Can pharma firms deduct fees in Hatch-Waxman suits?

Generic drug makers are watching two cases that will determine whether pharmaceutical firms can deduct—rather than capitalise—legal fees for defending against patent infringement suits, say Carina Federico and Anne Li of Crowell & Moring.

For taxpayers, the ability to deduct the entirety of an expense in the current year can be extremely important to their business. The Internal Revenue Service (IRS) and Department of Justice Tax Division continue to assert that, for patent infringement legal fees to be deductible, the issue must be capitalised—rather than deducted.

In two notable cases involving drug makers Mylan and Actavis, however, the taxpayers prevailed at the trial court level where the courts ruled that they could deduct these legal fees.

Generic drug manufacturers are now following two circuit court cases, where the outcomes will affect the tax treatment of patent infringement litigation expenses under the Hatch-Waxman Act. The Third Circuit and US Court of Appeals for the Federal Circuit each are set to decide cases, Mylan v Commissioner and Actavis Laboratories v United States, to decide whether pharmaceutical companies are able to deduct— rather than capitalise legal fees— for defending against patent infringement lawsuits.