In a significant decision for generic drug manufacturers, the Federal Circuit recently affirmed that litigation expenses incurred in defending Hatch-Waxman patent lawsuits are deductible as ordinary and necessary business expenses under the Internal Revenue Code (IRC). The ruling in Actavis Laboratories FL, Inc. v. United States, No. 23-1320 (Fed. Cir. Mar. 21, 2025), resolves a key tax dispute, allowing tax deductions for these expenses in the year they are incurred rather than capitalizing them over time. This outcome provides clarity and potential tax benefits for qualifying businesses navigating the interplay of patent litigation and FDA drug approvals.
Background: Hatch-Waxman Litigation and Tax Treatment
The Hatch-Waxman Act facilitates the entry of generic drugs into the market by allowing manufacturers to file Abbreviated New Drug Applications (ANDAs) with the FDA. When a generic manufacturer files an ANDA with a Paragraph IV certification'asserting that the branded drug's patents are invalid or not infringed'it often triggers patent infringement litigation from the branded drug manufacturer. These lawsuits, while tied to the timing of FDA approval, are a common hurdle for generic drug companies.
In this case, Actavis Laboratories FL, Inc. ("Actavis") incurred substantial legal expenses ($3.8 million in 2008 and $8.4 million in 2009) defending itself in multiple Hatch-Waxman lawsuits. Actavis deducted these costs on its tax returns as ordinary and necessary business expenses under IRC Section 162(a), which permits deductions for expenses paid in carrying on a trade or business. The IRS disagreed, classifying the expenses as capital expenditures under IRC Section 263(a), arguing they were incurred to acquire an intangible asset'namely, FDA approval to market generic drugs. Capital expenditures must be amortized over time rather than deducted immediately which delays the tax benefits.
Actavis paid...
