Drug Company Argues Patent Litigation Defense Costs are Deductible

MYLAN INC. & SUBSIDIARIES,
Petitioner,
V.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITIONER'S OPENING BRIEF

Judge Patrick J. Urda

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TABLE OF CONTENTS

I. SUMMARY OF ARGUMENT

II. NATURE OF CONTROVERSY AND TAX INVOLVED

III. ISSUE TO BE DECIDED

IV. PROPOSED FINDINGS OF FACT

V. ULTIMATE FINDINGS

VI. POINTS RELIED UPON

VII. LAW & ARGUMENT

VIII. CONCLUSION

TABLE OF AUTHORITIES

Cases

Am. Bioscience, Inc, v. Thompson, 269 F.3d 1077 (D.C. Cir. 2001)

Appeal of F. Meyer & Brother Co., 4B.T.A. 481 (1926)

Apotex, Inc, v. Thompson, 347 F.3d 1335 (Fed. Cir. 2003)

Commissioner v. Lincoln Sav. & Loan Ass'n, 403 U.S. 345 (1971),

Eli Lilly & Co. v. Medtronic, 496 U.S. 661 (1990)

FTC v. Actavis, Inc., 570 U.S. 136 (2013)

Glaxo, Inc, v. Novopharm, Ltd., 110 F.3d 1562 (Fed. Cir. 1997)

INDOPCO, Inc, v. Commissioner, 503 U.S. 79(1992)

In re Krimmel, 292 F.2d 948 (C.C.P.A. 1961)

Komhauser v. United States, 276 U.S. 145 (1928)

Lilly v. Accord Healthcare Inc,, No. 14-00389, 2015 WL 8675158 (S.D. Ind. Dec. 11,2015).

Munson v. McGinnes, 283 F.2d333 (3d Cir. 1960)

Purepac Phann. Co. v. Thompson, 354 F.3d877 (D.C. Cir. 2004)

Roche Prods., Inc, v. Bolar Pharm. Co., 733 F.2d 858 (Fed. Cir. 1984)

Rowan Cos., Inc, v. United States, 452 U.S. 247 (1981)

Schillinger v. United States, 155 U.S. 163 (1894)

Teva Pharms., USA, Inc, v. Leavitt, 548 F.3d 103 (D.C. Cir. 2008)

Urquhart v. Commissioner, 215 F.2d 17 (3d Cir. 1954)

Welch v. Helvering, 290U.S. Ill (1933)

Zeneca Ltd, v. Pharmachemie B.V., 16 F. Supp. 2d 112 (D. Mass. 1998)

Zoltek Corp, v. United States, 464 F.3d 1335 (Fed. Cir. 2006)

Statutes & Regulations

21 U.S.C. §355

26 U.S.C. § 162

26 U.S.C. §263

26 U.S.C. §6110

35 U.S.C. §271

Treas. Reg. § 1.263(a)-4

Treas. Reg. § 1.263(a)-5

T.D.9107, 2004-1 C.B. 447

67 Fed. Reg. 77701-01 (Dec. 19, 2002)

69 Fed. Reg. 436-01 (Jan. 5,2004)

Drug Price Competition and Patent Term Restoration Act, Pub. L. No. 98-417, 98 Stat. 1585 (1984)

Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066 (2003)

Legislative Materials

H.R. Rep. No. 98-857 (1984)

Other Authorities

Office of Chief Counsel, Internal Revenue Service, General Legal Advice Memo. 20114703F (Sept. 27, 2011)

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I. SUMMARY OF ARGUMENT

During the years at issue, Petitioner incurred legal fees and other expenses to defend itself in patent infringement cases. Until his audit of Petitioner's 2012 tax return, Respondent had always respected these expenses as deductible. Respondent now seeks to require Petitioner to capitalize them. Respondent bases his new position on a 2003 regulation, Treas. Reg. § 1.263(a)-4(e)(1)(i), which requires capitalization of costs that facilitate the acquisition of certain intangible assets. Under this regulation, a cost facilitates the acquisition of an intangible if incurred “in the process” of investigating or pursuing the acquisition.

Petitioner submitted to the Food and Drug Administration (the “FDA”) a number of abbreviated new drug applications (“ANDAs”) seeking approval to market generic drugs that were bioequivalent to brand drags that the FDA had previously approved for sale. When the brand drags were subject to claims of patent protection, Petitioner's ANDAs were sometimes accompanied by a certification that Petitioner's generic drag would not infringe the patent or that the patent was invalid. The certification is commonly referred to as a paragraph IV certification. See 21 U.S.C. § 355(j)(2)(A)(vii)(IV).

Notice of the filing of an ANDA with a paragraph IV certification may prompt, but does not require, a patent owner to sue the generic drug company for patent infringement.

Respondent asserts that Petitioner incurred the patent litigation defense costs at issue “in the process of . . . pursuing” FDA approval of the ANDAs and, therefore, that Petitioner must capitalize these costs as part of its tax basis in the ANDAs. Respondent invokes the Drug Price Competition and Patent Term Restoration Act (the “Hatch-Waxman Act” or “Hatch-Waxman”), Pub. L. No. 98-417, 98 Stat. 1585 (1984), which sought to accelerate approval and marketing of generic drugs. Respondent contends that the Hatch-Waxman Act conflated the litigation process for resolving patent disputes and the administrative process for obtaining FDA approval to market a generic drug in the United States, so that costs incurred to defend patent infringement suits must be capitalized, under Treas. Reg. § 1.263(a)-4(e)(1)(i), as costs that facilitate the receipt of FDA approval of an ANDA.

Respondent is incorrect.

• The FDA approval process for generic drugs is separate and distinct from the patent litigation process, and each process addresses separate and distinct issues with separate and distinct consequences.

• The FDA approval process is an administrative process in which the FDA conducts a scientific and technical review to determine whether the generic drug meets the Agency's statutory and regulatory requirements for safety and efficacy.

• The patent litigation process involves Federal court adjudication and enforcement of patents against alleged infringers, and it determines whether a generic drug infringes a patent and whether the patent holder has the independent legal right to prevent the manufacture and sale of a generic drug that satisfies the FDA's requirements prior to the expiration of the patent. The result of the patent litigation process is temporary — its effect is limited to the remaining term of the relevant patent. The FDA plays no role in this process and does not enforce or adjudicate patent rights.

• While the FDA lists patent information, submitted by brand drug companies, in the Orange Book, this role is purely ministerial. The FDA exercises no independent discretion or judgment in this listing.

• Although patent litigation under the Hatch-Waxman Act can delay the timing of final approval of an ANDA, it has no impact on the FDA's administrative review process or whether £ generic drug will ultimately receive FDA approval. The FDA conducts its scientific review regardless of any pending patent litigation and often approves ANDAs when patent litigation remains unresolved.

The regulations¹ that require capitalization of costs incurred in the process of pursuing a capital transaction limit the scope of the capitalization requirement in two ways: they define the transaction narrowly and limit transaction costs to those incurred in pursuing the transaction. Costs that are incurred in one process cannot be allocated to a separate process. Here, the costs at issue were incurred in the unrelated judicial process of defending patent infringement claims, and not in the separate administrative process of obtaining FDA approval of ANDAs. Like all other patent litigation costs, Petitioner's costs at issue here are properly deductible.

II. NATURE OF CONTROVERSY AND TAX INVOLVED

A. Tax Years in Issue

This case concerns Petitioner's 2012, 2013, and 2014 tax years (the “years at issue”). 2012 Petition at ¶¶ 1-3; 2013 Petition at ¶¶ 1-3; 2014 Petition at ¶¶ 1-3.

B. Notice of Deficiency

On September 23, 2016, Respondent issued a statutory notice of deficiency (“SND”) for Petitioner's 2012 and 2013 tax years. The SND for Petitioner's 2012 and 2013 tax years reflected Respondent's determination of deficiencies in Federal income taxes of $16,430,947 and $12,618,695, respectively. On November 17, 2016, Respondent issued a SND for Petitioner's 2014 tax year. The SND for Petitioner's 2014 tax year reflected Respondent's determination of a deficiency in Federal income taxes of $20,988,657.

C. Trial

1. Duration and location

A two-day trial was held, beginning on December 3, 2018 and ending on December 4, 2018, in Washington, D.C.

2. Stipulations and documentary evidence

The parties entered into two sets of document and fact stipulations.

3. Witnesses

Petitioner called two fact witnesses during the first day of trial. Those witnesses were Brian Roman, Mylan's Global General Counsel, and Wayne Talton, Mylan's Head of Global Regulatory Affairs.

A total of six expert witnesses testified at trial; each party offered three experts. The Court admitted the expert witness reports, including rebuttal reports, offered by both parties.

III. ISSUE TO BE DECIDED

The sole question for decision is whether, under Treas. Reg. § 1.263(a)-4(e), the legal fees incurred by Petitioner in defending itself against patent infringement lawsuits filed by brand drug companies² in response to Petitioner's notices of filing an ANDA with a paragraph IV certification must be capitalized as “transaction costs” incurred by Petitioner in the “process of . . . pursuing” FDA approval of an ANDA.

IV. PROPOSED FINDINGS OF FACT

A. Jurisdictional Matters

1. Mylan Inc. is the common parent of a group of corporations that file a consolidated Federal income tax return (collectively, “Mylan” or “Petitioner”). Mylan Inc. is organized under the laws of the State of Pennsylvania. At the time of filing the petitions in these consolidated cases, Mylan Inc.'s principal place of business and mailing address in the United States was at 1000 Mylan Boulevard, Canonsburg, Pennsylvania. First Stipulation of Fact (“First Stip.”) ¶ 2.

2. Mylan timely filed Federal income tax returns for taxable years 2012, 2013, and 2014 with the Internal Revenue Service (“IRS”). First Stip. ¶ 6.

3. On September 23, 2016, the IRS issued Mylan a SND for Mylan's 2012 and 2013 tax years. First Stip. ¶¶ 3, 4.

4. On November 17, 2016, the IRS issued Mylan a SND for its 2014 tax year. First Stip. ¶ 15.

5. Petitioner timely filed each of the three petitions in this consolidated case. First Stip. ¶ 8.

B. Mylan History and Business

6. At all times relevant to this case, Mylan has been in the business of developing and selling, among other things, generic pharmaceuticals (sometimes referred to herein as “generic drugs” or “generic products”). First Stip. ¶ 1.

7. Mylan has been in the pharmaceutical business since 1961. Mylan is currently one of the leading generic drug makers in the United States. Tr. (Roman) at 58:16-59:22.

8. Generic products have been, and continue to be, a big part of Mylan's business. Generic drug products are where the company got its start. Tr. (Roman) at 59:12-22.

9. During the company's years of operation, including the years in issue, patent litigation has been a regular and necessary part of Mylan's business operations. Tr. (Roman) at 59:23-61:14.

10. The pharmaceutical business, including the generic drug business, is highly competitive and litigious. Tr. (Roman) at 59:12-60:14.

1. Defending patent infringement lawsuits

11. From Mylan's perspective, there was no distinction between a patent infringement suit brought under 35 U.S.C. § 271(e)(2) and a patent infringement suit not brought under 35 U.S.C. § 271(e)(2). Tr. (Roman) at 61:11-63:11. Mylan litigated the so-called Hatch-Waxman patent infringement cases in the same way it litigated all patent infringement suits filed against it. Tr. (Roman) at 76:5-9. A brand drug company's complaint filed against Mylan under 35 U.S.C. § 271(e)(2) started the lawsuit just like complaints in all patent infringement suits. Tr. (Roman) at 68:4-12. All patent infringement actions, including those brought under 35 U.S.C. § 271(e)(2), were filed in the Federal district courts and proceeded in the same way, applying the same patent law and respective burdens of proof. Tr. (Roman) at 65:19-66:8, 128:16-129:4; Tr. (Figg) at 171:16-172:7. The venue for appeal of all patent cases, including those underlying this tax dispute, was to the U.S. Court of Appeals for the Federal Circuit. Tr. (Roman) at 62:6-17. The similarities are not superficial, as Respondent suggests. Tr. (Roman) at 128:16-129:4.

12. Patent infringement suits against Mylan were handled by the same in-house and outside lawyers and in the same way without regard to whether the suit was filed under 35 U.S.C. § 271(e)(2). Tr. (Roman) at 61:2-63:11, 65:6-66:8.

13. The FDA was not a party to any of the patent infringement actions brought under 35 U.S.C. § 271(e)(2) underlying this tax dispute. Tr. (Roman) at 64:13-16, 73:8-13; Tr. (Figg) at 161:19-162:13; Tr. (Bradshaw) at 351:23-352:7, 359:22-360:5. Moreover, there is no evidence that the FDA was ever a party in any patent infringement litigation between a brand drug company and Mylan (or any other company). Tr. (Roman) at 64:13-16, 73:8-13. The expert testimony of the former Chief Counsel of the FDA underscored the fact that the FDA was not a party to, and was not involved in, patent infringement cases such as those underlying this case or any other patent case. Tr. (Bradshaw) at 351:23-352:7, 359:22-360:5; see also Tr. (Figg) at 161:19-162:13.

14. The Federal courts in which Mylan litigated the underlying patent infringement suits did not, and indeed could not, decide the substantive issues that the FDA considered as part of its regulatory approval process. Tr. (Roman) at 129:5-130:22; Tr. (Figg) at 163:14-164:3. In fact, none of the FDA approval issues were involved in the patent infringement suits. Tr. (Roman) at 130:7-13; Tr. (Figg) at 159:25-160:12. Nothing going on in the patent litigation had any bearing on the substantive scientific approval questions the FDA was reviewing. Tr. (Bradshaw) at 352:24-353:17. The patent litigation was on a separate track from the FDA's substantive scientific review of the ANDAs. Tr. (Bradshaw) at 352:3-353:17.

2. The FDA regulatory process

15. Mylan's Regulatory Group was focused on obtaining FDA approval for generic drugs for which it submitted ANDAs. Tr. (Talton) at 241:19-243:16. To do so, it had to demonstrate (i) that its generic drug was “bioequivalent” to the brand drug that the FDA has already approved, (ii) that the generic contained the same active ingredient(s), route of administration, condition of use, dosage form, strength and labeling as the previously approved brand drug, and (iii) that its proposed manufacturing processes and controls would assure the drug's “identity, strength, quality, and purity.” 21 U.S.C. § 355(j)(2)(A); Ex. 206-P (Fleischer Report) at ¶¶ 31-32. Determining whether a generic drug meets these requirements (collectively, the “FDA Standards”) is a complex and often lengthy process. See Tr. (Roman) 78:4-79:21.

16. When Mylan submitted an ANDA to the FDA, generally it would submit one of four certifications to any patent listed in a publication that the FDA maintained (the “Orange Book”): that there were no such patents (a “paragraph I certification”); that any such patents had expired (a “paragraph II certification”); that approval was sought for a period beginning after expiration of such patents (a “paragraph III certification”); or that the patents listed in the Orange Book were invalid or would otherwise not be infringed (a “paragraph IV certification”). See 21 U.S.C. § 355(j)(2)(A)(vii)(I)-(IV); Tr. (Roman) at 76:17-77:1.

17. Mylan's Regulatory Group was the designated point of contact with the FDA on all ANDAs, including those filed with paragraph IV certifications. Tr. (Talton) at 249:22-250:8. The Regulatory Group continued to be the exclusive point of contact with the FDA if the brand drug company elected to file a patent infringement action against Mylan. Tr. (Roman) at 70:25-71:24; see, e.g., Ex. 130-J. Mylan's Legal Department did not directly communicate with the FDA about the pending patent cases. Tr. (Roman) at 71:13-24, 74:9-75:2. Further, Mylan did not communicate directly with any FDA lawyers about patent litigation. Tr. (Talton) at 251:22-252:2. The unrebutted expert testimony offered by Petitioner on FDA practices and procedures explained that there were no patent lawyers in the FDA General Counsel's office, and the FDA lawyers in that office were not assigned to monitor the patent infringement cases. Tr. (Bradshaw) at 362:24-363:3. The lawyers in the FDA General Counsel's office were not involved in the patent litigation. Tr. (Bradshaw) at 351:23-352:7. The Court also heard that at no point did the FDA involve itself in analyzing patents, nor does it have the expertise to do so. Tr. (Bradshaw) at 352:13-20. The FDA was not worried about or looking at where the district court seemed to be going or how the court was likely to rule. Tr. (Bradshaw) at 352:18-353:17. The activities during the patent litigation did not preclude the FDA from reviewing and approving the ANDA. Tr. (Bradshaw) at 358:7-16.

18. Mylan's Regulatory Group, and specifically its regulatory point of contact with respect to each ANDA, notified the FDA when the company sent notice letters to the brand drug company. Tr. (Roman) at 70:25-71:24; Tr. (Talton) at 254:13-256:18; see, e.g., Ex. 130-J. It also notified the FDA if the brand drug company filed suit within 45 days of receiving a notice letter from Mylan informing the brand drug company of the basis of Mylan's paragraph IV certification that the brand drug company's patent was not infringed by its generic version or was invalid or unenforceable. Tr. (Roman) at 67:13-67:22; Tr. (Talton) at 254:13-255:2, 258:5-8; see, e.g., Ex. 130-J.

19. The notice letters that Mylan sent to the brand drug companies focused on the legal and factual basis for Mylan's belief that its generic product did not infringe each brand drug company's patent and why the patent was invalid or unenforceable. Tr. (Roman) at 64:19-65:5, 101:8-102:17; Ex. 203-P (Figg Opening Report) at 11. The notice letters were not required to be sent to the FDA, and, Mylan did not send copies of the notice letters to the FDA. Tr. (Roman) at 67:6-12, 103:10-105:24; Tr. (Fleischer) at 317:11-17. Those letters were not part of the FDA's files and were not part of its scientific review of the ANDAs. Tr. (Fleischer) at 323:2-5. The FDA's only interest in the notice letter was to confirm whether Mylan had sent a notice letter to the brand drug company and if the brand drug company had filed an infringement suit against Mylan within 45 days of the receipt of that notice. Tr. (Bradshaw) at 361:6-15. If the brand drug company filed an infringement suit in a Federal court within 45 days of receiving the notice letter, the ANDA would become subject to an automatic 30-month stay, during which the FDA could not grant final approval of the ANDA until the earlier of the resolution of the patent litigation or the passage of 30 months from the date the brand drug company received the notice letter. Tr. (Roman) at 113:9-114:15; Tr. (Figg) at 165:6-20; Ex. 206-P (Fleischer Report) at ¶¶ 43,45. The FDA's interest in these events was driven by its need to know if and when the automatic 30-month stay was triggered. Tr. (Bradshaw) at 360:17-361:24. Notably, however, the FDA continued to and did review the ANDA during this time and could grant tentative approval of the ANDA on the ground that it satisfied all scientific and technical requirements for approval. Tr. (Talton) at 248:7-21, 258:17-25; Tr. (Bradshaw) at 358:7-16.

20. Mylan was not required to attach a copy of the brand drug company's complaint for infringement to its notice to the FDA that the brand drug company had elected to sue, but, as a courtesy, Mylan sent the complaints. Tr. (Roman) at 112:16-24. This information informed the FDA of the date the complaint was filed so it could determine if the brand drug company had filed suit within 45 days of receiving Mylan's notice letter. Tr. (Roman) at 112:16-113:12; Tr. (Bradshaw) at 360:17-361:24. The FDA was solely interested in determining if the brand drug company was entitled to the benefit of the 30-month stay. Tr. (Roman) at 112:16-113:12; Tr. (Bradshaw) at 360:17-361:24. The FDA needed notice of dates, but was not interested in the substance of the patent dispute. Tr. (Bradshaw) at 360:17-361:24. As explained at trial, the FDA did not care to know what the complaint alleged against Mylan, nor was the FDA interested in or otherwise capable of evaluating the strength of the brand drug company's patent case. Tr. (Bradshaw) at 361:6-24.

21. Mylan informed the FDA when the infringement case was resolved, whether by decision or settlement. Tr. (Roman) at 111:15-21, 115:2-20, 121:2-4; Tr. (Talton) at 258:9-16. The FDA expected to be notified of the court's decision, typically using what the FDA referred to as a patent amendment. Tr. (Bradshaw) at 361:6-362:23.

22. In some instances, Mylan received final approval from the FDA for generic drugs before resolution of its patent litigation while in other cases FDA's approval came after resolution of the patent litigation. Tr. (Roman) at 77:13-82:15. In either case, the patent litigation did not impact or otherwise delay the FDA's scientific review of the ANDA to determine whether the generic drug satisfied the FDA Standards. Tr. (Talton) at 248:7-21, 258:17-25; Tr. (Bradshaw) at 358:7-16.

23. When Mylan received final approval for an ANDA, that approval was not conditional; it entitled Mylan to market its generic version of the drug that was the subject of the approved ANDA even if the patent litigation was still pending. Tr. (Talton) at 248:13-249:4; Tr. (Fleischer) at 323:19-324:2.

3. Patent litigation legal fees at issue

24. During the years at issue, Mylan regularly incurred legal costs and expenses to defend itself in patent infringement lawsuits filed by brand drug companies after they received notice from Mylan that it had filed an ANDA with a paragraph IV certification with the FDA. Second Stipulation of Facts (“Second Stip.”) ¶ 136; Tr. (Roman) at 61:2-7, 69:1-6.

25. During the years at issue, Mylan regularly engaged in defending itself in patent infringement litigation. Second Stip. ¶ 136; Tr. (Roman) at 59:23-61:14.

26. Having incurred those patent infringement defense costs during its regular business of developing and selling generic drugs, Mylan deducted them as ordinary and necessary business expenses, as it had always done. Second Stip. ¶ 137. The IRS never disallowed those deductions prior to the years at issue.

27. Mylan claimed a deduction for patent infringement defense costs in 2012, 2013, and 2014 of $46,991,172, $39,684,483, and $44,060,180, respectively. Second Stip. ¶ 137.

28. Respondent disallowed Mylan's deductions for patent infringement defense costs of $46,991,172, $39,684,483, and $42,288,390 for its 2012, 2013,and 2014 tax years, respectively (collectively, “the amounts at issue”). Second Stip. ¶ 138.

29. Mylan incurred costs relating to its patent infringement cases before the brand drug company filed its complaint and incurred some costs after the patent infringement case had been resolved at the Federal district court level. Second Stip. 144-146. For example, Mylan incurred costs to prepare and send notice letters to brand drug companies and other costs leading up to the filing of patent infringement lawsuits by brand drug companies, and those amounts are included in the amounts at issue. Second Stip. ¶ 189.

30. After resolution of some patent infringement disputes, Mylan continued to incur certain costs related to its patent infringement defense, such as document production costs and bill of costs issues, and those costs are included in the amounts at issue. Second Stip. ¶ 190; Ex. 201-J.

31. In 2011, nearly 30 years after the enactment of Hatch-Waxman, and nearly 10 years after the promulgation of the section 263(a) regulations, Respondent reversed course and determined that patent infringement defense costs incurred after the filing of an ANDA with a paragraph IV certification, which Respondent had historically allowed to be deducted as ordinary expenses, were no longer deductible as ordinary expenses. Office of Chief Counsel, Internal Revenue Service, General Legal Advice Memo. 20114703F (Sept. 27, 2011).

4. Patent litigation legal fees not at issue

32. The amounts at issue include litigation costs related to two drugs, Quinapril and Paroxetine, for litigation in which Mylan was not sued under 35 U.S.C. § 271(e)(2). Second Stip. ¶ 191. The litigation costs related to Quinapril totaled $388,994, $1,049,042, and $46,068 for 2012,2013, and 2014, respectively. Exs. 97-J, 98-J, and 99-J. The litigation costs related to Paroxetine totaled $2,173,725 for 2014. Ex. 99-J. The litigation costs related to Quinapril and Paroxetine are outside the scope of the issue in this case and should be allowed, regardless of the outcome in this case.

33. The amounts currently at issue also include litigation costs related to one drug, Perforomist, in which a Mylan subsidiary held a patent on the brand drug that was listed in the Orange Book and filed suit against a generic drug company under 35 U.S.C. § 271(e)(2). The litigation costs related to that drug totaled $195,284 for 2014. Ex. 99-J. The litigation costs related to Perforomist are outside the scope of the issue in this case and should be allowed, regardless of the outcome in this case.

C. Overview of the Generic Drug Industry

34. To manufacture and sell prescription drugs, including generic drugs, in the United States, a company must obtain FDA approval. 21 U.S.C. § 355(a); Tr. (Talton) 292:15-19.

35. In the case of a drug that has never been approved before (sometimes referred to as a “brand drug”), the company must submit a new drug application (“NDA”) to the FDA that, among other things, identifies the components of the drug; the methods for manufacturing and testing the drug; the proposed uses and labeling of the drug; and the results of full clinical tests demonstrating that the drug is safe and effective for its intended use. Ex. 206-P (Fleischer Report) at ¶ 26.

36. In the case of a brand drug, the brand drug company may, and often does, obtain patents before filing the ND A, may pursue patents simultaneously with seeking FDA approval of the ND A, or may even wait until after receiving FDA approval to file patent applications with the U.S. Patent and Trademark Office (“PTO”), which has exclusive jurisdiction over the review of patent applications and the granting of patents. The FDA has no role in reviewing or issuing patents. Tr. (Bradshaw) at 351:23-352:20.

37. A company that wants to obtain FDA approval of a generic version of a previously approved brand drug, may submit an ANDA. Tr. (Talton) at 241:24-242:9; Ex. 206-P (Fleischer Report) at ¶ 31.

38. If the FDA determines that the ANDA satisfies the FDA Standards applicable to a generic drug, the Agency must approve the ANDA. Tr. (Talton) at 248:5:25; Ex. 203-P (Figg Opening Report) at 16; Ex. 206-P (Fleischer Report) at ¶ 46.

39. Because generic drug companies seek approval based on FDA approved, and often patented, brand drugs, the holders of patents on brand drugs may, but not always, elect, but are not required, to assert their patents to block generic drug companies from putting their drugs on the market and competing with the brand drugs before the relevant patents expire. See 35 U.S.C. § 271(e)(4)(B); Tr. (Roman) at 68:13-69:6.

40. The judicial process of resolving a brand drug company's assertion that a generic drug infringes its patent is an entirely different process from the FDA's scientific regulatory process for determining if the generic drug is safe and effective and whether it satisfies the FDA Standards. Tr. (Figg) at 155:23-156:20; Tr. (Talton) at 258:19-25; Tr. (Bradshaw) at 352:3-353:17. This was true both before and after Hatch-Waxman was enacted in 1984. Tr. (Figg) at 155:23-156:20.

41. The judicial process determines whether a generic drug infringes a brand drug company's patent and whether the brand drug company can temporarily prevent a generic drug company from manufacturing and marketing a drug that meets the FDA's complex scientific requirements. Tr. (Figg) at 234:6-12.

42. A brand drug company that claims a generic drug developer has infringed its patent may file an infringement suit in the appropriate Federal district court. Tr. (Roman) at 62:1-63:11. As in all patent infringement actions, the brand drug company has the burden of proving infringement of the asserted patent, and the generic drug company has the burden of proving invalidity of the asserted patent. Tr. (Roman) at 65:19-66:8, 128:16-129:4; Tr. (Figg) at 171:16-172:7. This was true both before and after Hatch-Waxman was enacted. See Tr. (Roman) 65:19-66:8; Tr. (Figg) at 158:1-159:18, 171:16-172:17.

43. The same process and the same legal infringement and invalidity standards for litigating patent disputes in the Federal district courts, including the proper venue, applies whether the allegedly infringed patent relates to a generic drug, a brand drug, or any other patented item. See Tr. (Roman) at 62:18-63:11, 128:16-129:4; Tr. (Figg) at 171:16-172:7. This process is the same regardless of whether the brand drug company's infringement suit is filed under 35 U.S.C. § 271 (e)(2), or any other infringement provision. Tr. (Roman) at 62:18-63:11, 128:16-129:4; Tr. (Figg) at 171:16-172:7.

44. Just as the FDA has no role or expertise in the process of issuing patents, it has no role in the process of resolving the patent disputes. Tr. (Bradshaw) at 351:23-352:20. As explained at trial, the FDA and the lawyers in its General Counsel's office are not involved in, and are not equipped to evaluate, the patent litigation between the brand drug companies and the generic drug companies. Tr. (Bradshaw) at 351:23-352:20. The FDA recognizes that the Federal district courts exclusively handle and decide the patent disputes. Tr. (Bradshaw) at 351:23-352:20.

D. The Hatch-Waxman Act

45. The Hatch-Waxman Act sought to increase public access to generic drugs by streamlining the process for obtaining FDA approval and to allow for the filing of patent infringement suits before a generic drug is approved and sold. Tr. (Figg) at 156:13-157:25. It did not incorporate these two distinct processes into one. Tr. (Figg) at 155:23-156:20; Tr. (Bradshaw) at 352:3-353:17.

46. Prior to the enactment of Hatch-Waxman, the FDA approval process addressed separate issues from those addressed in the patent litigation process. See Tr. (Figg) at 156:16-20,158:1-159:18. The same was and is true after the enactment of Hatch-Waxman. Tr. (Figg) at 155:23-156:20; Tr. (Bradshaw) at 352:3-353:17.

47. The Hatch-Waxman Act did not combine the FDA regulatory process and the patent litigation process with respect to ANDAs with paragraph IV certifications. Tr. (Figg) at 155:23-156:20, 160:25-161:18; Tr. (Talton) at 261:11-14; Tr. (Bradshaw) at 352:3-353:17; Tr. (O'Shaughnessy) at 502:21-24. The Hatch-Waxman Act streamlined the FDA regulatory review process by allowing the generic drug company to avoid repeating expensive and time-consuming clinical tests done by the brand drug company in obtaining FDA approval for the brand drug. Tr. (Fleischer) at 318:5-18. This was consistent with one of its primary goals — getting generic drugs into the market more quickly. Tr. (Figg) at156:25-157:6. It also made certain changes to the patent rules by creating a safe harbor for generic drug companies. Tr. (Figg) at 158:19-159:18,186:18-188:17. This safe harbor protects a generic drug company from infringement suits during development of generic products. Id. When the safe harbor expires, the brand drug company may file a patent infringement suit upon receiving notice from the generic drug company that it has filed an ANDA with a paragraph IV certification with the FDA (a “technical” act of infringement provided for in 35 U.S.C. § 271(e)(2)). Tr. (Figg) at 158:19-159:18, 186:18-188:17. Hatch-Waxman did not combine the FDA and patent-litigation processes into one, nor did it fuse them into a single process. Tr. (Figg) at 155:23-156:20; Tr. (Bradshaw) at 352:3-353:17. The two processes could and certainly did, as explained by Mr. Roman, move on different schedules with different goals. Tr. (Roman) at 77:2-82:18.

48. During the years at issue, and continuing to the present, the FDA process and the patent litigation process were separate and moved forward on separate tracks. Tr. (Figg) at 155:23-156:10, 160:25-161:18; Tr. (Talton) at 261:11-14; Tr. (Bradshaw) at 352:24-353:17; Tr. (O'Shaughnessy) at 502:21-24.

49. The Hatch-Waxman Act did not convert historically deductible patent infringement litigation costs into capital expenditures. See Drug Price Competition and Patent Term Restoration Act, Pub. L. No. 98-417, 98 Stat. 1585 (1984). Neither the statutory text nor the legislative history of the Hatch-Waxman Act expresses any intent to alter the tax treatment of brand drug companies or generic drug companies. See id. In fact, the word “tax” does not appear in the Hatch-Waxman Act. See id. Moreover, Congress made no suggestion in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066 (2003), that the generic drug company's legal fees incurred in the patent infringement cases arising under 35 U.S.C. § 271(e)(2) were not deductible.

50. Resolution of a patent infringement suit, or even the occurrence of a patent infringement suit, is not a prerequisite to the FDA's authority to approve an ANDA. Tr. (Talton) at 248:13-25; Tr. (Bradshaw) at 358:7-16; Ex. 206-P (Fleischer Report) at 44. As explained at trial, if the brand drug company elects not to sue within the 45-day period after receipt of the notice letter, as they sometimes do, the FDA can and will move forward with its review and approve the generic drug as soon as it determines compliance with the FDA Standards. Ex. 206-P (Fleischer Report) at 43; Ex. 207-P (Bradshaw Report) at 8 n.2. Moreover, the generic drug company could be entitled, along with other generic drug companies, to first-to-file status and the 180-day exclusivity period without having been sued by the brand drug company. Tr. (Roman) at 128:5-15. The 180-day exclusivity period is difficult to qualify for; it is also a fragile exclusivity due to the numerous ways in which it can be forfeited. Tr. (Roman) at 83:17-84:6. Even if the brand drug company elects to sue within the 45-day period after receipt of the notice letter, the FDA will continue to review the ANDA to determine whether the generic drug satisfies the FDA Standards, regardless of any patent infringement suit. Tr. (Talton) at 248:7-21, 258:17-25; Tr. (Bradshaw) at 358:7-16.

51. A finding of infringement in the patent litigation suit cannot prevent the FDA from ultimately approving an ANDA that meets the FDA Standards. Tr. (Figg) at 184:3-9, 233:9-234:4; see also Tr. (Talton) 258:17-25; Ex. 203-P (Figg Opening Report) at 3. Likewise, a ruling in the patent litigation that there is no infringement does not guarantee FDA approval, or otherwise impact whether the generic drug meets the FDA Standards. Tr. (Roman) at 77:13-82:15; Tr. (Talton) at 262:19-263:3.

1. Impact on the FDA approval process

52. Prior to the Hatch-Waxman Act, the process for obtaining FDA approval of a generic drug was like the process for obtaining FDA approval of a brand drug. Ex. 206-P (Fleischer Report) at ¶ 27. There was no well-defined process a generic drug company could use to get FDA approval of a generic drug, which hampered generic drug companies' ability to get FDA approval. Tr. (Fleischer) at 318:5-9; Ex. 206-P (Fleischer Report) at ¶ 27.

53. The Hatch-Waxman Act modified and streamlined the FDA administrative process by permitting a company that wanted to manufacture and sell a generic equivalent of a previously approved drug to file an ANDA. Ex. 206-P (Fleischer Report) at ¶¶ 28-30.

54. An ANDA is a streamlined (abbreviated) version of an NDA. See Ex. 206-P (Fleischer Report) at ¶¶ 30-32.

55. An ANDA applicant may rely on the clinical studies supporting the approved NDA for the brand drug to demonstrate safety and efficacy of its generic version of the brand drug if it demonstrates that its generic drug is the same as and bioequivalent to the brand drug. Ex. 206-P (Fleischer Report) at ¶¶ 31-32; Tr. (Fleischer) at 318:10-22.

56. To demonstrate sameness, an ANDA applicant must show that its generic drug satisfies the FDA Standards. 21 U.S.C. § 355(j)(2)(A); Ex. 206-P (Fleischer Report) at ¶¶ 31-32.

57. Determining whether a generic drug meets the FDA Standards is a complex and often lengthy process. See Tr. (Roman) at 77:18-79:21; Tr. (Talton) at 262:19-263:3; Ex. 206-P (Fleischer Report) at ¶¶ 31-37.

58. As discussed above, Hatch-Waxman requires a generic drug company that submits an ANDA to the FDA to submit one of four certifications with respect to any patents that may be listed in the Orange Book, namely: that there are no such patents; that any such patents have expired; that approval is sought for a period beginning after expiration of such patents; or that any patents listed in the Orange Book are invalid or would otherwise not be infringed, i.e., a paragraph IV certification. See 21 U.S.C. § 355(j)(2)(A)(vii)(I)-(IV); Tr. (Roman) at 76:17-77:1.

59. The FDA does not audit or substantively review an ANDA applicant's certifications. Tr. (Bradshaw) at 354:12-18, 357:2-6; see also Tr. (Fleischer) at 319:23-320:1. Instead, it accepts them at face value. Tr. (Bradshaw) at 354:12-18, 357:2-6; see also Tr. (Fleischer) at 319:23-320:1.

60. The fact that an ANDA had a paragraph IV certification when filed was of no substantive importance to the FDA reviewers. Tr. (Talton) at 246:16-247:8; Tr. (Fleischer) at 317:5-17. The certification type, in fact, had no impact on the FDA's scientific review process. Tr. (Talton) at 246:16-247:8; Tr. (Fleischer) at 320:2-24. The FDA applies the same standards to its review of an ANDA regardless of whether the ANDA contains a paragraph IV certification and regardless of whether patent litigation results. Tr. (Talton) at 246:8-247:8; Tr. (Fleischer) at 320:2-24. An ANDA with a paragraph IV certification is not reviewed by different employees at the FDA than ANDAs with other certifications. Tr. (Talton) at 246:16-247:8; Tr. (Fleischer) at 320:17-24.

61. A generic drug company may submit a single ANDA to the FDA that contains multiple certifications. Tr. (Roman) at 77:2-10; Tr. (Talton) at 245:12-16. For example, an ANDA may contain both paragraph III and paragraph IV certifications to different listed patents. Tr. (Roman) at 77:2-10; Tr. (Talton) at 245:12-16.

62. As explained at trial, the FDA does not analyze a paragraph IV certification, nor does the FDA ask the brand drug company about its views of the merits of a paragraph IV certification. Tr. (Bradshaw) at 356:16-357:1. The FDA does not and indeed cannot analyze, construe or enforce patents, as the former FDA Chief Counsel explained. Tr. (Bradshaw) at 357:2-17. Hatch-Waxman did not convert the FDA into a patent enforcement agency. Tr. (Fleischer) at 324:3-5; Tr. (Bradshaw) at 357:20-358:1.

63. The Hatch-Waxman Act required the maintenance of a publication, the Orange Book, that lists information submitted by brand drug companies on certain patents that allegedly apply to or cover brand drugs that have been previously approved by the FDA. Tr. (Bradshaw) at 354:21-355:24; Ex. 206-P (Fleischer Report) at ¶ 39; Ex. 207-P (Bradshaw Report) at 12.

64. The Hatch-Waxman Act made the FDA the custodian of the Orange Book because the FDA was already maintaining a database of approved drugs. Ex. 206-P (Fleischer Report) at ¶ 39. As explained by Mr. Bradshaw, and as all courts to have addressed the issue have repeatedly confirmed, the FDA consistently has described its responsibility for the Orange Book as “purely ministerial.” Tr. (Bradshaw) at 354:21-355:24; see also Teva Pharms., USA, Inc, v, Leavitt, 548 F.3d 103 (D.C. Cir. 2008); Purepac Pharm. Co. v. Thompson, 354 F.3d 877 (D.C. Cir. 2004); Apotex, Inc, v. Thompson, 347 F.3d 1335 (Fed. Cir. 2003); Am. Bioscience, Inc, v. Thompson, 269 F.3d 1077 (D.C. Cir. 2001). The FDA simply accepts the patent numbers and information submitted by the brand drug companies and puts them in the Orange Book. Tr. (Figg) at 162:5-13; Tr. (Bradshaw) at 354:21-356:12. The FDA does not make any judgement on the validity or correctness of the brand drug companies' patent number submissions, and makes no determination of whether a patent is properly listed or otherwise relevant to the brand drug. Tr. (Figg) at 162:5-13; Tr. (Bradshaw) at 354:21-356:12. In accepting the brand drug companies' patent numbers for the Orange Book, the FDA does not act as an agent for the brand drug companies and exercises no independent judgment concerning the brand drug companies' Orange Book submissions. Tr. (Bradshaw) at 354:21-356:12; 589:9-590:8.

65. The FDA's role in maintaining the Orange Book is limited to adding information submitted by brand drug companies. Tr. (Bradshaw) at 354:21-355:24. The FDA does not decide which patents to list in the Orange Book. Tr. (Bradshaw) at 354:21-355:24. That is exclusively determined by brand drug companies. Tr. (Bradshaw) at 354:21-355:24. The FDA's activities with respect to the Orange Book are purely ministerial acts involving no exercise of discretion or expertise by the FDA. Tr. (Bradshaw) at 354:21-355:24, 589:9-590:8.

66. The FDA has no role in granting patents or patent extensions. Tr. (Bradshaw) at 364:12-366:7. That is the exclusive role of the U.S. Patent and Trademark Office. Tr. (Bradshaw) at 364:12-366:7.

67. The holders of FDA-approved drugs submit to the FDA information regarding patents on their drugs for inclusion in the Orange Book, and the FDA accepts the information at face value. Tr. (Bradshaw) at 355:1-24. Many of the patents that may apply to a brand drug are ineligible for inclusion in the Orange Book, such as method-of-manufacture and process patents. Tr. (Figg) at 162:5-13, 170:9-21. The FDA exercises no discretion in determining whether brand-company-submitted patents should be listed in the Orange Book. Tr. (Bradshaw) at 354:21-355:24

68. The FDA has no role or expertise in deciding whether a listed patent is valid or enforceable, or whether a generic drug infringes a valid patent. Tr. (Fleischer) at 317:11-17; Tr. (Bradshaw) at 354:21-355:24. The FDA is not a patent enforcement agency or tribunal. Tr. (Figg) at 164:4-9; Tr. (Fleischer) at 324:3-5; Tr. (Bradshaw) at 364:5-18, 589:9-590:8.

69. An ANDA applicant may request expedited review for an ANDA with a paragraph IV certification if no generic version of a brand drug is in the market. Tr. (Flesicher) at 321:7-16; Tr (Bradshaw) at 369:8-23. The expedited review designation does not change the FDA's substantive review process. Tr. (Flesicher) at 321:7-16.

70. In reviewing the ANDA, the FDA's objective is to determine whether the generic drug satisfies the FDA Standards. Tr. (Roman) at 129:16-130:22; Tr. (Figg) at 171:6-13; Tr. (Fleischer) at 318:10-319:2; Ex. 206-P (Fleischer Report) at ¶¶ 31-32. As explained at trial, at no point does the FDA involve itself in analyzing any patent. Tr. (Bradshaw) at 352:13-20. As far as the FDA is concerned, there is nothing in the patent litigation process that has any bearing on the substantive matters the agency is reviewing. Tr. (Bradshaw) at 353:6-11; see also Tr. (Talton) at 258:17-25; Tr. (Fleischer) at 317:8-10,320:2-4.

71. Even if a court has determined that a generic drug would infringe a valid patent listed in the Orange Book, that determination does not stop the FDA's review of the ANDA, but merely postpones the effective date of any FDA approval of the ANDA until patent expiry. Tr. (Figg) at 184:3-9, 233:9-234:4; Tr. (Talton) at 258:17-258:23, 261:11-14. The FDA's review of an ANDA to determine whether the FDA Standards have been met does not include a determination of whether the patent is valid or infringed. Tr. (Talton) at 258:17-25; Tr. (Fleischer) at 317:11-17; Tr. (Bradshaw) at 355:8-24. The FDA recognizes that Federal district courts are solely responsible for handling patent issues. Tr. (Bradshaw) at 352:13-20.

72. The FDA may grant final approval of a generic drug even though the patent infringement suit is ongoing. Tr. (Roman) at 81:11-82:15; Tr. (Talton) at 248:13-25. Final approval is not conditional in any way. Tr. (Roman) at 82:10-15; Tr. (Talton) at 248:13-25; Tr. (Fleischer) at 323:19-324:2. The FDA approval process proceeds on its own track. Tr. (Roman) at 77:13-82:15; Tr. (Talton) at 258:17-25; Tr. (Bradshaw) at 352:24-353:17.

2. Impact on the patent infringement litigation process

73. The Hatch-Waxman Act limited the scope of the Federal Circuit's decision in Roche Products, Inc, v. Bolar Pharm. Co., 733 F.2d 858 (Fed. Cir. 1984). Tr. (Figg) at 186:23-188:17. Bolar held that use of a patented drug to develop a generic equivalent constituted infringement of any valid and unexpired patents for the patented brand drug. Tr. (Figg) at 186:23-187:10. Under Bolar, a generic drug company risked being sued for infringement if it started to develop a generic drug before the brand drug's patents had expired. Tr. (Figg) at 186:23-188:17.

74. To allow companies to develop generic drugs during the unexpired term of a patent without infringing the patent, Hatch-Waxman created a safe harbor, under which the use of a patented drug to develop a generic drug does not constitute infringement if the generic drug company's use of the patented drug was reasonably related to developing and submitting information in an ANDA seeking FDA approval of the generic drug. 35 U.S.C. § 271(e)(1); Tr. (Figg) at 187:11-188:17.

75. Having overruled Bolar, Hatch-Waxman also created a mechanism that enabled holders of patents to get into court to assert their patent before the generic drug is being sold. Tr. (Figg) at 187:11-188:17.

76. Under Hatch-Waxman, the filing of an ANDA with a paragraph IV certification is deemed an artificial act of infringement that gives rise to jurisdiction for a patent infringement suit. See 35 U.S.C. § 271(e)(2); Tr. (Figg) at 158:19-159:18,187:11-188:17.

77. The courts have described this deemed act of infringement as a “technical” act of infringement. See Eli Lilly & Co. v. Medtronic, 496 U.S. 661, 678 (1990); Tr. (Figg) at 187:11-188:17.

78. The description of the filing of an ANDA with a paragraph IV certification as a “technical” act of infringement reflects the fact that, after the overruling of Bolar, the testing and development of a generic drug are protected acts of infringement, and the remaining statutorily defined acts of infringement — including commercial manufacture and sale — have not yet occurred. Tr. (Figg) at 158:19-159:18,186:14-188:17. Nonetheless, the issues involved in patent suits brought after the filing of an ANDA are the exact same as those involved in any patent litigation: validity, enforceability and infringement. Tr. (Figg) at 171:16-172:7.

79. Hatch-Waxman's creation of a “technical act of infringement” enables the adjudication of patent issues to begin while the FDA is considering an ANDA and before the generic drug company can commence commercial manufacture and sale. Tr. (Figg) at 158:19-159:18, 186:14-188:17.

80. By allowing the brand drug company to sue in Federal court to block the generic drug company before its generic product is on the market, Hatch-Waxman permitted a potentially earlier resolution of patent disputes than if the brand drug company had to wait to sue until after the generic product entered the market. Tr. (Figg) at 157:19-25.

81. The technical act of infringement under 35 U.S.C. § 271(e)(2) does not prevent the FDA from continuing its technical scientific review process to determine if the FDA Standards are satisfied. Tr. (Figg) at 184:3-9; Tr. (Talton) at 258:17-25,261:11-14.

82. In patent infringement litigation brought under 35 U.S.C. § 271 (e)(2), the court must determine whether the manufacture and commercial use of the generic drug would infringe the patent. Tr. (Roman) at 63:5-11; Tr. (Figg) at 171:16-172:5; Ex. 203-P (Figg Opening Report) at 22.

83. A patent infringement case instituted under the Hatch-Waxman Act is no different than any other patent dispute. See, e.g., Glaxo, Inc, v. Novopharm, Ltd., 110 F.3d 1562, 1569 (Fed. Cir. 1997); Tr. (Roman) at 128:16-129:4; Tr. (Figg) at 160:21-161:18.

84. Like all patent infringement cases, a patent infringement case brought under 35 U.S.C. § 271(e)(2) addresses 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. Glaxo, 110 F.3d at 1569; Tr. (Figg) at 170:1-172:5.

85. In patent litigation that occurs before an ANDA is approved, the court effectively assumes that the ANDA has been approved. Ex. 203-P (Figg Opening Report) at 21-22. In a patent infringement case instituted under 35 U.S.C. § 271(e)(2), the court undertakes a “hypothetical inquiry” because “a specific infringing composition has not yet been made, used, or sold.” Glaxo, 110 F.3d at 1569. The inquiry requires the court to “determine whether, if the drug were approved based upon the ANDA, the manufacture, use, or sale of that drug would infringe the patent in the conventional sense.” Id.

86. As in all patent infringement cases, including a patent infringement case brought under 35 U.S.C. § 271(e)(2), the issue that the court must address is whether the manufacture and sale of a generic drug following FDA approval would infringe an unexpired patent. Tr. (Roman) at 63:5-11; Tr. (Figg) at 171:16-172:5.

87. The Hatch-Waxman Act requires that patentees who have listed patent information in the Orange Book receive prompt notice of a paragraph IV certification in the form of a notice letter. Tr. (Figg) at 158:19-159:10.

88. The FDA does not request, or receive, a copy of the notice letter. Tr. (Roman) at 67:6-12; Tr. (Talton) at 274:1-17; Ex. 207-P (Bradshaw Report) at 14.

89. The generic drug company itself must provide the notice letter to holders of relevant patents within 20 days of receiving notice that the FDA has accepted the generic drug company's ANDA filing. Tr. (Bradshaw) at 360:24-361:5. The notice letter states the factual and legal basis for the generic drug company's belief that the brand drug company's patent is not infringed, is invalid, or is unenforceable. Tr. (Roman) at 64:19-65:5, 101:8-102:17; Ex. 203-P (Figg Opening Report) at 11.

90. While not required to do so, if a brand drug company that receives a notice letter elects to file an infringement suit in a Federal district court within 45 days of receiving the notice, the FDA must automatically delay final approval of the ANDA until the earlier of the resolution of the patent dispute or the passage of 30 months from the date the notice letter is received. Tr. (Roman) at 113:9-114:15; Tr. (Figg) at 165:6-20; Ex. 206-P (Fleischer Report) at ¶¶ 43,45. A brand drug company that fails to file patent infringement litigation during this 45-day window retains the right to institute litigation later, either prior to the FDA's grant of final approval or after the grant of approval and the commencement of manufacture and sale of the generic drug. Tr. (Figg) at 181:17-182:18.

91. This so-called “30-month stay” is intended to provide a benefit to the brand drug company that elects to sue the generic drug company for patent infringement. Tr. (Figg) at 180:15-181:1. In a substantial number of cases, the brand drug company elects not to sue. Tr. (Figg) at 178:24-179:24. A brand drug company may have various reasons for not commencing litigation during the 45-day window. Tr. (Figg) at 180:3-14. Mr. Roman estimated that Mylan was sued in about 75% of the instances in which it submitted a paragraph IV certification. Tr. (Roman) at 69:1-6. Where a brand drug company elects not to sue within 45 days of receiving the notice letter, no 30-month stay applies. Tr. (Figg) at 180:21-181:1; Ex. 207-P (Bradshaw Report) at 8 n.2. The 30-month stay also does not apply when the patent that is the subject of the complaint is submitted to the Orange Book after the ANDA was submitted to the FDA. Ex. 207-P (Bradshaw Report) at 8 n.2.

92. The automatic 30-month stay also allows the patent litigation process to proceed simultaneously with the FDA's review of the ANDA. Tr. (Figg) at 157:19-159:18; Ex. 203-P (Figg Opening Report) at 15 n.12.

93. The 30-month stay does not, however, suspend the FDA's obligation to determine whether the subject generic drug satisfies the FDA Standards. To the contrary, the FDA is required to consider the ANDA promptly, regardless of any patent litigation. Tr. (Talton) at 248:5-2; Tr. (Bradshaw) at 358:7-16. The FDA's actions with respect to the 30-month stay are purely ministerial and involve no exercise of discretion by the FDA. Tr. (Figg) at 164:12-20; Tr. (Bradshaw) at 354:21-355:24; 361:19-363:12.

94. In practice, the FDA review process may take several years, so the 30-month stay often results in little, if any, delay in obtaining FDA approval of an ANDA. Tr. (Figg) at 164:12-20.

95. If the FDA makes a substantive determination to approve the ANDA before the 30-month stay expires, it notifies the applicant that the ANDA is tentatively approved, subject to termination or expiration of the stay. Tr. (Talton) at 248:7-21; 206-P (Fleischer Report) at ¶ 45.

96. If the patent suit is not resolved before the 30-month stay expires, the FDA must finally approve the ANDA if it has completed its review and has determined that the generic drug satisfies the FDA Standards. Ex. 203-P (Figg Opening Report) at 16; Tr. (Bradshaw) at 358:7-16.

97. The FDA's final approval after the expiration of the 30-month stay is not a conditional approval. Tr. (Talton) at 248:22-25; Tr. (Fleischer) at 323:24-324:2.

98. A generic drug company may “launch at risk” by marketing its product after the expiration of the 30-month stay and prior to the resolution of the patent infringement litigation. Tr. (Roman) at 82:2-9; Tr. (Figg) at 180:3-181:1. Although not a common occurrence, Mylan has launched some generic drugs at-risk. Tr. (Talton) at 295:18-296:1.

99. If a generic drug company launches at risk, the patent case will continue, and the generic drug company will remain subject to injunctive remedies and damages if the court considering the patent suit ultimately determines that the asserted patent is valid and infringed and that the brand drug company has the right to block the generic drug for the remaining term of the patent. Tr. (Roman) at 82:2-13; Tr. (Figg) at 154:24-155:2.

100. Even if the defendant generic drug company loses a patent infringement suit filed by a brand drug company, the patent litigation does not result in FDA disapproval of the ANDA; rather, the applicant converts the ANDA with a paragraph IV certification to an ANDA with a paragraph III certification that becomes effective when the relevant patent expires. Tr. (Roman) at 76:17-77:1, 121:14-122:11.

3. The patent litigation process and the FDA regulatory process are separate and distinct processes

101. The FDA approval process and the patent litigation process deal with entirely separate issues. Tr. (Figg) at 155:23-156:10, 160:25-161:18; Tr. (Talton) at 261:11-14; Tr. (Bradshaw) at 352:24-353:17.

102. The FDA process is an administrative process that determines whether an ANDA and generic drug meets the technical and scientific FDA Standards, and thus whether the ANDA applicant will receive the right to make and sell a drug in the United States without violating Federal food and drug law. Tr. (Talton) at 261:8-14; Ex. 206-P (Fleischer Report) at ¶ 26.

103. Patent litigation is an Article III judicial process that determines whether the generic drug that is the subject of the ANDA will infringe or violate another person's patent rights. Tr. (Figg) at 171:16-172:7; Ex. 203-P (Figg Opening Report) at 21-22.

104. Hatch-Waxman encouraged generic drug companies to develop generic drugs before potentially applicable patents expire, and it provided brand drug companies with a legal case or controversy to assert their patent infringement tort claims in Federal district courts before a generic product was sold. Tr. (Figg) at 155:23-159:18.

105. Hatch-Waxman modified the time at which patent infringement suits could be initiated, but it did not change the substantive requirements for receiving FDA approval or modify the substantive elements of what constitutes patent infringement. Tr. (Figg) at 157:16-25, 171:20-172:5; Tr. (Fleischer) 318:5-22.

106. Hatch-Waxman's separate modifications to each of the FDA process and the patent litigation process did not combine the two processes. Tr. (Figg) at 156:13-1.57:6, 160:21-161:18; Tr. (Talton) at 261:11-14; Tr. (Bradshaw) at 352:24-353:17.

107. If an ANDA meets the FDA Standards, it ultimately will be approved regardless of the patent litigation's outcome because the patent case only determines whether a patent is valid and infringed, and whether the patentee can temporarily prevent the applicant from exercising the rights it would obtain through an ANDA approval to commercially market the generic drug. See Tr. (Figg) at 184:3-9, 233:9-234:4; see also Tr. (Talton) 258:17-25; Ex. 203-P (Figg Opening Report) at 3.

108. The FDA's review of ANDAs focused on the safety and efficacy of the generic product. Tr. (Roman) at 129:16-130:22; Tr. (Fleischer) at 318:10-319:2; Ex. 206-P (Fleischer Report) at ¶¶ 31-32. The FDA did not consider or decide the patent issues that were before the Federal district courts in the infringement suits against Petitioner. Tr. (Bradshaw) at 351:23-353:17. Those courts did not decide issues related to the FDA Standards. Tr. (Roman) at 128:5-130:22; Tr. (Figg) at 160:5-12; Tr. (Bradshaw) at 385:14-23.

V. ULTIMATE FINDINGS

1. Mylan incurred legal fees in the amounts at issue in defending itself against patent infringement lawsuits filed by brand drug companies in response to Mylan's notices of filing ANDAs with paragraph IV certifications.

2. The amounts at issue include legal fees incurred by Mylan before the filing of the patent infringement lawsuits, including the preparation of notice letters to the holders of patents listed in the Orange Book, and those amounts were incurred in the patent infringement litigation process.

3. Mylan incurred legal fees in the amounts at issue in the ordinary course of its business. Mylan deducted those fees on its tax returns as ordinary and necessary business expenses.

4. The patent infringement litigation process and the FDA regulatory process are distinct and separate processes.

5. Patent infringement litigation brought under 35 U.S.C. § 271(e)(2) is patent infringement litigation.

6. In the patent infringement litigation process, the FDA is not a party to patent infringement litigation brought by a brand drug company under 35 U.S.C. §271(e)(2), and the FDA Standards are not at issue in that litigation.

7. The resolution of the patent infringement litigation process is not contingent on the resolution of the FDA regulatory process.

8. In the FDA regulatory process, the FDA's determination as to whether the FDA Standards have been met does not involve the review or analysis of patents.

9. The patent litigation process has no place in the FDA's determination as to whether a generic drug satisfies the FDA Standards.

10. The FDA's grant of final approval is not contingent on resolution of the patent infringement litigation process.

11. The legal fees Mylan incurred to defend itself against patent infringement lawsuits filed by brand drug companies in response to notices of filing an ANDA were not incurred in the process of pursuing FDA approval of the ANDA. Those costs were incurred in the patent infringement litigation process.

VI. POINTS RELIED UPON

Patent infringement defense costs historically have been, and still are, deductible as ordinary expenses. See Urquhart v. Commissioner, 215 F.2d 17, 20-21 (3d Cir. 1954); Appeal of F. Meyer & Brother Co., 4 B.T.A. 481,482 (1926).

The regulations promulgated under section 263(a) govern this case and provide the applicable standard for determining the deductibility of the legal fees at issue. See Treas. Reg. §§ 1.263(a)-4, 1.263(a)-5. Patent infringement defense costs are required to be capitalized if they are paid “in the process of . . . pursuing the transaction.” Treas. Reg. § 1.263(a)-4(e)(1)(i).

The examples promulgated in the section 263(a) regulations prove that legal fees that a generic drug company incurs to defend itself against a patent infringement lawsuit filed by a brand drug company in response to a notice of filing an ANDA with a paragraph IV certification do not facilitate the transaction, i.e., the FDA's grant of an ANDA.

The Hatch-Waxman Act did not combine the separate and distinct patent litigation process and the FDA regulatory process. Similarly, it did not convert the historically deductible costs incurred to defend against claims of patent infringement into capital expenditures.

The costs at issue that Mylan incurred to defend itself against patent infringement lawsuits filed by brand drug companies in response to notices of filing an ANDA with a paragraph IV certification are deductible under section 162 as ordinary and necessary business expenses.

VII. LAW & ARGUMENT

A. Petitioner is Entitled to Deduct Its Patent Litigation Defense Costs in the Year Incurred

There is no dispute that Petitioner incurred the legal fees at issue in this case in defending against patent infringement suits filed by brand drug companies in Federal district courts. PFF ¶¶ 26-27. Petitioner's deduction of these fees and related costs is consistent with longstanding practice and precedent.

In seeking to require capitalization, Respondent asserts that Petitioner incurred its patent litigation defense costs “in the process of . . . pursuing” FDA review and approval of various generic drug products. Tr. (Respondent's Opening Statement) at 50:15-51:3; see also Treas. Reg. § 1.263(a)-4(e)(1)(i). But the courts have long recognized the separateness of the patent law process from the process for regulating pharmaceutical products. See In re Krimmel, 292 F.2d 948, 954 (C.C.P.A. 1961).

Respondent contends, however, that changes made by the Hatch-Waxman Act of 1984 to the patent laws and to the food and drug laws made patent infringement litigation part of the FDA “process” for reviewing and approving generic drugs and that patent infringement defense costs must be capitalized because they “facilitate” the receipt of FDA approval. Tr. (Respondent's Opening Statement) at 42:24-43, 53:7-24. To bolster its argument, Respondent makes a variety of assertions regarding the nature and intent of the Hatch-Waxman Act — assertions that are inconsistent with over three decades of case law. The extent to which Respondent has been willing to go in seeking to rewrite the Hatch-Waxman Act — and distort its intent — reveals the weakness of Respondent's position.

B. Absent a Specific Requirement in the Section 263 Regulations, Patent Litigation Defense Costs Are Deductible Expenses

Section 162 provides that “[t]here shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Section 263(a) provides, however, that “[n]o deduction shall be allowed for . . . [a]ny amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.”

The distinction between expenditures that are currently deductible under section 162 and those that must be capitalized under section 263(a) has long been the subject of confusion and litigation. In Welch v. Helvering, 290 U.S. 111, 114 (1933), the Supreme Court observed that for purposes of section 162 the word “ordinary . . . does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often.”

1. Under established law, patent infringement defense costs, like the other costs incurred by a business in defending against tort claims, are deductible expenses

Despite the absence of clear standards for identifying ordinary and necessary business expenses that are deductible under section 162, it has been established law for nearly a century that the costs that a business incurs in defending against tort claims are currently deductible. See Komhauser v. United States, 276 U.S. 145, 153 (1928). Patent infringement is a tort. See Schillinger v. United States, 155 U.S. 163, 169 (1894); Zoltek Corp, v. United States, 464 F.3d 1335, 1336 (Fed. Cir. 2006)³

Deductibility of tort litigation defense costs reflects the fact that successful defense does not create a new asset or right. That is true of patent infringement defense costs. Successful defense establishes only that the defendant is not infringing the property rights of another; it creates no property right in the successful defendant. At most, the successful defense of the patent infringement litigation merely confirms that the plaintiff — the owner of the patent — does not have the right to prevent the defendant from using the patented product or process in the day-to-day conduct of its trade or business. Not surprisingly, the few cases in which courts have considered the issue have determined that costs incurred by a business in patent infringement litigation are currently deductible. See Urquhart v. Commissioner, 215 F.2d 17, 20-21 (3d Cir. 1954); Appeal of F. Meyer & Brother Co., 4B.T.A. 481, 482 (1926).

Respondent apparently agrees that, under traditional capitalization principles developed in judicial and administrative law that has evolved over more than ninety years, tort defense costs in general and patent infringement defense costs in particular are deductible as ordinary and necessary business expenses. Ex. 202-P (IRS Chief Counsel. Memo., AM 2014-006 (Aug. 11, 2014)). Respondent relies solely on regulations promulgated in 2003 under section 263(a) (the “section 263 regulations”). See T.D. 9107, 2004-1 C.B. 447; Tr. (Respondent's Opening Statement) at 50:15-51:3.⁴ Specifically, Respondent argues that Petitioner must capitalize costs incurred to defend patent infringement suits brought after it filed ANDAs with so-called paragraph IV certifications. Tr. (Respondent's Opening Statement) at 50:2-51:3. Respondent argues that such costs are “transaction costs” — costs that are incurred “in the process of" obtaining FDA approval of the ANDA. Treas. Reg. § 1.263(a)-4(e)(1)(i); Tr. (Respondent's Opening Statement) at 50:2-51:3.

2. Under the section 263 regulations, Petitioner's patent litigation defense costs are not subject to capitalization unless they “facilitate” the creation or acquisition of an intangible asset

The section 263 regulations cannot be fully understood apart from the context in which they arose. For many years, the predominant understanding of the capitalization requirement came from the Supreme Court's decision in Commissioner v. Lincoln Savings & Loan Ass'n, 403 U.S. 345 (1971). Noting that “the presence of an ensuing benefit that may have some future aspect is not controlling,” the Court held that the costs at issue were capital in nature because they “create or enhance . . . what is essentially a separate and distinct additional asset.” Lincoln Savings, 403 U.S. at 354. Many commentators and taxpayers read Lincoln Savings to hold that expenditures were not subject to capitalization unless incurred to acquire, create, or improve an identifiable asset. This traditional interpretation of Lincoln Savings was consistent with deductibility of patent infringement defense costs.

In INDQPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), the Supreme Court upended the accepted understanding of Lincoln Savings. At issue in INDQPCO were costs incurred by a target corporation to facilitate its acquisition by another corporation. INDQPCO, 503 U.S. at 82. The acquisition provided long-term business benefits to the taxpayer's business but created no new asset. The Court held that the costs were capital, reasoning that a taxpayer may be required to capitalize other expenditures that produce long-term benefits, even if those expenditures are not incurred to acquire, create, or improve a specific asset. Id. at 88-89. The standard implied by INDQPCO — requiring capitalization of expenditures that provide benefits beyond the current taxable year — proved to be problematic in the real world. Numerous types of traditionally deductible expenses, such as advertising, may provide some sort of future benefit. And reasonable minds can differ as to whether an intangible future benefit exists or is significant enough to warrant capitalization. Moreover, whether an expenditure produces a future benefit is fact specific. The same type or class of expenditure might be deductible by some taxpayers in certain situations and not by others in other situations. The burden on taxpayers and the IRS of applying an expansive reading of INDOPCO on an expense-by-expense basis would have been daunting.

For these reasons, the IRS and Department of the Treasury (the “Treasury”) determined that the theoretical standard suggested by INDOPCO was not administrable. Accordingly, they issued proposed regulations, under section 263(a) of the Code, identifying specific categories of expenditures that must be capitalized. 67 Fed. Reg. 77701-01 (Dec. 19, 2002). After notice and comment, they promulgated final regulations containing a list of specific expenditure categories subject to capitalization. 69 Fed. Reg. 436-01 (Jan. 5, 2004). The categories include costs incurred to produce assets, such as intangibles, as well as costs, such as the cost of recapitalizing a corporation, that were required under the INDOPCO standard to be capitalized even though they did not produce an asset.

One category included in the section 263 regulations targets amounts paid to a government agency to obtain a license or permit from the agency — such as amounts paid to the FDA to obtain approval of an ANDA — as paid to create an intangible asset and thus are subject to capitalization. See Treas. Reg. §§ 1.263(a)-4(b)(1)(ii), -4(d)(5), -4(1), Example 7. Because Petitioner's patent litigation defense costs are not paid to the FDA, that provision does not apply here. Instead, Respondent, relies on Treas. Reg. § 1.263(a)-4(b)(1)(v), which requires capitalization of amounts paid to “facilitate” the creation or acquisition of an intangible asset described in Treas. Reg. § 1.263(a)-4(b)(1)(i)-(iv). Tr. (Respondent's Opening Statement) at 50:2-51:3. According to Respondent, FDA approval is a license or permit described in Treas. Reg. § 1.263(a)-4(b)(1)(ii), and patent litigation defense costs incurred by Petitioner facilitate its receipt of FDA approval. Tr. (Respondent's Opening Statement) at 50:2-51:3.

As explained below, patent litigation defense costs do not facilitate the acquisition of FDA approval of an ANDA and therefore are not subject to capitalization. Respondent's position fails.

C. Patent Litigation Defense Costs Do Not “Facilitate” the Acquisition of an ANDA Within the Meaning of the Section 263 Regulations

1. Patent litigation defense costs are not incurred in the process of pursuing FDA approval of an ANDA

“[A]n 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.” Treas. Reg. § 1.263(a)-4(e)(1). The “transaction” is the “acquisition or creation” of the intangible asset — in this instance, the FDA-approved ANDA. Cf. Treas. Reg. § 1.263(a)-4(d)(5). Respondent appears to agree. See Tr. (Respondent's Closing Statement) at 614:20-22 (defining “transaction” as receipt of an approved ANDA). Therefore, Respondent cannot prevail unless this Court determines that Petitioner's patent litigation defense costs are incurred in the process of obtaining an approved ANDA from the FDA.

A pharmaceutical company seeking to manufacture and market a prescription drug in the United States must obtain the approval of the FDA. PFF ¶ 34. If it obtains that approval, but manufacturing and selling the generic drug may infringe another person's patent rights, the patent holder may sue the company in Federal district court to enjoin the company from making and selling the drug and also to obtain monetary damages. 35 U.S.C. § 271(e)(4)(B); PFF ¶ 39. But the patent holder's rights expire with the term of the patent. PFF ¶ 99.

The judicial process for resolving patent disputes is — and always has been — separate and distinct from the FDA's administrative process for scientifically reviewing and approving generic drugs. PFF ¶¶ 46-48. The two processes are established by different titles of the U.S. Code, and involve different substantive issues, different standards, different parties, and different forums. PFF ¶ 101-103.

The principal objective of Hatch-Waxman was to accelerate the introduction of generic drugs into the market. PFF ¶ 47. To achieve this objective, Congress modified both the FDA process and the patent dispute resolution process. PFF ¶¶ 47. Prior to Hatch-Waxman, the process for obtaining FDA approval of a generic drug was essentially the same as that for obtaining FDA approval of a new brand drug. PFF ¶ 52. Thus, generic drug companies had to prove that their proposed generic drugs met the same clinical efficacy and safety standards applicable to all new drugs. This requirement increased the time and cost necessary to bring a generic drug to market. Congress shortened the process for obtaining FDA approval of generic drugs by permitting the developers of generic drugs to rely on the same safety and efficacy data used to approve the brand drug. PFF ¶¶ 53-55. It introduced an “abbreviated” application process that requires the applicant to prove that its proposed generic drug meets the FDA Standards, including proving that the generic drug is bioequivalent to the previously-approved brand drug. PFF ¶¶ 54-56.

The separate process for resolving patent infringement disputes between brand drug companies and generic drug companies also had to be modified to further the Congressional purpose of accelerating the introduction of generic drugs. PFF ¶ 47. In Roche Products, Inc, v. Bolar Pharm. Co., 733 F.2d 858 (Fed. Cir. 1984), the Federal Circuit had held that any use of a patented item to develop a generic drug product constituted infringement, which was not protected by claims of an experimental use exception. The result was to delay experimental testing of generic drugs until expiry of the patents protecting the brand drug. See PFF ¶¶ 73-74. Congress was concerned that the holding in Bolar would delay the introduction of generic drugs into the market and effectively extend the patent life for brand drugs by delaying all testing and development of generic products until the expiration of all relevant patents. See PFF ¶ 74. In Hatch-Waxman, therefore, Congress overturned the decision in Bolar by creating a safe harbor that protects generic drug companies from infringement actions when they use patented brand drugs for purposes of preparing an application for FDA approval of a generic drug. PFF ¶¶ 74-75; see also 35 U.S.C. § 271(e)(1).

While Congress exempted certain activities occurring before commercialization of a drug from being considered infringement, it also provided an opportunity for patent litigation to commence while the FDA was considering whether to approve an ANDA. PFF ¶¶ 74, 79. If patent issues could be resolved before a generic drug began to be commercially manufactured and sold, a brand drug company could avoid incurring damages for lost profits. See PFF ¶ 79. To that end, Congress provided that the filing of an ANDA with a paragraph IV certification is an act of infringement of the patent that is the subject of the certification. 35 U.S.C. § 271(e)(2). According to the U.S. Court of Appeals for the Federal Circuit, 35 U.S.C. § 271(e)(2) provides “a jurisdictional basis for bringing suit in Federal district court . . . when, in light of § 271(e)(1), the ANDA applicant was not making, using, or selling the patented product, the traditional statutorily-defined acts of infringement.” Glaxo, Inc, v. Novopharm, Ltd., 110 F.3d 1562, 1569 (Fed. Cir. 1997). In addition to providing brand drug companies the right to sue for infringement after the filing of an ANDA, Congress went a step further, requiring the generic drug company — not the FDA — to give prompt notice of the filing of a paragraph IV certification to brand drug companies listed in the Orange Book. PFF ¶ 87. If a brand drug company elects to file an infringement suit within 45 days of receiving notice, it benefits from an automatic 30-month stay, during which the FDA may not grant final approval of the ANDA. PFF ¶ 90.

The Hatch-Waxman Act did not link resolution of the patent litigation to FDA review or approval of the ANDA. PFF ¶¶ 48, 106. The FDA must approve an ANDA after 30 months if it has determined that the generic drug satisfies the FDA Standards (and there are no other periods of exclusivity) even though the patent dispute remains unresolved. PFF ¶¶ 38, 96. When Congress passed the Hatch-Waxman Act, the median time for resolution of a patent suit was 36 months, with more than 10 percent of the cases taking more than 77 months to resolve. H.R. Rep. No. 98-857, pt.2, at 10 (1984). Thus, Congress understood that in many, if not most, cases, the 30-month stay would expire before the resolution of the patent litigation. Congress rejected a proposed amendment that “would have required that either the patent expire before [FDA] approval [of the generic substitute for marketing], or that there be a final decision by a Federal District Court that the patent in question was not valid.” Zeneca Ltd, v. Pharmachemie B.V., 16 F. Supp. 2d 112, 115-16 (D. Mass. 1998) (bracketing in original). See also Lilly v. Accord Healthcare Inc., No. 14-00389,2015 WL 8675158 (S.D. Ind. Dec. 11, 2015) (“Congress did not tie resolution of the patent litigation to approval of the product.”).

Thus, while Congress sought to accelerate both the FDA and patent litigation processes, it rejected proposals to link the processes. Changes to the patent litigation process did not bring patent litigation into the FDA approval process and did not change the requirements for receiving FDA approval. PFF ¶ 105. Regardless of when a patent case is resolved, the patent litigation process remains separate from the FDA approval process. PFF ¶¶ 106-107. The timing of the patent litigation, moreover, does not affect the substance of the issue before the court: whether the marketing, manufacture, and sale of the defendant's generic product would infringe the patent and whether the patent is invalid. PFF ¶¶ 11, 42-43, 105. As the U.S. Court of Appeals for the Federal Circuit provided:

[A] district court's inquiry in a suit brought under 35 U.S.C. § 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.' 21 U.S.C. § 355(j)(2)(A)(vii)(IV) (emphasis added). The only difference in actions brought under 35 U.S.C. § 271(e)(2) is that the allegedly infringing drug has not yet been marketed and therefore the question of infringement must focus on what the ANDA applicant will likely market if its application is approved, an act that has not yet occurred. The occurrence of the defined 'act of infringement' does not determine the ultimate question whether what will be sold will infringe any relevant patent.

Glaxo v. Novopharm, 110 F.3d 1562, 1569 (Fed. Cir. 1997) (emphasis added).

The judgement in a patent infringement case in no way determines whether an applicant has met the FDA Standards for ANDA approval. PFF ¶¶ 14, 17, 50-51, 70, 105, 107. Likewise, winning the patent litigation case does not ensure the generic drug company that it will receive FDA approval for the manufacture and sale of its generic product. PFF ¶ 51. It is not the approval of the ANDA (or the scientific review thereof) that raises the substantive issue of patent infringement, but rather whether the generic drug will infringe a valid patent in the conduct of the generic drug company's business during a defined and limited period. PFF ¶¶ 84-86.

It is true that a favorable decision for the patentee prevents a generic drug company that meets the FDA Standards from manufacturing and selling its generic product during the remaining term of the patent. See 35 U.S.C. § 271(e)(4)(B). But this impact is temporary. PFF ¶¶ 99-100. An ANDA applicant that meets the FDA Standards but loses the patent infringement litigation will receive approval with an effective date as of the expiration of the patent. PFF ¶¶ 71, 100. Prior to Hatch-Waxman, if a company had obtained FDA approval for the manufacture and sale of a generic product, a finding of infringement would have resulted in an injunction preventing the generic drug company from using the rights granted by the FDA until patent expiration. After Hatch-Waxman, a finding of infringement will result in a delay in the effective date of FDA approval. PFF ¶ 100. There is no substantive difference between receiving FDA approval with an effective date as of patent expiration and receiving an approval with an immediate effective date, the use of which has been enjoined until patent expiration. The FDA's administrative process and the FDA Standards are the same in either instance. See PFF ¶ 70. Therefore, the FDA and patent processes remain separate, address different issues, and have different outcomes. PFF ¶¶ 48, 101-103.

As was the case prior to Hatch-Waxman, a Federal district court tries patent litigation cases pursuant to Article III and title 35 of the U.S. Code according to the Federal Rules of Civil Procedure; the FDA, an administrative agency, considers whether the generic drug satisfies the scientific requirements of title 21 of the U.S. Code, which governs food and drug law. PFF ¶¶ 83-84. The patent holder is a party to the infringement litigation but not the FDA proceeding; the FDA is a party to the ANDA administrative process but not to the patent infringement litigation. See PFF ¶¶ 13, 70-71, 83-84. And success in one proceeding does not guarantee, or even affect the chances of, success in the other: a generic drug company may win the patent litigation but never receive FDA approval, or may receive tentative (or even final) approval of its ANDA from the FDA only to lose the patent litigation. PFF ¶¶ 22, 51.

The FDA has no role or expertise in the review, enforcement, or adjudication of patent issues. PFF ¶ 68. Upon approving a NDA, the NDA holder will list in the Orange Book certain types of patents. PFF ¶ 67. Orange Book entries are made based entirely on representations of the patent holders and brand drug companies. PFF ¶¶ 64-65. And when a generic drug company such as Petitioner files an ANDA seeking FDA approval to market the generic drug prior to patent expiration, it must make a paragraph IV certification that its product does not infringe any Orange Book-listed patents. PFF ¶ 58. Once the FDA informs the applicant that an ANDA is sufficiently complete for review, the generic drug company must provide the brand drug company (or patent holder) notification as to any paragraph IV certifications it has made regarding any Orange-Book listed patents held by the brand drug company. PFF ¶ 89. And the generic drug company must inform the FDA of any litigation filed within the 45-day period commencing on the date of the notice letter so that the FDA can comply with the statutory 30-month stay. PFF ¶¶ 19-20. But these actions are purely ministerial and involve no exercise of discretion by the FDA. PFF ¶ 93.

It is true that, upon filing of an infringement suit by a brand drug company within 45 days of receiving notice from the ANDA applicant, the FDA is subject to a 30-month stay during which it may not grant final approval of an ANDA. PFF ¶ 90. But the 30-month stay applies only to the formal grant of final approval: the FDA is free to (indeed, is required to) review the ANDA during the pendency of the patent infringement litigation and may even issue a tentative approval to the applicant indicating that its substantive review is complete and that the generic drug satisfies all of the FDA Standards for approval. PFF ¶¶ 92-93. Once the 30-month stay expires, if the generic drug satisfies the FDA Standards, the FDA must grant final approval even if the patent litigation remains unresolved. PFF ¶¶ 95-96. Thus, while Hatch-Waxman sought to accelerate the resolution of the FDA approval and patent litigation processes, it did not combine the two or make patent litigation an adjunct of the FDA process. PFF ¶¶ 47-48, 101-103.

Here, Petitioner's ultimate business objective was not to obtain ANDA approval, nor was it to win a patent infringement suit if one were brought. Its objective was to complete all processes necessary to make and sell a generic drug in the United States. PFF ¶¶ 6-8. FDA scientific approval farthers that objective, as does winning patent infringement suits, but that does not allow the two separate and distinct processes to be collapsed into one, and it does not permit the cost of one to be allocated to the other for tax purposes. There are other processes — beyond obtaining AN D A approval and resolving patent disputes — that must be successfully undertaken to market and sell a generic drug in the United States. For example, in order to obtain FDA approval of an ANDA, a generic drug company must show that its manufacturing facility meets the FDA Standards. PFF ¶ 15. Indeed, FDA approval of an ANDA is directly contingent on meeting FDA Standards that govern manufacturing. But no one would argue that a taxpayer that incurs costs to purchase, construct, or improve a manufacturing facility to comply with the FDA Standards is either permitted or required to amortize those costs over the 15-year tax life of the ANDA rather than the much longer tax life of the building.

2. Regulatory examples illustrating the application of the section 263 regulations demonstrate that patent litigation defense costs do not facilitate FDA approval of an ANDA

The section 263 regulations contain two definitions of “facilitate.” The first defines amounts that are treated as incurred to facilitate the creation or acquisition of an intangible asset:

Except as otherwise provided in this section, 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. Whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances. In determining whether an amount is paid to facilitate a transaction, the fact that the amount would (or would not) have been paid but for the transaction is relevant, but is not determinative. An amount paid to determine the value or price of an intangible is an amount paid in the process of investigating or otherwise pursuing the transaction.

Treas. Reg. § 1.263(a)-4(e)(1).

The second defines amounts that are treated as facilitating a capital transaction:

Except as otherwise provided in this section, an amount is paid to facilitate a transaction described in paragraph (a) of this section if the amount is paid in the process of investigating or otherwise pursuing the transaction. Whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances. In determining whether an amount is paid to facilitate a transaction, the fact that the amount would (or would not) have been paid but for the transaction is relevant, but is not determinative. An amount paid to determine the value or price of a transaction is an amount paid in the process of investigating or otherwise pursuing the transaction.

Treas. Reg. § 1.263(a)-5(b)(1). As this comparison demonstrates, the section 263 regulations adopt a common definition of “facilitate.” They differ only in that Treas. Reg. § 1.263(a)-4 defines “transaction” more narrowly than Treas. Reg. § 1.263(a)-5. The preamble to the final regulations confirms that Treasury and Respondent intended “facilitate” to have the same meaning in both contexts.⁵

For this reason, all examples contained in the section 263 regulations that illustrate the interpretation of “facilitate” are directly relevant to this case, whether included in Treas. Reg. § 1.263(a)-4 or Treas. Reg. § 1.263(a)-5.

These examples demonstrate that otherwise-deductible costs are not required to be capitalized as facilitative merely because they are incurred simultaneously with, or in connection with, a larger capital transaction.

a. The cost of terminating an existing lease to enable taxpayer to enter into a new lease does not facilitate the new lease.

In Example 2 of Treas. Reg. § 1.263(a)-4(e)(5), X enters into a 10-year lease of manufacturing equipment from Y. After six years, X enters into a new equipment lease with Z, a competitor of Y. The new lease with Z is, by its terms, contingent on X being able to terminate its existing lease with Y. X eventually agrees to pay Y $50,000 to terminate the original equipment lease, thereby enabling X's new lease with Z to move forward.

X's new lease with Z is an intangible asset, the cost of which would be subject to capitalization. X's $50,000 payment to Y is essential to consummation of the new lease with Z. That payment occurs after X has begun its pursuit of the new lease with Z. And the only reason for that payment is to enable X to acquire the new lease with Z. Nevertheless, the example concludes that the $50,000 payment to Y does not “facilitate” — that is, the payment is not incurred “in the process of investigating or otherwise pursuing the transaction” — X's new lease with Z. See Treas. Reg. § 1.263(a)-4(e)(1)(i). Thus, X is entitled to an immediate deduction of the $50,000 payment to Y and is not required to capitalize that payment into the basis of its new lease with Z.

In this example, X must complete the process of terminating the old lease in order to complete the related process of acquiring the new lease. Treas. Reg. § 1.263(a)-4(e)(5), Example 2. In that sense, the process of terminating the old lease facilitates the process of acquiring the new lease. But costs incurred in facilitating the process of terminating the old lease do not facilitate the process of entering into the new lease.

Factually, there is a much greater linkage between the Y and Z leases than exists between the FDA approval and patent litigation processes. As a commercial and economic matter, the two leases are mutually exclusive: X cannot enter into the Z lease unless it terminates the Y lease. In contrast, as explained above, a generic drug company that receives FDA approval may begin selling its generic product even if the patent litigation remains unresolved, and, even if it loses the patent infringement case, the generic drug company will, if its product meets the FDA Standards, obtain FDA final approval effective upon expiration of the patent. See supra at VII.C.l. Petitioner's facts provide an even stronger case for deductibility than the facts of this example. Treas. Reg. § 1.263(a)-4(e)(5), Example 2.

b. Borrowing costs incurred to fund an acquisition do not facilitate the acquisition.

Example 2 of Treas. Reg. § 1.263(a)-5(l) illustrates another facet of “facilitate.” In Example 2, a corporation (Q) seeks to acquire 100% of the stock of a target, Y corporation. To finance its acquisition of Y, Q must issue new debt. Q pays $25,000 to an investment banker to market the debt to the public and $10,000 to outside counsel to prepare the offering documents for the debt. Although Q issued the debt to acquire the Y stock, Example 2 holds that the $35,000 in costs incurred in the process of obtaining financing of Y do not facilitate the acquisition of Y. Instead, Example 2 concludes that the costs facilitate the issuance of the debt. The result is that instead of being non-amortizable costs of purchasing stock, the costs are amortizable debt issuance costs.

Respondent describes Hatch-Waxman as creating a “linkage” between patent litigation and the FDA process and invokes this purported “linkage” to recast patent litigation as merely part of the FDA process. Tr. (Respondent's Opening Statement) at 42:04-43:8. But the 30-month stay merely delays final FDA approval — it does not prevent a generic drug company from obtaining tentative approval before expiration of the stay, or from obtaining final approval prior to resolving the patent litigation. PFF ¶¶ 90, 93, 95. Even if the generic drug company loses the patent litigation, the effect of the loss is to postpone final FDA approval by converting the paragraph IV certification into a paragraph III certification. PFF ¶ 100. Ultimately, therefore, the patent litigation affects only the timing of final FDA approval, and not whether the generic drug that is the subject of the ANDA satisfies the FDA Standards.

In contrast, it is hard to imagine a more direct linkage than the linkage between purchasing an asset and acquiring the funds necessary to make that purchase. In Example 2, the debt is a prerequisite to the stock purchase: Q cannot acquire Y stock without first obtaining the cash necessary to pay Y's shareholders. Q's sole purpose in incurring the debt is to buy the stock of Y. Treas. Reg. § 1.263(a)-5(l), Example 2. Notwithstanding this direct linkage between the debt and the purchase, Example 2 concludes that the debt issuance costs do not facilitate — are not incurred “in the process of investigating or otherwise pursuing” — the purchase of Y. Treas. Reg. § 1.263(a)-5(b)(1), Example 2.

The basis for this conclusion is the recognition that, despite their interrelationship, the debt issuance and stock purchase involve separate processes that affect different legal and commercial rights. The distinctions between patent litigation and FDA administrative review are at least as great, if not more so, than the distinctions between borrowing money that is necessary to complete a purchase and the purchase itself.

c. Tort litigation costs do not facilitate a bankruptcy reorganization.

Example 18 of Treas. Reg. § 1.263(a)-5(l) is particularly relevant to the analysis of the patent litigation defense costs at issue in this case. In Example 18, X corporation is a defendant in numerous lawsuits involving tort liability arising from its manufacture of defective products. To manage those lawsuits in a single proceeding, X files a petition for reorganization under Chapter 11 of the Bankruptcy Code. X pays legal fees to outside counsel to prepare its bankruptcy petition and plan of reorganization, to attend hearings on the plan, to analyze the plan, and to defend against motions by creditors and tort claimants to strike the plan. Example 18 concludes that “amounts paid by X to its outside counsel to prepare, analyze or obtain approval of the portion of X's plan of reorganization that resolves X's tort liability do not facilitate the reorganization and are not required to be capitalized, provided that such amounts would have been treated as ordinary and necessary business expenses under section 162 had the bankruptcy proceeding not been instituted.” Treas. Reg. § 1.263(a)-5(l), Example 18(ii).

Respondent cannot square Example 18 (or Treas. Reg. § 1.263(a)-5(c)(4), which Example 18 illustrates) with its “holistic” interpretation of Hatch-Waxman. Treas. Reg. § 1.2632(a)-5(l), Example 18. According to Respondent, the resolution of patent disputes between generic and brand drug companies is merely part of the process by which a generic drug company obtains FDA approval of an ANDA. Tr. (Respondent's Opening Statement) at 50:2-51:3; Tr. (Respondent's Closing Statement) at 623:8-626:20. As explained above, Respondent's interpretation of Hatch-Waxman is wrong. See supra at VII.C.1. But Example 18 also demonstrates that much of Respondent's Hatch-Waxman argument is simply irrelevant to the question whether patent litigation defense costs facilitate the receipt of ANDA approval.

Consider, for example, the testimony introduced by Respondent that attempted to characterize Hatch-Waxman as creating “linkage” between the FDA process and patent litigation. See, e.g., Tr. (Thomas) at 416:20-417:21. In Example 18, the filing of the bankruptcy petition creates a linkage between the preexisting tort litigation and the bankruptcy reorganization; indeed, the whole purpose of the petition is to give the bankruptcy court jurisdiction over the tort claims in the bankruptcy process. And the bankruptcy process will resolve all claims — tort and non-tort — as part of a single reorganization. Adopting Respondent's “holistic” approach might lead to the conclusion that the tort litigation costs facilitate the transaction, but Example 18 concludes that the costs incurred in litigating the patent issues do not facilitate the bankruptcy reorganization. Treas. Reg. § 1.2632(a)-5(l), Example 18.

To take another example, Respondent asserts that patent litigation defense costs facilitate FDA approval because a loss by the generic drug company in the patent litigation will prevent it from obtaining final FDA approval of the ANDA until expiration of the relevant patent. Tr. (Respondent's Opening Statement) at 45:11-16. But a generic drug company that loses its patent case eventually will receive FDA approval of its ANDA as long as it satisfies the safety, bioequivalence, and other FDA Standards. PFF ¶ 51. In contrast, in Example 18 the failure to resolve the tort claims does not merely postpone consummation of the bankruptcy reorganization but precludes it altogether. Treas. Reg. § 1.2632(a)-5(l), Example 18. Applying Respondent's “holistic” approach, the inability of X to consummate the transaction — to exit bankruptcy — without first resolving the disputed tort liabilities might lead one to believe that the tort litigation costs “facilitate” the bankruptcy reorganization; Example 18 concludes otherwise. Id. Notably, this conclusion obtains even though the presumptive rule is that all costs incurred to institute or administer a Chapter 11 proceeding are treated as facilitating a reorganization. See Treas. Reg. § 1.263(a)-5(c)(4).

d. Summary of examples.

All three examples involve taxpayers that incur costs in one process in order to effect a capital transaction as part of another process. In each example, the costs are essential to the taxpayer's ability to complete the related transaction: the taxpayer must litigate tort cases to complete the bankruptcy reorganization, must issue debt to fund a stock purchase, or must terminate an existing lease to enter into a new lease. In two examples (the stock purchase and the lease), the taxpayer's sole purpose for incurring the costs is to engage in the related transaction. Nevertheless, in all three cases the costs do not facilitate — that is, they are not incurred in the process of pursuing — the related transaction. Instead, they are characterized by reference to another process (termination of the old lease, issuance of debt, or tort litigation) that is respected as a separate process even though factually related to another process.

Petitioner's patent litigation defense costs present an even stronger case for immediate deductibility. By asserting its “facilitate” argument, Respondent is implicitly conceding that patent infringement defense costs incurred outside of the Hatch-Waxman context are deductible. Thus, Respondent appears to agree that, if the FDA did not exist, any patent infringement defense costs incurred by a taxpayer seeking to market a generic version of a brand drug would be immediately deductible. In this respect, the issue is on all fours with the regulatory example involving tort litigation defense costs incurred in a bankruptcy reorganization. The facts here are stronger, because unlike the bankruptcy reorganization, it is possible, and indeed common, to obtain FDA approval prior to resolution of the patent infringement issues. PFF ¶¶ 93, 96.

3. For the same reasons, costs incurred in the preparation of notice letters are not subject to capitalization

The legal costs incurred in the preparation of notice letters are an inherent part of the patent infringement litigation process. Notice letters explain the legal and factual basis for the generic drug company's belief that its generic product either does not infringe the brand drug company's patent or that the patent was invalid or unenforceable. PFF ¶¶ 19, 89. A generic drug company is not required to send notice letters to the FDA. PFF ¶ 19. A generic drug company is required to notify the FDA that it has sent a notice letter to the brand drug company, but the FDA's only interest in that information is to know if and when the 30-month stay is triggered. PFF ¶¶ 18-19. Because the legal costs paid for the preparation of notice letters are incurred in the patent infringement litigation process, those costs are deductible as ordinary expenses in the year that they are incurred.

Notice letters directly facilitate the patent infringement litigation process. They provide the brand drug company with actual notice of an act of infringement, with an explanation of why the generic drug company believes its generic drug does not infringe the brand drug company's patent, and with the opportunity to begin adjudicating its patent rights for up to 30 months before commercial manufacture and sale of the generic drug can begin.

D. The Expert Testimony Introduced by Respondent is Unreliable and Irrelevant

Respondent seeks to rewrite Hatch-Waxman and bolster its position through testimony from three expert witnesses. Through these experts, Respondent asserts that (1) the patent litigation process is not separate from the FDA process because the FDA is a “patent enforcement agency,” (2) patent litigation instituted under Hatch-Waxman is not like “conventional” patent litigation, and (3) ANDAs that are accompanied by paragraph IV certifications are more valuable than other ANDAs. The first two contentions are erroneous; the third is irrelevant.

1. The FDA is not a “patent enforcement agency” that acts as the agent of patent holders

To support its capitalization argument, Respondent introduced testimony from Professor Thomas that Hatch-Waxman created a “linkage” between the patent litigation process and the FDA review process. Ex. 209-R at ¶¶ 13-16; Ex. 210-R at ¶¶ 13-16. Respondent invokes Professor Thomas's “holistic” view as evidence that under Hatch-Waxman the resolution of patent disputes is one step in the process of obtaining FDA approval. Tr. (Respondent's Closing Statement) at 623:22-624:8.

A crucial element of Respondent's case is Professor Thomas's testimony that Hatch-Waxman gave the FDA substantive patent-law responsibilities. Tr. (Thomas) at 415:11-416:19. Professor Thomas reimagines the FDA as a “patent enforcement agency.” Tr. (Thomas) at 424:7-22, 438:4-440:16; Ex. 208-P (Thomas Opening Report) at ¶ 16. In Professor Thomas's world, the FDA makes substantive determinations on patent issues and acts as an agent for patent owners seeking to enforce their rights. Tr. (Thomas) at 459:25-460:6. Professor Thomas contends that the FDA carries out these functions through a cadre of in-house patent experts. Tr. (Thomas) at 415:15-416:19. Indeed, given the substantive responsibilities that he attributes to the FDA, Professor Thomas testified that it was inconceivable to him that the FDA might not have in-house patent expertise. Tr. (Thomas) at 440:23-441:25. Professor Thomas also described the FDA as acting in the capacity of an “agent” for private companies, namely, those that own patents on brand drugs. Tr. (Thomas) at 427:3-7, 448:7-15. But as explained by Mr. Bradshaw, the FDA has never acted as an agent for the pharmaceutical companies it regulates. Tr. (Bradshaw) at 589:9-16; see also PFF ¶¶ 62, 68.

Professor Thomas's description of the FDA's role is inconsistent with a long line of cases describing the FDA as having only ministerial duties in maintaining the Orange Book and exercising other responsibilities with respect to patent information. See Teva Pharms., USA, Inc. v. Leavitt, 548 F.3d 103 (D.C. Cir. 2008); Purepac Pharm. Co. v. Thompson, 354 F.3d 877 (D.C. Cir. 2004); Apotex, Inc, v. Thompson, 347 F.3d 1335 (Fed. Cir. 2003); Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077 (D.C. Cir. 2001); Tr. (Thomas) at 459:21-460:6. Many of these cases appear in case books edited by Professor Thomas. See Ex. 219-P. When confronted on cross-examination with his own writings, Professor Thomas attempted to dance around these cases. He attempted to dismiss some cases as “old,” yet cited no subsequent authorities reversing or even questioning those cases. Tr. (Thomas) at 444:20-449:2. He insinuated that he sometimes includes wrongly decided cases in his books to stimulate discussion, without ever stating whether that was true of any of the cases describing the FDA's activities regarding patent information submitted to the Agency as “ministerial.” Tr. (Thomas) at 442:14-443:6. He even went so far as to suggest that judicial references to “ministerial” support his description of the FDA as an agent for the brand drug companies. Tr. (Thomas) at 448:1-15.

Professor Thomas's view of the FDA bears virtually no resemblance to reality. The former Chief Counsel of the FDA, Sheldon Bradshaw, testified without contradiction that the FDA does not view itself as a patent enforcement agency, Tr. (Bradshaw) at 357:20-358:1, does not employ any patent lawyers, Tr. (Bradshaw) at 362:24-363:2, and does not have patent expertise of any kind. Tr. (Bradshaw) at 356:16-357:19.

With respect to Professor Thomas's suggestion that the FDA acts as an agent for the brand drug companies, Mr. Bradshaw was emphatic that the FDA never acts as an agent for any third party. Tr. (Bradshaw) at 589:9-16. Mr. Bradshaw also refuted the contention that descriptions of the FDA's responsibilities as ministerial in no way suggest an agent-principal relationship with brand drug companies:

So when FDA describes it, the agency is only playing a ministerial role in some capacity like their relationship to the Orange Book, it means that they are completing some task without exercising independent judgment or discretion. So it's the classic definition of a government actor acting in a ministerial role. And it certainly, just to be clear, acting in a ministerial role never means that you are acting as the agent for some other party, you are merely fulfilling some duty without the exercise of any independent judgment. . . .

Tr. (Bradshaw) at 589:17-590:8. Professor Thomas's agent-principal theory, like his patent-enforcer theory, has no basis in reality and provides no support for Respondent's position. Tr. (Bradshaw) at 589:17-590:8.

Professor Thomas's attempted rewrite of Hatch-Waxman is the keystone of Respondent's position. There is no dispute that, prior to Hatch-Waxman, the patent litigation and FDA review processes were separate processes. There is also no dispute that, to achieve its goal of streamlining the introduction of generic drugs into the market, Congress adjusted both processes. But Congress explicitly rejected efforts to tie the resolution of patent issues to the receipt of FDA approval or the satisfaction of the FDA Standards. See supra at. VII.C.1. Hatch-Waxman did not make patent litigation part of the FDA process, nor did it make the FDA into a “patent enforcer.” PFF ¶¶ 62, 68.

In summary, Professor Thomas's testimony is as unreliable as it is unfounded. The FDA does not have in-house patent experts, it does not enforce patents, and it does not act as the agent for brand drug companies. PFF ¶¶ 17, 62, 68. That Professor Thomas went to such lengths to support his position demonstrates that his “holistic approach” provides no foundation for Respondent's position.

2. There are no substantive differences between patent litigation under Hatch-Waxman and “conventional patent litigation”

Respondent's second expert, Brian O'Shaughnessy, testified that patent litigation brought in connection with an ANDA with a paragraph IV certification differs from what he referred to as “conventional patent litigation.” Tr. (O'Shaughnessy) at 477:8-486:14.

Among the differences identified by Mr. O'Shaughnessy are that the “infringer [the generic drug company] initiates the suit and dictates the timing.” Tr. (O'Shaughnessy) at 476:25-477:2. As in any patent infringement case, however, a case brought under Hatch-Waxman begins when a patent owner files a lawsuit with a complaint alleging infringement of its patent. PFF ¶¶ 11, 83. Indeed, Mr. O'Shaughnessy acknowledged that the brand drug company is the plaintiff and has the right to decide whether to pursue a patent infringement case. Tr. (O'Shaughnessy) at 509:11-17. He also acknowledged that a patent holder could decide not to bring suit within 45 days of receiving notice without forfeiting its rights to file an infringement suit later, thus undermining any supposed linkage between the FDA administrative process and patent litigation process. Tr. (O'Shaughnessy) at 503:23-504:2.

Mr. O'Shaughnessy also made the remarkable assertion that the inquiry in a patent infringement case brought in response to a paragraph IV certification differs from the inquiry in any other patent infringement case. Tr. (O'Shaughnessy) at 498:22-499:1. The U.S. Court of Appeals for the Federal Circuit, which has exclusive jurisdiction over appeals involving patent infringement, has a different view: “[A] district court's inquiry in a suit brought under 271(e)(2) is that 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.” Glaxo, Inc, v. Novopharm, Ltd., 110 F.3d 1562, 1569 (Fed. Cir. 1997). And Mr. O'Shaughnessy later conceded that “the original Hatch-Waxman Act did not intend to change substantive patent law in terms of what constitutes infringement.” Tr. (O'Shaughnessy) at 508:20-509:4.

Another alleged difference cited by Mr. O'Shaughnessy is that, by virtue of the Orange Book listing, “we know at the outset of . . . litigation which patents are at issue.” Tr. (O'Shaughnessy) at 483:17-484:8. As the record demonstrates, however, many of the patents that may apply to a brand drug are ineligible for inclusion in the Orange Book, including method-of-manufacture and process patents. PFF ¶ 67.

Despite his mischaracterizations of patent litigation, Mr. O'Shaughnessy appears to agree with Petitioner that patent infringement litigation is not part of the FDA process. He agrees, for example, that “FDA has no responsibility for making legal determinations as to patent infringement.” Tr. (O'Shaughnessy) at 496:11-17. He also acknowledges that the FDA process and the patent litigation process are distinct: “[T]he Hatch-Waxman regime is premised on the foundation that there are differing competencies, regulatory authority, and legal capabilities of the FDA, PTO, and the patent owner.” Tr. (O'Shaughnessy) at 507:13-21; see also Tr. (O'Shaughnessy) at 509:8-509:10 (“[W]ithout those differing competencies and legal capabilities the Hatch-Waxman regime simply wouldn't work.”). Thus, Mr. O'Shaughnessy's testimony contradicts Professor Thomas's characterization of the FDA as a patent enforcement agency that employs a staff of patent-law experts.

3. Whether FDA approval of an ANDA with a paragraph IV certification has economic value is irrelevant to the “facilitate” issue

At trial, Respondent offered testimony of economist Dr. Richard Mortimer, who provided his views that the economic value of an ANDA with a paragraph IV certification exceeds the economic value of an ANDA with a paragraph III certification. Tr. (Mortimer) at 539:6-540:6. The Mortimer testimony is irrelevant to the issue in this case. That testimony has no relevance to the question whether patent infringement defense costs are incurred in the process of pursuing, and thus facilitate, FDA approval of an ANDA.

Presumably, Respondent introduced the Mortimer Report to support an argument that the benefits of obtaining FDA approval of an ANDA with a paragraph IV certification provide long-term benefits to the generic drug company. The special benefits that Dr. Mortimer ascribes to paragraph IV certifications arise mostly from the 180-day exclusivity period that is potentially available to the first successful ANDA applicant with a paragraph IV certification. Tr. (Mortimer) at 539:19-540:6, 565:8-566:1. This “first to file” benefit, however, has nothing to do with the patent litigation process. PFF ¶50. Aside from determining whether an applicant qualifies for 180-day exclusivity, the FDA's scientific review is the same whether the ANDA is accompanied by a paragraph III certification or a paragraph IV certification. PFF ¶ 60. Dr. Mortimer himself admitted as much, stating that any differences between the two are attributable to differences in the underlying drugs rather than differences between the two ANDAs. Tr. (Mortimer) at 560:11-21. As Dr. Mortimer testified, whether a generic drug company decides to proceed with a paragraph III or paragraph IV certification depends on its view of the strength of the underlying patents. Tr. (Mortimer) at 566:15-567:1. All other things being equal, a generic drug that does not infringe a valid patent is more valuable than one that does. That common-sense principle is not unique to the pharmaceutical industry: it is true of any product in any industry. All other things being equal, a product that does not infringe someone else's patent is more valuable than a product that does.

In any case, the alleged value of an ANDA with a paragraph IV certification is irrelevant to whether patent litigation costs facilitate FDA approval. As explained above, the section 263 regulations require capitalization of amounts paid “to create or enhance a future benefit,” but only if and to the extent such benefits are “identified in published guidance in the Federal Register or in the Internal Revenue Bulletin.” Treas. Reg. § 1.263(a)-4(a)(iv). Had the Treasury and Respondent published guidance invoking this authority and extending it to patent litigation costs incurred by a generic drug company, it is possible that Dr. Mortimer's testimony might have some relevance in this case. But since no such guidance exists, Treas. Reg. § 1.263(a)-4(a)(iv) is irrelevant here and cannot provide any rationale for introduction of the Mortimer Report.

Alternatively, it is possible that Respondent introduced the Mortimer Report to argue that capitalization of the patent infringement costs is necessary to match the deductions claimed by Petitioner against the future income allegedly produced by those costs. Once again, the statements made by the Treasury and Respondent in publishing the section 263 regulations make any such argument unavailable. The preamble to the final section 263 regulations includes the following statement:

Commentators questioned how the regulations interact with the clear reflection of income requirement of section 446(b) and whether the IRS would argue that an expenditure that is not required to be capitalized by the regulations should nonetheless be capitalized on the ground that deduction of the expenditure does not clearly reflect income under section 446. If an amount paid to acquire or create an intangible is not required to be capitalized by another provision of the Code or regulations thereunder or by the final regulations or in subsequent published guidance, the IRS will not argue that the clear reflection of income requirement of section 446(b) and the regulations thereunder necessitates capitalization.

T.D. 9107, 2004-1 C.B. 447 (Jan. 5, 2004), at II.B (emphasis added). This statement could not be more categorical. The future benefits that Dr. Mortimer ascribes to paragraph IV certifications provide no basis for requiring capitalization of patent litigation defense costs.

Thus, regardless of Respondent's reasons for procuring the Mortimer Report, it has no relevance to any issue in this litigation. To the extent the Mortimer Report provides any illumination on these issues, it sheds light on the absurdity of requiring capitalization over 15+ years. Most of the benefits that the Mortimer Report attributes to ANDAs with paragraph IV certifications arise in the first 180 days after the commencement of marketing; these benefits are available, however, only when the generic drug company meets the strict requirements for “first to file” status.⁶ Tr. (Mortimer) at 539:19-540:6, 565:8-566:1; PFF ¶ 50. Although the requirements are strict, no lawsuit is necessary for a generic drug company to obtain a 180-day exclusivity period. PFF ¶ 50. In addition, the 180-day exclusivity period is fragile and can be forfeited in a number of ways. PFF ¶ 50. At the latest, the incremental benefits of paragraph IV certification occur over the remaining term(s) of the unexpired patents. Despite the fact that these benefits are front-loaded, Respondent's position requires straight-line amortization over the first 15 years of commercialization. That result cannot be justified by the matching principle.

E. Respondent's Position Produces Indefensible and Arbitrary Results

1. Respondent's position would upset the balance intended by Hatch-Waxman

The legislative history of Hatch-Waxman reflects an intention to create a level playing field for generic and brand drug companies. See H.R. Rep. No. 98-857, pt. 1, at 14-15 (1984). This intention is reflected in numerous statutory provisions. For example, Hatch-Waxman creates an exception to the normal rules of patent infringement so that generic drug companies can develop generic versions of patented drugs during the patent term, thereby accelerating the development of generic drugs. At the same time, the statute permits brand drug companies to expedite the resolution of their patent rights by requiring that they receive notice after the filing of an ANDA with a paragraph IV certification. PFF ¶ 80, 87.

Respondent's position would tilt the level playing field that Congress created. Respondent's administrative position is that pharmaceutical companies that hold patents on brand drugs generally may deduct the costs they incur in suing generic drug companies in patent infringement litigation. See Ex. 202-P (IRS Chief Counsel. Memo., AM 2014-006 (Aug. 11, 2014)).⁷ Thus, under Respondent's approach, if a paragraph IV certification leads to patent infringement litigation, the brand-drug-company plaintiff can immediately deduct its litigation costs, while the generic-drug-company defendant must capitalize its costs. In fact, if the generic drug company is successful in the patent litigation and obtains FDA approval of its ANDA, it must wait until 15 years after it begins selling the generic product to recover the last of its litigation costs, even though the court has determined that the plaintiff had no valid right to prevent the defendant from marketing the generic drug.

Respondent's position creates an obvious and unjustifiable disparity between the tax treatment of plaintiffs and defendants. This disparity has no basis in the statutory text, legislative history, or policy of the Hatch-Waxman Act, which was intended to strike a balance between the interests of brand drug companies and the generic drug companies.

At trial, counsel for Respondent tried to limit the fall-out from this disparity by stating that deductibility of patent litigation costs by plaintiffs is determined according to a “facts and circumstances” standard. Tr. (Respondent) at 400:2-13. But Respondent's own internal guidance states that “the legal fees incurred by the drug manufacturer to try to establish that the manufacture, use, or sale of the drug subject to the ANDA would infringe the drug manufacturer's patent generally are not required to be capitalized.” See Ex. 202-P (IRS Chief Counsel. Memo., AM 2014-006 (Aug. 11, 2014)) (emphasis added). The only exception is the cost of litigating a dispute over the plaintiffs ownership in or title to the patent, a circumstance that Respondent's guidance characterizes as “highly unusual” Id. (emphasis added).

Nor does this disparity in treatment have any basis in tax policy. Cf. Munson v. McGinnes, 283 F.2d 333, 335 (3d Cir. 1960) (noting the anomaly of permitting one litigant to deduct legal fees while imposing capitalization on the other party). Respondent attempts to justify the result by asserting that FDA approval of an ANDA with a paragraph IV certification provides the generic drug company with more benefits than approval of an ANDA with a paragraph III certification. Tr. (Respondent's Opening Statement) at 48:22-50:1. Even if true, Respondent's argument ignores the fact that the additional benefits come at the expense of a brand drug company. A brand drug company that prevails in an infringement suit brought against a generic drug company realizes benefits that will last for the remainder of the term of the infringed patents. In short, the duration of the incremental benefits at issue for the plaintiff and defendant are virtually identical, yet Respondent permits immediate deductibility by the plaintiff while requiring a minimum of 15-year amortization by the defendant.

2. Respondent should explain how its position applies in common fact patterns

Respondent maintains that, under Hatch-Waxman, patent infringement defense costs are part of the price paid to obtain FDA approval of an ANDA that is accompanied by a paragraph IV certification. The apparent simplicity of this position is misleading: Respondent has carefully avoided explaining how its position would apply to specific fact patterns that exist in this case.

a. Respondent has not explained how its position applies to litigation costs attributable to patents not listed in the Orange Book.

Respondent's position relies on the existence of various procedural rules that are triggered by the listing of a patent in the Orange Book, including the paragraph I-IV certifications, the notice requirement applicable to paragraph IV certifications, and the 30-month stay triggered when a patent holder files suit within 45 days of receiving notice of a paragraph IV certification. Tr. (Respondent's Closing Statement) at 622:12-626:20.

Many of the patents that protect brand drugs are not eligible for inclusion in the Orange Book, such as method-of-manufacture and process patents. PFF ¶ 67. As the testimony at trial demonstrated, it is not uncommon for a brand drug company to bring patent infringement litigation that covers patents listed in the Orange Book and other patents not listed in the Orange Book. Petitioner's evidence includes one case in which litigation on a non-Orange Book patent went to the Supreme Court. Tr. (Figg) at 170:9-21. Similarly, it is not uncommon for a brand plaintiff to add patents to its Orange Book listing after the commencement of patent litigation. Thomas (Opening Report) at 58.

Respondent's arguments rely exclusively on the special procedural rules applicable to patents listed in the Orange Book. Respondent has provided no theory that would support capitalization of costs incurred in defending against infringement claims involving patents not listed in the Orange Book. Thus, it appears that Respondent's position would require allocation of litigation costs between Orange Book and non-Orange Book patents. Any such allocation is likely to be complicated and contentious. How, for example, are the costs of drafting a brief or taking a deposition to be allocated among multiple patents?

b. Respondent has not explained how its position applies when a brand drug company's actions preclude the application of an automatic 30-month stay.

Respondent cites the automatic 30-month stay imposed on the ANDA's final approval during the pendency of patent infringement litigation as evidence that the patent litigation is part of the FDA approval process. See Resp. Trial Memo. at 28-31. Yet the 30-month stay does not apply if the holder of an Orange Book patent does not bring an infringement case within 45 days of receiving a notice letter from the ANDA applicant.⁸ 21 U.S.C. § 355(c)(3)(C); PFF ¶ 91. Nor does the 30-month stay apply if the brand drug company includes a patent in the Orange Book after the generic drug company filed an ANDA. PFF ¶ 91; see, e.g., First Stip. ¶¶ 8, 69.

Although Congress intended the 30-month stay as an incentive for brand drug companies to initiate patent infringement cases, a brand drug company may have various reasons for not commencing litigation during the 45-day window. PFF ¶ 91. Congress recognized this reality when it amended Hatch-Waxman in 2003 to give a generic drug company a declaratory judgement case against a non-filer brand drug company. Tr. (Figg) at 182:4-18.

A brand drug company that fails to file patent infringement litigation during this 45-day window retains the right to institute litigation later, either prior to the FDA's grant of final approval or after the grant of approval and the commencement of manufacture and sale of the generic drug. PFF ¶ 90. In such cases, the litigation has no impact on the timing of final approval by the FDA; nevertheless, Respondent's position appears to be that generic drug companies must capitalize their patent infringement litigation costs in these cases as well.

c. Respondent has not explained whether a generic drug company that loses a patent infringement case must capitalize its litigation costs.

If a brand drug company responds to a paragraph IV certification by filing a patent infringement suit and prevails, the FDA converts the generic drug company's paragraph IV certification into a paragraph III certification. PFF ¶ 100. The FDA may not grant final approval of an ANDA with a paragraph III certification until the expiration of the patent or patents that are the subject of the paragraph III certification. PFF ¶ 100.

At trial, Respondent introduced expert testimony from Dr. Mortimer purporting to quantify the relative advantages of ANDAs with paragraph IV certifications over ANDAs with paragraph III certifications. As explained above, Respondent has not explained the relevance of that testimony, which does not appear to be probative of any issue in this case. See supra at VII.D.3. To the extent it has any relevance, however, Dr. Mortimer's testimony provides no support for capitalizing litigation costs if the generic drug company never receives approval of an ANDA with a paragraph IV certification. A generic drug company should not be required to capitalize infringement defense costs incurred in a losing effort.

Respondent should explain whether costs incurred by a generic drug company in an unsuccessful infringement case are deductible or must be capitalized into the ANDA after the conversion of the company's paragraph IV certification into a paragraph III certification.

d. Respondent has not explained why a generic drug company should be required to capitalize litigation costs incurred after receiving final approval from the FDA.

If a brand drug company files a patent infringement suit within the 45-day window, the FDA may not grant final approval of the generic drug for 30 months. PFF ¶ 90. The 30-month stay does not prevent the FDA from reviewing the drug, and once the stay expires the FDA may grant final approval, even if the patent litigation remains undecided. PFF ¶¶ 93, 95-96. If that occurs, the generic drug company may decide to begin marketing (in an “at-risk launch”) or may wait until resolution of the patent infringement litigation to begin marketing the drug. PFF ¶ 98.

In either case, the FDA's issuance of final approval marks the end of the FDA process. PFF ¶¶ 96-97. By definition, costs incurred after that date are not incurred “in the process of pursuing” FDA approval, and thus cannot facilitate the ANDA. Nevertheless, Respondent appears to contend that these post-approval litigation costs are subject to capitalization. Respondent's position appears to be that “final approval” from the FDA is not “final,” based on the theory that the FDA will likely withdraw approval if the brand drug company prevails in the infringement litigation. Resp. Trial Memo. at 30. That argument proves too much. As the evidence shows, there are many reasons why the FDA may withdraw final approval of an ANDA (or, for that matter, an NDA), including new developments or information regarding safety of the drug or concerns over the manufacturing facility. Tr. (Talton) at 294:3-9. The possibility that the FDA may withdraw a final approval does not mean, however, that every activity engaged in by a pharmaceutical company relating to safety of a previously approved drug is somehow part of the process for obtaining FDA approval of that drug.

e. Respondent's failure to explain how its position applies to these common fact patterns demonstrates the weakness of its analysis.

The drafters of the section 263(a) regulations contemplated that future guidance might be necessary to extend the regulations, on a prospective basis, to expenditures that produce some future benefit. Rather than pursuing that approach, Respondent has decided to try to shoe-horn the facts of this case into the “facilitate” standard. In doing so, Respondent has concocted a rationale that, on its face, does not justify capitalization in these common fact patterns. Respondent's apparent inability or unwillingness to come to terms with these circumstances is yet another indication of the flaws inherent in his position.

VIII. CONCLUSION

For the reasons set forth above, Petitioner's patent litigation costs meet all of the requirements for deductibility under section 162. Respondent's capitalization argument relies on the contention that the Hatch-Waxman Act made patent litigation a component of the FDA approval process. That argument has no basis in the statutory text or its legislative history, in judicial interpretations of the statute, or in the day-to-day reality of the FDA process for reviewing and approving generic drugs.

Respectfully submitted,

PETITIONER

David J. Curtin
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue NW
Washington, D.C. 20004
Telephone No: (202) 373-6669
Tax Court Bar No: CD0395
david.curtin@morganlewis.com

William F. Nelson
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue NW
Washington, D.C. 20004
Telephone No: (202) 373-6782
Tax Court Bar No: NW0106
william.nelson@morganlewis.com

James D. Bridgeman
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue NW
Washington, D.C. 20004
Telephone No: (202) 373-6628
Tax Court Bar No: BJ1764
james.bridgeman@morganlewis.com

James G. Steele, III
Morgan, Lewis & Bockius
1111 Pennsylvania Avenue NW
Washington, D.C. 20004
Telephone No: (202) 739-5390
Tax Court Bar No: SJ2284
james.steele@morganlewis.com

Dated: March 11, 2019