In a 2-1 decision issued on April 23, 2015, the Fourth Circuit held that a trademark applicant who appeals an adverse ex parte decision of the Trademark Trial and Appeal Board (TTAB) to a U.S. District Court must pay the prorated fees for attorneys from the U.S. Patent and Trademark Office (PTO) who defend the case. The obligation to pay the fees arises regardless of whether the appeal is successful. The decision in Shammas v. Focarino makes it likely that trademark appellants will choose the District Court route, rather than a straightforward appeal to the Federal Circuit, only in unusual, high-profile cases. 

In this case, Milo Shammas filed an application to register PROBIOTIC for fertilizer products. The PTO examining attorney refused registration on the ground that the term was generic and descriptive. The TTAB affirmed the decision.

Under Section 21 of the Lanham Act, Mr. Shammas could elect to have review of the TTAB decision through one of two means. One was by direct appeal to the Court of Appeals for the Federal Circuit, which would decide the case solely on the record before the TTAB. The other was to file a de novocivil action against the PTO in U.S. District Court, in which each party could supplement the record. Mr. Shammas chose the latter option. Section 21(b)(3) provides that the appellant must pay “all the expenses of the proceeding…whether the final decision is in favor of such party or not.”

The U.S. District Court for the Eastern District of Virginia granted the PTO’s motion for summary judgment, dismissing the appeal. It went on to grant the PTO’s motion for an award of more than $36,000 in expenses, which included the prorated salaries of two PTO attorneys and a paralegal. The Court reasoned that “all expenses” should be read literally and that Congress intended for the PTO to be made whole when it incurred the extra expense of defending a de novo civil action rather than an appeal based on the TTAB record.

Mr. Shammas, supported by an amicus brief filed by the International Trademark Association, appealed. They argued that the “American Rule” — in which each party pays its own attorneys’ fees — may not be abrogated unless the controlling statute in the case expressly does so. Since the Lanham Act makes express references to awards of attorneys’ fees elsewhere in the statute, they said, the failure to mention them in Section 21(b)(3) meant that attorneys’ fees were not to be included in an award of “expenses.”

The Fourth Circuit disagreed, and affirmed. It first held that the American Rule applies only to “fee-shifting,” i.e., recovery of attorneys’ fees by a prevailing party from a losing party. Here, said the court, there is no fee-shifting — the appellant pays “all expenses” whether it wins or loses. Therefore, the American Rule is not at issue, so Congress had no obligation to expressly provide for payment of attorneys’ fees.

The Court went on to hold that Section 21(b)(3) is in the nature of a “unilateral, compensatory fee, including attorneys’ fees, on every ex parte applicant who elects to engage the resources of the PTO when pursuing a de novo action in the district court…” In the Court’s view, the section “plainly incentivizes trademark applicants to appeal routine trademark denials to the Federal Circuit” and “was intended as a straightforward funding provision, designed to relieve the PTO of the financial burden that results from an applicant’s election to pursue the more expensive district court litigation.” Therefore, the language requiring that the dissatisfied applicant pay “all expenses of the proceeding” must mean all expenses, including the pro-rated salaries of PTO attorneys and paralegals.

To the dissenter, Judge King, the American Rule means that “‘absent explicit statutory authority,’ the courts presume that the litigants will ‘bear their own legal costs, win or lose’” (quoting In re Crescent City Estates, LLC v. Draper,588 F. 3d 822, 825 (4th Cir. 2009)). He saw nothing to indicate that Congress had “clearly and directly” authorized the award of attorneys’ fees under Section 21(b)(3), contrasting this clause with the express provisions for attorneys’ fees awards in five other places in the Lanham Act. He concluded by saying that, absent explicit statutory language, courts can “only speculate” on whether the phrase “all the expenses of the proceeding” includes attorneys’ fees — but that, against the backdrop of the American Rule, courts are not entitled to make “educated guesses.” He would have ruled that “expenses” means only out of pocket costs.

The PTO’s request for attorneys’ fees in this case was unusual, if not unprecedented. The PTO did not dispute Mr. Shammas’ contention that, prior to 2013, the PTO had never sought an attorneys’ fee award under either Section 21(b)(3) or under the parallel provision in the Patent Act. “If such awards had been generally available,” wrote Judge King, “the PTO’s silence in the face of such authority is more than passing strange.” The District Court decision took trademark practitioners by surprise, since the possibility of fee-shifting had never figured in the calculus of deciding whether to appeal anex parte refusal to the District Court instead of the Federal Circuit.

If the Fourth Circuit panel decision stands, however, applicants will have to have a compelling reason to choose review of a TTAB decision via the District Court route. Applicants should therefore spare no effort in making a complete record at the TTAB stage. The second bite at the apple before a District Court will be an expensive one, win or lose.

A copy of the Fourth Circuit decision and dissent may be found online.