Court Ruling Boosts Pharma: Hatch-Waxman Litigation Expenses Now Deductible

The Federal Circuit recently confirmed that litigation costs arising from Hatch-Waxman proceedings qualify as ordinary and necessary business expenses deductible under Section 162(a) of the Internal Revenue Code. The decision provides long-awaited clarity on the tax treatment of patent litigation costs in the context of defending branded drugs against generic challenges.

Background of the Case

The dispute arose from Alvogen Pharma US, Inc.’s attempt to deduct legal fees and costs associated with Hatch-Waxman litigation as ordinary business expenses. The IRS challenged the deductions, asserting that the litigation conferred long-term benefits and that the expenses should be capitalized. The Tax Court sided with Alvogen, and the Federal Circuit affirmed, reinforcing the deductibility of such litigation costs.

Ordinary and Necessary Business Expenses

Under Section 162(a), taxpayers are permitted to deduct all ordinary and necessary expenses paid or incurred in carrying on a trade or business. The Federal Circuit agreed with the Tax Court that Hatch-Waxman litigation is a routine and essential component of the pharmaceutical industry’s efforts to protect current revenue streams. The court emphasized that these legal costs are incurred regularly and are central to a company’s business operations, distinguishing them from capital expenditures aimed at creating or enhancing long-term assets.

Purpose of the Litigation

A critical factor in the court’s analysis was the purpose behind the litigation. The Federal Circuit found that the primary goal of Hatch-Waxman litigation is to preserve existing market share and revenue, rather than to acquire new assets. Accordingly, the costs are incurred to maintain the status quo and are deductible as current expenses.

Implications for Tax Planning and Litigation Strategy

This decision provides helpful guidance for in-house counsel, tax professionals, and litigators advising clients in the pharmaceutical space. By confirming that Hatch-Waxman litigation expenses are deductible, the ruling may influence how companies structure their litigation budgets and approach tax planning related to enforcement of their IP portfolios.

Conclusion

The Federal Circuit’s decision in the Alvogen case marks a significant development in the intersection of tax and patent law. It affirms that litigation to defend pharmaceutical patents under the Hatch-Waxman framework qualifies as an ordinary and necessary business expense. Legal and tax advisors should take note of this clarification when advising pharmaceutical clients involved in ANDA litigation.