NantKwest, Inc. v. Lee

By Samantha Leiner

DISCUSSION ON STATUS OF CASE:  The only brief that has been filed in the Fed. Cir. regarding the appeal of the order on the Motion for Expenses by the Eastern District of Virginia is the Brief for Appellant filed by the PTO.  We are still waiting for the reply briefs by NantKwest, Inc. The Fed. Cir. has not heard oral arguments.

ISSUE: Whether the phrase “all the expenses of the proceeding” in 35 U.S.C. § 145 includes the personnel expenses actually incurred by the PTO in defending the proceeding.

FACTS: NantKwest, Inc. is the assigned owner of a patent application filed by a Dr. Hans Klingemann in 2001.  In 2010, an examining attorney rejected the application based on a finding of obviousness in view of two prior art.   In October 2013, the PTAB affirmed the rejection by the examining attorney.

In December 2013, NantKwest filed its complaint in the Eastern District of Virginia under § 145, seeking review of the PRAB decision.  The PTO informed NantKwest that it would be seeking personnel expenses as part of the “all expenses of the proceeding” stated in the statute that a plaintiff must pay.  During the course of the trial, both sides retained experts and filed multiple motions.  In early September 2015, the Court granted summary judgment in favor of the PTO, finding the claims in NantKwest’s patent application were obvious in light of prior art.   The court found the two prior art referenced by the PTO “disclose[d] all the elements of the claimed invention … [and] that it is clear that a person of skill in the art in 1997 would have had a reasonable expectation of success and a motivation to combine the [two] prior art references.” The court found judgment in favor of the PTO, and NantKwest filed a notice of appeal.  The appeal is still currently pending before the Federal Circuit.

Following the entry of the judgement, the PTO filed a motion for reimbursement of expenses of the proceeding, under § 145, including $78,592.50 of personnel expenses calculated as the pro rata share of the salaries of the two attorneys and one paralegal who worked on the case.  In addition to the personnel expenses, the PTO requested reimbursement of the expenses incurred with the retaining of an expert witness to assist in defending the PTO rejection to the district court.

BACKGROUND ON STATUTE:

When a patent applicant is disappointed in the outcome (rejection of their patent), they may appeal through judicial review in two ways.  First, they can appeal to the Fed. Cir. directly under 35 U.S.C. § 141. Alternatively, the patent applicant can appeal to the district as a civil action under § 145.

The advantages to electing to proceed under § 145 are that “the district court is not constrained by the administrative record before the agency, so the applicant may introduce new evidence and obtain a de novo judicial determination of the significance of that evidence.” However, the disadvantages to filing a proceeding under § 145 is that it is stipulated in § 145 that, win or lose, “[a]ll the expenses of the proceedings shall be paid by the applicant.”  § 145.

The expense-reimbursement provision of § 145 has been a part of patent law since the original Patent Act of 1836.  In the 1836 Act, Congress created the right to commence court proceedings in the district court as a review of the PTO.  Congress further amended the act to require the plaintiff to pay “the whole of the expenses of the proceedings.”  Act of Mar. 3, 1839 (1839 Amendments), ch. 88, § 10, 5 Stat. 353, 354.  In 1870, Congress revised the act to allow all disappointed patent applicants to utilize § 145 proceedings.

Congress further incorporated the “all the expenses of the proceeding” language in the Lanham Act.  The Fourth Circuit debated the provision in Shammas v. Focarino, where the Fourth Cir. found the expense-reimbursement provision of the Lanham Act did not violate the American Rule, which is that each party is responsible for his or her own attorneys’ fees, whether they win or lose, unless a statute or contract provides otherwise.

HOLDING OF DISTRICT COURT: The Eastern District of Virginia both granted in part and denied in part the PTO’s Motion for Expenses.  The Court granted the motion as far as the motion relates to the expenses the PTO incurred for expert witnesses.  However, the Court denied the motion regarding the PTO’s attorney’s fees, or personnel expenses.

ANALYSIS BY DISTRICT COURT:

The district court’s main reasoning for denying the PTO’s motion regarding personnel expenses is because it would violate the American Rule, which is that each party is responsible for his or her own attorneys’ fees, whether they win or lose, unless a statute or contract provides otherwise.   The court cites a Supreme Court case in which the Court found “departures from the American Rule are authorized only when here is a ‘specific and explicit provision[] for the allowance of attorneys’ fees under [the] selected statute[].’” NanKwest, Inc. v. Lee, 2016 U.S. Dist. LEXIS 14598, at *4 (E.D. Vir. 2016) (citing Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2010)).  The District Court seems to rely on the interpretation of “specific and explicit” to mean a statute allowing for attorneys’ fees/personnel expenses to be paid must state something more specific than “expenses,” such as “fees” or even “attorney’s fees.”

The Court states § 145 does not specifically or explicitly provide for attorneys’ fees or personnel expenses.  The Court states the PTO has the burden of showing § 145’s use of the term “expenses” specifically means attorneys’ fees. The court finds the PTO cannot prove “expenses” means attorneys’ fees because “in § 145’s entire two-hundred-year existence, it has never been interpreted as including attorneys’ fees in ‘expenses.’” NanKwest, Inc., 2016 U.S. Dist. LEXIS 14598, at *5.  The court determined when Congress used the phrase “all of the expenses,” it merely meant to “point[] to a collection of the expenses used, commonly understood to encompass as printing, travel, and reasonable expert witness expenses.” Id.

The Court then emphasized the statue does not need to include the phrase “attorneys’ fees” in order to be able to depart from the American Rule, like in Baker Botts.  In Baker Botts, the Supreme Court concluded that the wording “reasonable compensation for actual, necessary services rendered” clearly authorized the award of attorneys’ fees. Baker Botts, 135 S. Ct. 2158.

The PTO then argued § 145 states just as clearly as the statute in Baker Botts that attorneys’ fees are included. However, the Court rejected that argument by stating the PTO “mischaracterized Baker Botts in two ways.” NanKwest, Inc., 2016 U.S. Dist. LEXIS 14598, at *7.  First, the PTO’s argument is that “the Court, after agreeing the statute at issue allowed attorney’s fees, rejected an attorneys’ request to apply the statute to fees the attorney had personally accumulated while defending himself during fee litigation.” The Court rejected this argument because “the Supreme Court’s refusal to deviate from the American Rule in the single instance involving an attorney’s fee-defense litigation was based solely on the fact the litigation the attorney sought expenses for, was not classic example of adversarial litigation, where ‘one side’ is against ‘the other.’” The present case, the Court argues, is a “classic adversarial litigation,” and just because NantKwest brings the suit under § 145, which requires it to pay for all expenses, does not mean the suit is not adversarial.  The Court went further to even find that because the type of suits in question are “naturally adversarial,” the requirement of the plaintiff to pay all expenses is meant to deter litigation, not just to compensate the PTO.

Second, the PTO alleges the Supreme Court in Baker Botts allowed for the broad term “reasonable compensation” to allow the statute to deviate from the American Rule, therefore, the broad terms in § 145 should allow the statute to deviate from the American Rule.  The Court points out that when Congress intends for a statute to deviate from the American Rule, it has done so explicitly.  The Court further distinguishes § 145 from the statute in Baker Botts because the statute in Baker Botts did not simply state “reasonable compensation” but “reasonable compensation for actual, necessary services rendered.”  Baker Botts, 135 S. Ct. 2158.  The Court then provides many examples of what deviates from the American Rule.  See 11 U.S.C. § 363(n) (authorizing recovery of “any costs, attorneys’ fees, or expenses incurred”); 12 U.S.C. § 1464(d)(1)(B)(vii) (at the court’s discretion, obligating federal savings associations to pay “reasonable expenses and attorneys’ fees” in enforcement actions); 26 U.S.C. § 6673(a)(2)(A) (requiring lawyers who cause excessive costs to pay “excess costs, expenses, and attorneys’ fees”); 31 U.S.C. § 3730(d)(4) (authorizing, in false claims suit, “reasonable attorneys’ fees and expenses” to prevailing defendant); 12 U.S.C. § 5009(a)(1)(B) (holding party at fault liable for “interest and expenses (including costs and reasonable attorney’s fees and other expenses of representation)”); Fed. R. Civ. P. 37(a)(5)(A) (requiring party at fault to pay “reasonable expenses … including attorney’s fees”); Equal Access to Justice Act, 28 U.S.C. § 2412 (Section (a)(l) the act states “a judgment for costs … but not including the fees and expenses of attorneys;” section (b) notes “a court may award reasonable fees and expenses of attorneys;” subsection (2) it outlines the payment of “fees and expenses of attorneys;” and in section (d)(l)(A) it states “a court shall award … fees and other expenses, in addition to costs.“).

Lastly, the Court concluded the Fourth Circuit’s determination in the trademark case, Shammas v. Focarino, that the American Rule only applies when the prevailing party seeks fees is erroneous. See Shammas v. Focarino, 784 F.3d 219, 223 (4th Cir. 2015).  The Fourth Circuit concluded “the American Rule applies only in the context of a prevailing party seeking fees from a losing party.” NanKwest, Inc., 2016 U.S. Dist. LEXIS 14598, at *12 (citing Shammas, 784 F.3d at 223 (concluding, “[t]hus a statute that mandates the payment of attorneys’ fees without regard to ta party’s success is not a fee-shifting statute that operates against the backdrop of the American Rule.”). The Fourth Circuit then decided that, “in the context of § 145, ‘[b]ecause the PTO is entitled to recover its expenses even when it completely fail, [§ 145] need not be interpreted against the backdrop of the American Rule.Shammas, 784 F.3d at 223.   The District Court found it was important to note the Baker Botts decision came out after the Shammas decision.

Further, the Court further noted the Shammas court cited to another Supreme Court case, Ruckelshaus v. Sierra Club, which only stated “the consistent rule is that complete failure will not justify shifting fees,” and decided nothing on whether the American Rule only applies to prevailing parties.  463 U.S. 680, 684 (1983).  Because Ruckelshaus did not talk about the American Rule, the District Court held it had no grasp on 15 U.S.C. § 1071(b)(3) of the Lanham Act, therefore no hold on determining § 145.    The Court then pointed out that neither the Shammas court nor the PTO had pointed out a Supreme Court case determining the American Rule only applies to prevailing parties.

Finally, the Court notes the Shammas court stated “even it has erroneously concluded that the term ‘expenses’ in § 145 deviates from the American Rule, its conclusion is nonetheless supported because it is clear from ‘ordinary parlance’ that ‘expenses’ is ‘sufficiently broad to include attorneys’ fees.’” NanKwest, Inc., 2016 U.S. Dist. LEXIS 14598, at *14.  However, the Court rejects this notion because it would then be misinterpreting the standard set by the Supreme Court in Baker Botts.  Because Congress must “speak” will “heightened clarity” to overcome the presumption of the American Rule, as stated by the Shammas court, § 145 is overly broad and does not depart from the American Rule.

ARGUMENTS OF PTO ON APPEAL:

The first part of the PTO’s argument on appeal is that personnel expenses incurred by the PTO during litigation brought under § 145 are “expenses of the proceeding” under § 145.  The PTO brings forth three reasons for this argument.  First, the PTO argue personnel expenses are “expenses of the proceeding” under § 145 because the plain language of the statute supports that finding.  The PTO states because, when interpreting a statute, the court must first consider the plain language of the statute, the Fed. Cir. should look at the plain meaning of the word “expense.”  According to the PTO, and Black’s Law Dictionary, an “expense” is an “expenditure of money, time, labor or resources to accomplish a result.” Black’s Law Dictionary 698 (10th ed. 2014).  The PTO further argues the Supreme Court has further defined “expenses” to include attorneys’ fees.  Taniguchi v. Kan Pac. Saipan, Ltd., 132 S. Ct .1997, 2006 (2012).  The PTO further argues the Fourth Circuit in Shammas, the only circuit to decide on the issue of whether expenses include attorney’s fees, stated that Congress was clear when it said “all expenses of a proceeding.”

Second, the PTO argues Congress intended to shift any, including attorneys’ fees and personnel expenses, to the plaintiff of a case brought under § 145 because Congress did not want the taxpayers or other PTO users to bear the expense of optional district court proceedings.  To support this view, the PTO cites to a Fed. Cir. case, Hyatt v. Kappos, which concluded Congress intended plaintiffs who brought the optional district court proceedings to bear the “heavy economic burden of paying ‘[a]ll the expenses of the proceedings’ regardless of the outcome.”  Hyatt v. Kappos, 625 F.3d 1320, 1337 (Fed. Cir. 2010).  The PTO focused on the fact that because proceedings under § 145 are optional, Congress did not want to place the burden on the PTO to bear.  The PTO further points out that because the PTO is now a user-funded agency, an implementation at Congress’ direction, Congress meant for the burden of the costs to be put on the plaintiff of a proceeding, not the PTO.  The PTO argues this “expense-reimbursement requirement” also deters gamesmanship by plaintiffs who might withhold evidence during PTO proceedings and present that evidence to the district court during the proceedings.

Third, the PTO argues § 145 has been a valid statute since it was enacted in 1836.  The PTO argues that because the statute has been around for almost 200 years, it further supports the notion that “expenses” includes personnel expenses and attorneys’ fees.  In the original Patent Act of 1836, Congress did define “expense” to include “the salaries of the officers and clerks herein provided for.”  1836 Act, § 9, 5 Stat. at 121.  Therefore, the PTO argues, Congress did intend on including personnel expenses in § 145.

The second part of the PTO’s argument on appeal is that the District Court erroneously analyzed § 145 as it pertains to the American Rule.  As summarizes above, the District Court determined the phrase “all the expenses of the proceeding” excludes personnel expenses and attorneys’ fees.   The PTO presents two reasons as to why this argument should prevail.  First, the PTO argues § 145 does not even implicate the American Rule at all.   The PTO points out that most statutes that deal with the American Rule only implicate the prevailing party, but here it does not matter if the plaintiff is the prevailing party or not under a § 145 ruling, the plaintiff still has to pay all expenses.  The PTO presents the same arguments presented above about the Shammas case and how § 145 does not constitute fee-shifting under the American Rule.  Throughout this argument, the PTO emphasizes that nothing in Baker Botts “suggests” or shows the American Rule would govern the interpretation of a statute like § 145, where it doesn’t matter if the PTO win or lose.  The PTO analogizes the proceedings under § 145 as an extension of the ex parte patent application process, therefore making the proceeding under § 145 a non-adversarial litigation. The PTO further argues this “expense-reimbursement provision” of § 145 is strikingly similar and essentially the same as the application fees to defray the PTO’s examination expenses.  The PTO analogizes the application fees to the expense reimbursement provision by stating the application fees are paid whether or not the application is successful.   The PTO also points out that the application fees, like the “expense reimbursement provision” of § 145, is meant to cover the costs of the examining attorney.  The PTO cited to a recent Supreme Court case, Sebelius v. Cloer, to show that the payment of attorneys’ fees regardless of the litigant’s success does not necessarily implicate the American Rule.

Second, the PTO argues if § 145 does implicate the American Rule, the plain language of § 145 exempts the statute from the traditional American Rule.  During this argument, the PTO recites its argument that the plain language in § 145 shows that “expenses” clearly means attorneys’ fee/personnel expenses, therefore departing the statute from the traditional American Rule.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s