Third Circuit Permits Deduction of Generic Hatch-Waxman Protection Prices

by Dennis Crouch

Mylan v. IRS, No. 22-1193, — F.4th — (3d Cir. July 27, 2023)

In a latest tax enchantment, the Third Circuit court docket of appeals afformed that authorized bills incurred by generic drug makers to defend in opposition to patent infringement fits introduced underneath the Hatch-Waxman Act are deductible as unusual and vital enterprise bills. This aligns with longstanding precedent treating patent litigation protection prices as deductible for the alleged infringer.

Mylan had deducted over $100 million in litigation bills for the durations of 2012-2014 it occurred in defending patent infringement lawsuits introduced in opposition to the generic producer after it submitted abbreviated new drug functions (ANDAs) with paragraph IV certifications difficult the respective patents.  The IRS disallowed the deductions and issued notices of deficiency to the corporate — concluding that as an alternative the litigation prices must be capitalized underneath I.R.C. § 263 (and related laws) as prices to amass intangible property (the FDA drug approvals).   The capitalization course of requires amortization over 15 years slightly than allowing rapid tax reduction offsetting present earnings.

Mylan petitioned the U.S. Tax Courtroom for redetermination and gained a holding that litigation prices have been deductible enterprise bills, rejecting the IRS’s place that they need to be capitalized.  The IRS Commissioner then appealed to the third Circuit who affirmed.

Within the enchantment, the IRS argued that litigation prices must be capitalized underneath Treas. Reg. §1.263(a)-4(b)(1)(v) as quantities paid to facilitate the acquisition of the FDA drug approvals, that are intangible property.  The third Circuit rejected that argument, holding that lawsuits by the branded producers don’t facilitate FDA approval.  The court docket famous that the FDA can approve an ANDA whatever the litigation final result and in addition that not each ANDA leads to litigation so it’s not a required step within the course of.  Though litigation is a contemplated side of the Hatch-Waxman course of, that doesn’t convert the litigation into an approval requirement.  The court docket additionally famous that disparate tax therapy between generics and types would undermine Hatch-Waxman.

The Third Circuit had beforehand held that litigation bills a patentee incurs in imposing its patents are unusual and vital enterprise bills as a result of they’re “peculiarly regular to the enterprise by which … [patentee] taxpayers [a]re engaged.” Urquhart v. Commissioner, 215 F.second 17, 19 (3d Cir. 1954). The court docket in Mylan reasoned that generic producers defending infringement fits are engaged in functionally the identical exercise as patentees imposing patents. Thus, the court docket concluded that deductibility shouldn’t differ primarily based on whether or not litigation bills are incurred by the patentee or alleged infringer. Within the court docket’s view, “[i]t makes no distinction in deciding the query of deductibility whether or not the patent litigation bills are incurred by the patentee or the alleged infringer. Nor does it matter that the deductibility query arises within the context of an ANDA swimsuit.”

Generic producers counting on deductibility of those litigation prices will profit from the ruling. If the charges needed to be capitalized, it could considerably enhance prices and undermine their incentives to problem weak patents underneath Hatch-Waxman.