Actavis Labs. FL, Inc. v. United States, Appeal No. 2023-1320 (Fed. Cir. Mar. 21, 2025)
Our Case of the Week, in the words of its author, Circuit Judge Stark, “is not actually a patent case. It is, instead, a tax case.” In this appeal from the Court of Federal Claims, the Federal Circuit considered whether expenses incurred by a generic drug manufacturer in defending against Hatch-Waxman infringement litigation are deductible from taxable income as ordinary business expenses in the year incurred; or such patent litigation expenses are non-deductible capital expenditures that must be amortized over time. The Court sided with Actavis and held that Hatch-Waxman litigation defense costs are deductible as ordinary business expenses.
The Hatch-Waxman Act creates a cause of action for patent infringement against drug manufacturers who pursue an Abbreviated New Drug Application (ANDA) to obtain FDA approval of a generic version of a previously approved drug covered by one or more patents, often held by brand-name drug manufacturers. When an ANDA applicant desires to obtain near-term approval to market a generic version of a patented drug, it may submit a “Paragraph IV certification” that the patent(s) is/are invalid or not infringed, pursuant to 21 U.S.C. § 355(j)(2)(A)(vii)(IV). The ANDA filer must notify the patentee of its Paragraph IV certification, which often provokes the patentee to file a patent infringement suit against the ANDA filer. The effectiveness of any FDA approval of the ANDA is then automatically stayed for up to 30 months pending resolution of validity and infringement questions during litigation. If the ANDA filer prevails or the automatic stay expires, then FDA approval of the application becomes effective and the filer may market its generic version of the drug. Conversely, if the patentee prevails, then any approval of the ANDA is treated as “tentative” and may not become effective until the patent(s) expire(s).
Actavis is a generic drug manufacturer who incurred more than $12 million in bills defending various Hatch-Waxman infringement suits in 2008 and 2009, which it deducted in its returns as ordinary business expenses. The U.S. Internal Revenue Service (IRS) took the position that because the expenses were incurred in pursuit of an intangible capital asset—namely, FDA approval to market its generic drugs—these litigation costs amounted to capital expenditures that could not immediately be deducted by Actavis but instead had to be amortized over time. Actavis accordingly paid what the IRS characterized as a deficiency resulting from its deductions, but also brought suit against the government to recover the resulting alleged overpayment. The Court of Federal Claims granted summary judgment in favor of Actavis.
On appeal, the Federal Circuit analyzed the issue under both the “origin of the claim” test articulated in Woodward v. Comm’r, 397 U.S. 572 (1970), and under IRS regulations that define capital expenditures to include “amount[s] paid to facilitate … an acquisition or creation of an intangible” asset, such as “rights obtained from a governmental agency.” See 26 C.F.R. § 1.263. The Court concluded that under either test, Actavis’s litigation expenses were immediately deductible ordinary business expenses.
Under the “origin of the claim” test, the Court considered “whether the origin of the claim litigated is in the process of acquisition of a capital asset.” The Court explained that the capital asset at issue—FDA approval of the ANDA—is granted or withheld solely on the basis of whether FDA regards the generic drug to be safe, effective, and bioequivalent to the approved one. Though the timing of when such approval becomes effective may be affected by the outcome of Hatch-Waxman litigation, the litigation and the approval themselves proceed on entirely separate tracks, with neither dependent upon or even affected by the outcome of the other: the ANDA filer may prevail in the patent litigation and still fail to gain FDA approval, or vice versa. As such, the Federal Circuit reasoned that the ”origin of the claim” in such cases is not the ANDA filer’s pursuit of market approval for its drug, but the patentee’s decision to enforce its patent through litigation. Applying a similar analysis, the Court concluded that Actavis’s Hatch-Waxman defense expenditures also were not incurred to “facilitate” FDA approval of its drug under 26 C.F.R. § 1.263. The Court further noted this conclusion was consistent with the typical treatment of patent litigation costs as deductible business expenses.
Because Actavis’s Hatch-Waxman litigation expenditures had been properly deducted as ordinary business expenses, the Federal Circuit affirmed the Court of Federal Claims’s grant of summary judgment in favor of Actavis.
The opinion can be found here.
By Jason Wrubleski
ALSO THIS WEEK
Maquet Cardiovascular LLC v. Abiomed Inc., Appeal No. 2023-2045 (Fed. Cir. Mar. 21, 2025)
In an appeal from a judgment that Abiomed et al. had not infringed certain claims of a patent directed to “Guidable intravascular blood pump and related methods,” the Federal Circuit rejected the lower court’s claim construction, and vacated and remanded the district court’s non-infringement judgment. In response to the district court’s construction of a claim to include a negative limitation based on statements made during prosecution, the Federal Circuit found the current claim language was not sufficiently similar to the claim language in the parent application; therefore, the parent’s prosecution history was irrelevant. The district court also construed a claim to include a limitation that contains the “exact same guide wire limitation” as its great-great-grandparent application. But the Federal Circuit found no unmistakable disavowal, because an “applicant’s silence in response to an examiner’s notice of allowance will generally not rise to a clear and unmistakable claim disavowal,” and an “argument that a skilled artisan would not be motivated to combine the prior art references does not speak” to the claim scope. The Court further rejected a third claim construction because the parent application’s prosecution history was not relevant and Maquet had made no clear claim disavowal.
The opinion can be found here.
By Jeff Liao
AMP Plus, Inc. d/b/a ELCO Lighting v. DMF, Inc., Appeal No. 2023-1997 (Fed. Cir. Mar. 19, 2025)
In an appeal from the U.S. Patent Trial and Appeal Board’s inter partes review decision that ELCO Lighting had failed to show challenged claim 22 of U.S. Patent No. 9,964,266 to be unpatentable, the Federal Circuit affirmed. Patent owner DMF argued the Court lacked jurisdiction to hear the appeal because ELCO had not timely filed a notice of appeal compliant with 37 C.F.R. § 90.2(a)(3)(ii), which requires the notice to “provide sufficient information to allow the [USPTO] Director to determine whether to exercise the right to intervene in the appeal… .” (ELCO had filed a corrected notice of appeal with this information later.) Noting that courts treat a procedural requirement as jurisdictional only if Congress “clearly states that it is,” the Federal Circuit readily determined the regulatory provision at issue was not jurisdictional in nature, and rejected DMF’s argument. Nonetheless, it found ELCO’s appeal to be substantially lacking in merit, and affirmed the PTAB’s decision that ELCO had failed to show unpatentability.
The opinion can be found here.
By Jason Wrubleski
Realtek Semiconductor Corp. v. ITC, Appeal No. 2023-1095 (Fed. Cir. Mar. 18, 2025)
In an appeal from an ITC decision that had denied sanctions, the Federal Circuit affirmed. DivX had sought an investigation of Realtek and others. Later, DivX filed a motion to withdraw its complaint, whereupon Realtek filed a motion for sanctions, alleging misconduct. The Administrative Law Judge denied the motion on procedural grounds. Realtek then sought an order from the Commission directing DivX to show cause, but the Commission declined. The Federal Circuit affirmed, holding that such decisions are within the sound discretion of the tribunal. Realtek had faulted the Commission for having failed to provide reasoning, but the Federal Circuit held such an order did not require an explanation of reasoning under the APA. The decision was about four pages in length.
The full text of the opinion is available here.
By Nika Aldrich
