Tax Win for Generics: Federal Circuit Says Hatch-Waxman Litigation Costs Are Deductible Business Expenses

Actavis Lab’ys FL, Inc. v. United States

In a major decision for the generic pharmaceutical industry, the Federal Circuit in Actavis Laboratories FL, Inc. v. United held that the legal expenses generic drug makers incur when defending against patent infringement lawsuits under the Hatch-Waxman Act can be deducted as ordinary business expenses for tax purposes. This ruling settles a key question about whether these litigation costs must be capitalized (and thus written off slowly over years) or can be deducted immediately, providing significant tax relief for companies seeking to bring lower-cost generics to market.

The dispute arose after Actavis filed Abbreviated New Drug Applications (ANDAs) with the FDA, which triggered patent lawsuits from brand-name drug companies. Actavis deducted its legal expenses on its tax returns, but the IRS claimed these costs had to be capitalized because they supposedly helped Actavis acquire the valuable asset of FDA approval. The Federal Circuit disagreed, explaining that the legal expenses stem from defending against patent claims brought by brand-name companies—not from the process of obtaining FDA approval itself.

The court emphasized that the patent litigation and the FDA approval process are fundamentally separate. While the outcome of a patent lawsuit can delay when a generic drug enters the market, it does not determine whether the FDA will approve the drug. Only the FDA can grant approval, and the litigation does not “facilitate” that approval in the way the IRS argued. As a result, the court found that these legal costs are ordinary business expenses, not capital expenditures.

This decision aligns with the Third Circuit’s earlier ruling in Mylan Inc. v. Commissioner and ensures consistent tax treatment for generic drug makers across the country. It also avoids creating an unfair tax advantage for brand-name companies, who have always been able to deduct their own litigation expenses. The outcome is a win for generics, making it easier for them to challenge questionable patents and bring affordable medicines to consumers.

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