Legal Challenge to PTO Fee Spikes Likely But Would Face Significant Obstacles, says Professor Vishnubhakat – First Legal Advisor to USPTO’s Chief Economists
Legal Challenge to PTO Fee Spikes Likely But Would Face Significant Obstacles, says Professor Vishnubhakat – First Legal Advisor to USPTO’s Chief Economists
Also: why opposition to fee increases on policy grounds is preferable
USPTO’s proposal for unprecedented fee increases continue to roil the innovation community and the patent bar. However, questions remain regarding the prospect of challenging the fees if the USPTO decides to continue to ignore the outcry.
Fortunately, the person best suited to address this topic, Saurabh Vishnubhakat, has generously shared his analysis below. He is a leading academic on the subject of USPTO’s policymaking and the former legal advisor to USPTO’s first two chief economists. He is now Professor & Director of the IP and Information Law Program at the Benjamin N. Cardozo School of Law. The arguments here should not be imputed to the USPTO or to any other organization.
Voice of IP has recently covered the proposed rise in Patent Office fees that would take effect in fiscal year 2025. I am grateful to Eli for inviting my thoughts as well on this seemingly arcane but quite important issue.
The current proposal is a departure from the usual run of USPTO fee-setting, which has tended to be incremental and largely technology-agnostic. Dozens of fees are rising by a margin of 25% or more, and a host of patenting activities will now carry entirely new fees. Moreover, a number of these fees and fee increases are expressly aimed at patenting activity in specific technological fields of economic, social, and political importance. As a result—and apart from concerns about access and affordability for under-resourced applicants—questions are now arising about potential legal challenges to the USPTO’s authority to undertake such significant policymaking in the guise of an accounting exercise.
My own view is that if these rules are finalized substantially as proposed, then a legal challenge is likely but would face significant doctrinal and practical obstacles.
Historical Indications for a Legal Challenge
The framework for a challenge to these fees would surely rest on the Tafas litigation, which challenged the USPTO’s 2007 rules altering continuation practice. Among other things, the 2007 rules had sharply curtailed the availability to applicants of continuation applications and requests for continued examination.
The district court in Tafas invalidated the rules and enjoined their enforcement. A Federal Circuit panel largely reversed and approved most of the rules, striking down only the restriction as to continuation applications. Though the Federal Circuit granted en banc rehearing, vacating the panel decision altogether, the case became moot while en banc consideration was still pending because the newly installed Kappos administration withdrew the rules. Importantly, the district court judgment was left intact.
The result is that, as former GSK chief patent counsel Sherry Knowles recently recounted to Voice of IP, the USPTO “remains under the permanent injunction issued by Judge Cacheris on April 1, 2008 from issuing regulations that overlap with the Final Rules published by the PTO August 21, 2007 regarding limitations to continuations and claims.” Ms. Knowles is of the view, and I generally agree, that pricing a behavior is preferable to prohibiting it outright and that such a strategy can be implemented here in a way that comports with statutory and case law.
However, others disagree and have raised the possibility of a Tafas-like challenge in connection with the current fee proposal, such as Fabian Koenigbauer at Ice Miller LLP as well as Heidi Lunasin, Ryan Smith, and Vicki Norton at Duane Morris LLP. Indeed, these comparisons were already part of the conversation a year ago when the USPTO first announced its plans. Courtenay Brinckerhoff at Foley & Lardner LLP invoked Tafas as a constraint on “extra-statutory restrictions on continuation applications” last April, and Richard Kelly at Oblon LLP likewise did so last June.
Some Obstacles to a Legal Challenge
Still, though a lawsuit may be in the offing, its prospects for success will run up against important doctrinal and practical difficulties. One set of difficulties is in the peculiar nature of the Tafas precedent itself. Another is in the Director’s capacious statutory authority to set fees. Still another is in the problem of disentangling the USPTO’s regulatory motivations, some of which have long benefited patent applicants and which opponents of the current fee proposal would not like to give up.
Tafas as Precedent
To begin with Tafas itself, we should remember that while the district court judgment remains in place, the substance of that judgment was largely disapproved in the Federal Circuit panel opinion. Though in agreement that the USPTO lacked substantive rulemaking authority, even the three-judge panel was fractured on important questions, including whether the agency might receive Chevron deference as to its own rulemaking authority and whether the rules in question were, in fact, substantive or procedural. Meanwhile, though the panel opinion was subsequently vacated, it is not clear that the agency would have fared worse before the court sitting en banc.
And in any case, how the Federal Circuit today might have seen the issues is highly speculative, as a large majority of the court has since turned over. Two of the panel judges are no longer active—Judge Rader by retirement and Judge Bryson by senior status. Five more from the en banc court are no longer active—Chief Judge Michel and Judge Gajarsa by retirement and Judges Mayer, Schall, and Linn by senior status. (Judge Lourie was recused in Tafas and now on senior status.) Seven new judges have taken their place, including Judge Chen, who was formerly the USPTO’s Deputy Solicitor and part of the agency’s litigation team in Tafas.
Though the district court judgment in Tafas is currently in force, as a matter of precedent it is a slender reed.
Section 41 Authority
Turning next to statutory fee-setting authority, the current language of 35 U.S.C. § 41 (as enacted in the 2011 America Invents Act) limits the extent of fee increases to the level of cost-recovery. Patent search fees must not exceed the agency’s estimated average cost for searching patent applications. Patent-related fees for other processing, services, or materials must not exceed the agency’s estimated average cost for carrying out those activities. This presents the agency with at least two angles of flexibility.
One is that § 41 may fairly be read as requiring cost-recovery while imposing no other restraints on fee-setting. After all, the statute commands the Director “to ensure that the fees recover an amount not to exceed the estimated average cost” to the agency of the relevant activity. It does not expressly command the Director only to ensure that. Thus, so long as fees do not exceed the cost-recovery cap, the agency may remain free to pursue other policy objectives as it sees fit—such as disincentivizing (without prohibiting) the usage of continuation or RCE practice.
The other is an interpretive backstop in case § 41 is read more narrowly. The canon of expressio unius, for example, may indeed lead the court to conclude that acting “to ensure that the fees recover an amount not to exceed the estimated average cost” requires acting only to ensure that. Even then, however, the argument would remain that setting or adjusting fees “to” ensure cost-recovery is not a limitation on the purpose of fees but only on their magnitude. We would be back to latitude for the agency to pursue via fee-setting a wide range of other policy objectives.
Mixed Regulatory Motivations
Indeed, as a practical matter, it is hard to see how the USPTO could responsibly avoid using fee-setting as a policy lever even if it tried. Under decades-long regulatory practice, the USPTO must, of course, do a cost-benefit analysis as any other agency would. And even a rudimentary cost-benefit calculation would have to recognize the price elasticity of different groups of applicants with respect to different sets of services. Simply put, raising the price of an activity deters participation in it, and that is true regardless of whether deterrence was the principal aim, or one of several aims, or wholly absent from the regulator’s plan. So if the USPTO must, through cost-benefit analysis, familiarize itself with its proposal’s likely effects upon applicant behavior, how can it also be obliged to avoid shaping applicant behavior?
One answer might be that effects are not the same as intentions. Indeed, the USPTO in its proposal is being unusually candid about using fees to optimize not only “operations” but also “filing behaviors.” The agency is also creating and raising fees that it expects will disproportionately target “large pharmaceutical and medical device companies” in apparent alignment with the policy aims of the USPTO-FDA collaboration initiative, which include guarding against the use of patents to “unjustifiably delay generic drug and biosimilar competition.”
It is unwise, however, to make this sort of regulatory transparency a basis for legal attack, as the alternative would not be better policy but rather opaque policy. There are undoubtedly good policy arguments for opposing such dramatic fee increases. For example, as Professor John Duffy argued over a dozen years ago in the months leading up to the enactment of the AIA, the fee-setting authority granted to the Patent Office allows it to “raise its fees to fuel its own growth.” The self-evident moral hazard is that fees may continue to rise so long as agency activities expand to justify them. Those who oppose either bureaucratic expansion in general, or the growing complexity of the patent system in particular, or the targeting of particular technology sectors and industries for politically disfavored treatment would all have much to criticize. Still, an ill-advised rulemaking is not the same as an illegal one.
And the logic would cut both ways. It is longstanding USPTO practice to set filing, search, and examination fees remain well below the marginal cost of those activities specifically to encourage entry into the Patent Office. Meanwhile, maintenance fees are set well above marginal cost to create a consciously crafted cross-subsidy whereby the post-grant payments of successful patent grantees fund discounted access to the patent system at the front end. This, too, is a use of fee-setting for policy purposes, except that the policy is one of patent-friendly inducement rather than deterrence.
Conclusion
The sticker shock from the USPTO’s current fee proposal is certainly understandable, and the recurring invocation of Tafas is good evidence that finalizing the schedule into a rule would probably provoke a challenge in the courts. However, the doctrinal and practical hurdles to such a challenge are significant, perhaps even intractable. Framing the opposition now on policy grounds is not only preferable—as it would reward and promote the desirable transparency the USPTO is showing in its regulatory motivations—but may also prove more likely to succeed.