“In acknowledging the arguments made about the USPTO’s failure over an extended period of time to take the position he was now advocating, Stewart conceded, ‘There is no question this is an atmospherically unhelpful point for us.’”

Justices Breyer, Kavanaugh, Ginsburg, Gorsuch and Chief Justice Roberts were among the most active questioners of Malcolm Stewart, representing the government of the United States, and Morgan Chu of Irell & Manella, representing NantKwest, during yesterday’s oral argument in Peter v. NantKwest at the Supreme Court.

The question presented in the case is “Whether the phrase ‘[a]ll the expenses of the proceedings’ in 35 U.S.C. 145 encompasses the personnel expenses the USPTO incurs when its employees, including attorneys, defend the agency in Section 145 litigation.”

In its petition, the USPTO explained that it first began attempting to recover personnel-related expenses in 2013 in response to two developments. First, the America Invents Act’s directed to the Office to set its fees so as “to recover the aggregate estimated costs to the [USPTO] for processing, activities, services, and materials relating to patents * * * and trademarks.” Second, “proceedings under Sections 145 and 1071(b) have grown increasingly expensive, and the single largest expense to the USPTO is often the time that agency employees must devote to those matters—as was true in this case,” said the USPTO’s petition.

In response, NantKwest said that “only ‘expenses’ are compensable under § 145, and both courts and Congress have historically treated ‘attorneys’ fees’ and ‘expenses’ as distinct.” NantKwest called the USPTO’s recent change in interpretation of Section 145 “remarkable” for ignoring the American Rule and upsetting nearly two centuries of practice.

‘Atmospherically Unhelpful’

The government’s argument at yesterday’s hearing seemed shaky at best. Stewart himself admitted repeatedly that there was “no good explanation” for the fact that the U.S. Patent and Trademark Office (USPTO) had, as noted in NantKwest’s reply brief “until now…never even sought, much less been awarded, attorneys’ fees under § 145 in the nearly two centuries since its passage.”

Stewart provided three principal reasons that the answer to the questions presented must be “yes.” First, he said the term “expenses” “unambiguously encompasses…money paid to employees or other personnel to accomplish a particular task.” Second, “requiring patent applicants who file suit under Section 145 to pay personnel expenses of the PTO is consistent with the overall statutory scheme” since Congress has charged the Office with recovering its aggregate operating costs, including personnel expenses. And finally, because the alternative of appeal directly to the Federal Circuit exists, which does not include a requirement to pay the USPTO’s attorneys’ fees, requiring payment of attorneys’ fees under Section 145 is “especially appropriate.”

However, in questioning, Stewart could not provide an example of another federal statute where the term “expenses” alone has been interpreted to include attorneys’ fees and he admitted that “to require an adverse litigant to pay the government’s personnel expenses or to require the prevailing party to pay…if you compare it to other adversarial litigation involving the government, yes, it is unusual.”

But because this is an unusual circumstance involving essentially an extension of the USPTO examination process, Stewart said it is appropriate. In administrative proceedings, if an applicant causes the USPTO to incur greater expenses, they must pay more, said Stewart. “So if your proposed patent has an unusually large number of claims, you may have to pay a larger fee. If you seek continued examination or if you file an administrative appeal to the PTAB, you have to pay additional fees.” Stewart explained that, in the present case for example, the USPTO sought roughly $111,000 in combined personnel expenses and expert witness fees, while the fees for application and examination of the typical patent application are about $3,300. “So here we’re dealing with a situation in which the Section 145 suit caused us to incur about 30 times the expenses that would ordinarily be the fees for a patent application and examination,” Stewart said.

Justice Gorsuch asked Stewart what would stop the Office from then charging other forms of overhead costs, such as the electric or sewage bill, under his interpretation of the term “expenses”? Stewart replied that presumably they would have to connect the fees to the specific case. Gorsuch then asked how the USPTO just figured out that it should be charging attorneys’ fees, to which Stewart replied:

Well, I think — we don’t have a good explanation for why we weren’t doing it before. We do have explanation — good explanations for why we focused on this matter at the time that we did.

However, Stewart didn’t have a chance to explain those reasons, instead fielding questions like one from Chief Justice Roberts about whether Stewart planned to send a bill to NantKwest for the present hearing. Stewart responded that 1) the USPTO has only sought expenses for USPTO personnel, not Department of Justice employees, 2) that there’s a question of whether an appellate stage of a case would fall within the term “proceedings” in Section 145, particularly since Section 141, which provides for direct appeal to the Federal Circuit, doesn’t make reference to recovery of expenses, and 3) that “with respect to the trial court proceedings in this case, the PTO didn’t seek recoupment of expenses for attorney time spent arguing about the fees. It requested recoupment of expenses only for the attorney time that was devoted to the issue of patentability.”

Justice Kavanaugh asked Stewart how he could explain the case law, which suggests that “there is something of a clear statement rule in this area that has to explicitly, expressly cover fees and, two, all of the statutes seem to refer to attorneys’ fees, or fees, and not the term expenses. So which part of that do you disagree with?” Stewart responded that the Court itself had made clear that “even though a relatively clear indication of congressional intent is necessary, there’s no magic words requirement,” and that “there is no ordinary, plain language understanding of the word ‘expenses’ that doesn’t encompass the money that you use to hire a person to accomplish a particular task.”

The opening to Stewart’s rebuttal argument though seemed to sum up the key struggle he faced. In acknowledging the arguments made about the USPTO’s failure over an extended period of time to take the position he was now advocating, he conceded, “There is no question this is an atmospherically unhelpful point for us.” He speculated that the Office’s motivation for not seeking attorneys’ fees earlier could have been “in part because it wondered whether the term was sufficiently clear to overcome the American Rule. But on close examination, we think that it is.”

It’s the Clear Rule

For his part, Chu stuck fast to the premise of the American Rule. He opened by presenting three considerations: 1) that “the American Rule is a bedrock principle, and this Court has recognized and applied that rule for two centuries”; 2) Second, “the government is arguing for a radical departure from the American Rule”; and 3) “there 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.”

Chief Justice Roberts pushed back on Chu by asking why Section 145 proceedings should not be treated 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?” asked Roberts.

Chu countered by arguing that this was not a filing fee but a claim for attorneys’ fees “against the strong backdrop of the American Rule,” and in the context of adversarial litigation, not inside the patent office. “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,” Chu said.

He explained to the justices that acceptable fees under the term “expenses” would include “Travel expenses, lodging expenses, parking expenses, expenses with respect to court reporters, printing expenses, marshal fees, docket fees, court interpreters,” etc. “That’s not an exhaustive list but it does not include attorneys’ fees,” he added.

Chu further noted that, while he did not believe “expenses” should include expert witness fees, NantKwest did not challenge the request for expert witness fees in this case and paid them in full. In response, Justice Breyer said:

Well, that’s — see, then you put your finger on, yes, the American Rule, yes, yes, yes, but you have a special kind of case. And Congress was saying, it seemed, and says again, look, present all your evidence to the Patent Office. And if you don’t like the result, go to the Federal Circuit. 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. I mean, did it carve out a separate special thing here or do we just use the American Rule?

To drive home his point that in every case where a party wanted attorneys’ fees under a statute, the Court had always applied the American Rule, Chu pointed to the case of Adams Fruit Co. v. Barrett. In that case, Chu explained, the U.S. Department of Labor was dealing with a statute passed by Congress that gave workers, under certain circumstances, a private right of suit, which the Department said it should get deference to interpret. Its interpretation was that the workers couldn’t sue in federal court but had to go through state law. The Supreme Court had to decide whether to defer to the agency’s interpretation of the statute and the Court said no, it did not have to, because it was a judicial matter. “So too here,” Chu said. “This is district court litigation where the parties are adversaries. The proceeding in the Patent Office is quite different from that. The American Rule has always applied in federal court litigation.”

Chu added that a finding for the USPTO could indeed have a follow-on effect on other statutes, including 19 U.S.C. 1608, relating to customs forfeitures; and 19 U.S.C. 6337, relating to IRS levies on taxpayer property.

While Chief Justice Roberts suggested that Stewart would likely characterize those statutes as distinct because there aren’t alternative proceedings available to the litigants in those cases, Chu countered: “Well, that is their argument. But that is rewriting the statute that Congress actually enacted in 1839 [b]ecause it may sound sensible to the government today.”

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