U.S. Court of Appeals Rules in Favor of Viatris: Legal Expenses for Defending Patent Infringement Suits Are Deductible

U.S. Court of Appeals Rules in Favor of Viatris: Legal Expenses for Defending Patent Infringement Suits Are Deductible

The U.S. Court of Appeals for the Third Circuit ruled in favor of Viatris by affirming the U.S. Tax Court holding that a generic drug manufacturer can deduct as ordinary and necessary business expenses legal fees incurred in defending itself against patent infringement suits.

The ruling marks a win for generic drugmakers as the decision allows the companies to write off millions of dollars in legal fees from patent cases related to the generic-drug approval process.

In 2021, the Tax Court previously had ruled that the legal expenses incurred by the taxpayer (a U.S. manufacturer of brand name and generic pharmaceutical drugs) to defend itself against patent infringement suits were deductible as ordinary and necessary business expenses.

The Internal Revenue Services (IRS) had appealed the aforesaid ruling, arguing that the legal fees ought to be understood as a cost of acquiring approval from the U.S. Food and Drug Administration (FDA) to market the taxpayer’s generic drugs and should therefore, be treated as capital expenditures.

However, the Third U.S. Circuit Court of Appeals denied the U.S. Internal Revenue’s appeal and rejected the agency’s argument that the fees should be taxable.

The U.S. Circuit Judge Kent Jordan wrote for a three-judge panel and observed that, “The Tax Court therefore correctly determined that litigation in response to a Paragraph IV certification is distinct from the FDA’s scientific review process and not actually facilitative of generic drug approval. We agree with its holding that ‘Congress’ decision to coordinate effective FDA approval with the outcome of a Section 271(e)(2) suit through the 30- month stay mechanism, 21 U.S.C. Section 355(j)(5)(B)(iii), does not convert such litigation into a link in the Abbreviated New Drug Application (ANDA) approval chain.”

Drug maker Mylan, which merged with Pfizer's Upjohn in 2020 to form Viatris, claimed deductions on its 2012, 2013, and 2014 tax returns for nearly $130 million in legal fees from defending against patent lawsuits triggered by its generic-drug applications with the U.S. Food and Drug Administration. These applications subject generic drug makers to infringement claims from brand-name drug patent owners under the Hatch-Waxman Act.

The IRS determined that the expenses were part of the approval process for generic drugs, making the money a non-deductible capital expenditure because it was spent to acquire property rights. The agency contended that Mylan owed around $50 million in additional taxes.

The U.S. Tax Court disagreed with the IRS. The Court was of the considered view that Hatch-Waxman patent litigation was separate from the approval process and that Mylan's fees were deductible as ordinary business expenses.

The Third Circuit upheld the ruling that Hatch-Waxman patent litigation is not part of the process for generic-drug approval. The Court further noted that a generic drugmaker can receive FDA approval and market its drugs ‘even when the manufacturer loses the patent case it is called on to defend.’

“Uultimate FDA approval is never decided by the outcome of patent litigation under Section 271(e)(2), even if it is delayed by such litigation. That the Hatch-Waxman Act affects when suit can be brought is noteworthy but certainly not determinative,” observed the Court.

Accordingly, the Third Circuit held the Tax Court had correctly determined that patent litigation is distinct from the FDA’s scientific review process and not actually facilitative of generic drug approval.

Viatris was represented by Greg Garre of Latham & Watkins, Bryan Killian of Morgan Lewis & Bockius, Matthew Hellman of Jenner & Block

On the other hand, IRS was represented by Clint Carpenter of the U.S. Department of Justice.