In a generic legal advice memorandum (GLAM) (AM 2014-006), the IRS National Office concluded that when a generic drug manufacturer files an abbreviated new drug application (ANDA) with IV certification, the legal fees incurred by that manufacturer to defend against a patent infringement suit must be capitalized under Treas. Reg. Sec. 1.263(a)-4.
In addition, the GLAM states that when a drug manufacturer holds a patent on a drug for which an ANDA with IV certification is filed, the legal fees incurred by that manufacturer to try to establish that the manufacture, use or sale of the drug subject to the ANDA would infringe on the manufacturer’s patent generally are not required to be capitalized under Treas. Reg. Sec. 1.263(a)-4(d)(9).
Generic drugs undergo an abbreviated approval process by the Food and Drug Administration (FDA) in which manufacturers must scientifically demonstrate that their product is the bioequivalent to the original drug. This ANDA process is designed to accelerate the resolution of any patent infringement issues that may arise from the manufacture or sale of the generic drug. As part of the application process, the generic drug manufacturer must certify whether there’s a patent covering the original drug and, if so, whether the patent has expired. If the patent hasn’t expired, the manufacturer must either request approval to begin marketing the generic drug after the patent expires or state whether they believe the patent is invalid or unenforceable or won’t be infringed upon by the generic drug. This latter certification is called the IV certification.
Under the ANDA process, the generic drug manufacturer must notify the patent holder that an ANDA with IV certification has been filed. The patent holder has 45 days to file a patent infringement suit against the generic drug manufacturer. If the court determines that the patent isn’t valid or hasn’t been infringed upon, the FDA will grant approval on the date the court makes its determination. If the court determines the patent has been infringed on, the FDA will grant approval only when the patent has expired. The FDA can withdraw approval even if the patent holder brings suit after the 45-day period and the patent is found to be infringed on. Both the generic drug manufacturer and the patent holder would incur legal costs related to the patent infringement suit.
The IRS concluded in the GLAM that the legal costs incurred by the generic drug manufacturer related to the patent infringement suit in an ANDA with IV certification were required to be capitalized under Treas. Reg. Sec. 1.263(a)-4 because they were integral to the pursuit of FDA approval of the generic drug. Amounts paid to a governmental agency to obtain a trademark, trade name, copyright, license, permit, franchise or other similar right from the governmental agency can be capitalized under Treas. Reg. Sec. 1.263(a)-4(d)(5)(i).
Additionally, the regulations require capitalization of any amounts that facilitate the acquisition or creation of an intangible. The cost of investigating or otherwise pursing the transaction are considered facilitative costs. Because FDA approval was ultimately contingent on the outcome of the patent infringement suit brought during the ANDA with IV certification process, the IRS concluded that the related legal fees were facilitative to the pursuit of FDA approval to market and sell the generic drug.
In contrast, the IRS concluded that the legal fees incurred by the patent holder weren’t required to be capitalized. Generally, patent infringement costs must be capitalized if they’re incurred for defense or perfection of title to the patent. However, patent infringement costs are deductible if they’re incurred to protect against patent infringement. In the case of the ANDA with IV process, the IRS reasoned that it is extremely rare for patent ownership to be challenged. Instead, such costs are almost always incurred to defend the validity of the patent or that it is being infringed upon. Accordingly, the IRS concluded that such costs aren’t required to be capitalized under Treas. Reg. Sec. 1.263(a)-4.