Mylan, Inc. v. Comm'r
| Decision Date | 27 April 2021 |
| Docket Number | Docket No. 26976-16,156 T.C. No. 10,Docket No. 26978-16.,Docket No. 26977-16 |
| Parties | MYLAN, INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
P, a U.S. corporation, is a manufacturer of brand name and generic pharmaceutical drugs. During 2012 to 2014 P incurred legal fees in connection with applications submitted to the Food & Drug Administration (FDA) for approval to market and sell generic versions of brand name drugs. As part of the application process P was required to provide a certification regarding the status of any patents that had been listed by the FDA as covering the respective brand name drug. On some applications P certified that listed patents covering the brand name drugs were invalid or would not be infringed by the manufacture of P's generic drugs. When it made such a certification, P was required to send notice letters to the brand name drug manufacturer and any patentees stating that P had made such a certification. Certification also constituted an act of patent infringement giving the brand name manufacturer and patentees the right to bring a patent infringement suit against P. At issue are the legal expenses incurred to prepare notice letters and legal expenses incurred in defending against these patent infringement suits.
On its 2012, 2013, and 2014 returns, P deducted its legal expenses as ordinary and necessary business expenditures. Upon examination, R determined that these expenses were nondeductible capital expenditures required to be capitalized and subsequently disallowed P's claimed deductions for the expenses at issue. R thereafter issued a notice of deficiency for each of P's 2012, 2013, and 2014 taxable years determining deficiencies of $16,430,947, $12,618,695, and $20,988,657, respectively.
Held: The legal expenses P incurred to prepare notice letters are required to be capitalized because they were necessary to obtain FDA approval of P's generic drugs.
Held, further, the legal expenses P incurred to defend patent infringement suits are deductible as ordinary and necessary business expenses because the patent litigation was distinct from the FDA approval process.
William F. Nelson and James G. Steele III, for petitioner.
Emily J. Giometti, Lisa M. Rodriguez, Mary Helen Weber, Kathryn E. Kelly, and Nina P. Ching, for respondent.
URDA, Judge: Petitioner, Mylan, Inc. & Subsidiaries (Mylan), is a manufacturer of brand name and generic pharmaceutical drugs. From 2012 through 2014 it incurred significant legal expenses in preparing notice letters and defending patent infringement lawsuits related to its generic versions of certain brand name drugs. On its 2012 through 2014 Federal income tax returns, Mylan claimed deductions for the legal fees as ordinary and necessary business expenses under section 162(a).1 The Internal Revenue Service (IRS) subsequently disallowed these deductions, determining that the legal expenses were required to be capitalized pursuant to section 263(a). We conclude that the legal expenses Mylan incurred to prepare notice letters are required to be capitalized, while the litigation expenses Mylan incurred to defend patent infringement suits are deductible as ordinary and necessary business expenses.
We begin by describing the highly reticulated statutory and regulatory scheme under which Mylan's legal expenses were incurred. Before a pharmaceutical company can market or sell a brand name or generic drug in the United States, it must first obtain approval from the Food & Drug Administration (FDA), the Federal agency responsible for, inter alia, the safety and efficacy of pharmaceuticals. See Federal Food, Drug, and Cosmetic Act, ch. 675, sec. 505, 52 Stat. at 1052 (1938) (). Although the first step in requesting approval is the same for both brand name and genericdrugs, i.e., by submitting to the FDA a Form FDA 356h, Application To Market a New or Abbreviated New Drug or Biologic for Human Use, the roads diverge thereafter.
For brand name pharmaceuticals, a drug's manufacturer formally proposes that the FDA approve the new drug for sale and marketing in the United States through a new drug application (NDA). See, e.g., FTC v. Actavis, Inc., 570 U.S. 136, 142 (2013). The NDA must provide sufficient information for the FDA to review the drug's components, methods of manufacturing and testing, proposed uses and labeling, and results of clinical trials demonstrating that it is safe and effective. 21 U.S.C. sec. 355(b). The drug manufacturer then undergoes a "long, comprehensive, and costly testing process, after which, if successful, the manufacturer will receive marketing approval from the FDA." Actavis, 570 U.S. at 142; see also 21 U.S.C. sec. 355(d).
NDA holders are required to submit patent information for patents that cover an FDA-approved brand name drug or an approved method of using that drug. See 21 U.S.C. sec. 355(b)(1), (c)(2); see also aaiPharma Inc. v. Thompson, 296 F.3d 227, 230 (4th Cir. 2002). Patents so disclosed are listed in a register maintained by the FDA, the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book). See Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 566 U.S. 399, 405-406 (2012); aaiPharma, 296 F.3d at 231. The FDA does not confirm the accuracy of the information provided with the Patent & Trademark Office or the NDA applicant. See Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1080 (D.C. Cir. 2001); see also Caraco, 566 U.S. at 406-407; Apotex, Inc. v. Thompson, 347 F.3d 1335, 1349 (Fed. Cir. 2003).
Until 1984, manufacturers of generic pharmaceuticals, like their brand name counterparts, were required to submit an NDA for FDA approval. See aaiPharma, 296 F.3d at 230-231. Congress altered course, however, in the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Act or Act), Pub. L. No. 98-417, 98 Stat. 1585. In the Act Congress sought "to strike a balance between 'two conflicting policy objectives: to induce name-brand pharmaceutical firms to make the investments necessary to research and develop new drug products, while simultaneously enabling competitors to bring cheaper, generic copies of those drugs to market.'" aaiPharma, 296 F.3d at 230 (quoting Abbott Labs. v. Young, 920 F.2d 984, 991 (D.C. Cir. 1990) (Edwards, J., dissenting on other grounds)); see also Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661, 676 (1990); In re Lipitor Antitrust Litig., 868 F.3d 231, 240 (3d Cir. 2017).
To implement the congressional purpose of bringing cheaper generic drugs to market, the Hatch-Waxman Act established a shortcut to FDA approval for manufacturers hoping to develop and market generic copies of brand name drugs previously approved by the FDA. See Actavis, 570 U.S. at 142; In re Lipitor, 868 F.3d at 240. Under this expedited approach, a generic drug manufacturer may submit an abbreviated new drug application (ANDA) that piggybacks on an approved brand name drug's NDA information by specifying that the generic has the "same active ingredients as, and is biologically equivalent to," the already-approved brand name drug. Caraco, 566 U.S. at 404-405 (citing 21 U.S.C. sec. 355(j)(2)(A)(ii), (iv)); see also Actavis, 570 U.S. at 142. Because the FDA would have previously determined the brand name drug to be safe and effective, the ANDA applicant can obtain approval while avoiding the "costly and time-consuming studies" needed to obtain approval for a brand name drug. See Eli Lilly, 496 U.S. at 676.
The "FDA will approve an * * * [ANDA] and send the applicant an approval letter if none of the reasons in § 314.127 for refusing to approve the * * * [ANDA] applies." 21 C.F.R. sec. 314.105(d) (2014); see also 21 U.S.C. sec. 355(j)(4). Title 21 C.F.R. sec. 314.127 (2014), in turn, enumerates a number of technical reasons for the rejection of an ANDA including failure to show that the generic has the same active ingredients as the brand name drug, failure to show bioequivalence between the drugs, failure to establish that the production methods would preserve the generic's identity, strength, quality, and purity, and failure to show proper labeling. See also 21 U.S.C. sec. 355(j)(4). None of the listed grounds relates to patent issues. See id.; 21 C.F.R. sec. 314.127.
FDA approval of an ANDA, however, does not necessarily mean that a generic drug may be sold and marketed. A generic drug, rather, "may be introduced * * * into interstate commerce when approval of the * * * [ANDA] for the drug product becomes effective." 21 C.F.R. sec. 314.107(a) (2014); see also 21 U.S.C. sec. 355(a) (). As a general matter, the "approval shall be made effective immediately". 21 U.S.C. sec. 355(j)(5)(B)(iii). In certain instances approval comes with a delayed effective date. Such an approval is tentative and does not become final until the effective date, id. cl. (iv)(II)(dd)(BB), which means that a new drug product may not be introduced or delivered for introduction into interstate commerce until approval of the ANDA is effective, id. subsec. (a).
In addition to endorsing a more simplified process for bringing generics to market, the Hatch-Waxman Act "contains a complex set of provisions designed to protect the intellectual property rights of * * * [brand name] drug companies and others holding patents on brand name drugs." aaiPharma, 296 F.3d at 231.
The Hatch-Waxman Act created "special procedures" for identifying and resolving patent disputes. See Actavis, ...
To continue reading
Request your trial