My Take after Oral Arguments: Supreme Court Likely to Affirm in Peter v. NantKwest

by Dennis Crouch

Peter v. NantKwest (Supreme Court 2019) [TRANSCRIPT]

The Supreme Court heard oral arguments on October 7, 2019 in this case involving the question of attorney fees in Section 145 civil actions.  I’ll agree with Mark Walsh who identified this as a “a dry, procedural patent case.”  But, I really enjoyed the oral arguments — Read some of the drama below.

Before getting too dramatic: I recognize that the result of this case is basically not going to have much of any impact on patent cases. So, perhaps one benefit is that the court is unlikely to ruin the patent system with its decision here.  Depending upon the outcome, Section 145 civil actions will be seen as relatively more/less expensive for the applicant. But, they are already very expensive for an applicant to pay its own expenses. My take is that the added PTO-attorney expense will be a relatively small extension of the already high-costs assuming that the PTO continues to be fairly thrifty in its defense of these cases.  On the PTO side, the agency has to pay its attorneys from collected fees somehow.  If it doesn’t get the fees from the 145 challenger, then it will collect them from the applicant pool in general (about $1.60 per applicant) as it has done for many years.

Conventional wisdom in patent cases is reversal. The Supreme Court does not take cases to offer congratulations to the lower court. And the absence of circuit splits means that there isn’t a right vs wrong appellate court.  My read of the oral argument though goes against this conventional wisdom — I’m betting on affirmance.  The Gov’t dropped its argument that the American Rule does not apply; and so the American Rule as applied in other areas has the potential of being undermined by a Gov’t win here.

Section 145 of the Patent Act authorize a patent applicant to file a “civil action against the [PTO] Director” seeking a court order that the “applicant is entitled to receive a patent for his invention.” The final sentence of the statute reads as follows:

All the expenses of the proceedings shall be paid by the applicant.

35 U.S.C. 145.

NantKwest filed a civil action and lost. The USPTO then requested its “expenses of the proceedings” that included the relevant portion of the salary of the PTO attorneys involved in the case — effectively attorney fees.  The question before the Supreme Court is statutory interpretation — does “all the expenses” include attorney fees?

Issue: 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 Section 145 litigation.

The Federal Circuit sided with the patent applicant and that “expenses” did not encompass attorney fees.  Basically, the Federal Circuit began with a strong presumption of the American Rule of attorney fees – that each side of a litigation is responsible for its own attorney fees.  The 7-4 court found insufficient reason to think that “expenses” as used in the statute encompassed attorney fees. In dissent, Chief Judge Prost gently explained that the cost of paying for personnel is an “expense.”

At the Supreme Court, the U.S. Gov’t lawyer began the arguments — Malcolm Stewart, Deputy Solicitor General. Stewart has been at the DOJ since 1991 and has argued lots of patent cases: Helsinn; Return Mail; Oil States; i4i; Bilski; etc. Esteemed IP litigator Morgan Chu represented NantKwest. Although a leader in our field, Morgan Chu still has to compete with his older brother Steven Chu, who is a Nobel Prize winner (physics) and was US Secretary of Energy under President Obama.

The Supreme Court also has a new internal rule this term that the Justices will not ask any questions for the first two minutes. As a result, each side gets to make their ‘main argument’ in some depth.

MR. STEWART: The question presented here is whether those “expenses” include money that the PTO spends to employ lawyers and paralegals who assist with the agency’s defense of the suit.

For three principal reasons, the answer to that question is yes. First, the term “expenses” unambiguously encompasses costs — money paid to employees or other personnel to accomplish an — a particular task. And unlike the term “costs,” which has a similarly broad common meaning, this Court has not construed the term “expenses” as a legal term of art with a more limited scope.

Second, requiring patent applicants who file suit under Section 145 to pay personnel expenses of the PTO is consistent with the overall statutory scheme. 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 expenses, and it’s therefore consistent with the logic of the statute to require them to pay more.

[T]hird, it’s especially appropriate to require Section 145 plaintiffs to pay the PTO’s personnel expenses because Section 141 is available as an alternative means of obtaining judicial review. [i.e., applicants could do the cheaper thing of appealing directly to the Fed.Cir.]

As a matter of statutory interpretation, the Justices looked for some link to other statutes:

JUSTICE GINSBURG: Is there any other federal statute that provides for attorneys’ fees on the basis of the word “expenses” alone?

MR. STEWART: We’re not aware of any, unless you include the trademark analogue to this provision. . . . We’re frankly not aware of any other federal statute that uses the term “expenses” standing alone.

MR. CHU: [T]here are 3,274 federal statutory provisions that use the word “expenses” without any reference to attorneys’ 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 attorneys’ fees, save for the two exceptions, radical exceptions, it is arguing here.

JUSTICE GORSUCH: Is there anything that would inhibit the government from suggesting that other forms of overhead might also be allocated to litigants? The electric bill? The sewage bill? Other things that were required in order to be able to litigate these cases?

MR. STEWART: Well, the statute refers to expenses of the proceeding. And so we would have to show the requisite connection

CHIEF JUSTICE ROBERTS: Are you going to send the Respondent a bill for your time today?

MR. STEWART: We are not. . . . . based on the idea this is a provision that is intended to help in making the PTO a self-financing agency. It
complements the requirement that the PTO collect fees to cover its own operating expenses, not that of other agencies.

At this point, Justice Breyer points out that the USPTO has not always been fully fee-funded and so using that current status as an interpretive tool is a bit tricky.

CHIEF JUSTICE ROBERTS: Why isn’t this just like a filing fee? In other words, the applicant can take the normal appeal to the court of appeals, but if he or she wants to go through the much more elaborate proceeding of trying the case, bringing in new evidence, they have to pay a filing fee?

MR. CHU: First, this is not a filing fee. It’s a claim for attorneys’ fees against the strong backdrop of the American Rule. Second, this is not inside the Patent Office. This is adversarial litigation. This is where a private party says the government made a mistake, and I, private party, I am going to sue the government in the United States district court. And once it’s adversarial litigation, there can be no doubt that the American Rule applies with its full force and effect over the last two centuries.

A potentially important note here is that the statute has been in place for 170 years and this is the first time in living memory that the Gov’t is seeking attorney fees.

JUSTICE GORSUCH: How did the government just figure this out?

MR. STEWART: We don’t have a good explanation for why we weren’t doing it before.

JUSTICE BREYER: But did you find any area where an agency, say, has proceeded along path one for 150 years, and then suddenly changes its mind and says now we’re going to go on path two, and the court either said oh, well, that makes no difference whatsoever or the court said: No, it’s too late, now we take into account the way you have carried this out?

MR. CHU: — no case, no instance where an agency has done anything like that, even for considerably shorter periods of time.

JUSTICE ALITO:If you have a situation where there’s a statute and it’s pretty evident — and certain parties, here it would be the PTO, for some period of time do not advance an interpretation of the statute that would benefit them, and a period of time passes, should we adopt a rule that that’s strong evidence of what the statute means?

MR. CHU: I would say yes, in the following sense: The beginning part of statutory interpretation is always plain and ordinary meaning of the language on the date of enactment. There can be other factors. But the over 170 years involve scores, maybe hundreds, of senior Patent Office officials. Not a one of them thought that the plain and ordinary meaning of “expenses” in Section 145 or its predecessors included attorneys’ fees. So that should be considered by this Court.

Linking back to Chief Judge Prost’s dissent, the Gov’t sees the starting point as the natural definition of “expenses”:

 MR. STEWART: As a matter of plain language, no one would doubt that the money paid to PTO personnel in the course of the suit were part of the expenses that the PTO incurred.

The only question is whether the term expenses, like the term costs, has acquired a status as a legal term of art that has a legal meaning narrower than its common meaning. And the Court has never used the term in that way. …

JUSTICE KAVANAUGH: Just in ordinary English, though, “expenses” would encompass attorneys’ fees, wouldn’t it? That’s Mr. Stewart’s point to the contrary.

MR. CHU: It might or might not….

MR. CHU: The Bouvier Legal Dictionary (1839) define “expensae litis,” which literally means expenses of litigation. And it actually defined those expenses to be the costs that could be awarded to the prevailing party

To the same effect are two other legal definitions from legal dictionaries, both before and after 1839. And, in fact, one of those was the first Black’s Law Dictionary, which was in 1891.

[T]oday. The meaning of “costs” has taken on a term of art in federal litigation. And there are certain things that are considered to be costs and other things not to be costs, but, overall, I think any litigator today in federal court would say the word “expenses” floating by itself alone is probably a broader term than “costs.” . . .

JUSTICE GINSBURG: Is there any language short of saying explicitly “attorneys’ fees” that would overcome the American Rule?

MR. CHU: The answer to the question is no, that either the words attorneys’ fees, counsel fees, reasonable compensation for services of a lawyer for a bankrupt estate, which was true in the Baker Botts case… [where] this Court made clear, that to have an exception [to the] American Rule, [the statute] must be specific and explicit.

JUSTICE KAGAN: — are you saying that “expenses of the office” is not enough to get you lawyers’ fees? Suppose it was just expenses of the Patent Office, which would presumably give you the expenses, you know, the costs of personnel.

MR. CHU: Yes, I am saying under this backdrop of the American Rule, this Court has made clear Congress needs to enact a statute that is specific and explicit.

JUSTICE KAGAN: It basically has to say lawyers?

MR. CHU: Or words to that effect, yes.

JUSTICE KAGAN: Well, what does “words to that effect mean?”

MR. CHU: Counsel, compensation for legal counsel, for advice, whatever.

JUSTICE KAVANAUGH: Fees? The word “fees” alone?

MR. CHU: I do not believe the word fees alone would cover it, because fees can refer to many, many other things, docket fees, marshal fees, filing fees, fees of other personnel, perhaps, but not attorneys’ fees. If there is an ambiguity under the American Rule, this Court has repeatedly made clear it must be “specific and explicit.”

JUSTICE GINSBURG: What expenses in your view does Section 145 impose on the person who invokes that proceeding?

MR. CHU: Travel expenses, lodging expenses, parking expenses, expenses with respect to court reporters, printing expenses, marshal fees, docket fees, court interpreters. That’s not an exhaustive list but it does not include attorneys’ fees.

JUSTICE BREYER: Experts?

MR. CHU: I do not think it should include expert witness fees, whether they are internal experts or external experts, but I want to note for the Court in this particular instance, for practical reasons, NantKwest did not challenge the government’s request for expert witness fees and they were paid.

In prior cases, the Federal Circuit has held that “all the expenses” means that applicant must pay the expenses win-or-lose, including the USPTO’s taxable costs.  Hyatt v. Kappos, 625 F.3d 1320 (Fed. Cir. 2010) (en banc).  Oral arguments included some discussion of that issue: 

MR. CHU: [T]he American Rule is a bedrock principle, and this Court has recognized and applied that rule for two centuries. [T]he 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….

JUSTICE KAVANAUGH: What sense does it make to think that Congress wanted the winning party to turn around and pay the government’s legal fees, given how unusual that is?

MR. STEWART: Since … the first iteration of the statute enacted in 1839 specifically said whether the decision is in its favor or not. And the trademark statute continues to include that language. … The Court has described a Section 145 suit as a continuation of the examination process. And there is language in the statute to that effect. It  says that the applicant shall pay all the expenses of the proceeding, rather than the plaintiff. … And so when you look to see is this unusual or not, you should compare it not just to other adversarial litigation involving the government; you should compare it to other stages of the patent application process.

JUSTICE BREYER: Okay. And in your experience, where you’re settling out of court or you’re trying to work out a system without going into court for resolving a claimant who says this is infringing my patent, or there are all kinds of people claiming it, you set up private systems, and the private systems, whether it’s arbitration, mediation, thousands of different systems, involve costs, is it fairly common, not fairly common, unheard of, or what, to say in the contract that, it’s doing this for future controversies, that you bring up the controversy, you pay the whole thing? Or maybe the opposite. What’s it like?

MR. CHU: I can think of no instance by my personal experience or through reading or otherwise where a contract would say you bring this up and you pay for the whole thing, no matter what, including attorneys’ fees. But there certainly are agreements that are silent on attorneys’ fees in recognition of the American Rule, or that expressly say attorneys’ fees may be shifted under certain circumstances, or expressly say not at all.

[I’ll note here that there are some arbitration agreements where one party agrees up front to pay for the costs of arbitration, but I have likewise never seen one where a party agrees to pay all of the attorney fees of both parties].

Justice Breyer focused some on the idea that the expense portion is an attempt to discourage the filing of Section 145 actions in favor of direct appeals to the Federal Circuit.

JUSTICE BREYER: You want a second bite, you forgot to bring in somebody or you didn’t, and then they will have to bring in people, and before you know it, you have some big expense here, experts. And, sure enough, you’re saying, no, don’t cover those. Not very discouraging, if they wanted to discourage you from using 145.

MR. CHU: I will say that in every case where a party wanted attorneys’ fees under a statute, this Court has always applied the American Rule.

JUSTICE BREYER: Yeah, I know.

7 thoughts on “My Take after Oral Arguments: Supreme Court Likely to Affirm in Peter v. NantKwest

  1. 6

    Ultimately it’s just a dry statutory interpretation question, and the government just doesn’t have a great argument that the word “expenses” also includes attorneys’ fees. I think the government would have a good argument about that “expenses” includes the costs of experts, but the applicant paid those and didn’t challenge that on appeal, so that shouldn’t be a factor in the decision here.

    I am curious why so many in the press have latched onto the argument that the USPTO has never requested attorneys’ fees for prevailing in a Section 145 action. Anyone who has represented the government regularly knows that this is a customary (and standard) practice in civil actions involving the government, even where the statute explicitly authorizes their collection and even where the case was borderline frivolous. When the government wins a civil case, they typically don’t even bother to submit a bill of costs.

    The reasons for this practice are easily understood. The federal government obviously doesn’t need the money, and asking the losing “little guy” citizen to pay the government’s fees can, to some judges, feel heavy handed or even a bit spiteful. A lot of district judges look upon a request by the government as unseemly, akin to dancing on the grave of its losing opponent, so government lawyers (whose primary currency is goodwill with district judges) often forego fee requests. A lot of government lawyers reason that it’s paramount to maintain a reputation for fairness, impartiality and professionalism with with the district judges before whom they routinely practice, so why tarnish that reputation even a bit with a nominal fee recovery that the government couldn’t care less about. The other historical reason is that most agencies don’t have any policy or practice for calculating what the “attorneys’ fees” would be, when you’re using salaried staff attorneys who would be paid the exact same amount regardless of whether they worked on this case, another case, or just sat around playing Mario Brothers.

    The government here relies on the deterrence rationale, that the expense shifting provision is necessary so district courts don’t become inundated with inventors who don’t want to pursue the normal PTAB-CAFC appellate route (and let’s be honest, many Section 145 actions are not particularly meritorious…), and instead want to pursue the far more costly district court action. It’s similar to the incentives provided in the Tax Court system; if you want to challenge an IRS tax assessment, you can challenge it in Tax Court and pay if you lose, or challenge it in district court. But to use district court, you first have to pay the assessed taxes and then file a claim for a refund, a requirement that pushes 99% of taxpayers towards using the normal Tax Court system.

    The expense shifting provision in Section 145 arguably serves a similar purpose of encouraging people not to use the district court route. But you don’t need to recover the PTO’s personnel expenses to further a deterrence purpose, as the PTO can still recover expenses like its costs, deposition fees, and even expert fees (which were paid here and not challenged, although that issue isn’t part of the appeal), which can run in the tens of thousands of dollars. That should be enough to deter the truly frivolous, baseless, and ill-conceived Section 145 actions from ever being filed.

  2. 5

    At one level, Dennis is right — this case doesn’t affect all that much. It’s not clear to me why the Supreme Court granted cert. At another level, § 145 is important, because the existence and availability of § 145 actions keeps the PTAB honest.

    We’ll see how the decision comes out, but oral argument seems to have real consequences for the PTO’s fee setting proceeding. See the comment letter from Seventy-Three Patent Practitioners, link to uspto.gov . This comment letter notes statutes and legislative history that have significant analogies to § 145 and NantKwest.

    1. 5.1

      Thanks again Dave for putting that letter together.

  3. 4

    Conventional wisdom in patent cases is reversal. The Supreme Court does not take cases to offer congratulations to the lower court. And the absence of circuit splits means that there isn’t a right vs wrong appellate court. My read of the oral argument though goes against this conventional wisdom — I’m betting on affirmance. The Gov’t dropped its argument that the American Rule does not apply; and so the American Rule as applied in other areas has the potential of being undermined by a Gov’t win here.

    I agree with just about all of this. This case varies from the mine run of FedCir cert grants in 2 ways. 1 is that the Solicitor General filed the cert petition. If the government says that the court of appeals is wrong and the case is important, I don’t think it’s a presumptive grant, but maybe something close to that. 2 is that in this case there actually is a circuit split. The Lanham Act has a nearly identical provision for trademarks, and the Fourth Circuit sided with the government’s view in the Shammas case. The cert petition highlights this at page 24, and the government’s counsel alludes to it at page 5 of the oral argument transcript. I don’t think the Supreme Court necessarily granted this with a plan to affirm the Federal Circuit and implicitly overrule the 4th, but the SG’s filing and the circuit split both make me think that the Supreme Court probably took this one without worrying that an affirmance might just be unnecessarily congratulations to the Federal Circuit.

  4. 3

    Can NantKwest recover the fees they had to pay Mr. Chu to respond to this frivolous petition?

  5. 2

    assuming that the PTO continues to be fairly thrifty in its defense of these cases.

    As they say with assumptions…

  6. 1

    Yes, let’s wait for the Supreme Court to uphold patents on correlating one fact with another and patents on “machine readable memory comprising non-obvious information” before we talk about the Court “ruining the patent system.”

    Because that might happen now that there’s a bunch of Repu k k k e / glibertarian know-nothings on the bench.

    Deal?

    Dennis the Joker. From the Show Me State!

Leave a Reply

Your email address will not be published. Required fields are marked *

You can click here to Subscribe without commenting

Add a picture