Third Circuit Allows Deduction of Generic Hatch-Waxman Defense Costs

by Dennis Crouch

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

In a recent tax appeal, the Third Circuit court of appeals afformed that legal expenses incurred by generic drug makers to defend against patent infringement suits brought under the Hatch-Waxman Act are deductible as ordinary and necessary business expenses. This aligns with longstanding precedent treating patent litigation defense costs as deductible for the alleged infringer.

Mylan had deducted over $100 million in litigation expenses for the periods of 2012-2014 it occurred in defending patent infringement lawsuits brought against the generic manufacturer after it submitted abbreviated new drug applications (ANDAs) with paragraph IV certifications challenging the respective patents.  The IRS disallowed the deductions and issued notices of deficiency to the company — concluding that instead the litigation costs should be capitalized under I.R.C. § 263 (and associated regulations) as costs to acquire intangible assets (the FDA drug approvals).   The capitalization process requires amortization over 15 years rather than permitting immediate tax relief offsetting current income.

Mylan petitioned the U.S. Tax Court for redetermination and won a holding that litigation costs were deductible business expenses, rejecting the IRS’s position that they should be capitalized.  The IRS Commissioner then appealed to the 3rd Circuit who affirmed.

In the appeal, the IRS argued that litigation costs should be capitalized under Treas. Reg. §1.263(a)-4(b)(1)(v) as amounts paid to facilitate the acquisition of the FDA drug approvals, which are intangible assets.  The 3rd Circuit rejected that argument, holding that lawsuits by the branded manufacturers do not facilitate FDA approval.  The court noted that the FDA can approve an ANDA regardless of the litigation outcome and also that not every ANDA results in litigation so it is not a required step in the process.  Although litigation is a contemplated aspect of the Hatch-Waxman process, that does not convert the litigation into an approval requirement.  The court also noted that disparate tax treatment between generics and brands would undermine Hatch-Waxman.

The Third Circuit had previously held that litigation expenses a patentee incurs in enforcing its patents are ordinary and necessary business expenses because they are “peculiarly normal to the business in which … [patentee] taxpayers [a]re engaged.” Urquhart v. Commissioner, 215 F.2d 17, 19 (3d Cir. 1954). The court in Mylan reasoned that generic manufacturers defending infringement suits are engaged in functionally the same activity as patentees enforcing patents. Thus, the court concluded that deductibility should not differ based on whether litigation expenses are incurred by the patentee or alleged infringer. In the court’s view, “[i]t 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.”

Generic manufacturers relying on deductibility of these litigation costs will benefit from the ruling. If the fees had to be capitalized, it would substantially increase costs and undermine their incentives to challenge weak patents under Hatch-Waxman.

16 thoughts on “Third Circuit Allows Deduction of Generic Hatch-Waxman Defense Costs

  1. 3

    And yet again, the rather mistaken “quality” notion is being peddled:

    it would substantially [___] and undermine their incentives to challenge weak patents under Hatch-Waxman.

    This “challenge” is akin to penalizing car buyers (or car FranchisEEs) while not focusing at all on the car manufacturers (or car FranchisORs).

    To combat “weak” necessarily impugns patent examination. And the answer there cannot be a blind “just say no” Reject, Reject, Reject mantra.

    Of course, it is easier (and plays into a Desired Narrative) to B L A M E the would-be patent FramchisOR with the “patents are B A D and ‘0h Noes, Tr011s’” epithets (with the ‘lighter’ flavor of, ‘only B A D people ever try to enforce ‘weak’ patents).

  2. 2

    Hallelujah! Now, if we can get the Tax Court to allow R&D expenses to be considered a legitimate business expense also then the US might regain some of its competitive position like back in the 60s. Liberal lunatics took control of the asylum and passed a series of laws that destroyed US manufacturing industries, i.e. failure to fund education in science and engineering, strict product liability, extreme environmental laws that encourage illegal dumping, discouraging proper patent examination by creating financial incentives for the USPTO to issue even bad patents for the collection of maintenance fees for self funding, etc.

  3. 1

    Question for those (including on the Left) who may be advocates of Modern Monetary Theory (and care little about balanced budgets):

    Why do we even have taxes?

    Asking for a friend.

    1. 1.1

      I am not an economist, but I think the short answer is that the purpose of taxes is to pay for spending for the public good and keep confidence in the economic system that services are paid for.

      I went to a college that taught the Austrian school of economics, i.e. Hayek, but I am also familiar with Keynesian school as well. Both Hayek and Keynes economic theories were just that, theories. The world is too complex for either the Hayek or Keynes model to be fully accurate of such a sensitive system.

      Keynes thought debt spending was permissible in times of crisis to save the system such as during war, pandemic, and economic depression, i.e. free market failure. The Hayek extremist model does not allow for such externalities and would let the economic system crash repeatedly so that the weak would die off hoping the system that survived would be stronger as a result. Unfortunately, when we attempted to implement the Hayek model before WWI, the world economy collapsed leading to the first world war. You can’t expect people just to accept economic destruction without a fight…to the death. The Keynes model was applied post WWII and has largely stabilized the world economy successfully. It is hard to argue with the success of the Keynes model, but I personally think there is a limit to how much debt can and should be accumulated for frivolous purposes such as the Trump tax breaks for the ultra-wealthy that threaten overall confidence in the economic system.

      1. 1.1.1

        Thanks JR – I may not agree with your views (vis a vis mention of one item from the former President that has been absolutely dwarfed by actions of the current President), but kudos for engaging on the merits.

      2. 1.1.2

        The idea that taxes “pay for spending” may be seen to align with the notion that spending should be paid for (the concept of a balanced budget).

        Modern Monetary theory (and largely, the current administration, although both sides of the aisle cannot be said to be blameless) repudiates notions.

        Now if one takes the notion as being repudiated (from multiple angles of ‘we just print more money’ AND ‘we really don’t have to balance the budget (stick it to the grandkids), then wouldn’t it be fair to look at taxes as a punitive we@p0n?


          “ Modern Monetary theory (and largely, the current administration, ”


          What a lame-o reality-denying stooge you are.


              The “O”s were autocorrected to “I”s — but I am more than certain you know what that acronym means.

    2. 1.2

      I wouldn’t call myself an “advocate” so much as “an opponent” of MMT anon, but I do know the answer to that. They had several debates between MMT economists vs. austrian economists (libertarian types etc) on youtube between some of the bigger names in each camp. I don’t have all the links on hand but you can probably google several easily, and once you watch like 5 they’ll start popping up in your recommendeds. Just google mmt vs austrian etc.

      Bottom line from many discussions was:

      Taxes are required because the alternative (money printer go BRRRRR to print the federal budget each year) would lead to:

      a more deeply regressive “tax” regime (the resulting inflationary pressure would be a stealth fairly super regressive tax compared to the normal “progressive” tax system we have in place, or else would require the fed reserve to stop monetary supply increases where they do currently to alleviate unemployment, which is primarily to “save black people from cletus”)

      lack of the federal reserve having monetary tools it likes to have and use to save the econ etc.

      Overall probably slightly more inflation depending on various things.

      Printing effectively taxes savings/holdings.

      Other government tools / tax tools being taken off the table

      Other odds and ends.

      And yes, obviously under the table they acknowledge that it would be taking a gubmit weapon off the table.

      I’ve watched many a program on this and other related issues. Can see one below.

      link to

      Not going to argue in depth about it but it is a fun debate. It’s also better to discuss why major politicians are only coming up to speed on the issue in the last decade or so.

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