In Actavis Labs. FL, Inc. v. U.S. (“Actavis”), a recent precedential decision, the Federal Circuit answered an important practical question regarding the interplay between the Hatch-Waxman Act and the Internal Revenue Code: are litigation costs incurred in defending against Hatch-Waxman litigation tax-deductible ordinary and necessary business expenses? 2025 WL 876911 (Fed. Cir. Mar. 21, 2025). In order to properly dissect the Federal Circuit’s opinion, a general understanding of the Hatch-Waxman Act and the Internal Revenue Code is needed. Accordingly, this article will first provide a high-level review of the relevant portions of the Hatch-Waxman Act and Internal Revenue Code before exploring the Federal Circuit’s Actavis opinion.
The Hatch-Waxman Act
The Hatch-Waxman Act provides an expedited process for acquiring FDA approval to market and sell generic versions of pharmaceutical drug products that have already been FDA approved (i.e. “branded products” or “reference products”). See Actavis, 2025 WL 876911 at *2. Under the Hatch-Waxman Act, a generic pharmaceutical manufacturer can seek FDA approval by submitting an Abbreviated New Drug Application (“ANDA”). Actavis, 2025 WL 876911 at *2 (citing Mylan Inc. v. Comm’r of Internal Revenue, 76 F.4th 230, 233-234 (3d Cir. 2023)). When filing an ANDA a generic manufacturer need only show that its product “has the same active ingredients as, and is biologically equivalent to,” the branded product. See Mylan, 76 F.4th 230, 234 (3d Cir. 2023). This process is typically far less costly and time-consuming than submitting a New Drug Application (“NDA”), which is required to market and sell a new drug product. See Mylan, 76 F.4th 230, 234 (3d Cir. 2023).
The Hatch-Waxman Act requires that an ANDA include a certification relating to any patents covering the approved reference product.1 21 U.S.C. § 355(j)(2)(A)(vii). For any unexpired patents listed in the FDA’s Orange Book, the ANDA filer must submit one of two certifications. See 21 U.S.C. § 355(j)(2)(A)(vii). The first is referred to as a “Paragraph III” certification and “requests that the FDA make any approval to market the generic drug effective only upon the expiration of the listed patent(s).” Actavis, 2025 WL 876911 at *2 (citing 21 U.S.C. § 355(j)(2)(A)(vii)(III)). The other certification, referred to as a “Paragraph IV” certification, is key to the Federal Circuit’s opinion in Actavis. An ANDA filer submitting a Paragraph IV certification “is representing to the FDA that any patent covering the NDA holder’s drug product ‘is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the [ANDA] is submitted.’” Actavis, 2025 WL 876911 at *2 (citing 21 U.S.C. § 355(j)(2)(A)(vii)(IV)).
Submitting an ANDA containing a Paragraph IV certification has several important consequences. An ANDA filer submitting a Paragraph IV certification to the FDA must send a notification letter, known as a “Paragraph IV Notice,” to the patent owner within 20 days of notice from the FDA that the application has been filed. 21 U.S.C. § 355(j)(2)(B). The Paragraph IV Notice must set out the factual and legal bases for the ANDA filer’s contention that the listed patents are invalid or will not be infringed. 21 U.S.C. § 355 (j)(2)(B)(iv)(II).
Filing an ANDA containing a Paragraph IV certification is an act of patent infringement under the Hatch-Waxman Act, giving the patent owner a cause of action on which to assert patent infringement under 35 U.S.C. § 271(e). See 35 U.S.C. § 271(e)(2). If the patent owner files a patent infringement claim against the ANDA filer within 45 days of receiving the Paragraph IV Notice, any FDA approval of the ANDA will not be effective until the earlier of (i) the 30 month period beginning on the date of receipt of the Paragraph IV Notice or (ii) the date the district court decides that all Orange-Book listed patents asserted by the patent owner are invalid or not infringed by the ANDA filer. 21 U.S.C. § 355(j)(5)(B)(iii).
Although FDA approval cannot be effective until the earlier of these two dates, the Hatch-Waxman litigation “does not affect the FDA’s review of the ANDA on the merits.” See Actavis, 2025 WL 876911 at *3. The FDA is not precluded from reviewing and “tentatively” approving the ANDA during the pendency of the Hatch-Waxman litigation. In sum, if an ANDA filer includes a Paragraph IV certification, the patent owner has the option to bring a patent infringement lawsuit within the requisite time period and delay effective FDA approval of the ANDA for a significant period of time. If the patent owner does not sue the ANDA filer for patent infringement within the allotted time, the ANDA filer may market and sell its product immediately upon FDA approval, albeit at risk of a future finding of patent infringement.
The Hatch-Waxman Act also provides an incentive for ANDA filers to include a Paragraph IV certification in their ANDA. The first ANDA filer to submit a substantially complete application containing a Paragraph IV certification is entitled to a 180-day exclusivity period, during which the FDA will not make effective the approval of another ANDA submitted after the date of the first ANDA filer’s submission. 21 U.S.C. § 355(j)(5)(B)(iv). This exclusivity period is typically very valuable to generic manufacturers, since during this period the generic manufacturer will only be competing with the branded product and potentially an authorized generic. See F.T.C. v. Actavis, Inc., 570 U.S. 136, 144 (2013) (“If the first-to-file generic manufacturer can overcome any patent obstacle and bring the generic to market, this 180–day period of exclusivity can prove valuable, possibly worth several hundred million dollars.”) (citations omitted).
As noted above, in addition to understanding the general concepts of the Hatch-Waxman Act, it is also important to understand certain tax statutes and regulations in order to fully understand the Federal Circuit’s Actavis opinion.
Key Tax Statutes and Regulations
The Actavis opinion concerns the intersection of the Hatch-Waxman Act and several tax statutes and regulations, which are further discussed below. 26 U.S.C. § 162(a) allows taxpayers to deduct “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” 26 U.S.C. § 263(a), however, prohibits deductions for “capital expenditures.” “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.’” Actavis, 2025 WL 876911 at *4 (quoting Woodward v. Comm’r, 397 U.S. 572, 575 (1970)). These capital assets can be tangible (i.e. an oil well) or intangible (i.e. a license to operate an oil well). 26 U.S.C. § 263(c).
Treating an expenditure as an ordinary and necessary business expense allows the taxpayer to deduct the expense immediately, unlike a capital expenditure, the cost of which is gradually written off (i.e. amortized) over a period of years. See Actavis, 2025 WL 876911 at *4. Thus, taxpayers typically prefer to treat payments as ordinary and necessary business expenses rather than capital expenditures. If a particular payment qualifies as both an ordinary and necessary business expense and capital expenditure, the Tax Code requires that 26 U.S.C. § 263 take precedent, so that the payment is treated as a capital expenditure.
The Commissioner of IRS (“Commissioner”) has adopted regulations providing examples of payments that must be treated as capital expenditures. See 26 C.F.R. § 1.263(a)-4; Final Regulations, 69 Fed. Reg. 436 (Jan. 5, 2004). These include “[a]n amount paid to create” “rights obtained from a governmental agency,” including licenses. 26. C.F.R. § 1.263(a)-4(b)(1)(ii), (v); 26 C.F.R. § 1.263(a)-4(d)(5). Under the regulation, capital expenditures also include “an amount paid to facilitate . . . an acquisition or creation of an intangible.” 26 C.F.R. § 1.263(a)-4(b)(1)(v). In this context, “facilitate” is defined to cover “the process of investigating or otherwise pursuing the transaction.” 26 C.F.R. § 1.263(a)-4(e)(1)(i). “Transaction,” in turn, is defined as “all of the factual elements comprising an acquisition or creation of an intangible.” 26 C.F.R. § 1.263(a)-4(e)(3).
The Facts and Procedural History of Actavis
The facts of the Actavis case are relatively straightforward. During 2008 and 2009 Actavis spent several million defending against Hatch-Waxman lawsuits brought by NDA holders. Actavis, 2025 WL 876911 at *4. Actavis deducted these expenditures as ordinary and necessary business expenses. Actavis, 2025 WL 876911 at *4. The Commissioner disagreed with this categorization, finding that these expenditures were incurred “to facilitated the creation of intangible assets, specifically FDA approvals of Actavis’ ANDAs that would become effective prior to the expiration of NDA holders’ patents.” Actavis, 2025 WL 876911 at *4. Thus, according to the Commissioner, these expenses were capital expenditures and improperly deducted. “Eliminating these deductions resulted in tax deficiencies of $1,359,033 for 2008 and $2,968,433 for 2009.” Actavis, 2025 WL 876911 at *4. Actavis paid these amounts and then filed amended returns for 2008 and 2009, which the IRS failed to act upon. Actavis, 2025 WL 876911 at *4.
Actavis then “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.” Actavis, 2025 WL 876911 at *5. The parties conducted discovery and filed cross-motions for summary judgment. The Court of Federal Claims found in favor of Actavis and granted its motion for summary judgment while denying the Commissioner’s motion, leading the Commissioner to appeal. Actavis, 2025 WL 876911 at *5.
Federal Circuit Analysis
The primary issue on appeal was “whether Actavis’ Hatch-Waxman litigation expenses are deductible as ordinary business expenses or must, instead, be treated as capital expenditures not deductible in their entirety in the year they are incurred.” Actavis, 2025 WL 876911 at *5. The parties each proposed different methods for analyzing whether Actavis’ expenses qualified as ordinary business expenses or capital expenditures.2 The Federal Circuit applied both methods of analysis and found that Actavis’ litigation expenses qualified as ordinary business expenses under either method. Actavis, 2025 WL 876911 at *5.
Actavis argued for the use of the “origin of the claim” test articulated in Woodward, 397 U.S. at 572, and United States v. Gilmore, 372 U.S. 39 (1963). The “origin of the claim” test asks “whether the origin of the claim litigated is in the process of acquisition” of a capital asset. Woodward, 397 U.S. at 577. “In analyzing the origin of a claim, the taxpayer’s motivation for making the expenditure in question is irrelevant.” Actavis, 2025 WL 876911 at *6 (citing Woodward, 397 U.S. at 578). “Also irrelevant are the consequences of the litigation for the taxpayer.” Actavis, 2025 WL 876911 at *6 (citing Woodward, 397 U.S. at 578). Actavis argued that the expenses it seeks to deduct originated from “the NDA holders’ filings of complaints containing a Section 271(e) Claim.” Actavis, 2025 WL 876911 at *6. The Commissioner, however, argued that Actavis’ expenses originated from “Actavis’ filing of ANDAs with Paragraph IV certifications,” which precipitated the ensuing litigation. Actavis, 2025 WL 876911 at *6.
Finding in favor of Actavis, the Federal Circuit held that “the claim being litigated in a Hatch-Waxman lawsuit originates in patent infringement” and “not the acquisition of FDA approval of an ANDA.” Actavis, 2025 WL 876911 at *7 (emphasis in original). Critical to this distinction is the fact that the litigation has nothing to do with FDA approval, but only the timing of the effectiveness of that approval. Recall that during the pendency of a Hatch-Waxman litigation the FDA is free to review and reject or tentatively approve the ANDA.
While Hatch-Waxman litigation can influence when FDA approval becomes effective, “[o]nly the FDA has the power to approve an ANDA.” Actavis, 2025 WL 876911 at *7. The district court “has no role in assessing whether the proposed generic drug is safe, effective, and bioequivalent to the reference branded drug.” Actavis, 2025 WL 876911 at *7. Even if the ANDA filer is found to infringe a valid patent, the FDA can still tentatively approve their ANDA. As explained by the Federal Circuit, “the issues in the litigation and the issues in the regulatory approval process are different, and they are resolved by different decision-makers.” Actavis, 2025 WL 876911 at *8. An ANDA filer embroiled in a Hatch-Waxman litigation “obtain[s] no rights from a successful outcome” and cannot somehow obtain effective FDA approval “sooner than it would have if the lawsuit had never been brought.” Mylan, 76 F.4th at 246. Put simply, the district court and Hatch-Waxman litigation are not part of the FDA approval process and play no role in whether or not the FDA approves an ANDA. See Actavis, 2025 WL 876911 at *9 (distinguishing Woodward on the basis that there “the taxpayer’s litigation expenses were incurred in the process of acquisition of the asset itself”).
The Federal Circuit further noted that a “contrary conclusion would lead to an incongruous outcome.” Actavis, 2025 WL 876911 at *8. Notably, the Federal Circuit found it undisputed that patent holders (i.e. brand-name drug companies) involved in Hatch-Waxman litigation deduct litigation expenses incurred in “asserting their patent rights and defending their market exclusivity.” Actavis, 2025 WL 876911 at *8. Based on this, the Federal Circuit reasoned that imposing different tax treatment on Hatch-Waxman defendants compared to plaintiffs is at odds with the Hatch-Waxman Act’s goal of improving access to generic drugs. Actavis, 2025 WL 876911 at *8.
Furthermore, the Federal Circuit rejected the Commissioner’s argument “that it is the Paragraph IV certification that triggers the Hatch-Waxman lawsuit.” Actavis, 2025 WL 876911 at *9. While the filing of an ANDA with a Paragraph IV Certification has a high likelihood of precipitating a lawsuit from the brand company, “such suits are not automatic,” “as the NDA holder must make an affirmative decision to bring the suit.” Actavis, 2025 WL 876911 at *9. Based on the foregoing, the Federal Circuit found that Actavis’ litigation expenses were deductible ordinary and necessary business expenses under the “origin of the claim” test. Actavis, 2025 WL 876911 at *9.
Unlike Actavis, the Commissioner argued that the proper analytic approach was “to apply C.F.R. § 1.263, the IRS regulation which implements the ‘significant future benefit’ standard,” adopted in response to INDOPCO, Inc. v. Comm’r, 503 U.S. 79 (1992). Actavis, 2025 WL 876911 at *10. Under this standard, “the question of whether Actavis’ Hatch-Waxman litigation expenses may be deducted or must instead be treated as capital expenditures turns on whether the litigation facilitates the ‘transaction’ of Actavis’ acquisition of the intangible asset of effective FDA approval of its ANDA.” Actavis, 2025 WL 876911 at *10 (emphasis in original). In arguing that Actavis’ litigation expenses were capital expenditures, the Commissioner emphasized that “facilitates” includes “the process of investigating or otherwise pursuing the transaction.” See 26 C.F.R. § 1.263(a)-4(e)(1)(i). The Federal Circuit rejected this argument for the same reasons provided while applying the “origins of the claim test,” finding that “Hatch-Waxman litigation is not part of the ‘process of … pursuing’ approval of an ANDA.” Actavis, 2025 WL 876911 at *10.
The Federal Circuit also rejected the Commissioner’s attempt to analogize Actavis’ litigation expenses to one of the examples of capital expenditures in C.F.R. § 1.263(a)-5(l). That example described “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.” Actavis, 2025 WL 876911 at *10. In distinguishing that case, the Federal Circuit emphasized that the competition regulators “would have stopped the acquisition and deprived the taxpayer of the asset it was pursuing.” Actavis, 2025 WL 876911 at *10. Hatch-Waxman litigation is different because it has nothing to do with the asset sought by ANDA filers, which is FDA approval of their ANDA. See Actavis, 2025 WL 876911 at *10. Accordingly, the Federal Circuit found that Actavis’ litigation expenses were deductible ordinary and necessary business expenses even under the Commissioner’s proposed “significant future benefit” standard. Actavis, 2025 WL 876911 at *11.
Conclusion
Actavis serves as a reminder for companies of the importance of statutory nuance when analyzing whether litigation expenses qualify as ordinary and necessary business expenses or capital expenditures, especially in the context of a complex statutory scheme. It is important to note, however, that the Actavis decision does not promote either the “origin of the claim” or “significant future benefit” approach over the other. Moreover, while the Federal Circuit noted that the Court of Federal Claims applied its own hybrid approach, it did not opine on the correctness of that approach either. Accordingly, it is unclear which analytical approach is proper, and litigants should be prepared to prove their position under each of these different analytical frameworks.
1 A list of patents covering an approved reference product can be found in the FDA’s “Orange Book.” See 21 U.S.C. § 355(b)(1)(A)(viii).
2 The Court of Federal Claims applied a two-step hybrid approach. While noting this approach, however, the Federal Circuit did not opine on the correctness of this test.
