Are Patent Litigation Expenses Relating to ANDA Tax Deductible?

Generic drugs typically cost less than the replicated brand-name drugs. It is a cost-effective way of making available expensive essential medications to patients who need them. Generic drugs are priced lower because manufacturers of generic drugs do not have to invest in clinical studies and tests that have already been done by the brand-name manufacturer.

The U.S. Food and Drug Administration (FDA) follows a specific process before approving generic drugs to ensure that they meet the established standards. A generic drug manufacturer is required to submit an Abbreviated New Drug Application (ANDA) to the FDA for permission to manufacture and sell a generic drug. When an ANDA is filed with the FDA, the patent holder (i.e., the brand name manufacturer) may try to slow or stop production of the generic drug by filing a patent infringement suit against the ANDA applicant. These lawsuits can be expensive, and the generic drug manufacturer is likely to incur large patent infringement litigation expenses defending the lawsuit. Patent infringement suits filed in response to ANDA filings are often called ANDA suits.

The tax treatment of patent litigation expenses on ANDA suits has been unclear; they are either capitalized and amortized under IRC sections 263(a) and 197, or they are deductible currently under section 162. Section 263(a) requires a taxpayer to capitalize amounts paid to acquire/create intangible assets and amounts paid to facilitate the acquisition or creation of these assets, and section 162 allows deductions for ordinary and necessary trade or business expenses paid or incurred during a tax year.

In Mylan, Inc. & Subsidiaries v. Commissioner, the Tax Court in 2021 held that legal expenses incurred in the preparation, assembly, and issuance of notice letters required by ANDA filings are required to be capitalized under section 263(a), while the legal expenses incurred to defend an ANDA suit are deductible under section 162. In July 2023, the Third Circuit Court of Appeals affirmed the Tax Court’s ruling that legal costs incurred to defend patent infringement suits are deductible legal expenses. The Third Circuit held that legal costs to defend ANDA suits do not facilitate the acquisition or creation of an intangible asset because they are not a required step in the FDA approval process. Therefore, legal costs incurred to defend a patent infringement suit are deductible business expenses (and capitalization is not required).

This favorable decision allows a generic drug manufacturer to deduct legal costs associated with defending ANDA suits.