IP Law Daily, PATENT—Fed. Cir.: Generic drug company could treat patent litigation costs as deductible expenses, (Mar 24, 2025)

By Linda O’Brien, J.D., LL.M.

Although patent infringement litigation typically proceeds in parallel with the FDA ANDA review, the resolution of the litigation was not a perquisite to FDA approval.

Legal expenses incurred by generic pharmaceutical manufacturer in defending several patent infringement lawsuits were deductible as ordinary and necessary business expenses and were not capital expenditures, the U.S. Court of Appeals for the Federal Circuit has ruled. The origin of the claim was the patent infringement litigation rather than the drug maker’s filing of Abbreviated New Drug Applications and the litigation did not facilitate the acquisition of an intangible asset. Thus, the grant of summary judgment to the generic drug manufacturer was affirmed (Actavis Laboratories FL, Inc. v. U.S., No. 23-1320 (Fed. Cir. Mar. 21, 2025)).

Pharmaceutical company Actavis Laboratories FL, Inc. filed Abbreviated New Drug Applications (“ANDAs”) with the Food and Drug Administration, seeking approval to sell generic versions of branded drugs that were already being sold in the U.S. Pharmaceutical manufacturers of the branded drugs, that held New Drug Applications (“NDAs”) and patents for those drugs, filed patent infringement suits against Actavis pursuant to the Hatch-Waxman Act. Actavis treated the litigation expenses incurred in defending the various Hatch-Waxman lawsuits and deducted them on its tax returns in the years the expenses were incurred. The IRS determined that the expenses were capital expenditures as they were incurred in the pursuit of an intangible capital assets, namely FDA approval to market generic drugs in the U.S. Actavis paid the tax liabilities calculated by the IRS and sued the commissioner, seeking refunds of the claimed overpayments. In granting Actavis’ motion for summary judgment, the Court of Federal Claims held that the litigation expenses were deductible and did not need to be capitalized. The IRS timely appealed the decision.

Patent litigation expenses. Under either the “origin of the claim” standard in Woodward v. Commissioner, 397 U.S. 572 (1970) or the “significant future benefit” methodology in IRS regulation C.F.R. §1.263(a)-4, Hatch-Waxman litigation expenses are deductible ordinary business expenses and are not capital expenditures, the court found. Drug manufacturers must obtain FDA approval to market any new drug in the U.S. To obtain such approval, the manufacturer submits an NDA to the FDA. Generic manufacturers may file ANDAs, which is less costly and time-consuming, which require a simpler showing that a generic drug has the same active ingredients and is biologically equivalent to the already approved branded drug. Once the generic manufacturer obtains FDA approval for its ANDA, approval becomes effective upon the resolution of any Hatch-Waxman litigation in its favor or upon the expiration of the 30-month stay. Brand name drug manufacturers do not always file lawsuits in response to ANDA filings and the decision to engage in or abstain from patent litigation has no role in the FDA’s review of an ANDA.

Under the origin of the claim test, the relevant inquiry is whether the origin of the claim in litigation was in the process of the acquisition of a capital asset. The taxpayer’s purpose in undertaking a defense in the litigation or the consequences to the taxpayer were irrelevant. In this case, the claim being litigated in a Hatch-Waxman lawsuit originates in patent infringement and the origin of the claim is not the acquisition of FDA approval of an ANDA. While a filer of an ANDA is pursuing the capital asset of an FDA approved ANDA, which gives the filer the right to sell its generic drug, Hatch-Waxman litigation does not determine whether or not the ANDA is approved. Hatch-Waxman litigation typically proceeds in parallel with FDA regulatory review. However, the two processes are distinct and only the FDA has authority to approve an ANDA and allow the filer to sell the approved drug in the U.S. Further confirmation that the origin of the claim rested with the patent holder’s decision to sue and not in the ANDA filer’s decision to seek drug approval from the FDA was the fact that patent infringement litigation could not provide ANDA approval, only the FDA could, the court explained.

Applying C.F.R. §1.263, the question of whether Actavis’ litigation expenses may be deducted or instead treated as capital expenditures turned on whether the litigation facilitated the transaction of its acquisition of the intangible asset of FDA approval of its ANDA. In rejecting the government’s argument that the definition of “facilitate” included the “process of investigating or otherwise pursuing the transaction,” the court noted that Hatch-Waxman litigation is not part of the process of pursuing approval of an ANDA. Thus, the litigation did not facilitate the acquisition of an FDA-approved ANDA and hence did not facilitate the acquisition of an asset providing a significant future benefit. Therefore, the expenditures were not capital expenditures and instead ordinary and necessary business expenses that may be deducted in the year in which they were incurred, the court concluded.

The Case is No. 23-1320.

Judge: Stark, L.

Attorneys: Kevin P. Martin (Goodwin Procter LLP) for Actavis Laboratories FL, Inc. Clint Carpenter, U.S. Department of Justice, for U.S.

Companies: Actavis Laboratories FL, Inc.

Cases: Patent FedCirNews