In a unanimous ruling, the U.S. Supreme Court in Peter v. NantKwest, case number 18-801, struck down the U.S. Patent and Trademark Office’s (USPTO) recent and often-criticized effort to recoup its legal fees – even in cases it loses – because it violates the so-called American Rule, which says U.S. litigants must typically pay for their own lawyers.

The Patent Act creates two mutually exclusive pathways to challenge an adverse decision by the USPTO. The first permits judicial review by direct appeal to the United States Court of Appeals for the Federal Circuit. There is “no opportunity for the applicant to offer new evidence” in a §141 proceeding, and the Federal Circuit “must review the PTO’s decision on the same administrative record that was before the [agency].”

The second pathway allows applicants to file a new civil action against the USPTO in federal district court.  Unlike §141, §145 “permits the applicant to present new evidence . . . not presented to the PTO.” The district court “acts as a factfinder when new evidence is introduced in a §145 proceeding” and must make de novo determinations that take into account “both the new evidence and the administrative record before the PTO.”

The parties may appeal the district court’s final decision to the Federal Circuit. Because §145 does not limit an applicant’s ability to introduce new evidence to challenge the denial of a patent, it can result in protracted litigation. As a condition for permitting such extensive review, the Patent Act requires applicants who avail themselves of §145 to pay “[a]ll the expenses of the proceedings.” The question the Court thus had to consider is whether such “expenses” include the salaries of attorney and paralegal employees of the USPTO.

In considering the issue, the Court started with the bedrock principle that “[e]ach litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.”  This is known as the American Rule, which has “roots in our common law reaching back to at least the 18th century.”  However, the USPTO argued the American Rule did not apply here because it is only applied when a statute awards fees to a “prevailing party,” and this was not a “prevailing party” case since the USPTO was entitled to its expenses regardless of whether it won or lost.

The Court rejected this argument reasoning it has never suggested that any statute is exempt from the presumption against fee shifting or limited its American Rule inquiries to “prevailing party” statutes. Rather, the Court has developed a line of precedents addressing statutory deviations from the American Rule that do not limit attorney’s fees awards to prevailing parties.  The Court further reasoned the presumption against fee shifting is particularly important here because reading §145 to permit an unsuccessful government agency to recover attorney’s fees from a prevailing party “would be a radical departure from longstanding fee-shifting principles adhered to in a wide range of contexts.”  Thus, the Court determined the American Rule does apply here and provides the starting point for assessing whether §145 authorizes payment of the USPTO’s legal fees.

Therefore, to determine whether Congress intended to depart from the American Rule presumption, the Court “look[s] to the language of the section” at issue. While “[t]he absence of [a] specific reference to attorney’s fees is not dispositive,” Congress must provide a sufficiently “specific and explicit” indication of its intent to overcome the American Rule’s presumption against fee shifting. In doing so, the Court found Section 145’s plain text does not overcome the American Rule’s presumption against fee shifting because the reference to “expenses” in §145 does not invoke attorney’s fees with the kind of “clarity we have required to deviate from the American Rule.”

Specifically, the Court found the definition of “expenses” in the statute, while capacious enough to include attorney’s fees, does not provide sufficient guidance.  The Court explained the mere failure to foreclose a fee award “neither specifically nor explicitly authorizes courts to shift [fees].” But, the Court reasoned the complete phrase “expenses of the proceeding” would not have been commonly understood to include attorney’s fees at the time §145 was enacted.  Moreover, the modifier “all” does not transform “expenses” to reach an outlay it would not otherwise include.  Instead, in common statutory usage, the term “expenses” alone has never been considered to authorize an award of attorney’s fees with sufficient clarity to overcome the American Rule presumption. In addition, the appearance of “expenses” and “attorney’s fees” together across various other statutes indicates that Congress understands the terms to be distinct and not inclusive of each other. Therefore, the Court found Section 145’s plain text does not overcome the American Rule’s presumption against fee shifting to permit the USPTO to recoup its legal personnel salaries as “expenses of the proceedings.”

The Court next considered the USPTO’s argument that, on occasion, the Court itself has used the term “expenses” to mean “attorney’s fees.”  However, the Court quickly rejected this argument, reasoning in common statutory usage, the term “expenses” alone has never been considered to authorize an award of attorney’s fees with sufficient clarity to overcome the American Rule presumption.

The Court also explained the Patent Act’s history reinforces that Congress did not intend to shift attorney’s fees in §145 actions. The Court noted there is no evidence that the original Patent Office ever paid its personnel from sums collected from adverse parties. In addition, the Court noted that the USPTO has not, until this litigation, sought its attorney’s fees under §145. Thus, the history of the Patent Act also reaffirms the Court’s view that the statute does not specifically or explicitly authorize the USPTO to recoup its lawyers’ or paralegals’ pro rata salaries in §145 civil actions.

Thus, in sum, the Court concluded that the USPTO cannot recover the pro rata salaries of its legal personnel under §145 and therefore affirmed the judgment of the Court of Appeals for the Federal Circuit.