Actavis Laboratories Fl, Inc. v. United States

United States Court of Appeals
for the Federal Circuit
______________________
ACTAVIS LABORATORIES FL, INC.,
Plaintiff-Appellee
v.
UNITED STATES,
Defendant-Appellant
______________________
2023-1320
______________________
Appeal from the United States Court of Federal Claims
in No. 1:19-cv-00798-RTH, Judge Ryan T. Holte.
______________________
Decided: March 21, 2025
______________________
K EVIN P. MARTIN, Goodwin Procter LLP, Boston, MA,
argued for plaintiff-appellee. Also represented by J ESSE
L EMPEL .
CLINT CARPENTER , Tax Division, United States Depart-
ment of Justice, Washington, DC, argued for defendant-ap-
pellant. Also represented by ARTHUR T HOMAS CATTERALL ,
D AVID A. H UBBERT .
______________________
Before CHEN, CUNNINGHAM , and STARK, Circuit Judges.
STARK, Circuit Judge.
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ACTAVIS LABORATORIES FL, INC. v. US 2
Actavis Laboratories FL, Inc. (“Actavis”) filed Abbrevi-
ated New Drug Applications (“ANDAs”) with the United
States Food and Drug Administration (“FDA”), seeking
FDA approval to market and sell generic versions of
branded drug products already being sold in the United
States. In response to Actavis’ ANDA filings, the manufac-
turers of those branded drugs – who already hold New
Drug Applications (“NDAs”) for their products, and also
own patents covering those products – sued Actavis for pa-
tent infringement. These suits were filed pursuant to the
Drug Price Competition and Patent Term Restoration Act
of 1984, Pub. L. No. 98-417, 98 Stat. 1585, commonly
known as the “Hatch-Waxman Act.” Under the Hatch-
Waxman Act, the submission of an ANDA is considered an
act of patent infringement when, as is the case here, the
ANDA filer (Actavis) seeks FDA approval that would be ef-
fective prior to the expiration of patents covering the re-
lated, branded drug product. In such circumstances, as
long as the NDA holder files suit claiming infringement
within 45 days after receiving the statutorily-required no-
tice from the ANDA filer, the Hatch-Waxman Act generally
mandates that a district court stay the FDA’s approval of
the ANDA for 30 months, during which time the parties
engage in litigation over infringement and invalidity of any
pertinent patents. 21 U.S.C. § 355(j)(5)(B)(iii).
While some background explanation of pharmaceutical
patent litigation is necessary to understand this appeal,
this is not actually a patent case. It is, instead, a tax case.
Actavis treated the litigation expenses it incurred in
defending itself in various Hatch-Waxman suits as ordi-
nary and necessary business expenses and, therefore, de-
ducted them on its tax returns in the years the expenses
were incurred. The Commissioner of the Internal Revenue
Service (“Commissioner,” “IRS,” or “government”), how-
ever, considered these expenses as capital expenditures. In
his view they are incurred in pursuit of an intangible capi-
tal asset: namely, FDA approval to lawfully market a
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ACTAVIS LABORATORIES FL, INC. v. US 3
generic drug product in this country. Actavis eventually
paid its tax liabilities as calculated by the IRS – that is,
without deducting its Hatch-Waxman litigation expenses –
and then sued the Commissioner in the Court of Federal
Claims to recover what Actavis contended was an overpay-
ment. The Court of Federal Claims sided with Actavis and
held that the litigation expenses are deductible and need
not be capitalized.
The Commissioner appeals. We affirm.
I
This case arises at the intersection of the FDA’s regu-
latory review process for approving new drugs, the Hatch-
Waxman Act framework for resolving patent disputes re-
lating to generic versions of branded drugs, and the provi-
sions of Title 26 of the U.S. Code, which constitute the
Internal Revenue Code (“IRC” or “Tax Code”), guiding the
decisions of the IRS.
In the complex circumstances we confront, even keep-
ing the terminology straight is somewhat tricky; each of the
participants in these multi-faceted procedures plays sev-
eral roles. We will refer to Actavis – and any similarly-
situated party in a Hatch-Waxman suit, who is seeking to
market a generic version of a branded drug – as the ANDA
filer (its identity in the FDA process), the Hatch-Waxman
defendant (its identity in the patent litigation), the Tax-
payer (its identity vis-à-vis the Commissioner), and the ge-
neric drug manufacturer (the position it hopes to obtain at
the conclusion of the process), interchangeably. We will re-
fer to the manufacturer of the branded drug which the
ANDA filer is seeking to sell a generic version of, as, inter-
changeably, the NDA holder (its identity in the FDA pro-
cess), the Hatch-Waxman plaintiff or patent owner (its
identity in the patent litigation), and the branded drug
manufacturer (its identity in the marketplace the ANDA
filer is seeking to enter).
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ACTAVIS LABORATORIES FL, INC. v. US 4
A brief recitation of certain FDA practices and regula-
tions, the Hatch-Waxman Act, and Tax Code provisions is
necessary to understanding, and resolving, the parties’ dis-
pute.
A
We begin with FDA regulatory review. In an opinion
presenting the identical issue before us today, the United
States Court of Appeals for the Third Circuit identified the
most pertinent features of the FDA’s process for evaluating
applications to market new drugs in this country. See
Mylan Inc. v. Comm’r of Internal Revenue, 76 F.4th 230,
233-38 (3d Cir. 2023). The Third Circuit explained:
Drug manufacturers must obtain FDA approval to
market any new pharmaceutical in the United
States. Typically, a manufacturer submits a New
Drug Application (“NDA”) to the agency . . . .
[G]eneric manufacturers [may] file an Abbreviated
New Drug Application (“ANDA”). 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.
. . .
Once a generic manufacturer has obtained FDA ap-
proval for its ANDA, it must wait for the approval
to become effective, which occurs upon resolution of
the [Hatch-Waxman] litigation in its favor . . . or, if
litigation is still pending, upon the expiration of the
30-month stay.
Id. at 233-34, 237 (internal quotation marks and citations
omitted; fourth alteration in original).
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ACTAVIS LABORATORIES FL, INC. v. US 5
B
The Hatch-Waxman Act established a new, expedited
process for obtaining FDA approval to market and sell ge-
neric versions of previously-approved pharmaceutical drug
products (often referred to as “branded,” “brand-name,” or
“reference” drugs). Under the Hatch-Waxman Act, an
ANDA submitted to the FDA must address any patents
covering the approved reference drug; these patents are
listed by the NDA holder in the FDA’s “Orange Book.” See
21 U.S.C. § 355(b)(1)(A)(viii). For any of the listed patents
(that have not yet expired) the ANDA filer must submit one
of two certifications. See id. at § 355(j)(2)(A)(vii). The first
is a “Paragraph III” certification, which requests that the
FDA make any approval to market the generic drug effec-
tive only upon the expiration of the listed patent(s). See id.
at § 355(j)(2)(A)(vii)(III). Filing a Paragraph III certifica-
tion allows the ANDA filer to avoid the risk of infringing
the NDA holder’s patents, but at the cost of having to delay
launching its generic drug product until those patents ex-
pire. Filing a Paragraph III certification does not consti-
tute an act of patent infringement.
Alternatively, the ANDA filer may submit a “Para-
graph IV” certification, by which it is representing to the
FDA that any patent covering the NDA holder’s drug prod-
uct “is invalid or will not be infringed by the manufacture,
use, or sale of the new drug for which the [ANDA] is sub-
mitted.” 21 U.S.C. § 355(j)(2)(A)(vii)(IV). By filing a Para-
graph IV certification, it is possible that the ANDA filer
will obtain effective FDA approval, allowing immediate
sale of its proposed generic drug product, before the expi-
ration of the NDA holder’s patents.
Making a Paragraph IV certification, thus, has several
consequences. First, submitting a Paragraph IV certifica-
tion to the FDA triggers a requirement that the ANDA filer
send a notification letter (“Paragraph IV Notice”) to the pa-
tent owner within 20 days, setting out the factual and legal
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ACTAVIS LABORATORIES FL, INC. v. US 6
bases for its contention that any pertinent patent listed in
the Orange Book is invalid or will not be infringed by the
proposed generic drug product. See 21 U.S.C.
§ 355(j)(2)(B).
Second, filing an ANDA with a Paragraph IV certifica-
tion is, under the Hatch-Waxman Act, an act of patent in-
fringement. See 35 U.S.C. § 271(e)(2) (“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 pa-
tent . . . if the purpose of such submission is to obtain ap-
proval . . . 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 pa-
tent.”). This gives the patent owner a cause of action
against the ANDA filer (“Section 271(e) Claim”). The pa-
tentee can then file a patent infringement suit, in particu-
lar a Section 271(e) Claim, against the ANDA filer.
Third, this process gives the NDA holder-patentee the
ability to prevent the FDA from giving final, effective ap-
proval to the ANDA for up to 30 months. It can accomplish
this by filing a Section 271(e) Claim against the ANDA filer
within 45 days of receiving the Paragraph IV Notice. See
21 U.S.C. § 355(j)(5)(B)(iii).1 If the patentee prevails in this
Hatch-Waxman lawsuit, any FDA approval of the ANDA
will be “tentative,” meaning that it will not be effective
(and, therefore, will not permit sale of the generic drug) un-
til the last of the infringed, valid patents covering the NDA
1 The district court handling the Hatch-Waxman
lawsuit has discretion to shorten or lengthen the 30-month
stay based on the parties’ cooperation with the court in its
efforts to complete the case within 30 months. See 21
U.S.C. §§ 355(c)(3)(C), (j)(5)(B)(iii). Neither party to the ap-
peal we are considering suggests that this discretion has
any relevance to their tax dispute.
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ACTAVIS LABORATORIES FL, INC. v. US 7
product expires. See 21 U.S.C. § 355(j)(5)(B)(iv)(II)(dd). If,
however, (i) the litigation concludes in favor of the ANDA
filer before the end of the 30-month period; (ii) the 30-
month period expires while the litigation is still pending;
or (iii) the patentee fails to file suit within 45 days of receipt
of the Paragraph IV Notice, then the FDA may grant final,
effective approval without delay and the generic drug can
enter the market.2 See id. at § 355(j)(5)(B)(iii). These sce-
narios incentivize generic drug manufacturers to file AN-
DAs with Paragraph IV certifications. As a further
incentive, the Hatch-Waxman Act provides a 180-day pe-
riod of exclusivity to the first ANDA filer with a Paragraph
IV certification to obtain effective approval from the FDA.
Id. at § 355(j)(5)(B)(iv)(I).
In Mylan, the Third Circuit pointed out some particu-
larly pertinent details of the Hatch-Waxman litigation pro-
cess:
[B]rand-name manufacturers do not always file a
lawsuit in response to a Paragraph IV certification.
Therefore, an ANDA accompanied by a Paragraph
IV certification could receive effective approval and
go to market without any attendant patent litiga-
tion.
. . .
A brand-name drug manufacturer’s decision to en-
gage in or abstain from patent infringement litiga-
tion plays no role in the FDA’s review of an ANDA.
Whether the application is approved or rejected
turns on scientific and technical issues . . . . And,
while a[] [Hatch-Waxman] suit may affect the
2 If the patentee eventually prevails on its Section
271(e) Claim after the 30-month stay expires, the FDA’s
effective approval of the ANDA will be converted to tenta-
tive approval.
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ACTAVIS LABORATORIES FL, INC. v. US 8
timing of the FDA’s effective approval of a[n]
[ANDA], litigation does not control the timing of
the FDA’s review.
76 F.4th at 237-38 (internal quotation marks, footnote, and
citations omitted). In short, while Hatch-Waxman litiga-
tion very frequently follows the filing of an ANDA accom-
panied by a Paragraph IV certification, and will often affect
the timing of effective FDA approval of an ANDA, it does
not affect the FDA’s review of the ANDA on the merits.
C
Several tax statutes and regulations are directly at is-
sue in this appeal. First, 26 U.S.C. § 162(a) (“Section 162”)
authorizes taxpayers to deduct “ordinary and necessary ex-
penses paid or incurred during the taxable year in carrying
on any trade or business.” Second, 26 U.S.C. § 263(a) (“Sec-
tion 263”) prohibits such deductions for “capital expendi-
tures.” Capital expenditures are “costs incurred in the
acquisition or disposition of a capital asset;” generally, a
capital asset is “property having a useful life substantially
beyond the taxable year.” Woodward v. Comm’r, 397 U.S.
572, 575 (1970) (internal quotation marks omitted). Capi-
tal assets may be tangible, such as an oil well, or may be
intangible, such as a license to operate an oil well. See 26
U.S.C. § 263(c). IRS regulations give examples of capital
expenditures, including “[a]n amount paid to acquire or
produce a unit of real or personal tangible property,” “[a]n
amount paid to improve a unit of real or personal tangible
property,” and “[a]n amount paid to acquire or create in-
tangibles.” 26 C.F.R. § 1.263(a)-1(d) (“C.F.R. § 1.263”).
Generally, a taxpayer prefers to treat an expenditure
as an ordinary and necessary business expense, rather
than as a capital expenditure, because the Tax Code per-
mits deduction of ordinary expenses immediately, rather
than requiring gradually writing off (i.e., amortization) of
the costs over a period of years. “The primary effect of char-
acterizing a payment as either a business expense or a
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ACTAVIS LABORATORIES FL, INC. v. US 9
capital expenditure concerns the timing of the taxpayer’s
cost recovery: While business expenses are . . . deductible
[at the time of the expense], a capital expenditure usually
is amortized and depreciated over the life of the relevant
asset.” INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 83-84
(1992); see also Mylan, 76 F.4th at 238 (“The practical dif-
ference in tax treatment between deductions and capital
expenditures is the timeline of cost recovery: deductions
may be claimed during the year incurred while capital ex-
penditures are either depreciated (for tangible assets) or
amortized (for intangible assets) over the life of an asset.”).
If a particular payment might qualify as both an ordinary
and necessary business expense, which can be deducted,
and also a capital expenditure, which cannot, the Tax Code
requires that Section 263 take precedent, meaning that
such a payment must be treated as a capital expenditure
and not deducted. See 26 U.S.C. § 161 (“Section 161”);
Comm’r v. Idaho Power Co., 418 U.S. 1, 17 (1974). In this
regard, then, a deduction in the year an expense is incurred
is an “exception[] to the norm of capitalization.”
INDOPCO, 503 U.S. at 84.
The Commissioner has adopted regulations addressing
the application of Section 263 to the acquisition or creation
of capital assets, including intangibles. See 26 C.F.R.
§ 1.263(a)-4; Final Regulations, 69 Fed. Reg. 436 (Jan. 5,
2004). 26 C.F.R. § 1.263(a)-4 identifies a variety of pay-
ments that must be treated as capital expenditures, includ-
ing “[a]n amount paid to create” “rights obtained from a
governmental agency,” such as a license. 26 C.F.R.
§ 1.263(a)-4(b)(1)(ii), (v); 26 C.F.R. § 1.263(a)-4(d)(5). The
regulation further requires treatment as a capital expendi-
ture of “an amount paid to facilitate . . . an acquisition or
creation of an intangible.” 26 C.F.R. § 1.263(a)-4(b)(1)(v)
(emphasis added). “Facilitate,” in turn, is broadly defined
to cover “the process of investigating or otherwise pursuing
the transaction.” 26 C.F.R. § 1.263(a)-4(e)(1)(i). Finally,
the regulation defines “transaction” to mean “all of the
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ACTAVIS LABORATORIES FL, INC. v. US 10
factual elements comprising an acquisition or creation of
an intangible.” Id. § 1.263(a)-4(e)(3).
II
During 2008 and 2009, Actavis was a defendant in at
least nine Hatch-Waxman lawsuits brought by NDA hold-
ers under § 271(e)(2), relating to seven different ANDAs
Actavis filed with Paragraph IV certifications.3 Actavis in-
curred substantial expenses in these Hatch-Waxman suits:
$3,882,951 and $8,481,237 in 2008 and 2009, respectively.
J.A. 6 (citing J.A. 66). Actavis deducted these litigation ex-
penses as ordinary and necessary business expenses under
Section 162. After reviewing Actavis’ tax returns, the
Commissioner determined that the expenditures were in-
curred in order to facilitate the creation of intangible as-
sets, specifically FDA approvals of Actavis’ ANDAs that
would become effective prior to the expiration of NDA hold-
ers’ patents. Hence, the IRS sent Actavis Notices of Defi-
ciency, advising it that the legal expenditures were
nondeductible and had to be capitalized under Section 263
and C.F.R.§ 1.263(a)-4. Eliminating these deductions re-
sulted in tax deficiencies of $1,359,033 for 2008 and
$2,968,433 for 2009, plus interest and late-payment penal-
ties. After Actavis paid these amounts, it filed amended
returns for 2008 and 2009, claiming refunds. The IRS
failed to act on the amended returns.
Actavis filed suit against the United States in the
Court of Federal Claims, seeking refunds for what Actavis
alleged were tax overpayments for 2008 and 2009. Follow-
ing discovery, the parties filed cross-motions for summary
judgment.
3 As a formal matter, the name of the entity that
filed the tax returns was Watson Pharmaceuticals, Inc.,
which due to subsequent transactions can now fairly be re-
ferred to, for simplicity, as Actavis.
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ACTAVIS LABORATORIES FL, INC. v. US 11
Before the Court of Federal Claims could address the
motions, the United States Tax Court ruled in favor of
Mylan. In Mylan, Inc. v. Commissioner, 156 T.C. 137, 161-
62 (2021), the Tax Court held that expenses an ANDA filer
“incurred in defending [Hatch-Waxman] suits were not
‘paid to facilitate’ the transaction and are not required to
be capitalized.” This is the judgment later appealed to, and
affirmed by, the Third Circuit in Mylan.
While the Mylan appeal was pending, the Court of Fed-
eral Claims granted summary judgment to Actavis and de-
nied the Commissioner’s cross-motion for summary
judgment. J.A. 3-37.4 The Commissioner timely appealed.
During the pendency of our appeal, the Third Circuit
affirmed the Tax Court’s Mylan decision. See Mylan, 76
F.4th at 233. The Third Circuit agreed with the Tax Court
that Mylan’s expenses incurred in litigating Hatch-Wax-
man suits were not capital expenses and, therefore, could
be deducted as ordinary business expenses. See id. at 242-
44.
We have jurisdiction over the Commissioner’s appeal
under 28 U.S.C. § 1295(a)(3). We review the Court of Fed-
eral Claims’ grant of summary judgment de novo. See Lua
v. United States, 843 F.3d 950, 954 (Fed. Cir. 2016). Inter-
pretation of a statute or regulation is a question of law that
we likewise review de novo. See Butterbaugh v. Dep’t of
Justice, 336 F.3d 1332, 1336 (Fed. Cir. 2003).
4 In granting summary judgment to Actavis, the
Court of Federal Claims ordered the government to refund
Actavis the amount of taxes and interest it overpaid; the
parties agreed to defer the question of the penalties the IRS
imposed for failure to file. See J.A. 275 n.39 (citing ECF
No. 30 at 1); J.A. 297 n.45. The propriety of the penalties
is not before us.
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ACTAVIS LABORATORIES FL, INC. v. US 12
III
The parties’ principal disagreement is whether Actavis’
Hatch-Waxman litigation expenses are deductible as ordi-
nary business expenses or must, instead, be treated as cap-
ital expenditures not deductible in their entirety in the
year they are incurred. They also dispute the method of
analysis we should undertake to resolve the issue. Specif-
ically, Actavis argues for us to apply the “origin of the
claim” test set forth in Woodward, 397 U.S. at 572, and
United States v. Gilmore, 372 U.S. 39 (1963). By contrast,
the Commissioner insists that the appropriate standard is
embodied in IRS regulations, specifically C.F.R. § 1.263(a)-
4, which implements the “significant future benefit” meth-
odology set out in INDOPCO, 503 U.S. at 79. We need not
decide which test is applicable because, as we explain be-
low, under either standard Actavis’ Hatch-Waxman litiga-
tion expenses are deductible ordinary business expenses,
not capital expenditures.5
A
Before we turn to application of the “origin of the claim”
and “most significant benefit” tests, we note that the Court
of Federal Claims applied yet another standard, one of its
5 The government contends that INDOPCO over-
ruled Woodward/Gilmore’s origin of the claim test and
that C.F.R § 1.263(a)-4 clarifies INDOPCO’s application to
intangible assets. See Open. Br. at 53-54. While we need
not decide if the government is correct about the impact of
INDOPCO, we are unaware of any court agreeing that the
origin of the claim test has been overruled. Moreover, our
court has applied this test several times since INDOPCO.
See, e.g., Dana Corp. v. United States, 174 F.3d 1344, 1350
(Fed. Cir. 1999); Baylin v. United States, 43 F.3d 1451,
1453-54 (Fed. Cir. 1995); Stokely-Van Camp, Inc. v. United
States, 974 F.2d 1319, 1325 (Fed. Cir. 1992).
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ACTAVIS LABORATORIES FL, INC. v. US 13
own creation. It adopted a two-step test, which it stated
had been used previously by both the Commissioner and
the Tax Court, and which it quoted the IRS as describing
as follows:
When legal fees are incurred in litigation, there is
a two-step process for determining whether the
fees must be capitalized. First, the origin of the
claim doctrine must be applied to ascertain the
character and nature of the expenditures. Second,
the capitalization of intangibles regulations must
be applied to determine, based on the ascertained
character and nature, whether the expenditures
are within any of the categories of expenditures
that must be capitalized under the regulations.
J.A. 18-19 (emphasis omitted).
Our conclusion that the outcome is the same under
both the “origin of the claim” and the “most significant ben-
efit” tests, and our agreement with the trial court’s conclu-
sion that Actavis may deduct its Hatch-Waxman litigation
expenses as ordinary and necessary business expenses,
means we do not need to assess the correctness of the two-
step approach of the IRS that was applied by the Court of
Federal Claims.6
B
Under the “origin of the claim” test, the relevant in-
quiry is “whether the origin of the claim litigated is in the
process of acquisition” of a capital asset. Woodward, 397
U.S. at 577; see also Stokely-Van Camp, Inc. v. United
States, 974 F.2d 1319, 1324 (Fed. Cir. 1992) (“[I]f the origin
6 Actavis endorses the Court of Federal Claims’ hy-
brid approach, while insisting it prevails under any of the
standards noted in this opinion. See Response Br. at 20,
28-36, 42-46, 55-56.
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ACTAVIS LABORATORIES FL, INC. v. US 14
of an expenditure is capital in nature (such as the acquisi-
tion, enhancement, or disposition of a capital asset), the ex-
penditure is not deductible as an ordinary business
expense . . . .”). Here, the Commissioner insists the origin
of the claim litigated in the Hatch-Waxman lawsuits
against Actavis is Actavis’ filing of ANDAs with Paragraph
IV certifications. By contrast, Actavis contends that the
origin of the claim giving rise to the expenses it seeks to
deduct is the NDA holders’ filings of complaints containing
a Section 271(e) Claim. We agree with Actavis.
In analyzing the origin of a claim, the taxpayer’s moti-
vation for making the expenditure in question is irrelevant.
See Woodward, 397 U.S. at 578. Thus, for example, we do
“not even consider the taxpayer’s motives or purposes in
undertaking defense of the litigation” in which the ex-
penses are incurred. Id.; see also Ark. Best Corp. v.
Comm’r, 485 U.S. 212, 223 (1988) (holding that taxpayer’s
motivation in purchasing asset is irrelevant to determina-
tion of whether the asset is a capital asset). Also irrelevant
are the consequences of the litigation for the taxpayer. See
Woodward, 397 U.S. at 578 (“The Court rejected a test that
looked to the consequences of the litigation.”); see also Gil-
more, 372 U.S at 49 (“[T]he origin and character of the
claim with respect to which an expense was incurred, ra-
ther than its potential consequences upon the fortunes of the
taxpayer, is the controlling basic test of whether the ex-
pense was ‘business’ or ‘personal’ and hence whether it is
deductible or not under [Section 161].”) (emphasis added).
However, we also must be careful not to allow our inquiry
to become so formalistic that it ignores how the litigation
fits into a larger transaction. See Woodward, 397 U.S. at
577; Gilmore, 372 U.S. at 47-49.
With these considerations in mind, we conclude, as did
the Court of Federal Claims, that the claim being litigated
in a Hatch-Waxman lawsuit originates in patent infringe-
ment. The origin of the claim is not the acquisition of FDA
approval of an ANDA.
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While the ANDA filer is, of course, pursuing the capital
asset of an FDA approved ANDA, which gives the ANDA
filer the right to sell its generic drug product, Hatch-Wax-
man litigation does not determine whether the ANDA is, or
is not, approved. Only the FDA has the power to approve
an ANDA and authorize the applicant to market and sell
the approved drug product in the United States. Hatch-
Waxman litigation typically proceeds in parallel with the
FDA’s regulatory review, but the two lanes are distinct.
The district court is entrusted with resolving patent in-
fringement and invalidity, but it has no role in assessing
whether the proposed generic drug is safe, effective, and
bioequivalent to the reference branded drug. Likewise, the
FDA “lacks both expertise and authority to review patent
claims.” Caraco Pharm. Lab’ys, Ltd. v. Novo Nordisk A/S,
566 U.S. 399, 406-07 (2012) (internal quotation marks
omitted). As the Court of Federal Claims put it, the “ge-
neric drug company is not obligated to demonstrate patent
invalidity or noninfringement to the FDA to obtain ANDA
approval, nor is it obligated to show the technical accepta-
bility of its ANDA application to the court during Hatch-
Waxman litigation.” J.A. 33. The Hatch-Waxman and
FDA processes are fundamentally separate.
That the origin of the claim in Hatch-Waxman litiga-
tion is a patent claim brought by the NDA holder, and not
the pursuit of effective FDA approval of an ANDA sought
by the ANDA filer, is further supported by the fact that any
combination of outcomes is possible. That is, a party could
win or lose in the litigation and that same party could suc-
ceed or fail in the FDA review – without either being influ-
enced by the other. Specifically, even if the patentee
prevails on its Section 271(e) Claim, proving that its patent
is infringed and defeating any invalidity challenge, the
FDA may or may not approve the ANDA. Alternatively, if
the patentee fails to prove infringement of its patent or
fails to defeat an invalidity challenge, the FDA still may or
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ACTAVIS LABORATORIES FL, INC. v. US 16
may not approve the ANDA. There is no impact on the out-
come of one process from the outcome of the other process.
To be sure, the litigation may well affect the timing of
when FDA final approval becomes effective, permitting sale
of the generic drug product, but it does not affect whether
the FDA grants such approval. As long as the NDA holder
files a Section 271(e) Claim within 45 days of receiving the
Paragraph IV Notice, the automatic 30-month stay prohib-
its the FDA from providing final, effective approval of an
ANDA. The FDA is free to conduct and complete its tech-
nical review of the ANDA and give it tentative approval,
see, e.g., Centene Corp. v. Merck & Co., 2024 WL 5244598,
at *5 (D.N.J. Dec. 30, 2024) (discussing tentative FDA ap-
proval of ANDA during 30-month stay), but until the expi-
ration of the 30-month period, that approval may not be
made effective, which the ANDA filer needs before it can
sell its generic drug product. In this way (among others),
Hatch-Waxman litigation may delay effective approval and
market entry. Similarly, at the conclusion of the litigation,
if the patentee has prevailed on its Section 271(e) Claim,
the FDA must refrain from converting any tentative ap-
proval to effective, final approval until after expiration of
the patents covering the reference branded drug. See 21
U.S.C. § 355(j)(5)(B)(iii); Mylan, 76 F.4th at 243 (“[E]ven if
the generic manufacturer loses the patent suit after receiv-
ing effective approval, the FDA does not revoke or suspend
approval, but merely converts the approval to a tentative
approval effective after the expiration of the relevant pa-
tents.”); see also 21 C.F.R. § 314.107(g). But none of this
injects the district court in the FDA approval process; it
merely means that the litigation has consequences for
when the result of that approval process becomes effective.
Such consequences, however, do not transform the origin of
the claim being litigated. See Woodward, 397 U.S. at 578.
In short, the issues in the litigation and the issues in
the regulatory approval process are different, and they are
resolved by different decision-makers. Because the
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ACTAVIS LABORATORIES FL, INC. v. US 17
litigation expenses incurred by the ANDA filer are incurred
in defending against the Section 271(e) Claim – that is,
while proceeding in the Hatch-Waxman lawsuit “lane” –
and not in seeking to obtain FDA approval, it is proper to
deem the origin of the claim giving rise to the expenses in
question as being the patent claim.
Further confirmation that the origin of the claim rests
in the patentholder’s decision to sue, and not in the ANDA
filer’s decision to seek drug approval from the FDA, is the
fact that infringement litigation cannot provide the ANDA
filer what it wants – only the FDA can. As the Third Cir-
cuit aptly put it: “When generic manufacturers like Mylan
defend themselves in patent infringement suits resulting
from a Paragraph IV certification, they obtain no rights
from a successful outcome. They acquire neither the intan-
gible asset of a patent nor an FDA approval.” Mylan, 76
F.4th at 246 n.24. From the ANDA filer’s perspective,
Hatch-Waxman litigation often results only in delaying ef-
fective FDA approval of the ANDA; it cannot result in ef-
fective FDA approval occurring sooner than it would have
if the lawsuit had never been brought.
We recognize that the Supreme Court has observed
that filing an ANDA with a Paragraph IV certification “of-
ten means provoking litigation.” F.T.C. v. Actavis, Inc., 570
U.S. 136, 143 (2013) (internal quotation marks omitted).
And it is undeniable that the Hatch-Waxman Act’s creation
of the Section 271(e) Claim establishes a relationship be-
tween the patent litigation and the FDA regulatory review
process. But it does not follow that the lawsuit is actually
part of the FDA process. Hence, here, the “origin of the
claim litigated,” i.e., the Section 271(e) Claim, is not “in the
process of acquisition itself” of the asset Actavis aims to ac-
quire, which is effective FDA approval. See Woodward, 397
U.S. at 577 (explaining that test is whether “origin of the
claim litigated is in the process of acquisition itself”). The
actual claim being litigated, and therefore generating the
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ACTAVIS LABORATORIES FL, INC. v. US 18
expenses Actavis wishes to deduct, is a patent infringe-
ment claim.
A contrary conclusion would lead to an incongruous
outcome. It appears to be undisputed that, as the Third
Circuit noted in Mylan, 76 F.4th at 241, “brand-name drug
companies can . . . deduct the litigation expenses they in-
cur in” Hatch-Waxman lawsuits, through which they are
asserting their patent rights and defending their market
exclusivity. “[I]mposing very different tax treatment on
the warring sides in an ANDA dispute, as the Commis-
sioner advocates, is at odds with the careful statutory bal-
ance [embodied in the Hatch-Waxman Act] of improving
access to lower-cost generic drugs while respecting intellec-
tual property rights.” Id. at 245 n.23. This differential tax
treatment would result in an artificial distinction between
the parties to the same Hatch-Waxman lawsuit. See Gil-
more, 372 U.S. at 48 (warning that courts “should be slow
to attribute to Congress a purpose producing such unequal
treatment among taxpayers, resting on no rational founda-
tion”).
Additionally, it is well-settled that once a Section
271(e) Claim is filed, it is litigated in essentially the same
manner as an ordinary Section 271(a) patent infringement
claim. See Glaxo, Inc. v. Novopharm, Ltd., 110 F.3d 1562,
1569 (Fed. Cir. 1997) (“[A] district court’s inquiry in a suit
brought under § 271(e)(2) is the same as it is in any other
infringement suit, viz., whether the patent in question is
invalid or will not be infringed by the manufacture, use, or
sale of the drug for which the [ANDA] is submitted.”) (in-
ternal quotation marks and emphasis omitted). It is undis-
puted that in ordinary Section 271(a) patent litigation,
both the patentee and the accused infringer are permitted
to treat their legal expenses as deductible business ex-
penses. J.A. 1213 (“In general, costs to defend against a
claim of patent infringement are deductible on the theory
that the taxpayer is protecting or maintaining its income-
generating business.”). Logically, then, because the
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ACTAVIS LABORATORIES FL, INC. v. US 19
substance of the litigation is the same for a Section 271(a)
Claim, the expenses incurred in litigating a Section 271(e)
Claim should be deductible as well.
In urging us to conclude that Actavis’ litigation ex-
penses cannot be deducted, the government argues that it
is the Paragraph IV certification that triggers the Hatch-
Waxman lawsuit. We disagree. While the ANDA filing
with a Paragraph IV certification is an “artificial act of in-
fringement” under the Hatch-Waxman Act, and its filing is
a necessary predicate to a Section 271(e) Claim, neither the
ANDA itself nor the Paragraph IV certification (or the Par-
agraph IV Notice to the NDA holder) are sufficient to man-
ifest the ensuing litigation, as the NDA holder must make
an affirmative decision to bring a suit. While Actavis un-
doubtedly anticipates Hatch-Waxman litigation as a near-
certain consequence of the large majority of its ANDA fil-
ings that contain Paragraph IV certifications, such suits
are not automatic, and whether they occur is beyond the
control of Actavis.7
The government also relies heavily on Woodward, 397
U.S. at 597, in which the Supreme Court concluded that
the origin of the claim standard required capitalization of
expenses incurred by the taxpayer in the course of litiga-
tion to determine the price at which the taxpayer would
acquire an asset: the minority shares in a company in
which the taxpayer was the controlling shareholder. The
sale process, which was necessary for acquisition of the as-
set, could not have been completed without a price being
set, and due to a failure of negotiation, the price could not
7 The record in Mylan included testimony of Mylan’s
general counsel that patentees who receive Paragraph IV
Notices sue ANDA filers approximately 75% of the time.
See 76 F.4th at 238 n.8; see also J.A. 328 (Actavis expert
testifying that NDA holders elect not to file Section 271(e)
Claims in “nearly half of all” cases).
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ACTAVIS LABORATORIES FL, INC. v. US 20
be set without the litigation. Therefore, as the Supreme
Court found, the taxpayer’s litigation expenses were in-
curred in the process of acquisition of the asset itself. In
our situation, by contrast, resolution of the patent litiga-
tion is not a prerequisite to FDA approval (or even to effec-
tive FDA approval) of the ANDA. Filers, like Actavis, of an
ANDA with a Paragraph IV certification can obtain effec-
tive FDA approval even without a district court decision (i)
if no patent litigation is ever filed against them; (ii) if a
Section 271(e) Claim is filed more than 45 days after the
NDA holder receives the Paragraph IV Notice, which re-
sults in no 30-month stay of FDA approval; or (iii) after ex-
piration of the 30-month stay if the Section 271(e) Claim is
still being litigated.
Finally, the government observes that “[a]cquir-
ing . . . pre-expiration approval is the only potential benefit
of making a paragraph IV certification – which infringes
the patents and invites litigation – instead of a non-infring-
ing paragraph III certification.” Gov. Open. Br. at 50. Re-
latedly, the government acknowledges that ANDA filers
would prefer not to get sued, but adds that when they are
sued the only reason they defend themselves against a Sec-
tion 271(e) Claim is because they want ANDA approval
that is effective before the expiration of the applicable pa-
tents and that defaulting on a Section 271(e) claim does not
risk subjecting a defendant to damages liability. See Oral
Arg. at 00:54-2:24.8 These points are true, but they are not
decisive in (or even strongly relevant to) the inquiry into
the origin of the claim that generated Actavis’ expendi-
tures. We are required to focus on the nature of the pro-
ceeding itself, not on the taxpayer’s motivation for being
8 Available at https://oralarguments.cafc.uscourts.
gov/default.aspx?fl=23-1320_06072024.mp3.
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ACTAVIS LABORATORIES FL, INC. v. US 21
engaged in the litigation nor the impact the litigation may
have on the taxpayer’s assets. See Gilmore, 372 U.S. at 48.
For all of these reasons, we conclude that the origin of
the claim giving rise to the litigation expenses incurred by
Actavis in the various Hatch-Waxman lawsuits in which it
defended itself in 2008 and 2009 is the NDA holders’ asser-
tions of their patent rights. It is not the ANDA filer’s pur-
suit of FDA approval to sell its proposed generic drug
product. Thus, application of the origin of the claim test
demonstrates that Actavis’ Hatch-Waxman litigation ex-
penses are deductible as ordinary and necessary business
expenses.
C
We reach the same conclusion under the Commis-
sioner’s preferred analytical approach, which is to apply
C.F.R. § 1.263, the IRS regulation which implements the
“significant future benefit” standard and was adopted in
response to INDOPCO.9 As relevant here, C.F.R. § 1.263
requires capitalization of “[a]n amount paid to create an
intangible” and of “[a]n amount paid to facilitate . . . crea-
tion of [such] an intangible.” 26 C.F.R. § 1.263(a)-4(b)(ii),
(v) (emphasis added). The provision further provides that
“an amount is paid to facilitate the acquisition or creation
of an intangible (the transaction) if the amount is paid in
the process of investigating or otherwise pursuing the
transaction.” Id. § 1.263(a)-4(e)(1)(i). It then defines
“transaction” as “all of the factual elements comprising an
acquisition or creation of an intangible and includes a
9 On appeal, the government has abandoned its pre-
vious contention that INDOPCO’s “significant future ben-
efits” test applies independently of the IRS regulation and
argues, instead, that we should apply the regulation.
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ACTAVIS LABORATORIES FL, INC. v. US 22
series of steps carried out as part of a single plan.” Id.
§ 1.263(a)-4(e)(3).
Applying C.F.R. § 1.263, the question of whether Ac-
tavis’ Hatch-Waxman litigation expenses may be deducted
or must instead be treated as capital expenditures turns on
whether the litigation facilitates the “transaction” of Ac-
tavis’ acquisition of the intangible asset of effective FDA
approval of its ANDA. The government emphasizes the
breadth of the regulation, focusing on its definition of “fa-
cilitate,” which includes “the process of investigating or
otherwise pursuing the transaction.” Gov’t Open. Br. at 31-
32; see also 26 C.F.R. § 1.263(a)-4(e)(1)(i). However, for the
reasons we have already explained, and reiterate below,
Hatch-Waxman litigation is not part of the “process
of . . . pursuing” approval of an ANDA.
As we have noted, the FDA regulatory approval process
and Hatch-Waxman litigation may proceed in parallel. But
neither “facilitates” the other. Obtaining regulatory ap-
proval from the FDA requires the ANDA filer to show that
its proposed generic drug product is safe, effective, and bi-
oequivalent to the reference drug of the NDA holder. Pre-
vailing in Hatch-Waxman litigation requires the ANDA
filer to defeat the NDA holder’s patent infringement claim
or prove the patent claims are invalid. There is no neces-
sary link between these two showings: whether the NDA
holder succeeds or fails before the FDA, it may also succeed
or fail in the district court.
The intangible asset sought by the ANDA filer is final,
effective approval of the ANDA itself – and acquisition of
that asset is not facilitated by Hatch-Waxman litigation.
As we explained in connection with the origin of the claim
standard, and as is equally true even if C.F.R. § 1.263 gov-
erns, that intangible asset is pursued through, and can be
granted only by, the FDA. The district court presiding over
the related Hatch-Waxman lawsuit has no power to grant
approval of an ANDA; its only ability to impact FDA
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ACTAVIS LABORATORIES FL, INC. v. US 23
approval is to delay its effectiveness, first through the au-
tomatic 30-month stay and, after entering a final judgment
in favor of the patentee, until expiration of the last of the
pertinent patents. Thus, the Hatch-Waxman litigation
does not facilitate the acquisition of the FDA-approved
ANDA, and hence it does not facilitate acquisition of an as-
set providing a significant future benefit.
C.F.R § 1.263 describes exemplary applications of the
regulation, and the Commissioner contends that our case
is analogous to Example 10 of C.F.R. § 1.263(a)-5(l). Ex-
ample 10 describes American Stores Co. v. Commissioner,
114 T.C. 458 (2000), which involved litigation initiated by
competition regulators who were attempting to prevent a
proposed corporate acquisition. In Example 10, the ex-
penses incurred by the proposed acquirer in litigating
against regulators are said to “facilitate the acquisition of”
an asset – the corporation being acquired – and are, there-
fore, capital expenditures. 26 C.F.R. § 1.263(a)-5(l). Our
situation is distinguishable. While the competition regula-
tors against whom the taxpayer was litigating in Example
10 would have stopped the acquisition and deprived the
taxpayer of the asset it was pursuing had they prevailed in
the lawsuit, in a Hatch-Waxman lawsuit the litigation has
no impact on whether the asset (ANDA approval) is ob-
tained, although its effectiveness may be delayed. There-
fore, even assuming the antitrust litigation expenses in
Example 10 facilitated the acquisition transaction involved
there, it does not follow that the Hatch-Waxman litigation
expenses incurred by Actavis “facilitated” effective FDA-
approval of its ANDAs in a similar manner.10
The Third Circuit in Mylan distinguished Example 10
just as we have done, explaining: “a merger threatened by
10 The Commissioner also cites C.F.R § 1.263(a)-
4(e)(5) Example 4, which is based on Woodward’s “origin of
the claim” test, which we analyzed above.
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ACTAVIS LABORATORIES FL, INC. v. US 24
antitrust litigation cannot occur without resolution of the
litigation, whereas the same is not true for FDA approval
of an ANDA. . . . [A]n ANDA suit, . . . is not a precondition
to receiving an FDA approval of the ANDA.” 76 F.4th at
240 n.13. And in Mylan, both the Third Circuit and the
Tax Court expressly applied C.F.R § 1.263(a)-4. Id. at 242.
They both accepted the Commissioner’s premise that the
“transaction” being evaluated was “effective FDA approval
of an ANDA with a Paragraph IV certification.” Id. The
Third Circuit explained in detail why Hatch-Waxman liti-
gation does not facilitate that transaction within the mean-
ing of the regulation. See id. at 244 (“Patent litigation, if it
occurs at all after a Paragraph IV certification, does not fa-
cilitate acquisition of an FDA-approved ANDA because the
two processes are distinct and ultimately separate. If any-
thing, an ANDA suit makes acquisition of FDA approval
more difficult because it slows it down.”).
While the Hatch-Waxman lawsuit and the FDA regu-
latory review process “can and do co-exist,” they “do not de-
pend on each other.” Id. at 245. Therefore, “Paragraph IV
certifications do not transform ordinary patent infringe-
ment litigation into a facilitating step for generic drug ap-
proval.” Id. “‘Congress’ decision to coordinate effective
FDA approval with the outcome of a Section 271(e)(2) suit’
through the 30-month stay mechanism, 21 U.S.C.
§ 355(j)(5)(B)(iii), ‘does not convert such litigation into a
link in the ANDA approval chain,’” and does not, thus, “fa-
cilitate” the ANDA filer’s pursuit of the intangible asset of
effective FDA approval. Id. at 245-46 (quoting Mylan, 156
T.C. at 159). We agree with the Third Circuit on each of
these points.
In arguing that Mylan is wrongly decided, the govern-
ment mostly repeats contentions we have already rejected
in connection with applying the origin of the claim stand-
ard. Most particularly, the government writes, “[t]he only
reason a paragraph IV applicant defends against a Hatch-
Waxman suit is to obtain FDA approval that is effective
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ACTAVIS LABORATORIES FL, INC. v. US 25
prior to the patent-expiration date.” ECF No. 32 at 1 (re-
sponse of United States to notice of supplemental author-
ity). But just because this is the ANDA filer’s motivation,
and the impact of the litigation might be to end delay of
effective FDA approval, it does not follow that the expenses
incurred by the generic filer in the Hatch-Waxman suit “fa-
cilitate” that approval. The ANDA filer would prefer not to
be sued and then to obtain final FDA approval that be-
comes effective upon the FDA’s completion of its regulatory
review, without a 30-month stay and risk of losing the liti-
gation and needing to wait until the expiration of all perti-
nent patents. Hence, the reality that an ANDA filer
making a Paragraph IV certification has the option, upon
being named a defendant in an NDA holder’s Section 271(e)
Claim, of converting to a Paragraph III certification and
choosing not to defend the lawsuit, does not render the law-
suit – which cannot result in the district court granting ef-
fective FDA approval – a facilitating step in the FDA
regulatory approval process.
We conclude, therefore, that under C.F.R § 1.263, Ac-
tavis’ Hatch-Waxman litigation expenses do not “facilitate”
Actavis’ pursuit of the intangible asset of effective FDA ap-
proval of its ANDA. Therefore, these expenditures are not
capital expenditures but are, instead, ordinary and neces-
sary business expenses that may be deducted in the year
in which they are incurred.
IV
We have considered the government’s remaining argu-
ments but find them unpersuasive. Because the costs in-
curred in defending Hatch-Waxman litigation are
deductible as business expenses, whether considered under
the “origin of the claim” standard or C.F.R. § 1.263, we af-
firm the Court of Federal Claims’ grant of summary judg-
ment for Actavis and against the government.
AFFIRMED
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