“To invent, you need a good imagination and a pile of junk.” Those famous words by Thomas Edison, holder of over 1,000 United States Patents, and over 2,300 worldwide apply to inventors, entrepreneurs, and technology startups more as much now as they did in the 20th Century. But a notable patent case from the United States Supreme Court could impact that how much imagination one needs to become an inventor in the United States Patent and Trademark Office (USPTO).
Pantent Case Review: Peter v. NantKwest 589 U.S. _ (2019)
This patent case concerned whether applicants challenging a patent rejection under Section 145 of the U.S. Patent Act (35 U.S.C. § 145) are obligated to pay attorneys’ fees for the USPTO.
Under the Patent Act, United States Code Title 35, applicants can challenge an adverse decision by (1) appealing directly to the Court of Appeals for the Federal Circuit pursuant to §141; or (2) filing a new civil action against the Director of the USPTO in federal district court under §145. If an applicant opts to file a new action in district court, the applicant is able to present new evidence for de novo review. As a condition for permitting such extensive review, the applicant is required to pay “[a]ll the expenses of the proceedings.”
After the USPTO denied NantKwest, Inc.’s patent application, NantKwest brought a new civil action under §145. The District Court granted summary judgment to the USPTO, and the Federal Circuit affirmed. The USPTO then moved for reimbursement of expenses, including the pro rata salaries of legal personnel that worked on the case. The en banc Federal Circuit affirmed and the Supreme Court granted certiorari.
The Supreme Court’s unanimous opinion in December 2019, written by Justice Sotomayor, began its analysis of the issue with the “bedrock principle known as the ‘American Rule’: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.” The Court noted that this presumption applies to all statutes—even those like §145.
The USPTO argued that the American Rule didn’t apply to §145 proceedings because fee-shifting statutes usually reward only prevailing parties, and §145 doesn’t require the USPTO to be a prevailing party in order to recover expenses. However, the Court pointed out that there are exceptions to the prevailing party requirement, such as cases brought under the National Childhood Vaccine Injury Act; those exceptions are—and are required to be—extremely clear in order to create an exception to the American Rule.
The Supreme Court ultimately found that §145 does not provide the requisite clarity. The word “expenses” itself is ambiguous as to whether it would include attorney’s fees. Likewise, the phrase “expenses of the proceeding” is similar to the term of art “expensæ litis” (Latin for expenses of the litigation), which traditionally excludes attorney’s fees. Finally, the word “all” preceding “expenses of the proceeding” does not broaden the scope of recoverable costs, merely the extent to which appropriate expenses are recoverable. Thus, the American Rule applies, and the USPTO is not entitled to recover its attorney’s fees as expenses as a matter of right under §145.
Implications on a Future Patent Case
The Supreme Court’s decision in this case is likely to impact appellate review of trademark matters as well, because the procedures set forth in the Trademark Act are parallel to the Patent Act’s §§ 141 and 145. In fact, a trademark case decided under the statute parallel to §145, Shammas v. Focarino, 784 F.3d 219 (4th Cir. 2015), served as the strongest, most analogous precedent for the Federal Circuit’s decision to automatically award attorney’s fees to the USPTO. The NantKwest ruling undermines the holding in the Shammas case and, because Supreme Court decisions are the ultimate binding authority, this precedent is likely to be applied with full force to district court review of TTAB decisions as well.
Bonus Case Review:
Mission Product v. Tempnology
While this is not a patent case, it’s another important decision from the Supreme Court where it was asked to determine whether a trademark licensor’s rejection of a licensing agreement during bankruptcy proceedings terminates the rights of the licensee that would otherwise survive a licensor’s breach of contract under applicable law.
Unlike in the patent case above, here, the debtor, Tempnology, Inc. manufactured athletic clothing and marketed the product under the name “Coolcore.”
Tempnology provided Mission Product Holdings, Inc. with an exclusive license to use the Coolcore trademarks. The license was set to expire in July 2016. In September 2015, Tempnology filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of New Hampshire (the “Bankruptcy Court”). Tempnology rejected the licensing agreement with Mission Products and sought a declaratory judgment that the rejection of the executory contract terminated the contract and extinguished the rights Mission Products had in the trademarks.
The Bankruptcy Court agreed that the contract was terminated. The Bankruptcy Appellate Panel reversed, and the First Circuit reinstated the Bankruptcy Court’s decision. The Supreme Court granted certiorari to resolve the dispute.
The Supreme Court decided that companies that go bankrupt cannot use the process to unilaterally revoke a trademark license. The opinion, authored by Justice Elena Kagan, concisely resolved a longstanding circuit split regarding recourse for termination of trademark licenses during bankruptcy, stating:
“The question is whether the debtor-licensor’s rejection of that contract deprives the licensee of its rights to use the trademark. We hold it does not. A rejection breaches a contract but does not rescind it. And that means all the rights that would ordinarily survive a contract breach, including those conveyed here, remain in place.”
The Supreme Court’s holding in this case will apply to all executory contracts and unexpired leases, not just trademark licenses, and thus is likely to have far-reaching implications. This decision places limits on debtors’ rights to reject agreements in some circuits and, as such, debtors may be less likely to reject certain executory contracts, including trademark licenses and options contracts. Brand owners and other stakeholders are wise to consult with an experienced intellectual property law firm to analyze the trademark rights, patent rights, and other legal rights in play during the formation or winding down of a company.