Mylan Inc & Subsidiaries v. Comm'r
| Docket Number | 22-1193,21-1194,22-1195 |
| Decision Date | 27 July 2023 |
| Citation | 76 F.4th 230 |
| Parties | MYLAN INC & SUBSIDIARIES v. COMMISSIONER OF INTERNAL REVENUE, Appellant |
| Court | U.S. Court of Appeals — Third Circuit |
76 F.4th 230
MYLAN INC & SUBSIDIARIES
v.
COMMISSIONER OF INTERNAL REVENUE, Appellant
No. 22-1193
No. 21-1194
No. 22-1195
United States Court of Appeals, Third Circuit
Argued January 12, 2023
Filed July 27, 2023
On Appeal from the United States Tax Court (IRS-1: 16-26976, 16-26977 and 16-26978) Tax Court Judge: Honorable Patrick J. Urda
Clint Carpenter [ARGUED], Arthur T. Catterall, United States Department of Justice, Tax Division, 950 Pennsylvania Avenue, NW, P.O. Box 502, Washington, DC 20044, Emily J. Giometti, 550 Main Street, Suite 9-351, Cincinnati, OH 45202, Lisa M. Rodriguez, Office of District Council, Internal Revenue Service, One Newark Center - Ste. 1500, Newark, NJ 07102, Mary H. Weber, Internal Revenue Service, Office of Chief Counsel, 312 Elm Street - Ste. 2350, Cincinnati, OH 45202, Counsel for Appellant
Gregory G. Garre [ARGUED], Eric Konopka, Latham & Watkins, 555 11th Street, NW - Ste. 1000, Washington, DC 20004, Bryan M. Killian, William F. Nelson, James G. Steele, III, Morgan Lewis & Bockius, 1111 Pennsylvania Avenue, NW - Ste. 800 North, Washington, DC 20004, Counsel for Appellee
Matthew Hellman, Adam G. Unikowsky, Jenner & Block, 1099 New York Avenue, NW - Ste. 900, Washington, DC 20001, Counsel for Amicus Appellee
Before: JORDAN, PHIPPS and ROTH, Circuit Judges
OPINION OF THE COURT
JORDAN, Circuit Judge.
I. OVERVIEW
The Commissioner of Internal Revenue1 appeals a ruling of the United States Tax Court allowing Mylan, Inc., a manufacturer of generic drugs, to deduct as ordinary and necessary business expenses the legal fees it incurred in defending itself against patent infringement lawsuits brought under the Hatch-Waxman Act, Pub. L. No. 98-417, 98 Stat. 1585. According to the Commissioner, such fees ought to be understood as a cost of acquiring approval from the U.S. Food and Drug Administration ("FDA") to market Mylan's generic drugs and should therefore be treated as capital expenditures. The Tax Court, in a thorough and well-reasoned opinion, explained why the Commissioner is wrong. Based on our own precedent and the sound reasons given by the Tax Court, we will affirm.
II. BACKGROUND
A. Regulatory Overview
To understand the outlines of this dispute, it will first be helpful to have in mind the FDA approval process for generic drugs, as well as the rules of taxation distinguishing between deductions and capitalization.
Drug manufacturers must obtain FDA approval to market any new pharmaceutical in the United States. See Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 355(a) (2022) ("No person shall introduce or deliver for introduction into interstate commerce any new drug, unless an approval of an application filed . . . is effective with respect to such drug."). Typically, a manufacturer submits a New Drug Application ("NDA") to the agency, and so begins "a long, comprehensive, and costly testing process, after which, if successful,
the manufacturer will receive marketing approval from the FDA." F.T.C. v. Actavis, Inc., 570 U.S. 136, 142, 133 S.Ct. 2223, 186 L.Ed.2d 343 (2013) (citing 21 U.S.C. § 355(b)(1)). That process is formidable, and, until 1984, generic drug manufacturers needed to comply with it fully, even though they were marketing essentially identical versions of preexisting, FDA-approved drugs. aaiPharma Inc. v. Thompson, 296 F.3d 227, 230-31 (4th Cir. 2002). If the business risks and costs involved in the regulatory process were not already a high enough barrier to the creation of generic drugs, legal liability loomed as well, since the development and testing of a proposed generic drug was deemed to be an act of patent infringement, as stated in Roche Products, Inc. v. Bolar Pharm. Co., 733 F.2d 858, 861 (Fed. Cir. 1984).
In an effort to change the risk-reward ratio and entice the development and marketing of generic drugs, Congress passed the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, codified at portions of Title 35 and Title 21 of the U.S. Code. The Hatch-Waxman Act established an expedited process for obtaining FDA approval to sell generic drugs. Rather than filing an NDA, generic manufacturers could now file an Abbreviated New Drug Application ("ANDA"). See 21 U.S.C. § 355(j). Instead of the time-consuming and costly testing requirements of an NDA, an ANDA requires the simpler showing that a generic drug has "the same active ingredients as, and is biologically equivalent to, [the already approved] brand-name drug." Actavis, 570 U.S. at 142, 133 S.Ct. 2223 (internal quotation marks omitted). The Hatch-Waxman Act also effectively overturned the ruling in Roche Products by providing a legal safe harbor for the development of generic drugs prior to the expiration of a branded drug manufacturer's patents.2 See 35 U.S.C. § 271(e)(1) ("It shall not be an act of infringement to make, use, offer to sell, or sell within the United States . . . a patented invention . . . solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs[.]"); see also Warner-Lambert Co. v. Apotex Corp., 316 F.3d 1348, 1357-58 (Fed. Cir. 2003) (recognizing that the passage of the Hatch-Waxman Act, in relevant part, 35 U.S.C. § 271(e)(1), effectively overruled its prior holding in Roche Products by "enabl[ing] generic manufacturers to test and seek approval to market during the patent term"). Finally, the Act grants certain successful ANDA filers a 180-day period of exclusivity to market the first approved generic version of a brand-name drug. 21 U.S.C. § 355(j)(5)(B)(iv).
In passing the Hatch-Waxman Act, Congress "attempted to balance the goal of making available more low cost generic drugs with the value of patent monopolies in incentivizing beneficial pharmaceutical advancement." In re Lipitor Antitrust Litig., 855 F.3d 126, 134 (3d Cir. 2017) (cleaned up). "The Act seeks to accomplish this purpose, in part, by encouraging manufacturers of generic drugs . . . to challenge weak or invalid patents on brand name drugs so consumers can enjoy lower drug prices." Id. at 134-35 (cleaned up). To that end, the Act requires the FDA to decide on an expedited basis whether to approve an ANDA. 21 U.S.C. § 355(j)(5)(A) (imposing a 180-day deadline on the agency
to approve or disapprove the application, absent mutual agreement with the applicant). And, in tandem with that approval process, the Act seeks "to facilitate the resolution of patent-related disputes over pharmaceutical drugs" through a "streamlined mechanism for identifying and resolving patent issues related to the proposed generic products." Apotex, Inc. v. Thompson, 347 F.3d 1335, 1338 (Fed. Cir. 2003).
That "streamlined mechanism" involves brand-name manufacturers listing the patents that cover their drugs in an FDA publication known as the Orange Book,3 and generic drug manufacturers in turn certifying in their ANDA filings that they "will not infringe" any relevant patents, or that the patents are invalid. Caraco Pharm. Lab'ys, Ltd. v. Novo Nordisk A/S et al., 566 U.S. 399, 406, 132 S.Ct. 1670, 182 L.Ed.2d 678 (2012); 21 U.S.C. § 355(b). The generic drug manufacturer can provide that assurance in one of four ways: by certifying (1) that no patent information on the branded drug has been submitted to the FDA (a Paragraph I certification); (2) that any relevant patents have expired (a Paragraph II certification); (3) that any relevant patents will expire on a stated date, implying that they will have expired by the time the generic drug goes to market with FDA approval (a Paragraph III certification); or (4) that any relevant patents are "invalid or will not be infringed by the manufacture, use, or sale of the new [generic] drug for which the [ANDA] is submitted" (a Paragraph IV certification). 21 U.S.C. § 355(j)(2)(A)(vii)(I)-(IV).4 That last type of certification, under Paragraph IV, is the most frequent and the kind that is germane here.
A Paragraph IV certification is, by virtue of the Hatch-Waxman Act, a technical act of patent infringement, so it "often means provoking litigation." Actavis, 570 U.S. at 143, 133 S.Ct. 2223 (internal quotation marks omitted). Indeed, it is designed to give patentholders a chance to start the dispute-resolution process without waiting for the creation of a case or controversy by an ordinary act of infringement, such as the manufacture, use, or sale of a copy-cat drug. In re Wellbutrin XL Antitrust Litig. Indirect Purchaser Class, 868 F.3d 132, 144 n.6 (3d Cir. 2017). When making a Paragraph IV certification to the FDA, the generic drug manufacturer is obligated to send notice of the certification
to the brand-name manufacturer, explaining in detail the factual and legal bases for the claim that the patent is invalid or will not be infringed. 21 U.S.C. § 355(j)(2)(B). At that point, the branded drug maker can choose to respond to the technical act of infringement by filing suit, by negotiating,5 or by walking away from the fight. Assuming it chooses to file suit, the brand-name manufacturer will invoke 35 U.S.C. § 271(e)(2), which provides:
It shall be an act of infringement to submit . . . an [ANDA] . . . for a drug claimed in a patent or the use of which is claimed in a patent . . . if the purpose of such submission is to obtain approval . . . to engage in the commercial manufacture, use, or sale of a drug . . . claimed in a patent or the use of which is claimed in a patent before the expiration of such patent.
35 U.S.C. § 271(e)(2).
Patent infringement suits launched under § 271(e)(2) as a result of a Paragraph IV certification are often called ANDA suits and are functionally the same as other patent infringement suits, Glaxo, Inc. v. Novopharm, Ltd., 110 F.3d 1562, 1569 (Fed. Cir. 1997), though their timing is different.6 ANDA suits are preemptive,
occurring before the...
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