PTO’s Newly-minted Money Grab: Why do I have to pay the PTO’s fees when its examiner blew it?

PTO’s Newly-minted Money Grab: Why do I have to pay the PTO’s fees when its examiner blew it?
December 18, 2018 RPJ Law

December 18, 2018

Trademark and patent applicants and practitioners have grown used to (and weary of) ever-increasing Patent and Trademark Office [PTO] fees, particularly since Congress mandated that the PTO’s operations be self-funded.  But, even the most cynical PTO practitioner might be surprised at the ingenuity of the PTO Director’s latest revenue generating strategy.  The sources of the “new” revenue include a pre-war—U.S. Civil War, that is—patent statute enacted under the Van Buren administration in 1839 (yes, 18) and a seventy-year-old Lanham Act provision.  Within the last five years, for the first time, the Director decided that these statutes require unsuccessful patent and trademark applicants who challenge the PTO’s denial in federal district court to pay the PTO’s attorneys’ fees, even if the aggrieved applicant wins and the PTO errs.  One important federal circuit court has sustained the Director’s position.  Another has rejected it, thus creating a circuit split.

As discussed below, requiring unsuccessful trademark and patent applicants who take advantage of the benefits of proceeding in district court—and even win—to pay the PTO’s attorneys’ fees has significant implications for them.  Effectively, that rule will deny all but the most affluent applicants the benefits of a district court proceeding.  The statutes already disincentivize district court proceedings by requiring the applicant to pay court costs and other expenses.  Requiring applicants to pay the PTO’s attorneys’ fees will further disincentivize them from seeking full review.

Congress Allows Two Alternate Proceedings for Review of PTO Patentability and Trademark Denials

Closely identical provisions of the Lanham Act and Patent Act establish two alternate ways to seek review of a PTO’s Patent Trial and Appeal Board’s denial of patentability or Trademark Trial and Appeal Board’s denial of trademark registration.  First, an unsuccessful applicant may appeal to the Federal Circuit Court of Appeals.  In the case of a Federal Circuit appeal, each party, including the PTO Director, bears its own costs, regardless who wins or loses, but the decision is based on the limited record developed before the PTO.

The second option is to file a civil action in the United States District Court against the Director of the PTO, in which case “all the expenses of the proceeding shall be paid by the party bringing the case, whether the final decision is in favor of such party or not.”  The “all the expenses” provision is rooted in an 1839 amendment to the Patent Act of 1836, and the Lanham Act contains a basically identical requirement for payment of the PTO’s expenses for review of trademark denials.

Recent PTO Practice and Circuit Decisions Construing the Term “Expenses” to Include the PTO’s Attorneys’ Fees

Neither the Lanham Act nor the Patent Act expressly defines “expenses of the proceedings.”

The PTO does not dispute that prior to 2013, it had not sought an attorneys’ fee award under existing patent and trademark laws.  Within the last few years, however, the PTO began asking for its legal fees—in the form of a pro rata portion of its attorney and paralegal salaries—along with other “expenses” under the Patent Act and the Lanham Act.

In Shammas v. Focarino, the U.S. Court of Appeals for the Fourth Circuit agreed with the PTO Director’s position and ordered a trademark applicant to pay the PTO’s expenses, including attorneys’ fees, incurred in the district court proceeding defending the adverse trademark application ruling.

In 2017, in Nantkwest, Inc. v. Matal, a majority of a panel of the Federal Circuit Court of Appeals found the analogous Patent Act provision permitted the PTO Director to recover the pro rata share of the attorneys’ fees the PTO incurred to defend the applicant’s appeal.  The Federal Circuit, however, directed rehearing en banc and vacated that decision.  In a 7-4 decision, on July 27, 2018, the Federal Circuit sitting en banc affirmed the district court, holding that the Patent Act does not require applicants to pay the PTO’s attorneys’ fees.  A dissent following the rationale of the Fourth Circuit’s Shammas decision argued that the term “all the expenses” included attorneys’ fees, at least to the extent those attorneys were staff in-house attorneys, finding that “[i]n this context, the overhead associated with the PTO attorneys’ work is more aptly characterized as an ‘expense’ to the PTO than what is traditionally considered to be ‘attorneys’ fees.’”

Thus, with respect to patent review—over which the Federal Circuit has jurisdiction—at this point, parties seeking review of a PTO patent rejection will not have to pay the PTO’s attorneys’ fees, thus reducing the cost and likely expanding the number of applicants who can take advantage of the expansive discovery process a full district court review permits, but which is not available with a direct appeal to the Federal Circuit.

However, the issue is not yet settled in the Federal Circuit.  As of this writing, the Director has not yet filed a petition for certiorari with the Supreme Court on the Nankwest decision, although it sought and was granted two extensions of time to file its case.  It has until December 21, 2018 to file a petition, which it likely will do given the cost the PTO incurs in district court litigation of patent denials.  Given the circuit split, as well as the high level of disagreement among the en banc Federal Circuit, as reflected in its 7 to 4 decision, many believe that a Supreme Court review is likely.

The Negative Impact of the Director’s Reading on Intellectual Property Rights

The consequences for IP applicants of the decision on this issue are substantial.  Interpreting “expenses” to include the PTO’s attorneys’ fees has a chilling effect by imposing a prohibitive cost that only litigants with significant financial resources can afford.  On its own, Congress’ requirement that applicants pay “[a]ll the expenses of the proceedings” in district court already strongly discourages proceeding in district court.  That impediment, however, pales in comparison to the substantially higher costs litigants face by having to pay both its own attorneys and the PTO’s.  The Director’s reading, therefore, would substantially reduce the right to district court review for many patent and trademark applicants by imposing the significant and unpredictable cost of the PTO’s attorneys’ fees for litigants that choose to take advantage of the benefits of district court review that is not available on direct review to the Federal Circuit.  Indeed, the amount of time and resources the PTO invests into an action is outside the applicant’s control, thus injecting a great deal of uncertainty about potential costs that very likely will deter such litigation.

The decision to proceed in district court rather than direct appeal has substantial consequences.  When an aggrieved applicant brings an appeal to the court of appeals, the appeal is taken “on the record” before the PTO, and the appeals court will uphold the PTO’s factual findings unless they are “unsupported by substantial evidence.”  In contrast, in a proceeding in district court, the record of the PTO is admissible into evidence, and the parties may conduct discovery, supplement the PTO record and submit further testimony and evidence.  The district court reviews the evidence de novo and serves as the trier of fact.  Thus, the review in the district court is based on a more fully developed factual record, with the district judge able to take a fresh review of that evidence.  By allowing applicants to proceed in a district court, Congress recognized that an applicant may need a district court’s broad jurisdiction and expansive discovery process in order to introduce facts outside the scope of the PTO and PTAB review process.

Time will tell if the Director seeks Supreme Court review, and we will update on any additional relevant proceedings.

Lawrence Brocchini

This article is intended only as a general discussion of these issues.  It is not considered to be legal advice or relied upon.  If you need assistance with particular IP, commercial or employment  issues, Larry Brocchini would be pleased to consider providing additional details or advice about specific situations.