At issue is whether the phrase “[a]ll the expenses of the proceedings” in 35 U.S.C. § 145 includes attorney and paralegal salaries, characterized as personnel expenses, incurred by the United States Patent and Trademark Office when it defends the agency in Section 145 litigation brought by an applicant dissatisfied with the decision of the agency’s Patent Trial and Appeal Board (the “PTAB”). The plaintiff/applicant contends that this interpretation of the expenses provision of Section 145 and its predecessor statutes (for over 180 years it was not applied to include attorney’s fees), runs afoul of the American Rule common-law doctrine that each party bears its own legal fees; and could result in the outcome of a prevailing party applicant paying the USPTO’s attorney’s fees.
Mr. Robert J. Rando, Founder and Lead Counsel, The Rando Law Firm P.C.*
*Please note that Mr. Rando is co-Counsel on an Amicus brief filed on behalf of the Association of Amicus Counsel in this case.
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 Friday, October 11, 2019, during a live teleforum conference call held exclusively for Federalist Society members.
Micah Wallen: Welcome to The Federalist Society's teleforum conference call. This afternoon’s topic is a Courthouse Steps Oral Argument teleforum on Peter v. NantKwest Inc. which was argued earlier this week. My name is Micah Wallen, and I'm the Assistant 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 fortunate to have with us Robert Rando, who Founder and Lead Counsel, of The Rando Law Firm, and Robert filed an amicus brief in this case for the Association of Amicus Counsel. After our speaker gives his opening remarks, we will then go to audience Q&A. Thank you for sharing with us today. Robert, the floor is yours.
Robert J. Rando: Thank you very much, Micah. And thanks to The Federalist Society for the opportunity to discuss this case with those on the call. I’ve followed this case over its history and would like to begin the way I usually do when I’m presenting on the case over the course of this journey. I’d thought that that most difficult aspect of this case would be figuring out how to pronounce NantKwest. I soon learned that that was the easy part.
The hard part, and the question at the heart of this case, is figuring out what the word expenses means within the context of the provision in the patent laws, 35 U.S.C. § 145. And that states in part, quote, “All the expenses of the proceedings shall be paid by the applicant.” Now under § 145, an applicant dissatisfied with the decision of a patent trial and appeal board in an appeal under § 134(a) may, unless the appeal has been taken to the United States Court of Appeals for the Fifth Circuit, 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 Supreme Court is whether or not the term “expenses” would include legal costs or fees, or as commonly referred to as attorney’s fees.
Now, before I get into the arguments by the government and the respondent, I’d like to go over some of the background in this case. In 2001, Dr. Hans Klingemann described a method for treating cancer and claimed it in a U.S. non-provisional patent application titled, “Natural Killer Cell Lines and Methods of Use,” which was assigned to NantKwest. In October 2013, the PTAB affirmed part of the examiners obviousness rejection of several claims in the application. Later in 2013, in order to present additional evidence of patentability and traversal of the PTAB’s adverse ruling on obviousness, the applicant instituted a § 145 civil action for de novo review in the Eastern District of Virginia.
On September 2, 2015 in an unpublished memorandum opinion in 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 panel.
On September 16, 2015, 14 days later, the Department of Justice attorneys for the PTO filed a motion for reimbursement of the government’s expenses and attorney’s fees, totally approximately $112,000 pursuant to the agencies interpretation of the “all the expenses of the proceeding shall be paid by the applicant” provision of § 145.
Now it’s interesting to note that including the phrase “expenses and attorney’s fees,” would suggest the implicit acknowledgment that in this context expenses on the one hand and attorney’s fees on the other are being qualitatively separate independent terms. But we’ll leave that for later.
On February 2016 in a memorandum opinion, an order in accordance with the all-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 the expert witnesses in an amount of approximately $33,000. However, the court denied the rest of the motion as being unauthorized by § 145 and in derogation of the common law doctrine known as the American Rule against the shifting of attorney’s fees, insofar as the government sought reimbursement of 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, quote, “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 Federal Circuit panel reversed the district court’s 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 all the expenses be awarded against the plaintiff applicant under § 145 must include the pro rata salaries of the PTO’s in-house legal staff that 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 11-member majority of the regular active judges on Federal Circuit voted sua sponte to vacate the panel decision, reinstate and re-adjudicate the government’s appeal at the district court’s decision. The case was set for en banc hearing with submission of new merits briefs. And the parties were strictly limited to the issue of whether § 145’s all-expenses of the proceedings provision required the shifting of the defendant PTO’s legal costs to the plaintiff applicant in all instances.
July 2018, the Federal Circuit issued a divided 7-4 en banc affirmance of the district court’s denial of the government’s motion for legal costs. In December 2018, the government on behalf of the PTO appealed the en banc ruling by filing a timely petition for writ of cert to the Federal Circuit, which the Supreme Court granted on March 4, 2019.
Now before I get into the oral argument, a few general observations. It appears from the argument that the justices may find themselves in an unfamiliar territory of agreeing with each other and agreeing with the majority in the Federal Circuit’s en banc opinion, although they often agree with each other on reversing the Federal Circuit in patent cases. That being said, I don't see a right/left divide or administrative state divide from the oral argument.
However, should those issues emerge—more efficient government spending, agency deference, etc.—the decision could be a lot closer. Short of that outcome, if the American Rule rules the day—all puns intended—we could see a 9-0, maybe at worse a 7-2 affirmance of the Federal Circuit.
The questions posed to both side, but certainly to the government, focused mostly on a couple themes. One was under the American Rule, each pays their own legal fees, absent clear language providing for attorney fee shift, and depending on prevailing party, the loser pays. Another line of inquiries focused on the history of the PTO’s failure for over 170-plus years to interpret, or at least enforce, implementation of the inclusion of legal fees or attorney’s fees as part of the recoverable or reimburse expenses in the expenses provision of the statute and its predecessors. In fact, the government was pressed on that issue and the justices queried whether there might be a doctrinal basis for deciding this so-called habit of not including the legal fees, which would provide a basis to convince the Court or to carry the day.
Now for the oral argument. The PTO was represented by Malcolm Stewart, DOJ Deputy Solicitor General. And NantKwest was represented by Mr. Morgan Chu of Irell & Manella. As an interesting side note, having nothing to do with anything other than Laura Peter, Deputy Director, being substituted in as a nominal party, the Irell firm is current USPTO director, Andrei Iancu’s former law firm before he assumed the PTO director position.
The government argument: so Mr. Stewart opened up with stating the question presented as whether the expenses include money that the PTO spends to employ lawyers and paralegals who assist with the agency it defends under § 145. He then articulated three principle reasons why the answer to the question should be yes.
First, 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.
Second, requiring patent applicants who file under § 145 to pay personnel expenses of the PTO is consistent with overall statutory scheme. Congress has directed the PTO to charge fees that are sufficient to cover its aggregate operating costs, including personnel expenses. And § 145 applicants put the PTO to particular expenses, and it’s therefore consistent with the logic of the statute to require them to pay more.
Third, it’s especially appropriate to require § 145 plaintiffs to pay the PTO’s personnel expenses because § 141, which is the direct appeal provision to the Federal Circuit, is available as alternative means of obtaining judicial review. And in the government’s view §141 is not a cut-rate or substandard mode of judicial review. It’s 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 personal expenses.
I’ll stop here to note there’s a bit of hand waving going on here in that there is and are differences in the two proceedings with respect to standard of review. The Federal Circuit appeal is solely on the administrative record because of high-threshold in deference when the district court’s proceeding is de novo provides for inclusion of additional evidence, etc.
Justice Ginsberg asked the government whether there is any other federal statute that provides attorney’s fees on the basis of the naked word “expenses.” The government reply was, “No, except for the trademark analogue,” which by the way is on cert petition in a case known as Booking.Com from the Fourth Circuit decision conspiring the analogous expenses language provision in an opposite outcome to the Federal Circuit NantKwest.
The government also acknowledged that shifting of attorney’s fees, Congress uses language like “expenses and” or “expenses included.” Justice Kavanaugh was troubled by that fact, and although not in the case, the apparent fee shift would require a prevailing party to pay the losing party’s legal or attorney’s fees. And he referred to it as a “radical departure.”
The government’s response was in agreement that it was unusual but then pivoted to its theme that it is not unusual when compared to other stages of the patent application process. So the government’s argument that this is merely an extension of the application process for which the PTO is obligated to balance its books, so to speak, by charging applicants to cover the agency as a self-funding, revenue generating agency.
Of course, NantKwest, during Mr. Chu’s argument, would have none of that. And Mr. Chu pointed out that the § 145 action is an adversarial proceeding in an Article III tribunal and not an agency proceeding.
Justice Gorsuch questioned whether expenses could also include overhead for utilities, electric bill, sewage bill, etc. The government’s response was that there would have to be a connection to the proceeding. So Justice Gorsuch pressed further, and the government admitted in setting its application fees, it’s essentially accounting for overhead costs. Justice Gorsuch then said it was helpful to know that the PTO was already doing that and essentially asked why it took the government 170 years to figure out that the §145 legal fees should also be accounted for. The government responded that there was not a good explanation for the past, but the explanation for the current focus was Congress’ direction in 2011 to the PTO to balance its books and the PTO’s effort to find a way to do that.
Justice Ginsberg then asked if there were -- if the government had been violating the statute for all these years. The government said not violating but perhaps like a statute of limitations it was waiving.
And then there was some give and take with Mr. Stewart by Justices Kavanaugh and Kagan regarding whether the government was dropping its argument against the American Rule presumption. Mr. Stewart’s reply was that like -- found by the Fourth Circuit, the mandate is silent on the ultimate outcome of the litigation. So the rule does not apply or the context leads you to believe that personnel expense are including attorney and paralegal personnel. Chief Justice Roberts asked whether there would be a request for reimbursement of his time at oral argument. And Mr. Stewart responded no because they view §145 as limited to trial expenses and also not for DOJ personnel.
Justice Breyer was also troubled by the inconsistencies and long duration of time before the government essentially changed its interpretation to a prevailing party where the loser pays, here the costs are spread among all the applicants. Justice Ginsberg then pointed out that the Federal Circuit indicated that it would result in an increase of $1.60 per applicant.
Now for the respondent’s argument by Mr. Chu. Mr. Chu, arguing for NantKwest, made three points. One, the American Rule is a bedrock principle that the Court has recognized and applied for two centuries. Second, the government is arguing for a radical departure from the American Rule. The government is arguing that when a private party sues the government for its improper action, then the private party must pay for the government’s attorneys, even when the government and its attorneys turn out to be flatly wrong. Third, Mr. Chu pointed out that there are over almost 3,300 federal statutory provisions that use the word “expenses” without any reference to attorney’s fees or counsel fees. Some of those 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 except for the two exceptions—the radical exceptions—its arguing here.
Chief Justice Roberts questioned why this is not merely part of the filing fee, following up on the government’s argument. Mr. Chu responded that it is not a filing fee, but attorney’s fees against the strong backdrop of the American Rule. And as noted before, this is not in the PTO but in the U.S. district court where the American Rule rules.
Justice Ginsberg questioned whether there was magic language. Mr. Chu responded that under the American Rule Congress uses specific language to delineate, and without it the rule should not be violated.
Justice Alito questioned the fairness of spreading the costs among all the applicants. Mr. Chu responded, quote, “If we were Congress—and we’re not—Congress could decide what it thinks is fair or wise or good public policy. But as the Court as said in Alyeska and Baker and Botts, not matter how good that policy might be, this Court does not have the roving authority to make those decisions. It is up to Congress.”
And I will stop there. Very glad to answer any questions.
Micah Wallen: And Robert, while we’re waiting for seem questions to come in, I wanted to ask you if you had any predications for us after seeing or reading the transcript of the oral argument and where you think each of the justices are.
Robert J. Rando: As I indicated earlier, it seems for the most part there appears to be a consensus among the justices that the government is pushing way beyond violating the American Rule. And most commentators seemed to have reached the same conclusion based on the oral argument. But as I indicated, if other issues arise with respect to restricting government spending or if it becomes a question of agency deference issues, that could divide the Court. Otherwise, it’s likely we would see a 9-0.
Certainly, out of all the justices, Justice Breyer seemed more sympathetic to the government in his questions. And of course Justice Thomas’s silence was not unusual, and in other patent cases [he] has not really been a strong proponent of patent protection, thinking of the Oil States case in terms of patent rights. So Justice Thomas may be a question mark as well.
Micah Wallen: Not seeing any questions coming through on the lines, Robert, I will throw it over to you. Did you have any closing remarks or anything else you wanted to address?
Robert J. Rando: Well, I would just say this case has broader implications than just in the patent arena. I mean, certainly as pointed out by Mr. Chu, there are almost 3,300 statutes with the naked expenses language. So I think it’s important not only in the IP space and the patent law space but also beyond that. I guess it remains to be seen what other issues might influence the justices when they render their opinion.
Micah Wallen: All right, well on behalf of The Federalist Society, I’d like to thank our expert for the benefit of his valuable time and expertise today. We welcome listener feedback by email at firstname.lastname@example.org. Thank you all for joining us. We are adjourned.
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