Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.
• Position: TAX TRENDS

Expenses & Deductions

Generic drug manufacturer can deduct patent infringement suit expenses

A generic drug manufacturer, as part of applications for Food and Drug Administration (FDA) approval to produce and market generic versions of brandname drugs, made certifications that the patents for the brand-name drugs were invalid or would not be infringed by the production and marketing of generic versions and sent letters to brand-name drug manufacturers giving notice of these certifications, which allowed the brand-name manufacturers to immediately file patent infringement lawsuits. The Tax Court held that the generic drug manufacturer must capitalize the legal expenses related to the notice letters because they were required as part of the FDA approval process; however, it held that the manufacturer could deduct its legal expenses from the patent infringement lawsuits that arose out of the certifications because the patent litigation was distinct from the approval process.

Background

Mylan Inc. is a U.S. corporation that manufactures brand-name and generic pharmaceutical drugs. During the period in question, 2012 through 2014, Mylan sought FDA approval to manufacture generic versions of many brand-name drugs. In order to bring generic copies of brand-name drugs to market, under rules enacted in the Hatch-Waxman Act, P.L. 98-117, generic drug manufacturers like Mylan must submit applications (called abbreviated new drug applications, or ANDAs) to the FDA for approval to market and sell generic versions of the drugs.

As part of an ANDA, the applicant manufacturer may make what is known as a paragraph IV certification. This is a certification that the listed patents for the brand-name drug for which the applicant is seeking approval were invalid or would not be infringed by the manufacture of generic versions of the drug by the applicant. When the applicant makes such a certification, it is required to send notice letters to the brand-name drug manufacturer and any patentees of the drug, stating that the applicant company has made such a certification.

The practical importance of a paragraph IV certification by an applicant manufacturer is that under the HatchWaxman regime, it constitutes an act of patent infringement, giving the brandname manufacturer and patentees the right to immediately bring a patent infringement suit against the applicant (a Section 271(e)(2) suit). The only difference between a Section 271(e)(2) lawsuit and a patent infringement lawsuit brought after a drug is being marketed is that the question of infringement must focus on what the ANDA applicant will likely market if its application is approved, rather than on a drug that is already being marketed. After an ANDA applicant makes a paragraph IV certification and sends notice letters to the applicable brand-name manufacturer and patentees, the manufacturer and the patentees frequently initiate Sec. 271(e)(2) lawsuits, and the ANDA applicants have significant legal expenses from these lawsuits.

Mylan, being a prolific manufacturer of generic drugs, had millions of dollars in legal expenses in 2012 through 2014 related to its preparation of ANDA applications and the notice letters it was required to send to brand-name manufacturers and patentees when these applications included a paragraph IV certification. It also had millions of dollars of legal expenses incurred in the various Section 271(e)(2) suits arising out of paragraph IV certifications that it was a party to in those years. Mylan timely filed a consolidated Form 1120, U.S. Corporation Income Tax Return, for each of its 2012,2013, and 2014 tax years. On those...