On the first day of the 2019-20 term, the Supreme Court heard oral argument in Peter v. NantKwest, Inc.,[1] a case raising the question of whether a patent applicant should be responsible to pay all of the PTO's attorneys' fees in a § 145 "appeal"; it did not go well for the government. With the Supreme Court's new procedures, the Deputy Solicitor General arguing the case was able to set forth the three main points of the government's case in two uninterrupted minutes. After that, he was barraged by pointed questions. Morgan Chu of Irell & Manella, arguing for NantKwest, faced less difficult questions and was better able to turn them to his advantage. Ultimately, the argument left the impression that the Justices are very skeptical of the government's desire to recover attorneys' fees as "expenses" of a § 145 action regardless of whether the applicant prevails.
The NantKwest case arose after a patent applicant lost an argument at the Patent Trial and Appeal Board. A dissatisfied applicant has two options after an adverse PTAB decision: a routine appeal of the agency decision to the Federal Circuit under the Administrative Procedure Act under 35 U.S.C. § 141, or a civil action the U.S. District Court for the Eastern District of Virginia under 35 U.S.C. § 145. The § 145 action allows for fulsome discovery, introduction of new evidence, and de novo review of the decision. However, it requires that "[a]ll of the expenses of the proceeding shall be paid by the applicant." 35 U.S.C. § 145.
Since the enactment of the statute in 1839, the PTO has required patent applicants to pay certain costs arising from a § 145 action, such as travel expenses, expert fees, and document reproduction. For the first time in 170 years, however, the PTO demanded that NantKwest pay its attorneys' fees from the § 145 appeal. The District Court rejected the PTO's demand but, on appeal, a split panel of the Federal Circuit agreed that NantKwest should be liable for the PTO's attorneys' fees regardless of the outcome of the appeal. The full Federal Circuit then reheard the decision en banc and rejected the panel's decision. The Supreme Court granted certiorari exclusively on the issue of whether the statute's requirement that the applicant pay "all of the expenses" meant that it would be required to pay attorneys' fees, win or lose.
During oral argument, the PTO spelled out three arguments to support its position. First, the term "expenses" unambiguously includes costs, but is necessarily broader than the legal term of art "costs," and therefore may include fees. Second, Congress has directed that the PTO cover fees that are sufficient to cover its operating costs (including the personnel fees it incurs, such as agency solicitors) and § 145 can be part of the fee schedule that approximates the costs of various actions "in a rough and ready way." Third, applicants have § 141 available as an alternative means of review of an adverse decision (without any obligation to pay the PTO's personnel fees), and therefore something more would be expected of applicants pursuing review under § 145.
The Justices then jumped on the Deputy Solicitor General in rapid, bipartisan succession. First, Justice Ginsburg established that § 145 and the parallel trademark provision being considered as part of the same argument are the only provisions in the entirety of the Federal Code in which the government has suggested the term "expenses" alone would include attorneys' fees.[2] Then, Justice Kavanaugh raised a question to make sure that this was the only statute under which attorneys' fees could be awarded to the government as a losing (non-prevailing) party, which the Justice described as a "radical departure." In its defense, the PTO argued that while it would be unusual for an adversarial proceeding involving the government, it wouldn't be unusual when compared to other aspects of patent prosecution in which the Office charges various fees. But that led Justice Gorsuch to pounce on the issue and ask what more the PTO could charge -- "The electric bill? The sewage bill? Other things that were required in order to be able to litigate these cases?"[3] And again, the Office had little response: such costs might be part of the fully burdened rate for personnel costs, but might also be considered in patent applications generally. More fundamentally, the PTO had no response for why it hadn't attempted to collect attorneys' fees for 170 years. Both Justice Breyer and Justice Gorsuch were quite troubled by the long practice of not seeking to recoup fees. And they seem less than satisfied by the Deputy Solicitor General's attempt to shorten the time until only 2011, when the PTO became self-funding by statute (which nonetheless involved a delay before seeking fees).
Like the PTO, NantKwest raised three basic arguments. First, the "American Rule" is a bedrock principle of U.S. litigation, creating a strong presumption that parties bear their own fees in the absence of a clear statement to the contrary. Second, this is a radical departure from the American Rule in which a party can be held liable for the opposite party's attorneys' fees not only if it loses -- a rare, but not unprecedented departure from the American Rule -- but also if it prevails. Third, there are 3,274 Federal statutes that use the term "expenses" without discussing attorneys' fees, and none of them, except the two at issue here, even arguably would include attorneys' fees within their scope.
The Chief Justice started the questioning by asking why this wasn't analogous to a very costly filing fee, as is seen with certain agency filings. NantKwest refused to take the bait and instead insisted that this was an adversarial litigation in which the PTO was seeking attorneys' fees as part of the litigation, not a filing fee, which necessarily implicated the American Rule. Justice Ginsburg, who had earlier betrayed her leanings, asked if there were any words other than explicitly calling for attorneys' fees that would do. Mr. Chu offered some other options to show that there were no "magic words" required. In response to questions from Justices Sotomayor, Kagan, and Kavanaugh, he made it clear that the statute would have to provide some indication that attorneys' fees were intended (not just personnel costs) because the American Rule is such a strong presumption. He discussed what expenses beyond costs might be included in the statutory recovery, always distinguishing attorneys' fees. Mr. Chu then seemed to enlist Justices Breyer[4] and Alito on his side, both by arguing the strength of the American Rule and pointing out the extensive length of consistent practice of the PTO not seeking attorneys' fees under § 145. Finally, he pointed out that the case would likely affect other statutory provisions that discuss "expenses" without reference to attorneys' fees, including provisions relating to customs forfeitures and taxpayers' property.
On rebuttal, the Deputy Solicitor General attempted to lessen the importance of the long practice of foregoing fees by calling "an atmospherically unhelpful point," but asserting that it didn't fall within any recognized doctrinal category. He then pointed out that NantKwest had argued about what might or might not be covered, but had failed to propound any test that could be applied in future cases to determine what expenses would be recoverable. However, the PTO's practice itself hadn't been consistent: sometimes it charged for travel, sometimes it didn't; sometimes it charged for printing; sometimes it didn't.
All in all, the Justices' questions put the PTO in a difficult position, while NantKwest was able to parry the blows easily. Given the thrust of the argument, it would be surprising if the PTO were to prevail on the recovery of attorneys' fees under § 145; indeed, it would be surprising if even two or three of the justices did not apply the American Rule once again.
[1] The case has been known as NantKwest, Inc. v. Matal and NantKwest, Inc. v. Iancu. See https://www.patentdocs.org/2017/06/nantkwest-inc-v-matal-fed-cir-2017.html and https://www.patentdocs.org/2018/07/nantkwest-inc-v-iancu-fed-cir-2018-en-banc.html for a more extensive discussion of the history of the case.
[2] Ultimately, Justice Ginsburg made it clear that she simply wasn't buying the government's argument, saying, "I can see the argument, Mr. -- Mr. Stewart, that the word 'expenses' could include attorneys' fees, but I don't understand the argument that expenses alone must include attorneys' fees."
[3] Perhaps farcically, Chief Justice Roberts asked if the government would be sending NantKwest a bill for the Supreme Court argument. While the Deputy Solicitor denied it, the question pointed out that there wasn't as clear a division between § 141 and § 145 as the government might like.
[4] In a bit of a surreal exchange, Justice Breyer created a predicate for another question with the following exchange:
JUSTICE BREYER: Is -- you probably, I'm just looking at your resume here, have experience in this patent area. Is that true?
CHU: Yes.
It was more than a bit of an understatement to say that Morgan Chu "probably" has experience in the patent area.
