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An Exception to the American Rule: Attorney Fees Under ERISA §502(G)(1)

November 7, 2019

A recent New York Law Journal article by Michael C. Rakower and Melissa Yang of Rakower PLLC in New York, “Attorney Fees Under ERISA §502(G)(1): An Exception to the American Rule,” report on ERISA §502(g)(1).  This federal statute vests courts with discretion to award attorney fees and costs in an action brought by a plan participant, beneficiary or fiduciary.  This article examines the standards courts apply when assessing motions for these discretionary awards.  This article was posted with permission.  The article reads:

The Employee Retirement Income Security Act (ERISA) marks one of those rare instances where Congress chose to depart from the American Rule to grant litigants an opportunity to seek attorney fees. ERISA §502(g)(1) vests courts with discretion to award attorney fees and costs in an action brought by a plan participant, beneficiary or fiduciary.  This article examines the standards courts apply when assessing motions for these discretionary awards.

‘Some Degree of Success on the Merits’

In 2010, the U.S. Supreme Court issued an opinion in Hardt v. Reliance Standard Life Ins. Co., clarifying the standard under ERISA §502(g)(1). 560 U.S. 242 (2010).  A litigant need not be a “prevailing party” to be eligible for a fee award; rather, the litigant must establish “some degree of success on the merits.” Id. at 254-55.  According to the Second Circuit, this is “the sole factor that a court must consider in exercising its discretion.” Donachie v. Liberty Life Assurance Co. of Boston, 745 F.3d 41, 46 (2d Cir. 2014) (emphasis in original).

The “some degree of success on the merits” standard is met when a claimant obtains a “favorable judicial action on the merits.” Scarangella v. Grp. Health, 731 F.3d 146, 152 (2d Cir. 2013).  A summary judgment or trial verdict can, of course, meet this standard, see, e.g., Buckley v. Slocum Dickson Med. Grp., PLLC, 585 Fed. App’x 789, 794 (2d Cir. 2014) (stating employee entitled to seek attorney fees under ERISA §502(g)(1) after prevailing on summary judgment); Toussaint v. JJ Weiser, 648 F.3d 108, 110 (2d Cir. 2011) (acknowledging some degree of success requirement was met when summary judgment was affirmed in favor of the directors of ERISA plan sponsor), as can a favorable out-of-court settlement if it is triggered by court action, see, e.g., Scarangella, 731 F.3d at 154 (citing to Perez v. Westchester Cnty. Dep’t of Corr., 587 F.3d 143, 150-51 (2d Cir. 2009)).  Even a remand to the plan administrator can qualify where it is premised upon a determination that the administrator’s prior assessment of a claim was deficient or rendered in an arbitrary or capricious manner.  See, e.g., Gross v. Sun Life Assurance Co. of Canada, 763 F.3d 73, 79 (1st Cir. 2014); McKay v. Reliance Standard Life Ins. Co., 428 F. App’x 537, 546-47 (6th Cir. 2011); Valentine v. Aetna Life Ins. Co., 2016 WL 4544036, at *4 (E.D.N.Y. Aug. 31, 2016); Delprado v. Sedgwick Claims Mgmt. Servs., No. 1:12-CV-00673 BKS, 2015 WL 1780883, at *41 (N.D.N.Y. April 20, 2015) (concluding plaintiff obtained “some degree of success on the merits” when plaintiff’s claim was remanded back to plan administrator because prior denial of disability benefits was arbitrary and capricious).

In contrast, “trivial success on the merits” or a “purely procedural victory” is insufficient to merit an award of attorney fees. Hardt, 560 U.S. at 255.  Accordingly, obtaining “relief due to the voluntary conduct of another party after minimal litigation” will not warrant a discretionary award. Scarangella, 731 F.3d at 155.

Favorable Slant Toward Plaintiffs

Case law shows that a court’s discretion is guided by Congress’ intent to encourage participants and beneficiaries to enforce their statutory rights under ERISA. Salovaara v. Eckert, 222 F.3d 19, 28 (2d Cir. 2000).  As a result, even though ERISA §502(g)(1) contemplates that an award may be imposed against “either party,” courts have construed attorney fee motions with a “favorable slant towards ERISA plaintiffs … to prevent the chilling of suits brought in good faith … .” Id. (internal citation omitted); see, e.g., Critelli v. Fidelity Nat’l Title Ins. Co. of New York, 554 F. Supp. 2d. 360 (E.D.N.Y. 2008) (declining to award attorney fees to employer because plaintiff did not act in bad faith and a fee award to employer could act as a disincentive to potentially meritorious ERISA actions).  Rarely does a court award attorney fees against a participant or beneficiary; such instances tend to arise when a court not only rules against the claimant, but also deems the action to be frivolous.  See, e.g., Garlock v. Nelson, No. 96-CV-1096(FJS), 1998 WL 315089, at *1 (N.D.N.Y. June 9, 1998) (considering defendant’s application for fees after concluding defendant is entitled to a fee award because participant’s claims under ERISA are frivolous).

(Discretionary) ‘Chambless’ Factors

Upon a finding of “some degree of success on the merits,” a court in New York may (but is not required to) consider five additional factors to determine whether to grant a fee award.  Hardt, 560 U.S. at 255 n.8 (“[A] court may consider the five factors adopted by the Court of Appeals … in deciding whether to award attorney fees.”); Donachie, 745 F.3d at 46 (“Although a court may, without further inquiry, award attorney fees to a plaintiff who has had ‘some degree of success on the merits,’ Hardt also made clear that courts retain discretion to ‘consider [] five [additional] factors … in deciding whether to award attorney’s [sic] fees.”).  These factors, known as the “Chambless Factors,” are set forth in Chambless v. Masters, Mates & Pilots Pension Plan, 815 F.2d 869, 871 (2d Cir. 1987) as follows:

(1) the degree of the offending party’s culpability or bad faith, (2) the ability of the offending party to satisfy an award of attorney’s fees, (3) whether an award of fees would deter other persons from acting similarly under like circumstances, (4) the relative merits of the parties’ positions, and (5) whether the action conferred a common benefit on a group of pension plan participants.

If the court looks to the Chambless Factors, then it must consider all of the factors; it cannot selectively weigh certain factors and disregard others. Donachie, 745 F.3d at 47.  However, a court may grant a fee award after considering all of the Chambless Factors even if all factors do not weigh in favor of the award. Locher v. Unum Life Ins. Co. of Am., 389 F.3d 288, 299 (2d Cir. 2004) (concluding that failure to satisfy fifth Chambless factor does not preclude an award of fees).

Interim Awards

While the majority of litigants seek attorney fees and costs at the conclusion of a litigation, parties who face financial adversity during the course of the litigation may seek an interim award so long as they can satisfy the “some success on the merits” standard.  See, e.g., Pagovich v. Moskowitz, 865 F. Supp. 130, 139 (S.D.N.Y. 1994) (granting interim attorney fees to plaintiff after defendant admitted to liability for some benefits owed to plaintiff under the plan); Aronoff v. Serv. Employees Local 32-BJ AFL-CIO, No. 02-CIV-5386, 2003 WL 1900832, at *2 (S.D.N.Y. April 16, 2003) (acknowledging court’s authority under ERISA to award interim attorney fees but declining to do so under the facts of the case).  However, practically speaking, any litigant contemplating a motion for interim relief should recognize that establishing sufficient success to warrant discretionary relief will likely be more difficult in the middle of the case than at the end.

Recoverable Costs

Under ERISA §502(g)(1), litigants can recover attorney fees and other reasonable out-of-pocket expenses incurred by their attorneys, such as filing fees, service of process fees, courier charges and printing costs.  Algie v. RCA Glob. Commc’ns, 891 F. Supp. 875, 898 n.13 (S.D.N.Y. 1994) (“Section 502(g)(1) of ERISA refers to an award of ‘costs’, but that term apparently covers not only taxable costs under 28 U.S.C. §1920, but also other disbursements that are customarily charged to the client.”); Severstal Wheeling v. WPN, No. 10CIV954LTSGWG, 2016 WL 1611501, at *4 (S.D.N.Y. April 21, 2016); Cohen v. Metro. Life Ins. Co., No. 00 CIV 6112 LTS FM, 2007 WL 4208979, at *2 (S.D.N.Y. Nov. 21, 2007), aff’d in part, 334 F. App’x 375 (2d Cir. 2009); Taaffe v. Life Ins. Co. of N. Am., 769 F. Supp. 2d 530, 544-45 (S.D.N.Y. 2011).  These costs must have been incurred in connection with the prosecution or defense of a lawsuit in court.  Peterson v. Cont’l Cas. Co., 282 F.3d 112, 119 (2d Cir. 2002).  Thus, pre-litigation costs incurred by litigants to exhaust their administrative remedies or to attempt a negotiated settlement are not recoverable.  See Aminoff v. Ally & Gargano, No. 95 CIV. 10535 (MGC), 1996 WL 675789, at *4 (S.D.N.Y. Nov. 21, 1996) (disallowing fee award to plaintiffs who expended resources to settle retirement plan dispute because no litigation was commenced).  However, “fees incurred during an administrative remand ordered by the district court and over which the court retains jurisdiction are authorized by the statute.” Id. at 122.  (“The fact that a court orders additional fact finding or proceedings to occur at the administrative level does not alter the fact that those proceedings are part of the ‘action’ as defined by ERISA.”)

Factors Affecting the Size of the Award

Any fee award under ERISA §502(g)(1) must be reasonable.  In New York, courts generally apply the lodestar method, which multiplies the number of hours reasonably expended in the action by attorneys and paralegals against a reasonable hourly rate for each such timekeeper.  Conners v. Connecticut General Life Ins. Co., No. 98-CV-8522(JSM), 2003 WL 1888726, at *1 (S.D.N.Y. April 15, 2003).  After determining the lodestar, the court may in its discretion deduct from that amount the cost of legal services rendered in connection with unsuccessful aspects of the case. Id. at *2.  In this way, hours expended on failed claims wholly unrelated to the successful ones may be excluded from the fee award. Grant v. Martinez, 973 F.2d 96, (2d Cir. 1992). See also Conners, 2003 WL 1888726, at *2 (defining claims as unrelated if they are based on “‘different claims for relief that are based on different facts and legal theories’”) (quoting Hensley v. Eckerhart, 461 U.S. 424, 434 (1983)).  But if all of the claims are interrelated (i.e., the claims involve a “common core of facts” or are “based on related legal theories”), then the court should “focus on the significance of the overall relief obtained” to determine whether any reduction to the lodestar is warranted.  Conners, 2003 WL 1888726, at *2 (internal quotation marks and citation omitted).  Of course, courts are always free to adjust a lodestar award by comparing it to the size of the plaintiff’s recovery, even if no reduction for unsuccessful claims is warranted.  In doing so, courts discharge their obligation to consider whether “[t]he amount of fees awarded [are] reasonable in relation to the results obtained.” Id.

Aside from the lodestar, courts may use their discretion to award an appropriate sum to further the goals of ERISA.  This seems most apt in the case of fee award to a defendant who successfully defends against a frivolous action. Weighing the deterrent value of a fee award against a plaintiff for filing frivolous claims with the chilling effect that award would have on potential plaintiffs, courts have discretion to grant a defendant an award lower than the lodestar would support.  See, e.g., Christian v. Honeywell Retirement Ben. Plan, No. 13-CV-4144, 2014 WL 1652222, *8 (E.D. Penn. April 24, 2014) (concluding that an award of $10,000 to defendant serves the purpose of protecting pension benefits and deterring conduct at odds with ERISA’s purpose even though defendant incurred approximately $76,779.18 in succeeding on its motion to dismiss).  Courts are also free to adjust the lodestar upward if, for example, a party’s counsel exhibits superior work product and exceeds the expectation of the party and normal levels of competence.  Feinstein v. Saint Luke’s Hosp., No. 10-CV-4050, 2012 WL 4364641, at *6 (E.D. Penn. Sept. 25, 2012) (citing Rode v. Dellarciprete, 892 F.2d 1177, 1184 (3d Cir. 1990).)

Conclusion

ERISA §502(g)(1) offers an exception to the American Rule to encourage participants, beneficiaries and fiduciaries of ERISA-governed plans to vindicate their rights in court.  A court’s discretionary right to grant a fee award under this provision arises when a party achieves “some degree of success on the merits.”  Courts apply a plaintiff-friendly slant to motions for attorney fees in recognition of ERISA’s fundamental purpose, which is to protect employees’ rights.  This approach generally insulates plaintiffs unsuccessful in litigation from the pain of an adverse fee award, but offers a valuable incentive to a party who may have been wrongly denied an applicable benefit.

Michael C. Rakower and Melissa Yang are partners at Rakower Law PLLC in New York.

Parties Seeking PTAB Attorney Fees Face High Bar in Courts

November 5, 2019

A recent Law 360 article by Lionel Lavenue, R. Benjamin Cassady, Bradford Schulz, and Regan Rundio of Finnegan Henderson LLP, “Parties Seeking PTAB Attorney Fees Face High Bar in Courts,” report on seeking attorney fee award in Patent Trial and Appeal Board (PTAB) proceedings.  This article was posted with permission.  The article reads:

Since the U.S. Supreme Court lowered the standard for prevailing parties to recover attorney fees in patent cases in the 2014 Octane Fitness LLC v. ICON Health & Fitness Inc. decision, district courts have been weighing the proper interaction between Title 35 U.S. Code Section 285 and Patent Trial and Appeal Board proceedings.  Under Section 285, prevailing patent litigants may recover attorney fees in “exceptional cases.”

The Octane Fitness decision clarified that district court judges maintain broad discretion for determining what makes a case “exceptional.”  It did not divulge whether that discretion permits a judge to review the losing party’s conduct in a related administrative proceeding or whether the court may award attorney fees for work done before that administrative body.  These questions were abandoned to the lower courts, which tackle them with increasing frequency given the PTAB’s popularity.

In American Vehicular Sciences LLC v. Autoliv Inc., the U.S. District Court for the Eastern District of Michigan attempted to unwind these issues.  Magistrate Judge Anthony Patti did not break ground by adopting standards for the awarding of attorney fees accumulated at the PTAB.  But he entered rarified air in concluding that a losing party’s misconduct before the board could not, by itself, render a case “exceptional” if the board abstained from sanctioning it.  The court denied an award, reaffirming the maxim that “exceptional cases” are indeed the exception, not the rule.

AVS v. Autoliv

In September 2015, American Vehicular Sciences sued Autoliv and 20 others for allegedly infringing U.S. Patent No. 9,043,093, directed to a single-curtain airbag capable of protecting passengers in a vehicle’s front and rear seats.  Three months later, Unified Patents — independently of Autoliv — petitioned for inter partes review of a subset of the ’093 patent’s claims.  The PTAB granted that petition in June 2016, prompting a stay of district court litigation pending resolution of the IPR.

By September, Autoliv had filed two of its own IPR petitions against the ’093 patent.  One challenged all claims as obvious over a combination of references “substantially similar” to that asserted by Unified; the other attacked the ’093 patent’s priority claim.  Both were instituted in March of 2017.

Two months later, the PTAB invalidated 10 of the claims challenged by Unified, sparing eight others.  AVS appealed to the U.S. Court of Appeals for the Federal Circuit.  The following spring, Autoliv’s IPRs invalidated the ’093 patent’s remaining claims.  AVS again appealed.  But, in June 2018, the Federal Circuit summarily affirmed the board’s decision in Unified’s IPR, leading AVS to dismiss its federal case.  Autoliv moved for fees, asserting that AVS’ arguments before the board drove the case into exceptional territory.

The Threshold Inquiry to Recovery

Proving exceptionality, however, was only one barrier to Autoliv’s recovery.  Autoliv first had to persuade Judge Patti of the court’s authority under Section 285 to award those attorney fees accumulated at the PTAB.  The handful of courts that have addressed the issue of awarding PTAB-related fees are split.

Judge Patti identified the two most popular standards.[8] Namely, a prevailing party can recover PTAB-related attorney fees when: (1) the PTAB’s proceedings “played a central role in determining the outcome of the federal court case ” or (2) “there was a stay of the related district court case, such that the [PTAB] proceedings effectively took the place of the of the federal court litigation.”  The court recognized that Autoliv cleared the latter standard, thereby hurdling one obstacle to recovery.  Yet the burden of showing exceptionality proved too weighty.

The Exceptionality Determination

Judge Patti was unenthusiastic about Autoliv’s exceptionality arguments for two principal reasons.  First, the court was unconvinced that AVS made its arguments in bad faith (although bad faith is not a prerequisite to exceptionality under Octane Fitness).  Asserting the opposite, Autoliv posited that the PTAB’s institution of Unified’s IPR put AVS on notice that it was “reasonabl[y] likel[y]” that the challenged claims would fall.

Unmoved, the court recognized that AVS’ validity arguments, though ultimately unsuccessful before the PTAB, had once persuaded the U.S. Patent and Trademark Office examining corps — during prosecution of the ’093 patent, the examiner considered the same references that Unified and Autoliv would put forward in their IPRs and AVS overcame the same concerns about priority that ultimately doomed the ’093 patent.  For the court, the examining corps’ surrender under the weight of AVS’ arguments justified AVS’ continued reliance on them.  AVS’ validity position was, therefore, not baseless.

Second, and more notably, the court was reluctant to review the PTAB’s decision to not sanction AVS.  AVS asserted that if Autoliv wanted to recover PTAB fees off the back of alleged misconduct before the PTAB, its remedy rested, quite naturally, with the PTAB.

Yet Autoliv never appealed to that tribunal for attorney fees; it resorted to the district court — a body much less acquainted with the alleged misconduct, which was all alleged to have occurred before the PTAB.  These considerations persuaded Judge Patti to defer to the “PTAB’s experience with exceptional cases and its composition of specialized administrative law judges”; if the PTAB didn’t sua sponte sanction AVS’ conduct, the court wouldn’t find an exceptional case.

Analysis and Implications

American Vehicular needles the tension between Section 285 and the PTAB regime, providing insight into Section 285 motions.  Judge Patti affirmed the court’s authority to grant attorney fees for work done before the PTAB.  But only where the PTAB proceedings either substituted for the court’s work or played a central role in the case’s outcome.

By holding so, the Eastern District of Michigan aligned itself with several district courts that have addressed the issue.  Accordingly, securing a litigation stay pending resolution of an IPR is important to setting the groundwork for seeking a Section 285 award for PTAB-related fees.  This consideration implicates venue as some courts are more willing to stay cases in favor of the PTAB than others.

But more notably, Judge Patti highlighted the issue of circumvention: Does a prevailing party make an end-run around the PTAB by requesting relief from a federal court for PTAB-related work?  The PTAB only shifts fees when sanctioning misconduct.  Yet district courts may invoke Section 285 even where misconduct falls short of a sanctionable level.  Cognizant of this imbalance, U.S. Circuit Judge Alan Lourie of the Federal Circuit recently asked a prevailing party if it was “trying to piggyback” off Section 285 in order to recover PTAB-related attorney fees.

It is unclear how many other judges, apart from Judge Patti, share Judge Lourie’s skepticism for this method of recovering attorney fees from an IPR.  For example, at least one court has considered the reasonableness of arguments made before the USPTO in finding a case exceptional.  Nevertheless, when seeking such fees under Section 285, prevailing parties may do well to seek sanctions from the board, especially if conduct before the board is the sole basis for exceptionality.

Lionel M. Lavenue is a partner, R. Benjamin Cassady and Bradford C. Schulz are associates, and Regan Rundio is a law clerk at Finnegan Henderson Farabow Garrett & Dunner LLP.

Article: Paying for Claimants’ Attorney Fess is the Exception to the Rule in DC

October 11, 2019

A recent Lexology article by Meredith L. Pendergrass of Goldberg Segalla LLP, “Paying for Claimants’ Attorney Fees is the Exception to the Rule in D.C.,” reports on a recent appellate decision on attorney fee entitlement and recovery in workers’ compensation claims before the federal circuit.  The article was posted with permission.  The article reads:

The D.C. Court of Appeals was recently presented with the opportunity to weigh in on the prerequisites for ordering employers and insurers to pay for claimants’ litigation fees and costs in workers’ compensation claims.  In the case of Kelly v. D.C. Dep’t of Employment Servs., No. 18-AA-13, 2019 WL 4073672 (D.C. Aug. 29, 2019), the court refused to require the employer and insurer to bear the cost of the claimant’s attorney fees.

In Washington, D.C., there are only two limited circumstances where the employer and insurer will pay attorney fees for the claimant. D.C. Code Section 32-1530 (a) provides the ability for the claimant to seek payment of his attorney fees if employer and insurer do not pay any compensation within 30 days for the claim being filed and the claimant uses the services of an attorney to subsequently obtain benefits.

D.C. Code Section 32-1530 (b) further provides that attorney fees may be awarded against the employer and insurer in a specific set of circumstances.  This subsection requires the employer and insurer to have initially paid compensation in the claim and then a controversy arises as to the amount of further benefits due.  In order to be held to pay the claimant’s attorney’s fee in this situation, the employer and insurer have to reject a recommendation by the Mayor regarding resolution of the amount in controversy, and the claimant needs to then utilize the services of the attorney to obtain a greater amount than the employer and insurer offered to pay.  The attorney fee awarded would only apply to the difference in the amount the employer and insurer offered to pay and the amount ultimately obtained through litigation.

The only way to obtain a recommendation from the Mayor is to attend an Informal Conference and have a claims examiner issue a Memorandum of Informal Conference.  In the Kelly case, the claimant’s attorney applied for an Informal Conference to resolve a dispute regarding permanency benefits, but the employer and insurer applied for a Formal Hearing before the Informal Conference occurred.  The D.C. Court of Appeals found that since the employer and insurer did not reject a recommendation from the Mayor as subsection (b) requires, then attorney fees could not be awarded against them.  The D.C. Court of Appeals held that it was irrelevant that the employer and insurer made it impossible for the claimant to participate in the Informal Conference by applying for the Formal Hearing.  The court cited to the American Rule for litigation, which generally requires each party to bear the burden of their own litigation costs, as well as the specificity in which the act outlines the exceptions to this rule in coming to their decision.  With the Kelly case clarifying this issue, we will likely see fewer Informal Conferences going forward when it comes to litigating additional benefits owed in a claim as a way to limit overall exposure.

Meredith L. Pendergrass is an Associate at Goldberg Segalla LLP in Baltimore.  She focuses her practice on defending employers, insurance carriers, and third-party administrators in workers’ compensation matters throughout Maryland and the District of Columbia.  She regularly appears in both Maryland and the District of Columbia at agency-level proceedings all the way through each jurisdiction’s highest court system on appeals.

Article: Defense Perspective on Plaintiffs’ Attorney Fees in FLSA Litigation

October 8, 2019

A recent Wage & Hour article by Mark Tabakman, “Plaintiff Attorney Fees in FLSA Cases: The Frustrating, Driving Force in These Cases,” reports on plaintiffs’ attorney fee requests in Fair Labor Standards Act (FLSA) litigation from a defense counsel perspective.  This article was posted with permission.  The article reads:

I read a very interesting article in the Epstein Becker Wage & Hour Defense Blog, whose sentiments I wholeheartedly agree with.  It concerns the issue of attorney fees for plaintiff lawyers in FLSA/wage cases.  The blog post notes that often, these lawyers get big dollar fee awards, while the allegedly victimized people they represent get “pennies.”

The posting notes, and I agree, that there are many, many plaintiff wage hour class (or single) action lawyers who believe in their clients and feel that their clients were “wronged” by not receiving proper payment (e.g. overtime).  With that said, there are also many who are more dedicated to their fees and maximizing those fees than they are in vindicating their clients’ position.

The posting notes that some plaintiff lawyers will announce that they “need” to get a certain sum as their fees for the case.  Then, the defendant’s lawyer (and a mediator, if it goes that far) know that they have to work back from that demanded fee award to get to a point where the case settles and the plaintiff(s) get something, whatever that “something” is.  That is, as the post correctly notes, the “tail wagging the dog.”

The posting notes, and again I agree, that the issue defaults to whether judges will try to do something about this disturbing trend, to stem this tide.  One example makes the point.  A Judge was presiding over a matter where the parties settled a wage-hour case, with small recoveries by the plaintiffs and where the plaintiff lawyers sought fees far greater than the recoveries that their clients would themselves receive.

The Judge could have easily approved the settlement, just to get it off the docket, but this Judge refused to take the easy way out.  She observed that these cases often are not about the employees or “justice” but rather the plaintiff lawyer’s fees.  She would not approve the settlement and hoped that other Judges would also not put up with these tactics.

 The Takeaway

I am so glad to hear a Judge express this sense of frustration.  I encounter it all the time and feel it all the time.  She is right.  Often times, I find myself settling so-called small cases because the portent of a large attorney fee demand makes the risk of defending too great, even if I know the client did nothing wrong.  That is wrong and very frustrating to me.

I hope the next Judge I get in a wage hour case is just like this one…

Mark E. Tabakman is a partner in the Labor & Employment Department of Fox Rothschild LLP who focuses his practice on advising and defending employers across the country in wage-hour matters. Based in the firm’s Princeton, NJ office.

3 Things to Watch with USPTO Fee Rule Before SCOTUS

October 4, 2019

A recent Law 360 article by Bill Donahue, “3 Things to Watch as USPTO’s Fee Rules Hits the High Court, reports on the USPTO attorney fee rule that's before the U.S. Supreme Court.  The article reads:

With the U.S. Supreme Court set to hear arguments over the U.S. Patent and Trademark Office's controversial policy on attorney fees, Law360 asked legal experts what they’re expecting to hear from the justices.  The case, Peter v. NantKwest, will determine the legality of an unusual USPTO policy that demands reimbursement of the agency’s attorney fees in certain types of appellate proceedings — regardless of whether or not it wins the case.

The USPTO has argued that the tactic, first rolled out in 2013, is necessary to pay for a more expensive appellate option, but critics say it will harm small businesses and individual inventors who can’t afford to automatically pay the agency’s legal bills.  Lower appeals courts have split on whether the policy violates the so-called American Rule — a deep-rooted doctrine that says litigants must pay their own expenses unless Congress expressly says otherwise.

After the Federal Circuit struck down the policy last year in a case filed by the drugmaker NantKwest, the USPTO appealed to the high court, which agreed to hear the case in March.  With oral arguments set for Monday morning, here are three big issues that experts who have been tracking the case say they’ll be watching.

American Rule

One major factor to watch is the extent to which the justices focus on big questions about the American Rule and public policy or on narrow questions about exact statutory language.  The USPTO's fee policy is rooted in a novel interpretation of so-called de novo appeals — a longer and more fact-intensive route that allows a dissatisfied patent or trademark applicant to appeal to a district court rather than simply asking the Federal Circuit to review a refusal on the existing record.

At issue at the high court?  Language included in both the Patent Act and the Lanham Act that says applicants who choose the de novo route must reimburse "all expenses of the proceeding."  Crucially, that requirement applies regardless of whether an applicant wins or loses its appeal.

For decades, the USPTO interpreted that language to mean relatively minor expenses, like travel costs and expert fees.  But that changed in 2013, when the USPTO started demanding that applicants reimburse the substantially larger cost of the salaries paid to agency attorneys.  Whether that reinterpretation is legal has split the circuits courts.

In the current case against NantKwest, the Federal Circuit ruled that the policy violates the American Rule, saying that Congress did give the agency clear authority to win such fees.  But in a separate trademark case, the Fourth Circuit refused to apply the American Rule, and instead simply held that the definition of “all expenses” could reasonably include salaries paid to agency lawyers.

Experts will be watching whether the justices seem to be focusing, like the Federal Circuit did, on the bigger question of the American Rule or whether they merely want to analyze what “all expenses” means.  “If questions from the bench refer to the American Rule, it may mean the court views the government’s case skeptically,” said Theodore H. Davis, an attorney Kilpatrick Townsend & Stockton LLP who penned an amicus brief against the USPTO for the American Bar Association.  “But if the court zeros in on the definition of the word ‘expenses,’ that may suggest it’s leaning toward a reversal or a vacatur,” Davis said.

Across the Aisle

The challenge to the USPTO’s fee policy presents arguments that experts say could resonate on with both ideological wings of the high court.  Much of the criticism of the agency’s policy has been centered on the idea that it would limit access to justice for applicants with fewer resources.  The ABA said the rule means that applicants' “wealth would determine their access to the pathway to justice provided by Congress.”  The International Trademark Association warned that it would make de novo appeal unavailable “for all but the wealthiest applicants.”

Those policy arguments could strike a chord with the court’s liberal members, experts say.  “The more liberal justices may focus on the fact that fee-shifting creates an access to justice problem,” said Dyan Finguerra-DuCharme, an attorney at Pryor Cashman LLP.  “Those with less money will hesitate to pursue legitimate claims by civil action.”

For the conservatives, an abrupt about-face by a federal administrative agency that results in foisting large legal bills onto private companies might not sit well.  “I am particularly looking forward to the questions that Justices Neil Gorsuch and Brett Kavanaugh present to the parties,” said William Atkins, an attorney at Pillsbury Winthrop Shaw Pittman LLP who wrote an amicus brief against the USPTO for the Federal Circuit Bar Association.  “The views of administrative law may be on full display.”

Dissenting Voice

Ahead of arguments, the amicus briefs filed in the case have largely been one-sided, with almost all of them asking the court to strike down USPTO’s policy.  But one outside group, a conservative think tank called the R Street Institute, is pressing the court to uphold the agency’s interpretation.  According to R Street, administrative procedures at the USPTO for rejected patent applications largely replicate the advantages of a de novo appeal for a fraction of the cost, eliminating much of the “access to justice” policy arguments against the fee rule.

The real advantage of de novo appeals, according to R Street, is that they can be exploited to give “well-financed applicants” in the pharmaceutical industry extra time on the back end of a patent term.  Under separate provisions of the Patent Act, time spent litigating a de novo case is tacked onto the term.  For Charles Duan, the attorney at R Street who penned the group’s brief, the extent to which that argument gains traction with the justices will be another element to watch.