to charge fees that are sufficient to cover its aggregate operating costs, including personnel expenses. And Section 145 applicants put the PTO to a particular expense and is therefore consistent with the logic of the statute to require them to pay more.
And third, that it’s especially appropriate to require section 145 plaintiffs to pay the PTO’s personnel expenses, because Section 141 is a direct appeal to the Federal Circuit and is available as an alternative means of obtaining a judicial review. And Section 141 is not a cut-rate or substandard mode of judicial review, but rather it's an ordinary, on the record, APA style judicial review, and it contains no requirement that the applicant who chooses that course must pay the PTO’s personnel expenses.
As I previously noted and will again, since the Court and its decision also addresses the issue, there is a bit of hand-waving in that there is and are differences in the two proceedings, with respect to the standard of review, and availability of introducing additional evidence. And as we argued in our Association of Amicus Council amicus brief filed in the case, the Federal Circuit appeal is solely on the administrative record [and] has a high threshold for debt and deference, whereas the district court proceeding is de novo and provides for inclusion of additional evidence.
Now for NantKwest’s arguments. For its part NantKwest made three points at oral argument. First, the American Rule is a bedrock principle that the Court has recognized and applied for two centuries. Second, that the government is arguing for a radical departure from the American Rule. It is arguing that when a private party sues the government for its improper action, then that private party must pay for the government's attorneys, even if the government and its attorneys are flatly wrong. Third, there are over 3,000 federal statutory provisions that use the word “expenses” without any reference to attorney fees or council fees. Some of these provisions are open ended, as is the case here. The government can point to not a one of those other provisions to say that the word “expenses” includes attorney’s fees, save for the two exceptions, the radical exception that it's arguing here.
Okay, for the decision. The Court started out by describing the proceeding under Section 145, and also the two distinct paths presented by the de novo review in the district court under 145, and a direct appellate review under Section 141. The Court highlighted the differences as significant, as contrasted with the government's argument discussed a moment ago. The Court noted that, quote, “its basic point of reference when considering the award of attorney fees is the bedrock principle known as the ‘American Rule.’” That is, “each litigant pays [their] own attorney’s fees, win or lose, unless a statute or contract provides otherwise.” And that “the American rule has roots in our common law, reaching back to at least, the 18th century.” The Court also stated that while the government did not dispute the import of the American Rule, that it should not apply since the “presumption is most often overcome when a statute award fees to a ‘prevailing party,’” which is not the case here.
Now I’ll pause here to point out that the government argument, as shot down by the Court with examples of attorney fee awards to a party notwithstanding a failure to prevail, only exacerbates the absurdity of having a potential prevailing party be required to pay a fee-shift to the government. Indeed, the Court stated that the government view is incorrect, and that “the Court has never suggested that any statute is exempt from the presumption against fee shifting. Nor has it limited its American Rule inquiries to prevailing-party statutes.” In fact, the Court has noted that it “developed a ‘line of precedents’ addressing statutory deviations from the American rule that do not limit attorney's fees awards to the ‘prevailing party.’”
The Court also noted that “the presumption against fee-shifting not only applies, but is particularly important because Section 145 commits an unsuccessful government agency to recover its expenses from a prevailing party.” And “reading Section 145 to award attorney’s fees in that circumstance would, quote, ‘be radical departure from the longstanding fee-shifting principles adhered to in a wide range of contexts.’”
The Court next went on to explain this approach to determine whether Congress intended to depart from the American Rule, and stated that the Court must first look to the language of the section of the statute at hand. And “while the absence of a specific reference to attorney’s fees is not dispositive, that Congress must provide a sufficiently specific and explicit indication of its intent to overcome the American Rule presumption against fee shifting.”
The Court then analyzed Section 145 in three specific contexts. First, it looked at the clarity, or lack thereof, of the term “expenses” in a section. Second, it looked at the statutory usage of the term “expenses” in the section. And third, how the history of the USPTO interpretation of the term “expenses and attorney’s fees”, with respect to the statutory provision and the patent back was, as a whole, clarity.
As for the clarity question the Court found that the reference to expenses in Section 145 does not invoke attorney’s fees with the kind of clarity we have required to deviate from the American Rule. The Court then identified various general definitions of expenses and stated that although the definitions are capacious enough to include attorney’s fees, the mere failure to foreclose a fee award, neither specifically or explicitly, authorizes courts to shift the fees.
Then, and what I see as having significant implications beyond this case, the Court went on to analyze the term “expenses”, alongside neighboring words in the statute to support the conclusion that legal fees were not within the scope of the term. Specifically, the Court examines the complete phrase “expenses of the proceeding,” and stated that it is similar to the Latin expensæ litis, or expenses of the litigation, a term that “has long referred to a class of expenses commonly recovered in litigation to which attorney’s fees did not traditionally belong.” And also referring to definitions of the Latin term in Black’s and J. Bouvier law dictionaries, concluded that “[those] definitions suggest that the use of “expenses” in Section 145 would not have been commonly understood to include attorney’s fees at its enactment.”
Finally, the Court addressed the modifier “all”, and stated that “it does not expand Section 145’s reach to include attorney’s fees.” And “although the word conveys breadth, it cannot transform ‘expenses’ to reach an outlay it would not otherwise include”. And the Court cited to his other recent IP case Rimini v. Oracle interpreting the term “costs” in the copyright law, where the Court held that the adjective “full” in the phrase “full cost” does not alter the meaning of the word “costs”, but that “full costs” is limited to all of the costs, otherwise available under law, not including attorney’s fees. The Court concluded that “Section 145’s plain text does not overcome the American Rule’s presumption against fee shifting to permit the PTO to recoup its legal personnel salaries as expenses of the proceedings.”
Next, statutory usage. As for the statutory usage, the Court stated that “the record of statutory usage also illustrates how the term ‘expenses’ alone does not authorize the recovery of attorney’s fees.” Specifically, the fact “that ‘expenses’ and ‘attorney fees’ appear in tandem across various statutes shifting litigation costs indicates that Congress understands the two terms to be distinct and not inclusive of each other,” and that “in common statutory usage, the term ‘expenses’ alone has never been considered to authorize an award of attorney fees with sufficient clarity to overcome the American Rule presumption.”
Next, the Patent Act’s history. In that, the Court found that “the Patent Act’s history reinforces that Congress did not intend to shift fees in Section 145 actions.” The Court noted that since its inception, “there is no evidence that the patent office, the PTO’s predecessor, originally paid its personnel from sums collected from adverse parties in litigation, or that the Office initially even employed attorneys.” And then even though “salaries of PTO employees might have qualified as an expense of the agency, [it] does not mean that they are an ‘expense’ of a Section 145 proceeding.” And harkening back to Justice Gorsuch’s discourse with the government during oral argument, pointed out that until this litigation, “the PTO had not sought it’s attorney’s fees under Section 145”—at least for over 170 years—and “that the agency [had] managed to pay its attorneys consistently, [suggesting] that financial necessity does not require reading 145 to shift the fees, either.”
Finally, the Court noted that when Congress intended to provide for attorney’s fees in the Patent Act, it does so with clearly explicit language that is contained in several other sections of the patent law. And that “because Congress failed to make its intention similarly clear in Section 145, the Court would not read the statute to contravene fundamental precepts of the common law.” So, the Court concluded that “the history of the Patent Act [also] reaffirms the Court's view that the statute does not specifically, or explicitly, authorized the PTO to recoup its lawyers’ or paralegals’ pro-rata salaries in Section 145 civil actions.”
So, just some observations: one, the case provides clarity for the question of whether statutory attorney fee shifts must be specific and explicit in order to overcome the American Rule against shifting attorney’s fees.
Second, it also provides a window into the Courts approach to statutory interpretation of specific term or provisions that, while always starting with the words of the statute, takes into account the context; the integration of the entirety of the language with the provisions language, as well as the particular statute, analogous statutes, and provisions; the history of the statute; and the relevant common law of presumptions.
Third, while not addressing any deference issues, the Court certainly demonstrated in a unified manner in a unanimous opinion the limits of agency authority when it comes to interpreting a statute up against the common law doctrine. And as for the patent laws, this case provides comfort for patent applicants in that an opposite decision would’ve had a chilling effect, on an applicant's ability to challenge the PTAB’s decisions de novo.
And now I'll stop here, and I'm glad to answer any questions.
Wesley Hodges: So, Rob I don't have any questions for you at this moment, but I wanted to touch back with you. Is there any other part of the case that you feel like you'd like to dive into more?
Robert J. Rando: Not necessarily. You know as I said at the outset, this is a very straightforward decision. It's only a 10-page decision, and it's refreshing in that regard. It's unique in that it's a 9-0 unanimous affirmance of the Federal Circuit in a patent case, although the issue lends itself well beyond any patent law issues; except for the fact that it deals with the specific provision in the patent laws to have an attorney fee shift, irrespective of the outcome. And I think that that probably heavily influenced the decision as well, because you first have the American Rule, which is against loser pays, but now in this instance, it wouldn't matter whether you're a loser or a winner, but you would end up having to pay and having to pay the government. And as I mentioned, a contrary decision would definitely have had a chilling effect on patent applicants challenging decisions coming out of the PTAB and, from my perspective, would certainly lend itself to weakening the patent system overall
Wesley Hodges: Rob, perhaps one question, talking about the Court more generally. We were having a small discussion about this before the call, but obviously our callers are calling into an intellectual property-oriented case, would you mind giving us maybe the 50,00-foot view on just how prevalent IP cases have been for this court?
Robert J. Rando: Oh, absolutely. I mean, certainly the Roberts Court has had a hyper-focus on IP cases, and with within the recent past, there have been certain terms where the petition grants out of -- generally only 70 certs are granted per year in the more recent years, and there's been some terms where there's been 10, maybe 12 IP cases in the past. Prior to that, if you had one or two patent cases in a term that was a lot, and back in the ‘60s, they were petition grants in the 200 range. So, there's been quite a shift, quite a diminishment in the number of cases that the Supreme Court takes.
And on the other hand has been quite an increase in the number of cases dealing with intellectual property. And I think justifiably so, in terms of the impact that intellectual property has overall in the general economy. With respect to patent cases, it's argued that, post-formation of the Federal Circuit, initially that the Supreme Court was kind of letting the Federal Circuit get their sea legs, so to speak, and then decided that they might have to jump in down the road. But certainly, since the eBay case, there has been a steady increase and focus on patent cases. But, again, not only patent cases now, the copyright and trademark cases, it seems that the Court is continuing to focus and grant cert in those cases.
Wesley Hodges: And seeing no questions, Rob, just right back to you. Any closing thoughts while we end today?
Robert J. Rando: Actually, just again I'll just repeat that this is short decision, short opinion, which is refreshing. Certainly, I think the case -- the Court got it right. I mean it's certainly what we argued in our amicus brief for the Association of Amicus Council. It's always nice to see the Court get it right.
Wesley Hodges: Well, Rob, I'd like to thank you on behalf of The Federalist Society for the benefit of your valuable time and expertise today. We welcome all listener feedback by firstname.lastname@example.org. Thank you all for joining us for the call. We're now adjourned.
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