U.S. Supreme Court Justice Sonia Sotomayor. Credit: Jason Doiy/ ALM

The U.S. Patent and Trademark Office cannot recover its attorney fees when it's taken to court over a decision to withhold a patent.

A unanimous U.S. Supreme Court ruled Tuesday that, although Section 145 of the Patent Act permits the USPTO to recover "all expenses of the proceedings," that does not include the salaries of the office's lawyers and paralegals who work on the matter.

"Simply put, 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" against fee-shifting, Justice Sonia Sotomayor wrote in Peter v. NantKwest.

The decision made a winner of Irell & Manella partner Morgan Chu in his first argument to the Supreme Court. Deputy Solicitor General Malcolm Stewart argued for the government.

The ruling means the USPTO will have to eat the $78,000 bill it was trying to shift to billionaire inventor Patrick Soon-Shiong and his cancer treatment startup NantKwest Inc. It also means resource-constrained small inventors and companies will still have the option of pursuing their patents in court, said Pillsbury Winthrop Shaw Pittman partner William Atkins, who submitted an amicus brief on behalf of the Federal Circuit Bar Association.

Inventors have a choice when the USPTO rejects an application. They can appeal to the Patent Trial and Appeal Board, where the PTAB reviews the record of proceedings at the office. They also can sue in the Eastern District of Virginia under Section 145. A 2012 Supreme Court decision gave applicants the right to submit new evidence into the record in Section 145 proceedings, and the court must consider it de novo.

That change has made Section 145 proceedings more expensive, the USPTO argues. And because the agency is now fully funded by user fees, it argues that applicants who choose the 145 option should pay for all of it.

The problem for the USPTO is that Section 145 says only that, win or lose, the agency shall recover "all the expenses of the proceedings."

The U.S. Court of Appeals for the Fourth Circuit in 2015 interpreted a nearly identical provision of the Lanham Act to include the PTO's attorney fees in analogous trademark proceedings.

The U.S. Court of Appeals for the Federal Circuit initially agreed in a 2-1 decision, but dissenting Judge Kara Stoll eventually led a 7-4 en banc court to rule against the USPTO. She wrote that the Supreme Court has generally applied the American Rule and allowed fee shifting only when Congress explicitly provides for it. "All the expenses" doesn't meet that standard, she concluded.

On Wednesday, the Supreme Court agreed with Stoll. Sotomayor pointed out something NantKwest and the Federal Circuit Bar Association have been stressing in their briefs: that the USPTO had not interpreted Section 145 as including attorney fees during the first 160 years of the statute and its predecessors' existence.

Sotomayor wrote that Congress has enacted other fee-shifting statutes that apply to nonprevailing parties such as Section 145, and that the court has applied the American Rule's presumption against shifting to them.

She reasoned that the statutory phrase "expenses of the proceeding" evokes the Latin phrase "expensae litis," or "expenses of the litigation."

"This term has long referred to a class of expenses commonly recovered in litigation to which attorney's fees did not traditionally belong," Sotomayor wrote.

In any event, expenses "does not invoke attorney's fees with the kind of 'clarity we have required to deviate from the American Rule,'" Sotomayor concluded, citing the Supreme Court's decision in Baker Botts v. Asarco.

While $78,000 may not seem like a large figure in the patent world, it definitely would have had a chilling effect on small inventors and companies, said Pillsbury partner Atkins. By contrast, the fee for noticing and briefing an appeal to the PTAB is $760 for a micro-entity such as an individual investor.

"Even if you're a medium-sized company and you've got a budget" for patent prosecution, the possibility of a $78,000—or more—fee bill could foreclose the 145 option, Atkins said.