The ‘Unamerican’ Rule: Analysis of Shammas v. Focarino and Paying to Play in Trademark Appeals

Introduction

When you file a trademark application with the United States Patent and Trademark Office (PTO), the website openly warns you that “The trademark registration process is a legal proceeding that may be complex . . . Therefore, you should consider hiring an attorney before starting the process.” So it should not come as a surprise that pursuing that “®” by your company’s logo is going to require you to shell out some cash. Also, the possibility of rejection, denial, and ultimate failure in your pursuit is a very real possibility. For those who join the club of Snooki, Sarah Palin, Donald Trump, Harley Davidson, and Twitter in getting their trademark applications denied, the Lanham Act does provide several avenues of recourse – one of which is commencing a de novo action in a federal district court. However, in addition to his own costs, 15 U.S.C. § 1071(b)(3) imposes that the party bringing such an action is also required to “pay ‘all the expenses of the proceeding,’ whether he succeeds in the action or not.”

In a traditional proceeding in a U.S. federal court, the party bringing the action is responsible for paying all fees on his own side. However, under a Lanham Act § 1071(b)(1) action, that party is also responsible for the costs of the other side as well. Such was the case of Mila Shammas, a dissatisfied applicant in an ex parte trademark proceeding who was charged “all the expenses for the proceeding” incurred by the PTO which included the salary expenses of the two attorneys and a paralegal who represented the PTO’s position totaling $36, 320.49.

The Case

The central issue of the appeal was whether § 1071(b)(3) of the Lanham Act, granting the right for the PTO to recover costs associated with a de novo action in federal district court, included the right for the PTO to recover attorney’s fees. Shammas contended that such an interpretation of the statute would fly in the face of the American rule, which provides that a winning party may not recover attorney’s fees from a loser and that Congress codified no such intent into the Lanham Act. However, in a 2-1 decision, a 4th Circuit panel turned down Shammas’s argument. The panel, led by Judge Paul Niemeyer, held:

“[The rule] does not constitutes fee-shifting that implicates the American Rule but rather an unconditional compensatory charge imposed on a dissatisfied applicant who elects to engage the PTO in a district court proceeding . . . [T]his compensatory charge encompasses the PTO’s salary expenses for the attorneys and paralegals who represent the Director [in the proceeding].”

The ruling explored the precedent invoked by In re Crescent City Estates where the 4th Circuit found that a clear and direct intent of Congress codified into law may displace the tenants of the American rule in circumstances where the American rule would otherwise seem to control and prohibit attorney’s fees from being collected. The 4th Circuit agreed with Judge T.S. Ellis III who wrote the appealed district court opinion which read:

“[T]he plain meaning of the term “expenses,” by itself, would clearly seem to include attorney’s fees. But if any doubt remains about that inclusion, it is removed by Congress’s addition of the word “all” . . . When the word “expenses” is prefaced with the word “all,” it is pellucidly clear Congress intended that the plaintiff in such an action pay for . . . attorney’s fees.”

The Court further bolstered its ruling in iterating that § 1071(b)(3) applies to the party who brings the action regardless of outcome and therefore no fee-shifting occurs. This is unlike the fee-shifting the American rule generally prohibits where the loser pays the costs of the winner because the outcome does not shift who pays the costs – the same party pays every time.

The Dissent

Judge Robert King dissented from the majority stating that Shammas was being penalized for “seeking vindication of his trademark rights.” He noted that the American rule is “deeply rooted” in U.S. legal history so as to ensure parties are not discouraged from bringing suit for fear of fees if they lose. Judge King was particularly annoyed that under the majority holding, the PTO would collect its attorney’s fees even if Shammas prevailed on the merits.

Judge King’s arguments echoed those made in the International Trademark Association’s amicus brief which stated a ruling that would allow the PTO to recover attorney’s fees under § 1071(b)(3) “would create a chilling effect by imposing a prohibitive cost—one that only the wealthiest of applicants could afford. Such a result . . . is anathema to the principles undergirding U.S. intellectual property rights.”

Community Reactions

In light of the 4th Circuit’s decision, the National Law Review issued a practice note for attorneys that “If a party decides to challenge a TTAB decision in district court, it must be prepared to reimburse the government for the salaries of those involved in defending the PTO’s decision.”

Latham and Watkins, LLP issued a “Client Alert” after the district court decision was originally issued suggesting that applicants can avoid the costly fees of paying the PTO’s legal fees even in a successful de novo action “by ensuring that they develop a full record before the TTAB, thereby eliminating the need to present additional evidence on appeal.”

Also after the original district court decision was issued, Adam Baldrige and Nicholas Vescovo of Baker Donelson Bearman Caldwell & Berkowitz PC suggested that a silver lining for applicants appealing trademark denials was that it was now established that the PTO’s attorney’s fees had to be calculated using the actual salaries of government attorneys rather than prevailing market rates which are normally higher.

The case is Shammas v. Focarino, No. 14-1191 (4th Cir. Apr. 23, 2015), aff’g 990 F. Supp. 2d 587 (E.D. Va. 2014).