In an opinion released July 27, 2023, the Third Circuit affirmed a 2021 Tax Court decision upholding a pharmaceutical company’s immediate deduction of patent defense litigation costs in suits brought under the Hatch-Waxman Act. The IRS argued that the patent litigation fees were a part of the cost of acquiring FDA approval to market its generic drugs and, therefore, were required to be capitalized as costs that facilitate the creation of an intangible under section 263(a).

As a part of its ANDA applications in the years at issue, Mylan submitted to the FDA certifications stating its proposed generic drugs would not infringe valid patents. As a result of those certifications, Mylan faced about 120 patent infringement suits and tens of millions of dollars in legal fees. Mylan deducted the legal fees under section 162 as ordinary and necessary business expenses. The IRS argued, in line with many of its issued memoranda, that the costs of defending patent infringement suits filed in response to such certifications must be capitalized as part of the costs of creating an intangible under section 263(a). The Tax Court determined the costs of preparing the certifications were capital expenditures under section 263(a) because they were a necessary element of acquiring FDA approval. However, the Tax Court determined the legal fees related to the patent infringement suits were deductible under section 162 because the suits were distinct from the FDA approval process.

The Third Circuit characterized the appeal as turning on “what the word ‘facilitate’ means.” The court emphasized that “the outcome of patent litigation is irrelevant to the FDA’s review” because FDA approval turns on whether a generic is considered safe and effective. Thus, the litigation has no bearing on whether or not FDA approval is obtained – the FDA can approve an ANDA for an infringing generic and deny one for a non-infringing generic. Therefore, the court determined, patent litigation does not facilitate the acquisition of an FDA-approved ANDA because “the two processes are distinct and ultimately separate.” The court further noted that, if anything, ANDA suits slow the approval process down, implying that something that makes the approval more difficult does not facilitate the approval. The court concluded that the certifications made in the ANDA process “do not transform ordinary patent infringement litigation into a facilitating step for generic drug approval,” and certainly not to an extent that justifies disparate tax treatment from ordinary patent infringement suit costs.

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