As Benjamin Franklin famously remarked, “nothing is certain except death and taxes.” Recently, the U.S. Court of Appeals for the Third Circuit provided more certainty about the latter by holding that legal expenses incurred by generic drug manufacturers in defending patent infringement suits brought under the Hatch-Waxman Act are deductible from the manufacturers’ federal taxes as ordinary and necessary business expenses. Mylan, Inc. & Subsidiaries v. Comm'r of Internal Revenue, 76 F.4th 230 (3d Cir. 2023).

In the appeal, the Commissioner of Internal Revenue argued that these expenses should be capitalized, under 26 U.S.C. § 263 and the associated regulations, as amounts paid to acquire approvals from the Food and Drug Administration (“FDA”). Id. at 243. The Third Circuit rejected the Commissioner’s argument noting that “ultimate FDA approval is never decided by the outcome of patent litigation under [35 U.S.C.] § 271(e)(2), even if it is delayed by such litigation.” Id. at 244. The Third Circuit concluded that “it makes no difference in deciding the question of deductibility whether the patent litigation expenses are incurred by the patentee or the alleged infringer. Nor does it matter that the deductibility question arises in the context of an ANDA suit.” Id. at 239-240.

Generic drug manufacturers can certainly leverage this ruling at corporate tax time. Companies should also consult with their tax advisors about the treatment of costs associated with the preparation, assembly, and transmittal of notice letters required by the Abbreviated New Drug Application.

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