Lee v. Tam – Disparaging Mark or Free Speech? – Pending Decision

By Michael Small

 

Section 2(a) of the Lanham Trademark Act, 15 U.S.C. §1052(a) allows the United States Patent and Trademark Office (USPTO) to refuse registration of marks that contain immoral or scandalous matter.[1]  Known as the disparagement clause, the USPTO enforces the rule in the Trademark Manual of Examining Procedure (TMEP) Section 1203.01, specifying the types of rejected marks that fall under immoral or scandalous nature, such as obscene graphics or disparaging terms.[2]  Examples of rejected trademark applications include the following: Stop the Islamisation of America; Democrats Shouldn’t Breed; Naturally Intelligent God Gifted Africans; and most recently, the cancellation of the Washington Redskins NFL football team’s trademark name in 2014.  Rejected trademarks are void from government benefits, such as preventing registration from other confusingly similar marks during the application process, receiving sole ownership of the mark for advertising purposes, and prevent foreign companies with similar marks to import their trademarked goods.  In the pending U.S. Supreme Court case Lee v. Tam, the justices will make a decision that determines whether Section 2(a) of the Trademark Act violates the First Amendment.[3]  If the justices confirm that Section 2(a) violates the First Amendment, it would mark one of the most significant changes to the Lanham Act since the amendment of the Trademark Counterfeiting Act of 1984.[4]

Background

Before the case began, Tam created an all-Asian American band in 2006, named “The Slants.”  According to Tam, the name addressed issues with racism that Asian Americans face and share the band members’ experiences with the term, ultimately reclaiming the word for Asians.[5] Tam attempted to register the band name with the USPTO in 2011; however, an USPTO examiner rejected the application, arguing that the name is derogatory of Asians and those of Asian descent, despite the band’s intent.  Tam appealed to the USPTO’s Trademark Trial and Appeal Board, but the Board affirmed the examiner’s position.  Tam filed an appeal to the United States Court of Appeals for the Federal Circuit, arguing that the USPTO’s rejection of his mark is unconstitutional in accordance to the First Amendment.  Although the Federal Court initially affirmed the USPTO’s decision, Tam filed a petition for a rehearing en banc.  The en banc panel found that the government erred in treating the case with strict scrutiny because the government did not take into consideration Tam’s accusation of First Amendment violation.  The en banc panel reversed the USPTO’s rejection of the trademark, arguing that the USPTO examiner’s rejection under Section 2(a) despite the band’s ideology is viewpoint discrimination and therefore violates the First Amendment.  The panel further clarifies that the First Amendment protects even hurtful speech.  The director of the USPTO, Lee, filed a writ of certiorari to the Supreme Court.  The Supreme Court accepted the writ and heard oral arguments of the case in January 2017.  A final decision from the Supreme Court is pending.

 

Analysis

The Supreme Court’s decision on this case will have a huge impact on U.S. Trademark Law should the Court rule in favor of Tam.  If the Court agrees that Section 2(a) of the Trademark Act is unconstitutional, it would mean the readjustment of the Lanham Act to accommodate trademark registration that contained restrictions on immoral or scandalous materials.  Trademark registrants would have to depend on other regulations to take down purposeful slanders of their marks, such as dilution or likelihood of confusion.  Consumers would also be at risk of exposure to trademarks that may offend them, which could discourage their investment into U.S. markets.  For instance, consumers and entrepreneurs of black descent in the U.S. would not be open to purchasing goods whose mark consists of material that may offend them, such as marks that refer to hate groups or openly mocks their descendent.  The approval of Tam’s mark, despite the owner’s intent, may bring about a challenge as to how the consumers will react to future disparaging marks.

There is a previous Supreme Court case that dealt with a similar situation as Lee v. Tam.  In 2015, the Court reviewed Walker v. Texas Division, Sons of Confederate Veterans, Inc., in which the state of Texas rejected the Sons of Confederate Veteran’s confederate flag design for license plates.  The Board’s reasoning for this rejection centered around the public’s view, who may find the confederate flag offensive due to its association with organizations that express hatred directed towards specific people and/or groups.[6]  In this case, the Supreme Court ruled that license plates are government speech because of their maintenance and distribution by the state of Texas.  Therefore, license plates are exempt from the First Amendment defense, even from the expression of private individuals.  As the USPTO also mandates the marks that will receive protection, it is likely that the Supreme Court could also decree trademarks government speech and rule in favor of Lee.  However, the ruling in Walker had a 5-4 decision amongst the justices, making the ruling a narrow victory for government speech.  It is evident that there is a divide between justices in determining the eligibility of protection under government speech or the First Amendment.

Conclusion

Based on evidence from previous Supreme Court decisions and the treatment of government speech and the First Amendment, one can conclude that the court’s ruling on this case will have an impact on how the legal system views trademark law.  If Tam acquires the court’s favor and receives registration of his mark, it would open the opportunity for other groups to register marks for similar purposes as Tam.  However, the intent to use said marks will vary for each group, bringing about a concern of whether future registered marks will be used in good or bad faith.  If the court rules in favor of Lee, then trademarks could be identified as government speech.  Therefore, it may be recommended for future owners of rejected trademarks not to rely exclusively on the First Amendment to defend their trademark.  Debate might also arise as to whether other aspects of government-protected intellectual property rights are government speech, such as trade dress or patents.  This would bring about confusion in IP law as to whether the acquisition of government protection is enough to warrant government speech.  One can hope that regardless of the Supreme Court’s decision, the outcome will further clarify what terms are eligible for protection under the First Amendment or government speech for trademark registration.

 

[1] See 15 U.S.C. §1052(a)

[2] E.g. Greyhound Corp. v. Both Worlds Inc., 6 U.S.P.Q.2d 1635, 1639 (T.T.A.B. 1988) (holding that a mark of a defecating dog as a logo for polo shirts and t-shirts was scandalous, and thus barring the mark from registration under Section 2(a)).

[3] Lee v. Tam, No. 15-1293, 2016 U.S. LEXIS 4462 (U.S. Sept. 29, 2016) (granting certiorari).

[4] The Trademark Counterfeiting Act of 1984 enforces a penalty for the unauthorized or intentional usage of counterfeit trademark, with the maximum sentence of five years imprisonment or a $250,000 – $1 million fine.  See 18 U.S. Code § 2320.

[5] See Katy Steinmetz, “The Slants” Suit: Asian-American Band Goes to Court Over Name,” Time, Oct. 23, 2013, http://entertainment.time.com/2013/10/23/the-slants-suit-asian-american-band-goes-to-court-over-name/ (“Prior to the term Asian becoming in vogue, the term that the Asian-American community used [to describe themselves] was “yellow.” It’s empowering when people use it and embrace it as part of their identity.”).

[6] See Walker v. Tex. Div., Sons of Confederate Veterans, Inc., 135 S. Ct. 2239 (2015).

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Star Athletica v. Varsity Brands – Supreme Court Ruling’s Impact

By Michael Small

 

In a recent Supreme Court case regarding the compatibility between clothes and copyright, Star Athletica v. Varsity Brands, the justices ruled in favor of Varsity Brands in a 6-2 decision, holding that the Defendant’s cheerleading uniform designs are protectable under copyright because they were deemed conceptually separable[1] from the uniform.  This decision answered the question brought to them by Star Athletica’s petition,[2] to which they state the following regarding the compatibility of copyright on clothes using the conceptual separability test:

A feature incorporated into the design of a useful article is eligible for copyright protection only if the feature (1) can be perceived as a two- or three-dimensional work of art separate from the useful article, and (2) would qualify as a protectable pictorial, graphic, or sculptural work—either on its own or fixed in some other tangible medium of expression—if it were imagined separately from the useful article into which it is incorporated.[3]

When placed into the context of the cheerleading uniforms, the justices noted that the surface decoration of the cheerleading uniforms are separable and when alone, allows them to appear as a pictorial, graphic, or sculptural work.  When the separated decorations are applied to any other medium, they would be considered a two-dimensional work of art.  Therefore, Varsity’s designs on their cheerleader uniform are protectable under copyright.

The initial case began in 2015 when Varsity Brands sued Star Athletica under copyright infringement of their cheerleader uniform designs, which are registered in the Copyright Office from the drawings and photographs taken of the outfits.  The district court ruled in favor of Star Athletica, agreeing with their argument that copyright could not be applied to the utilitarian nature of the uniform, regardless of how unique the patterns are on the uniform.  Varsity Brands successfully filed for appeal in the Sixth Circuit and the lower court’s decision was reversed.  The Sixth Circuit ruled in favor of Varsity Brands, holding that the design patterns are copyrightable as the photography made the designs into “pictorial, graphic, or sculptural works,”[4] which is protectable under the Copyright Act.  Star filed for a writ of certiorari in 2016, arguing that the Sixth Circuit’s decision “allows roundabout copyrighting of garment designs masquerading as separable decorative features, preventing competition and inviting new copyright claims for all manner of garments … based solely on the arrangement of stripes and color blocks.”[5]  Ultimately Star Athletica’s argument aimed to dismiss Varsity Brand’s copyright hold on their outfits.  The writ was approved and the case ascended to the U.S. Supreme Court.  The final decision was made in March 2017, in which the U.S. Supreme Court ruled in favor of Varsity Brands, thus concluding the issue.

Prior to the U.S. Supreme Court’s ruling, clothing design is not protectable by copyright law because clothes serve a utilitarian purpose and are identified as useful articles;[6] they keep the customer warm, covered, and protected from the elements.  The functionality of clothing outweighed the creative intent of any design added to the garment, and are therefore not applicable for copyright.  This is the same reason why most clothes cannot be protected by utility patents, although design patents and trademarks may apply on a case-by-case basis (e.g., purses and shoes, large logo T-shirts).  This lack of intellectual property (IP) protection meant that new, creative designs for clothes released in businesses such as the fashion industry, are prone to receiving knockoff versions being sold afterwards, often flooding the market with multiple copies of similar, but lower quality goods.  These knockoffs enter the market after or even before the original design is ready for sale, stealing profits from the original designer.

The U.S. Supreme Court’s ruling on this case will likely have a major impact on the fashion industry.  Fashion designers have been given a tool supported by the U.S. Supreme Court that can be used to argue that the conceptual nature of a design in their product can be protected under copyright by using the conceptual separability test.  This logic can give fashion designers an incentive to clamp down on the copycat/knockoff industry that manifested in the fashion industry due to being a copyright-free environment.  This would make it more difficult for copycat/knockoff designers to make and sell products in a market where copyright is enforced, thus returning profits to the original designers.  Although there is no bill that guarantees protection of clothing design, the conceptual separability test approved by the U.S. Supreme Court could be used to help grant designers the copyright protection they want for their works.  If the design concept can be separated from the clothing design and appear as a two-dimensional work, a copyright can be applied to a clothing design.

While the ruling may provide copyright benefits for the fashion industry, not all are in support of the potential impact.  Up until this ruling, the fashion industry maintained itself somewhat efficiently without the protection required from copyright.  In fact, there are arguments that support the lack thereof for copyright, stating that such an implementation would damage innovation for designers.  Previous attempts to make fashion design copyrightable through legislative bills such as the Innovative Design Protection Act (2012) and the Design Piracy Prohibition Act (2007) have been met with opposition from independent fashion designers and businesses alike, making them fail to pass in Congress.  Some argue that it would be impossible to make an original design from scratch because designers learn and become influenced from other creations.  Therefore, copying is essential in fashion design to promote innovation and new takes on fashion under Raustiala and Sprigman’s Piracy Paradox argument.[7]  Others are more concerned that designers would focus more on the risk of copyright litigation rather than making interesting designs, reducing innovation and creativity in the fashion design industry.  In addition, legal costs for fashion designers can rise should they consult with a lawyer regarding fashion design and copyright, which could indirectly lead to a rise in prices of clothes and designs for the consumer overall.  Finally, enforcement of copyright protection may not be a viable option due to the fast-paced nature of fashion design, where the ‘next big thing’ is only from months to less than a year away, as opposed to the length and complexity of filing a copyright litigation and going to court.  With an industry that has adapted to having limited IP protection since the Copyright Act’s implementation, arguments against copyright in the fashion industry center around the problem that its incorporation could severely damage the industry’s economic and creative value now and in the future.

Despite the opposition against implementing copyright into the fashion industry, the U.S. government has shown interest in the past to make such an introduction.  It could be argued that the Star Athletica v. Varsity Brands U.S. Supreme Court ruling is a representation of this interest, giving designers a tool to use should they feel that their design is being infringed.  The effort to include fashion design for copyright protection would also strengthen the U.S.’s global market to attract foreign direct investment, as several countries in Europe have their own copyright laws for fashion design, such as France and Germany.  This is further reinforced by the presence of the European Union (EU), which grants 25 years of design copyright protection for all its 28 member states.  The protection granted by the EU makes it viable for fashion design companies concerned about copycat/knockoff designs to doing business overseas in the EU’s member states than in the U.S.  The outcome of Star Athletica v. Varsity Brands could garner interest from politicians and businesses to try and compile another bill to include fashion as copyrightable, allowing the U.S. to garner interest in some fashion designers that were wary of the previous copyright-free area of clothing design.  At the same time, however, companies that relied on the copyright free environment for designing outfits, such as certain sports teams or other artists, would have to put resources into redesigning the product so that their goods do not infringe on the original copyright.  An introduction of a bill that would enforce an immediate change without a smooth transition could have a drastic effect on the fashion design industry, for better or worse.  The impact of the Star Athletica v. Varsity Brands ruling has yet to be fully measured as the decision was just made and there are not many cases that have tested the U.S. Supreme Court’s conceptual separability test.   It is very likely that a rise of copyright litigations will occur that will test the extent of the copyright protection granted to clothes by the conceptual separability test from both individual fashion designers and businesses.  Once its protection range has been analyzed, it will become easier to analyze the aftermath of the Star Athletica v. Varsity Brands ruling.

[1] “In its statutory form, the separability inquiry asks whether the aesthetic features of a useful article can be identified separately from, and can exist independently.”  See Barton Keyes, Alive and Well: The (Still) Ongoing Debate Surrounding Conceptual Separability in American Copyright Law, Ohio State Law Journal, 69 (109), (2012), http://moritzlaw.osu.edu/students/groups/oslj/files/2012/04/69.1.keyes_.pdf.

[2] “What is the appropriate test to determine when a feature of the design of a useful article is protectable under § 101 of the Copyright Act?”  See Star Athletica, L.L.C., v. Varsity Brands, Inc., Varsity Spirit Corporation, and Varsity Spirit Fashions & Supplies, Inc., On Petition for a Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit, (2016).

[3] See Star Athletica, L.L.C. v. Varsity Brands, Inc., et al., 580 (U. S. Supreme Court, 2017), https://www.supremecourt.gov/opinions/16pdf/15-866_0971.pdf.

[4] See Varsity Brands, Inc. v. Star Athletica, LLC, 799 F.3d 468, 471 (6th Cir. 2015).

[5] See Petition for a Writ of Certiorari at 31, Star Athletica, LLC v. Varsity Brands, Inc. (Jan. 5, 2016) (No. 15-866), http://www.scotusblog.com/wp-content/uploads/2016/05/SACP.pdf.

[6] “A ‘useful article’ is an article having an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information. An article that is normally a part of a useful article is considered a ‘useful article’.”  See 17 U.S.C. § 101.

[7] The Piracy Paradox argument revolves around the idea that the nonstop changing trends of fashion in the fashion industry is made aware of by the consumer, such as not wearing what everyone else is wearing, or the constant demand for new products even after acquiring new products.  This awareness makes copying a viable option that helps drive faster innovation in design, sales, and competition more than enforcing copyright or other forms of IP protection. See Kal Raustiala and Christopher Sprigman, The Piracy Paradox: Innovation and Intellectual Property in Fashion Design., Virginia Law Review, 92, (Nov. 13 2006), p. 1687-1777.

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.

 

In re Cuozzo Speed Techs., LLC, 793 F.3d 1268 (Fed. Cir. 2015)

By Samantha Leiner

Facts:  In 2002, Giuseppe A. Cuozzo applied for a patent covering a speedometer that shows a driver when he is driving above the speed limit.  Essentially, the invention encompasses a white speedometer needle that turns red when it passes under a translucent piece of red glass (or equivalent, say red cellophane).  If you attach the piece of red material to a speedometer beginning at 65 mph, then the white needle will look red when it passes that speed.  The invention includes attaching the red glass to a rotating plate, attaching the plate to the speedometer, connecting the plate to a GPS receiver, and entering onto a chip or a disk all the speed limits on all the US roads.  Thus, the GPS receiver can signal where the car is, the chip or disk can signal the speed limit at that location, and the plate can rotate to the right number turning the white needle to red, signaling to the driver that he or she is going over the speed limit.  The PTO granted the patent in 2004.  Giuseppe assigned the patent to the current petitioner, Cuozzo Speed Technologies, LLC.

In 2012, Garmin filed a petition seeking inter partes review (IPR) of the Cuozzo Patent’s 20 claims.  Garmin alleged claim 17 was obvious in light of 3 major patents (the Aumayer patent, Patent No. 6,633,811; the Evans patent, Patent No. 3,980,041; and Wendt patent, Patent No. 2,711,153).  The Board agreed to reexamine claim 17, as well as claims 10 and 14 because, even though Garmin did not expressly challenge claims 10 and 14 on the same obviousness ground as claim 17, the Board believed “claim 17 depends on claim 14 which depends on claim 10,” and therefore, Garmin had “implicitly” challenged claims 10 and 14 on the same prior art. The Board reasoned that anyone with more than an “ordinary skill” and “ordinary creativity” – could have taken the approach in the Aumayer patent and applied it to the Evans and Wendt patents.  The Board denied Cuozzo’s proposed amendments to the claims because it believed the amendments would not cure the obviousness issue.  The Board canceled claims 10, 14, and 17.

Cuozzo appealed to the Fed. Cir. and argued the PTO improperly instituted the IPR because Garmin had not challenged claims 10 and 14 “with particularity” as the statute requires for petitions. § 312(a)(3).  Cuozzo further argued the Board improperly used the “broadest reasonable construction” standard set forth in the PTO’s regulations (37 C.F.R. § 42.100(b)), when it should have applied the standard courts normally use when judging a patent’s validity (the “ordinary meaning [of the claims] . . . as understood by a person of skill in the art”). Phillips v. AWH Corp., 415 F.3d 1303, 1314 (Fed. Cir. 2005).  A divided panel of the Fed. Cir. rejected both arguments.  First, the majority pointed out that § 314(d) made the decision to institute an IPR “nonappealable.”  Second, the majority affirmed the application of the “broadest reasonable construction” standard because the regulation is reasonable, and a lawful, exercise of the PTO’s statutorily granted rulemaking authority.

Issues:  The Court looked at two of the issues presented the Fed. Cir.: (1) Whether § 314(d) precludes a court from reviewing if the PTO wrongly decided to institute IPR, when it did so on grounds not mentioned by the third party’s request for review; and (2) Whether § 316(a)(4) authorizes the PTO to issue a regulation that states the Board, in an IPR, must use a “broadest reasonable construction” standard to determine the validity of the reviewed patent’s claims.

Holding: The Court affirmed the Fed. Cir.’s opinion that the PTO’s decision to institute IPR is nonappealable based on § 314(d), and that § 316(a)(4) authorizes the PTO to use the regulation declaring the Board must use a “broadest reasonable construction” standard when determining validity of patents in IPR.

Analysis:  The Supreme Court majority rejected Cuozzo’s argument that the PTO’s decision to institute the IPR is appealable because the PTO unlawfully reviewed claims that were not stated “with particularity.”  First, the Court rejected the above argument because the statute states “determination by the [PTO] whether to institute [IPR] under this section shall be final and nonappealable.” § 314(d).  Second, the Court rejected Cuozzo’s above argument because, even though § 312 states a petition must be plead with particularity, § 314(d)’s language “must, at the least, forbid an appeal that attacks a ‘determination . . . whether to institute’ review by raising [the] kind of legal question” if the PTO should have only heard the claims that were plead with particularity or can hear any claims that “rise and fall” with a pleaded claim.   Third, the Court rejected the above argument because holding otherwise would be contrary to congressional intent of passing § 314(d).  The Court stated Congress specifically gave the PTO power to revisit earlier patent grants.  The Court doubted Congress intended to grant the PTO this power if it thought the PTO’s final decision could be undone by a minor statutory technicality related to the decision to institute IPR.   Further, the Court determined the existence of similar provisions in this, and related patent statutes reinforces its conclusion.  See §319 (limiting appellate review to the “final written decision”); §312(c) (2006 ed.) (repealed) (the “determination” that a petition for IPR “raise[s]” a “substantial new question of patentability” is “final and non-appealable”); see also §303(c) (2012 ed.); In re Hiniker Co., 150 F. 3d 1362, 1367 (Fed. Cir. 1998).

The Court majority then looked at and rebutted Alito’s dissent, as well as the Fed. Cir. dissent.  The dissent would limit the “No Appeal” provision to interlocutory appeals, making the court free to review the decision to institute an IPR in the context of the PTO’s final decision.  Post, at 1, 5 (ALITO, J., concurring in part and dissenting in part); In re Cuozzo Speed Tech., LLC, 793 F. 3d, at 1291 (Newman, J., dissenting).  The majority rejected this interpretation of § 314(d) because the Administrative Procedure Act already limits review to final agency decisions (5 U.S.C. § 704) and the decision to institute an IPR is a “preliminary” decision, not a final one.  Additionally, the PTO’s decision to deny a petition to institute IPR is discretionary.  See § 701(a)(2); §314(a) (no mandate to institute review).  The dissent argued it’s approach is “familiar practice,” and is consistent with other areas of law.  However, the majority reasoned the kind of initial determination here – “that there is a ‘reasonable likelihood’ that the claims are unpatentable on the grounds asserted” – are similar to decisions in other contexts where the Court has held to be unreviewable.    The Court majority then argued even though there is a strong presumption in favor of judicial review, the presumption may be overcome by “‘‘clear and convincing’’ indications, drawn from ‘specific language,’ ‘specific legislative history,’ and ‘inferences of intent drawn from the statutory scheme as a whole,’ that Congress intended to bar review.” Block v. Community Nutrition Institute, 467 U. S. 340, 349–350 (1984).  The majority believes the standard from Block is met here.  The dissent disagreed and pointed to Lindahl v. Office of Personnel Management, 470 U. S. 768 (1985) to support its view that, in light of this presumption, § 314(d) should be read to permit judicial review of any issue bearing on the PTO’s preliminary decision to institute IPR.  The Supreme Court in Lindhal held that a statute that makes decisions from an agency “final,” “conclusive,” and “not subject to review,” barred a court from revisiting the factual underlay of the determinations but allowed review when the agency “substantially depart[ed] from important procedural rights.”  The majority rejected the argument saying their interpretation is in accords with Lindhal because the statute states the decision is final and nonappealable.

The Court limited its interpretation of § 314(d) so it applies “where the grounds for attacking the decision to institute [IPR] consist of questions that are closely tied to the application and interpretation of statutes related to the [PTO’s] decision to initiate [IPR].” See §314(d).  The Court emphasized it is not, and does not, “decide the precise effect of §314(d) on appeals that implicate constitutional questions, that depend on other less closely related statutes, or that present other questions of interpretation that reach, in terms of scope and impact, well beyond ‘this section.’” Cf. Johnson v. Robison, 415 U. S. 361, 367 (1974); Traynor v. Turnage, 485 U. S. 535, 544–545 (1988).

The Court majority rejected Cuozzo’s argument that the PTO lacked the “legal authority” to issue a regulation requiring the PTO, when conducting an IPR, to give a patent claim “its broadest reasonable construction in light of the specification of the patent in which it appears,” for many reasons. 37 CFR §42.100(b).  Section 316(a)(2) grants the PTO authority to issue “regulations . . . establishing and governing [IPR] under this chapter.” §316(a)(4).

First, the Court majority interpreted Congress’ grant of rulemaking authority to the PTO in light of Chevron U.S.A., Inc. v. natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  The Court in Chevron U.S.A. held when a statute is clear, the agency must follow the statute.  Id. at 842-843.  However, where a statute leaves “gaps” or is “ambiguous,” the court typically interprets it as granting the agency leeway in enacting rules and regulations that are reasonable in light of the text, nature, and purpose of the statute.  United States v. Mead Corp., 533 U.S. 218, 229 (2001); Chevron U.S.A., Inc., 467 U.S. at 843.  Here, the statue creates such a gap because the statute does not contain a rule regarding what standard the PTO must use.  Additionally, the statute even expressly grants the PTO the authority to issue rules and regulations “governing [IPR].” § 316(a)(2).  The dissent in the Fed. Cir. and Cuozzo both believed other “tools of statutory interpretation,” such as INS v. Cardoza-Fonesca, 480 U.S. 421, 432, and n. 12 (1987), lead to a conclusion Congress did not intend to impart rulemaking authority to the PTO.  The Court majority held § 2(b)(2)(A) does not contain the Circuit’s claimed limitation to proceedings, nor is its language the same at § 316(a)(2).  Section 2(b)(2)(A) grants the PTO the authority to issue regulations, “which . . . shall govern . . . proceedings in the Office,” but the statute before us, §316(a)(4), does not refer to “proceedings” but more broadly to regulations “establishing and governing [IPR].” 

Next, Cuozzo argued the Court must review the purpose of IPR, which, in Cuozzo’s view, is to modify the previous reexamination procedures and to replace them with a “’trial, adjudicatory in nature.’”  Cuozzo pointed out a decision to cancel a patent normally has the same effect as a district court’s determination of a patent’s invalidity.   Therefore, according to Cuozzo, Congress’ intended that IPR was designed as a “surrogate for court proceedings,” therefore it would also be Congress’ intent that the agency use the same claim construction standard as the district courts.   The Court majority reasoned the problem with Cuozzo’s argument is that an IPR is more like a specialized agency proceeding, and less like judicial proceedings because parties who initiate the IPR need not have a concrete stake in the outcome nor constitutional standing to bring a petition.  Additionally, challengers do not need to remain in the proceedings.  Further, the PTO may intervene in judicial proceedings regarding its final IPR decision to defend it position.  The burden of proof is different in an IPR than in district courts: in an IPR, the challenger (or the PTO) must establish unpatentability “by a preponderance of the evidence”; in district court, a challenger must prove invalidity by “clear and convincing evidence.”  These features combined, as well as the predecessors to IPR, show the purpose of an IPR is not the same as the purpose of district court litigation.  The purpose behind an IPR is reexamination, even though the phrase reexamination was changed to review.  The Court further considered that no statutory language, purpose, or history shows Congress intended to consider what standard the PTO must use during the reexamination of a patent.

The majority concluded the PTO’s regulation, 37 C.F.R. § 42.100(b), is a reasonable exercise of the PTO’s rulemaking authority granted by Congress.   The Court held using the “broadest reasonable construction” standard is reasonable because it helps to ensure the PTO is not granting patent exclusive rights to overly broad claims and the use of the standard encourages an applicant to draft the patent narrowly.    Additionally, past practice shows the “broadest reasonable construction” standard has been used by the PTO for more than 100 years.

Cuozzo made two arguments in response to the Court’s view that the standard is reasonable.  First, Cuozzo contended there is a difference between the PTO’s initial examination of an application to determine if a patent should issue, and an IPR, where the agency reviews an already issues patent.  In the initial examination of the application, the patent examiner uses the broadest reasonable construction standard and may reject the claims for being overly broad, then the applicant may present amendments to narrow the claims.  Cuozzo pointed out that examination both protects the public from overly broad claims and gives the applicant a fair chance to draft an amendment to the claims so the application will qualify for protection.  In an IPR, the broadest reasonable construction standard may help protect public interests, but there is no absolute right to amend any of the challenged claims.  Cuozzo stated an IPR is unfair to the patent holder.  The Court rejected Cuozzo’s argument that an IPR is unfair to patent holders because in an IPR, the patent holder may make a motion to amend the claims at least once in the process, just like he or she would in the original examination process.  Cuozzo then argued only 5 out of 86 motions to amend have been granted.  However, the Court rejected the argument stating the low numbers “may reflect the fact that no amendment could save the inventions at issue.”  The PTO rejected Cuozzo’s motion to amend because the proposed amendments “enlarge[d],” rather than narrowed the challenged claims.

Second, Cuozzo argued the use of the broadest reasonable construction standard in an IPR and the use of the ordinary meaning standard in the district court may cause inconsistent results and added confusion because a district court may find a patent valid, and then the PTO can later find the patent invalid under a different standard.  The Court rejected the argument because, even if it is correct that a district court can find the patent valid and the PTO find it invalid later on, this possibility has been present for a long time in the patent system, which provides different tracks for the review and adjudication of patent claims – one in the PTO and one in the courts.

Finally, Cuozzo presented various policy arguments in favor of an ordinary meaning standard.  However, the PTO is legally free to accept or reject policy arguments based on its own analysis.  Because the PTO clearly decided the best policy was to adopt the broadest reasonable construction standard, the issue of a better alternative standard is one Congress left to the PTO to decide.

Dissent:  Justice Alito wrote the dissenting opinion, in which Justice Sotomayor joins.  Alito and Sotomayor concur with the majority’s position on the “broadest reasonable construction” standard, but disagreed on the appealability of the PTO’s decision to institute IPR. The dissent does not think Congress intended to shield the PTO from compliance or noncompliance with the limits of strict scrutiny.  Because there is a strong presumption favoring judicial review, the dissent believed Congress required that judicial review, including of issues bearing on the institution of patent review proceedings, be channeled through an appeal from the agency’s final decision.

The dissent disagreed that the decision is nonappealable because the statute says so.  The dissent argued “Congress rarely intends to prevent courts from enforcing its directives to federal agencies. For that reason, this Court applies a ‘strong presumption’ favoring judicial review of administrative action.” Mach Mining, LLC v. EEOC, 575 U. S. ___, ___ (2015) (slip op., at 4) (quoting Bowen v. Michigan Academy of Family Physicians, 476 U. S. 667, 670 (1986)).  The dissent claimed that, even though the strong presumption of judicial review is rebuttable, “the agency bears a ‘heavy burden’ in attempting to show that Congress ‘prohibit[ed] all judicial review’ of the agency’s compliance with a legislative mandate.” Mach Mining, supra, at ___ (slip op., at 4–5) (quoting Dunlop v. Bachowski, 421 U. S. 560, 567 (1975)).  Essentially, the dissent believed if a provision can be reasonably read to permit judicial review, it should be.  The dissent took the view that the courts cannot stop the proceeding (IPR) from going forward, the issue of whether it was lawful to institute review will not escape judicial scrutiny.

The dissent further disagreed that allowing judicial review “would undercut one important congressional objective, namely, giving the [PTO] significant power to revisit and revise earlier patent grants.” The reasoning is that this would give the government cause to do away with judicial review whenever the government thinks review makes it harder for an agency to carry out important work.  The dissent believed § 319 is not limited to the PTO’s final written decision because the statute does not restrict what issues may be raised on appeal.  The dissent argued a party may be dissatisfied with the final written decision because the PTO lacked authority to institute an IPR in the first place.

The dissent explained that because the decision to institute an IPR is appealable (by their beliefs), that does not mean that courts must (or should) throw out an IPR decision whenever there is some technical deficiency in the challenger’s petition or in the PTO’s institution decision.  Additionally, normal limits on judicial review still apply such as prejudicial error.  The dissent then revealed doubts on whether Cuozzo would even prevail at the Court of Appeals because claim 17 rises and falls with claims 10 and 14, but this does not mean that his arguments are not worthy