NantKwest: Attorney Fee case Moving Toward Decision

by Dennis Crouch

In NantKwest v. Matal, the Federal Circuit will sit en banc to decide whether the cost-shifting provision found in 35 U.S.C. § 145 permits the USPTO to recover its attorney fees. I explained the setup in a prior post:

After being finally rejected by both the examiner and the PTAB, a patent applicant can then take its case to court. The Statute provides two options – either (1) a direct appeal to the Federal Circuit or (2) filing a civil action in district court to pursue a trial on the merits under 35 U.S.C. § 145.

An oddity of Section 145 civil action is the last line which states: “All the expenses of the proceedings shall be paid by the applicant.” In 2010, the en banc Federal Circuit ruled that the statute means what it says – expenses are to be paid by the applicant “regardless of the outcome.” Hyatt v. Kappos, 625 F.3d 1320 (Fed. Cir. 2010) (en banc). In NantKwest, the split panel ruled that the “expenses” include attorney fees.

In a sua sponte order, the Federal Circuit then ordered en banc review of the fee shifting rule – particularly whether the statutory “expenses” include attorney fees (especially in-house salaried attorney fees). Briefs have now been filed in the case and oral arguments are set for March 8, 2018 in the Federal Circuit’s Washington D.C. Courthouse at 717 Madison Place.

[Briefs Filed (Big PDF): 16-1794_Documents]

The US Government (USPTO) brief makes the basic argument that Congress intended for patent applicants to bear the expense of the optional district court proceedings, and attorney fees are a major component of that expense. The Gov’t further explains that the Federal Circuit majority approach has also been approved by the 4th Circuit with regard to the parallel Lanham Act provision. Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015). Although not express, the Gov’t approach suggests that “all expenses” need not even be limited to reasonable expenses.

In response, Nantkwest relies heavily on history – noting that prior to this case, “neither the PTO, nor Congress, nor the courts have ever interpreted § 145 to authorize any attorneys’ fees.” That history along with the presumption against fee shifting and the limited language of the statute should collectively prevent a fee award here.

  • Amicus from Federal Circuit Bar Association: The FCBA argues in support of NantKwest that expenses as used in the statute should not include attorney fees. Their prime example is that §145 does not say “attorney fees” while a parallel provision for infringement litigation, §285 does expressly say “attorney fees.” The longstanding practice of the USPTO has been to not ask for attorney fees – that approach should add considerable weight to whether the PTO’s interpretation is correct.
  • Amicus from AIPLA: “No reading of ‘all expenses of the proceedings’ can mean reimbursement of staff salaries.”
  • Amicus from IPO: “Attorneys’ fees are not expenses ‘of the proceeding'” as required by the statute.
  • Amicus from INTA: The American rule creates a strong presumption against attorney fee awards.

One of the basic debates here is how the general presumption against awarding attorney fees in US Courts should be applied.  The Government Lawyers makes the odd technical argument that the “American Rule” is a presumption is against awarding attorney fees to the prevailing party. Here, they argue, the presumption is not implicated since the statute awards fees win-or-lose.  That particular argument is wrong on many levels, but it does have the majority on its side as well as the 4th Circuit panel.

= = = = =

Patenting is a Pay for Service Process: In thinking through the case, one starting point is a recognition that the patent is a pay-for-service process.  Applicants pay for filing, for PTO searches, for PTO Examination, for Appeals, for Issuance, etc. Although it makes sense to spend some taxpayer money on encouraging scientific research and innovation, the pay-for-service model is much easier politically.  In that setup, it also seems reasonable that there would be a fee for filing and pursuing a civil action. With most fees today, the PTO is setting fees to reflect some average cost of providing service (with some additional policy preferences embedded into pricing).  However, the difficulty for the PTO here is that the mechanism for collecting fees under Section 145 looks just like fee shifting – which the courts historically disfavor.

18 thoughts on “NantKwest: Attorney Fee case Moving Toward Decision

  1. 5

    The point that anon makes at January 26, 2018 at 10:18 am is important. Since the early 19th century American courts and US law have separated out attorney’s fees from all other expenses and treated them differently even though a accountant would consider an attorney’s fees to constitute expenses except in one relevant case.

    There is nothing particularly wrong for attorneys and for accountants to use different definitions of the same term. It happens all the time that specialists in different fields have different epistemic jargons which share terms but with different meanings. Just ask a plumber and a farmer what a pig is.

    Maybe Judge Ellis, the fourth circuit, and the majority of the CAFC Nantkwest panel are correct that we should throw out the legal distinction between attorney’s fees and expenses and just use the accountant’s definition as we ignore all the precedents and statutes that uphold said legal distinction.

    Guess what! An accountant applying Generally Accepted Accounting Principles (GAAP) would call a USPTO lawyer’s salary direct labor cost and not an expense because the USPTO provides a legal service. For some businesses it may make sense to treat the salary of an in-house lawyer as an expense (subaccount legal) but not in the case of the USPTO. One might separate out the legal expense subaccount for the purposes of cost planning because, for example, legal expenses of a bakery may be rather less predictable than the legal expenses of the USPTO.

    Thus even if we throw out over one hundred years of precedents and statutes and apply GAAP, we still should not consider USPTO attorney salaries as expenses under 35 U.S. Code § 145.

    So why is the USPTO trying to rewrite US law?

    We must take a revisionist Critical Legal Studies (CLS) approach to understand this aberration. CLS presumes that “laws are used to maintain the status quo of society’s power structures.”

    The revisionist CLS scholar argues that when an administrative agency becomes corrupt, it uses laws to maintain and to further the corrupt power structures.

    Between SAWS and results of post-grant review proceedings, there is increasing evidence of USPTO ultra viresexertion of power in ways that have at least violated the APA but perhaps more seriously have led to statutory criminal violations.

    There is evidence of connection between USPTO senior staff and at least one Wall Street investment firm — a prima facie violation of the STOCK Act that the FBI and the SEC should be investigating.

    Under revised CLS theory a corrupt administrative agency like the USPTO will attempt to escape supervisory authority of the judiciary. Thus we will find (as we have found) increasing use by the PTAB of 112 (b) to invalidate issued patents because under Chevron Deference the CAFC defers to the USPTO in the case of 112 (b) invalidation.

    So how does alleged USPTO corruption relate to 35 U.S. Code § 145 proceedings? Not only does the USPTO claim to have eliminated SAWS, but a patent owner subject to a corrupt PTAB invalidation of a patent has no recourse to a 35 U.S. Code § 145 proceeding.

    Suppose that before the issuance of the original application the patent owner made a continuation application to claim aspects of an invention disclosed but not claimed in the original application. Maybe the continuation is still being prosecuted when the issued patent is invalidated in a corrupt PTAB proceeding, in which the petitioner (or someone connected to the petitioner) has paid off a corrupt USPTO official to guarantee a PTAB invalidation. The corrupt USPTO official could try to prevent the continuation from issuing, but the patent owner/applicant would have recourse to a hybrid de novo 35 U.S. Code § 145 action to obtain a patent. If a patent issues from the District Court, separation of powers might prevent it from being invalidated by the PTAB in a post-grant review proceeding. Upon issuance of the continuation, the patent owner/applicant might be able to bring a complaint for infringement against the petitioner, who thought he had paid off corrupt USPTO officials. The petitioner would understandably be quite pissed off, and such anger could have serious consequences.

    Obviously a corrupt USPTO official must work as hard as possible to eliminate the 35 U.S. Code § 145 proceeding from patent law, and if he fails to eliminate it, he must create insurmountable barriers (like unreasonable expenses) to recourse by the patent owner to such a legal action.

    BTW, I have to mention that from the POV of an accountant, the USPTO is not self-funding because USPTO employees receive US government employee pensions.

    1. 5.1

      because the USPTO provides a legal service

      Not accurate for the government attorneys at issue here.

      This goes to the “pay for serevive” views reflected in the article and notably that the attorneys at point are not “providing a service” to a paying client; rather; the point at hand is this is NOT what one would consider a service being rendered that would be paid according to that tax treatment. As such, I do not see this as escaping a GAAP expense treatment (also leaning that way is the fact that this action is not a typical one that applicants would ‘account for’ in the primary nature of patent examination).

      1. 5.1.1

        I thought about this point, and anon scores for bringing it up.

        When I wrote my comment, I took a look at the USPTO web page for the Office of the Solicitor.

        Here is the first bullet.

        Defends decisions by the Patent Trial and Appeal Board (PTAB) and the Trademark Trial and Appeal Board (TTAB) before the United States Court of Appeals for the Federal Circuit and the federal district courts

        Because I could not map this work, which seems primary for the Office of the Solicitor, to anything that, for example, the general counsel for GM might do, I think that I qua government accountant must consider the salaries for the staff of the Office of Solicitor to be direct labor costs.

        Now I suppose I could create subaccounts and assign the biggest part of the charges of the Office of the Solicitor to a direct labor cost subaccount and a small part of the charges of the Office of the Solicitor to an expenses subaccount. Such assignment seems like a substantive matter to me, and as a government accountant, I would need to follow a regulation with respect to the USPTO subaccounts. (Otherwise someone might accuse me a hiding charges.)

        Currently there is no regulation, and I would not have the authority to assign subaccounts. Because it would be a substantive regulation, the USPTO does not have the authority to assign subaccounts. Until some entity with substantive regulatory authority assigns the subaccounts and defines their use, I have no choice qua government accountant but to categorize the charges of the Office of the Solicitor in direct labor cost under GAAP definitions.

        IANAL, and this situation might just be a case of bad writing of statute, but I don’t see any easy way to resolve the situation. I looked at the historical statutes. They bring us back to the legal definition of attorney’s fees, for the statutes refer to clerking for the commissioner separately from expenses.

        Outside of law, no one uses clerk in this sense (e.g., to clerk for a judge). As far as I can tell OPLA, the examiner staff which seems comparable to a staff of magistrates, and the staff of the Office of the Solicitor are all clerking for the Commissioner/Director.

    2. 5.2

      Joachim Martillo. Interesting. I had thought of this as just another way to try to limit patents.

  2. 4

    35 U.S.C. 145 Civil action to obtain patent

    I never did have much time to look at Oil States, but really the best argument for why IPRs are unconstitutional is that there is the option for a civil action in the obtaining a patent. And, yet, there is no civil action option in the losing of the patent.

    That is probably the biggest reason to dump IPRs.

  3. 3

    Well considering the a patent is a “right” should the applicant meet the statutory requirements – and “suing out your patent right” is axiomatic to the ‘rights’ model of our Government and Patent system and as old as the Republic, it’s hard to contemplate that suing to vindicate a ‘right’ against the Government, could ever be a loser pay, or pay all Government legal fee system. Indeed, if this were the case, the Government could erect a ‘pay my fee’ structure for any right that needed to be vindicated in a suit against the Government. Equal Protection Clause? Were there not Jim Crow laws that attempted the same punitive – make it expensive to sue out your right – invalidated under Equal Protection?

    1. 3.1

      Both here and below you have raised good points as to how the judicial branch has failed to properly execute the powers that they do have.

      But the point remains: “One must ask the right questions.”

      The question is NOT “is the government performing under the law as written?”.

      In this instance, the law as written DOES permit a “must pay the government regardless of win or lose.” And let me add that – as written – there is not even a “reasonableness” check on what must be paid. To the letter of the law then, the government COULD throw as many attorneys as they wish, and “bill” as many hours as possible, and ALL of that would need to be footed by the rights holder seeking her (or his) redress.

      The path forward for the courts is to enforce the law as written, or find some PROPER basis to throw the law out. Their role here (in a strictly NON-common law situation) does not include evolving the law, rewriting that law to be a better law, but one that Congress did not write.

      The concept of checks and balances is supposed to be a check on poorly written laws. That check is to make Congress do a better job. When that check is not used, Congress does not learn its lesson and continues to write poor laws (with no consequence).

      1. 3.1.1

        You can always exercise your right to vote. Or you can do what you like to do and just throw your vote away “in protest”. Very serious!


          I can vote – and I do more than just vote. I actively engage my representatives and share my informed views.

          I also vote with meaning – especially if given the choice between Donkey C R P and Elephant C R P.

          And how did your vote go? Did you enjoy the Donkey C R P sandwich?

  4. 2

    The “relying on history” argument reminds me of the Solo cup incident (the False Marking notion corrected (in part) by the AIA) and that a correct reading of the actual words of the statute trumps whatever “history” of incorrect readings may have preceded the correct reading.

  5. 1

    There are countries – notably England – where there’s a “loser pays” model in litigation. But nowhere is a there a “winner pays loser’s expenses” model.

    The view that the PTO should be paid even when it loses is absurd, and therefore the statute can’t properly be interpreted as requiring or even allowing that. As it is, applicants are forced to spend money they shouldn’t because of poor examination and abuse of the system by a significant min0rity of examiners. If anything, when the PTO loses in a 145 action, it is the PTO that should be required to pay the applicant’s expenses, because if the people at the PTO hadn’t been so dense, the 145 action wouldn’t have been required in the first place.

    With some good statistical analysis, the PTO can determine the levels at which its other fees should be set in order to cover the salaries of the in-house solicitors who deal with the occasional 145 action. And it’s not like the PTO is running a deficit – it’s collections continue to outstrip its expenditures.

    1. 1.2

      is absurd, and therefore the statute can’t properly be interpreted

      That is a logical fallacy.

      Just look at the AIA and see that statutes can indeed be written in an excessively poor manner.

      Absurdities can in fact abound and be part of the law. The answer is NOT to have the judicial branch rewrite that law (especially when it concerns statutory law that is – Constitutionally – delegated to a specific single branch to write.

      The Judicial Branch has but two options: enforce the law or strike down the law (if possible, that is, if the law violates some other Constitutional protection).

      Other areas of law fully welcome the type of law making known as common law.

      Patent law is not one of those areas.

      1. 1.2.1

        Agreed, and this is the tragedy of Roberts, this creeping SCOTUS – rewrite the statute to save the statute doctrine – the challenge to the CFBP comes to mind – saving the statute by saying the unremovable head of the Agency – is actually removable by the Executive. And of course ObamaCare with the “administrative fines are really a tax.”

    2. 1.3

      I agree Atari man. I am always amazed at how callous the judiciary and government is about how much it costs people to litigate.

      The federal courts are out of the price range of all but a few people in this country.

    3. 1.4

      “If anything, when the PTO loses in a 145 action, it is the PTO that should be required to pay the applicant’s expenses, because if the people at the PTO hadn’t been so dense, the 145 action wouldn’t have been required in the first place.”

      Only in exceptional circumstances. It is entirely acceptable and reasonable that the executive branch might disagree with the legislative branch on some things, you still have to pay the gubmit to review your issue.

      1. 1.4.1

        When the USPTO argues that the other applicants subsidize the applicant that resorts to a 35 USC § 145 action to obtain a patent, the argument is

        a) at best misleading when it is made by an honest USPTO official and

        b) at best disingenuous when it is made by a dishonest USPTO official.

        It makes no difference whether USPTO in-house lawyers represent direct labor cost according to GAAP (Generally Accepted Accounting Principles) or an expense paid out from accounts payable as attorney fees are normally accounted (like all temp and consultant expenses).

        Suppose all patent applicants are paying a little toward 35 USC § 145 actions into the paychecks of USPTO in-house attorneys.

        That charge represents insurance for all patent applicants against USPTO error or misbehavior. I doubt many patent applicants have a problem with paying such insurance, which relatively speaking is quite small compared to the cost of a patent.

        Only if the USPTO is perfect and never makes error is the cost of 35 USC § 145 a subsidy.

        Obviously, Congress does not believe the USPTO is perfect and never makes an error.

        If Congress did, it would repeal 35 USC § 145.

        Of course, it is completely understandable that a corrupt USPTO official would want to punish an applicant as much as possible if he resorted to 35 USC § 145 action to obtain a patent.

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