[00:00:00] Speaker 05: OK, we'll next hear argument in docket number 23-1320, Activist Laboratories versus the United States. [00:00:11] Speaker 05: Mr. Carpenter, whenever you want to begin. [00:00:14] Speaker 03: Thank you, Your Honor. [00:00:17] Speaker 03: Good morning. [00:00:18] Speaker 03: May it please the court? [00:00:19] Speaker 03: My name is Clint Carpenter. [00:00:20] Speaker 03: I represent the United States in this case. [00:00:23] Speaker 03: The decision below should be reversed because activists incurred litigation expenses at issue in the process of pursuing its acquisition of intangible capital assets, specifically the FDA approvals of its generic drugs before the brand and name drug patents expired. [00:00:44] Speaker 03: The only reason that a paragraph four applicant like Tavis litigates these suits, the only reason to defend against the suits, the only reason to contest these infringement suits, is to obtain that FDA approval that is effective before the patents expire. [00:01:06] Speaker 02: What's the relevance of it being the only reason that suggests motivation? [00:01:10] Speaker 02: And I thought your point was motivation doesn't matter. [00:01:14] Speaker 03: Well, I think it's objectively the only reason. [00:01:18] Speaker 03: It's not their subjective motivation for doing it. [00:01:22] Speaker 03: But there's no other consequence to the applicant. [00:01:25] Speaker 03: They could default. [00:01:27] Speaker 02: Isn't the reason the generic defends itself in district court litigation is because they're sued by the branded patentee? [00:01:35] Speaker 03: No, actually. [00:01:36] Speaker 03: Normally, in a normal infringement suit, sure, that would be the case. [00:01:43] Speaker 03: Nothing can happen to them as a result of this suit if they were saying they were just a default or just to concede the suit and not participate. [00:01:52] Speaker 03: All that would happen was they would get an injunction prohibiting them from marketing their drug until the patents expire. [00:01:59] Speaker 03: And there would be an order telling the FDA that they can't issue approval with an effective date before the patents expire. [00:02:06] Speaker 03: The FDA couldn't do that anyway if you lose the suit. [00:02:12] Speaker 03: Um, but so there, there's no, there's no risk of damages. [00:02:16] Speaker 03: I mean, the statute specifically prohibits granting damages here and there's no damages because they haven't actually done anything infringing. [00:02:23] Speaker 03: I mean, they've committed this act of deemed infringement by virtue of submitting an ando with a paragraph 4 application. [00:02:31] Speaker 03: Congress made that an act of deemed infringement that allows the patent holders to sue. [00:02:37] Speaker 03: But there hasn't been any infringement. [00:02:39] Speaker 01: What is your best argument for why we should treat expenses associated with defending against 271A claims versus those defending against 271E2 litigation? [00:02:50] Speaker 03: Because the best argument is that there being 271A claims, no one's prosecuting it or defending it in pursuit of the capital asset. [00:03:06] Speaker 03: The patent holders already have the patent. [00:03:07] Speaker 03: I mean, that's an intangible. [00:03:12] Speaker 03: their right to the patent isn't an issue in the case. [00:03:15] Speaker 03: And the defendant isn't trying to get a patent or get an FDA approval or anything. [00:03:19] Speaker 03: They're just trying to vindicate their pre-existing right to sell their product in regular patent litigation. [00:03:27] Speaker 03: In this case, though, in this 271E2 litigation, [00:03:32] Speaker 03: They are trying to obtain FDA approval, specifically before the patents expire. [00:03:39] Speaker 03: And Congress established a process in the Hatch-Waxman Act for applicants to get that pre-expiration approval. [00:03:47] Speaker 03: And as part of that process, they have to submit this paragraph 4 certification, which is an act of deemed infringement. [00:03:54] Speaker 03: They have to write a letter to the patent holders and basically say, hey, we infringed your patents. [00:03:59] Speaker 03: You can sue us. [00:04:00] Speaker 03: And then if the patent holders do sue, they don't always. [00:04:03] Speaker 03: But if they do sue, the applicant has to defend that suit. [00:04:08] Speaker 03: If they don't, they can't get that approval before the patents expire. [00:04:13] Speaker 03: And so defending the suit in that case is part of the process that Congress set up for acquiring that intangible asset, the FDA approval. [00:04:22] Speaker 05: Is there a case that's analogous to the facts here? [00:04:25] Speaker 05: I guess you're saying that [00:04:28] Speaker 05: They're trying to acquire an intangible government-granted license, the approval of an ANDA, earlier in time than they could have otherwise. [00:04:40] Speaker 05: And I'm trying to think, OK, is there another case where being able to acquire an acquisition earlier in time than you could otherwise [00:04:50] Speaker 05: by overcoming some hurdle is, in fact, something that ought to be capitalized rather than deducted. [00:04:58] Speaker 05: Is there a case that is something similar to this, where the timing of the acquisition matters? [00:05:06] Speaker 03: I am not aware of a specific case that addresses that, other than the Milam. [00:05:11] Speaker 03: Milam. [00:05:12] Speaker 03: I'm aware of that. [00:05:12] Speaker 03: Milam. [00:05:13] Speaker 03: But apart from that, which is the same issue here, apart from that, I'm not aware of an analogous situation. [00:05:19] Speaker 03: I guess what I would say [00:05:20] Speaker 03: is that if you look at the regulation and you look at the examples, that process of pursuing standard capitalization that's in the regulation, it's really broad. [00:05:30] Speaker 03: And it includes things that are purely optional. [00:05:34] Speaker 03: There's an example that says that if you're acquiring an intangible and before you buy it, you get an independent appraisal, you pay someone for an independent appraisal, you have to capitalize that because it was part of the process. [00:05:47] Speaker 03: There's no law that says you have to get an independent appraisal before you buy a tangible. [00:05:52] Speaker 03: It might be the smart thing, but you don't have to. [00:05:54] Speaker 01: Since you are aware of Mylan and we're all being aware of it, can you respond to the reasoning set forth there in the Third Circuit decision? [00:06:00] Speaker 03: Yeah. [00:06:00] Speaker 03: I think, in essence, I think the problem with the Mylan decision is that the court was looking at the, they sort of defined the issue correctly, but then looked at it the wrong way. [00:06:09] Speaker 03: And so that manifested in a couple of ways. [00:06:12] Speaker 03: I think first, they talked about, [00:06:17] Speaker 03: that litigation doesn't facilitate the FDA's approval. [00:06:24] Speaker 03: But that's not our position. [00:06:26] Speaker 03: Certainly, they don't benefit from being sued. [00:06:30] Speaker 03: It doesn't help them get the approval that they get sued. [00:06:33] Speaker 03: They'd rather not get sued. [00:06:35] Speaker 03: But if they are sued, [00:06:37] Speaker 03: Defending that suit does facilitate the approval because they have to defend it. [00:06:42] Speaker 03: I mean, they have to defend it and they have to win or at least litigate it for 30 months if they want that pre-expiration. [00:06:48] Speaker 02: But isn't that an important distinction? [00:06:50] Speaker 02: I imagine there's a lot of things that could happen in parallel to a generic company requesting FDA approval of their ANDA that [00:07:00] Speaker 02: the generic may have to do if other things happen. [00:07:04] Speaker 02: But we wouldn't say that those things facilitate the approval. [00:07:08] Speaker 02: It's a separate approval process. [00:07:10] Speaker 03: Well, in fact, though, in the Mylan case, the Third Circuit mentioned this in passing, but it was that this issue wasn't appealed. [00:07:18] Speaker 03: The tax court held that the attorney's fees that they paid [00:07:25] Speaker 03: to pay their attorneys to write those letters to the patent holders, they did have to capitalize. [00:07:31] Speaker 02: Because that's within the generics control, and it's absolutely 100% all the time required if you want to pursue a paragraph for approval of an ANTA. [00:07:42] Speaker 03: It is. [00:07:43] Speaker 02: Very different than the litigation, which they cannot bring themselves [00:07:49] Speaker 02: They have to wait for the patentee to decide whether to bring it. [00:07:53] Speaker 02: And the approval can happen almost regardless of what happens in the district court litigation under certain scenarios. [00:08:02] Speaker 02: Yeah, under certain scenarios. [00:08:04] Speaker 02: For example, if it takes 31 months for the district court to get an opinion out. [00:08:07] Speaker 03: Correct. [00:08:08] Speaker 03: Correct. [00:08:08] Speaker 03: Now, if they then lose after that 30 months, the FDA actually revokes the approval. [00:08:14] Speaker 02: Right. [00:08:14] Speaker 02: But they did have it. [00:08:15] Speaker 03: But they had it at some point. [00:08:16] Speaker 03: That's true. [00:08:17] Speaker 03: I mean, I think that that, we would say that that's a distinction, but it doesn't really make it different. [00:08:24] Speaker 03: Because the issue here is when you are sued, you have to capitalize the expenses of litigating that. [00:08:32] Speaker 03: They may not get sued. [00:08:33] Speaker 03: That's not in their control. [00:08:35] Speaker 03: But it's no less optional to defend a suit when you are sued than it is to write letters. [00:08:41] Speaker 03: You have to do all of those things if you want this pre-expiration approval. [00:08:46] Speaker 02: Were you going to catalog some other problems you see in Judge Jordan's opinion? [00:08:50] Speaker 02: Yes, yes. [00:08:50] Speaker 03: And I know Judge Jordan is well respected by this panel, and he hears a lot of patent cases. [00:08:58] Speaker 03: And so certainly, I wouldn't tell him or you about the patent side of things. [00:09:01] Speaker 03: But on the tax side, he misunderstood some things. [00:09:06] Speaker 03: There's also the issue, there's the 30-month approval. [00:09:10] Speaker 03: The Mylan court viewed that as the litigation doesn't have to be resolved in order to get approval, or doesn't necessarily, because it can go on for 30 months. [00:09:23] Speaker 03: But again, the issue is it does have to be defended against. [00:09:27] Speaker 03: There could be a question where whether you have to capitalize expenses the expenses that you paid for after that 30 month period if you've got the FDA approval at 30 months Do you have to capitalize the stuff for the rest of the legation? [00:09:41] Speaker 03: You know that maybe is a closer question. [00:09:42] Speaker 03: We don't have that here I don't think you need to decide that but but you know there could be some argument there, but certainly up to the 30 months you had to do that in order to get that approval and [00:09:54] Speaker 03: whether or not the litigation has to be resolved. [00:09:58] Speaker 03: You know, the process that matters under the regulation is the taxpayer's process for pursuing the asset. [00:10:05] Speaker 03: It's not just the FDA's process. [00:10:07] Speaker 03: The FDA's process is the scientific and technical things, but by law, even if they satisfy all of the technical requirements for approval, the FDA cannot give them effective approval [00:10:19] Speaker 03: if they get sued until at least 30 months has passed or the litigation is resolved before then. [00:10:27] Speaker 01: Can you give us the definition of the intangible asset in your opinion here? [00:10:31] Speaker 03: The intangible asset is the government granted right to market or sell a generic drug. [00:10:37] Speaker 03: I think the party sort of disagreed somewhat about whether that the [00:10:45] Speaker 03: The right to sell it before the patents expire, is that part of the asset or is that just sort of a separate timing thing? [00:10:52] Speaker 03: In our view, the better. [00:10:54] Speaker 03: We think the better view is that it's part of the asset, because it's a different right. [00:11:00] Speaker 03: You have the government-branded right. [00:11:02] Speaker 02: Is your definition of the asset and the transaction at issue, does it have the time element of paragraph 4 embedded in it, or does it not? [00:11:10] Speaker 03: I think it doesn't have to. [00:11:12] Speaker 03: I think we win either way. [00:11:15] Speaker 03: I think it's easier for us if you include the timing aspect in it. [00:11:21] Speaker 03: But even if you don't, if you just say that it's just purely FDA approval. [00:11:26] Speaker 03: Or maybe more specifically, effective approval. [00:11:29] Speaker 03: Yeah, I'm sorry. [00:11:30] Speaker 03: Yes, it has to be effective approval. [00:11:31] Speaker 03: You don't receive any government granted right until it becomes effective. [00:11:36] Speaker 03: So yes, if the asset is just effective FDA approval, regardless. [00:11:39] Speaker 05: The patent litigation is a roadblock to effective approval. [00:11:43] Speaker 05: So they have to. [00:11:45] Speaker 05: basically fight it out through the patent litigation before they get effective approval? [00:11:51] Speaker 03: Yeah. [00:11:52] Speaker 03: I think it's a roadblock. [00:11:54] Speaker 03: It's part of the process that Congress set out that you have to do it. [00:11:59] Speaker 03: You have to expose yourself to being sued. [00:12:02] Speaker 03: And if you get sued, you've got to defend. [00:12:04] Speaker 03: And you either have to win or at least [00:12:06] Speaker 03: at least litigate it for 30 months. [00:12:07] Speaker 02: Do you agree the outcome here is the same whether we go with just right to your regulation or if we do this origin of the claim analysis? [00:12:16] Speaker 03: Yeah, I think we think it's the same. [00:12:19] Speaker 03: We think the regulation is controlling. [00:12:21] Speaker 03: In other words, they rise and fall together. [00:12:23] Speaker 05: You couldn't imagine winning on one and losing on the other. [00:12:27] Speaker 03: I don't see how that could happen. [00:12:29] Speaker 03: But if your honors were to disagree, we would say the regulation's control. [00:12:33] Speaker 02: Did either side argue for the sort of hybrid test that the Court of Federal Claims used? [00:12:38] Speaker 03: No. [00:12:39] Speaker 03: No. [00:12:39] Speaker 03: I think Octavius argued for origin of the claim. [00:12:43] Speaker 03: We argued for the regulation. [00:12:44] Speaker 03: There was some iris guidance that used sort of this hybrid approach although it came out to the opposite conclusion And I get think that's where the claims work got in our court has applied the origin of the claim tests in numerous cases Sure after woodward have we not sure oh absolutely and we weren't were we wrong to do that No, no, I think well at least certainly not until 2004 this regulation didn't come about till 2004 so origin of the claim definitely was controlling up to that point and [00:13:13] Speaker 03: I don't think there's any, Octavius didn't cite any. [00:13:18] Speaker 03: I'm not aware of any cases where origin of the claim was applied where something after 2004 was an issue. [00:13:23] Speaker 03: Some of the cases happened after 2004. [00:13:27] Speaker 03: But again, we don't think that the outcome really, it doesn't make a difference. [00:13:31] Speaker 03: The standard is almost the same. [00:13:33] Speaker 01: Are you contending that we need to reach whether origin of the claim test is still applicable post 2004? [00:13:42] Speaker 03: No. [00:13:43] Speaker 03: I think if you were to conclude that we win under the regulation, the government wins under the regulation, but the government loses under origin of the claim, then I think you'd have to decide that. [00:13:58] Speaker 03: But otherwise, no, you don't need to decide that. [00:14:01] Speaker 02: In all other scenarios, we would not have to decide that question. [00:14:04] Speaker 02: All other scenarios that I've thought of, yes. [00:14:07] Speaker 00: It does require a win by you. [00:14:09] Speaker 00: That isn't a necessary prerequisite. [00:14:11] Speaker 03: That isn't a necessary prerequisite. [00:14:13] Speaker 03: I don't mean to suggest that's a foregone conclusion. [00:14:15] Speaker 03: But yes, that's right. [00:14:20] Speaker 03: You're into your rebuttal. [00:14:22] Speaker 03: Oh, I'm in my rebuttal. [00:14:23] Speaker 03: Well, then I should stop talking. [00:14:24] Speaker 03: OK, very good. [00:14:25] Speaker 03: Let's hear from the other side. [00:14:26] Speaker 03: Thank you. [00:14:32] Speaker 04: Good morning, Your Honors, and may it please the court. [00:14:34] Speaker 04: Kevin Martin on behalf of activists. [00:14:36] Speaker 04: And may I have my colleague, David Zimmer. [00:14:39] Speaker 04: Your Honors, at bottom, the government's arguing that- Is it activists or activists? [00:14:42] Speaker 04: So I think I've heard my clients say activists. [00:14:43] Speaker 04: I'm beginning to doubt myself now after the last 15 minutes, but I'm fairly certain it's activists. [00:14:48] Speaker 04: Sorry to use up your time. [00:14:49] Speaker 04: Keep going. [00:14:50] Speaker 04: So at bottom, the government's arguing that generic drug companies, alone among all patent infringement defendants, should be denied the ability to deduct their defense costs. [00:15:00] Speaker 04: It's elevating form over substance. [00:15:02] Speaker 04: It's seeking disparate treatment of similarly situated taxpayers. [00:15:06] Speaker 04: The tax court, the claims court, the Third Circuit were all correct to reject that approach. [00:15:10] Speaker 02: So the Supreme Court has described, and we probably have too, the Hatch-Waxman regime as involving generic and defilers who make paragraph four certifications as provoking or inviting litigation. [00:15:23] Speaker 02: And it's talked about the intricate relationship between the FDA process and the district court litigation. [00:15:30] Speaker 02: Isn't that what has been said? [00:15:32] Speaker 02: Isn't that how courts have described it? [00:15:35] Speaker 02: And doesn't that have implications here for whether your expenses should be capitalized? [00:15:40] Speaker 04: That language is out there, certainly, Judge Stark. [00:15:42] Speaker 04: But we would answer that question, no. [00:15:45] Speaker 04: The origin of the claim test is the test that applies here. [00:15:47] Speaker 04: And what the Supreme Court has said for the origin of the claim test is that you don't look at the consequences for the taxpayer of losing the case. [00:15:55] Speaker 04: You look at what the origin of the claim is. [00:15:57] Speaker 04: What's the origin and character of the claim? [00:15:59] Speaker 04: We think the best precedent from this court, for example, on that question is the court's decision in Glaxo v. Novofarm, where this court made clear at some length that really, while there is the artificial act of infringement, once you get into it, 271A litigation and 271E2 litigation are about the same thing. [00:16:19] Speaker 04: They're an effort by the patent holder to keep another company from competing with it, from engaging in it. [00:16:25] Speaker 02: But the only reason that litigation is happening before you launch your product [00:16:30] Speaker 02: is because you want to launch your product prior to the expiration of the patent. [00:16:34] Speaker 04: And there's really nothing that distinguishes that, Your Honor, from a 271A case. [00:16:39] Speaker 04: In any other industry, even in pharmaceuticals, if you are not a generic company but a company seeking NDAs, you are looking to launch before a patent has expired. [00:16:50] Speaker 05: What if the Hatch-Waxman Act was written differently? [00:16:55] Speaker 05: What if it said after the generic manufacturer files the ANDA and does a paragraph for certification, the generic manufacturer has to file a DJ action? [00:17:11] Speaker 05: to seek a declaration from district court that the patents are either invalid or not infringed by the generic manufacturers. [00:17:22] Speaker 05: And then what happens? [00:17:25] Speaker 04: That would, in fact, be a very different case, Judge Chen, because we know. [00:17:28] Speaker 05: So you would agree that the litigation expenses there would have to be capitalized? [00:17:34] Speaker 04: I don't know that I would agree. [00:17:35] Speaker 04: One of the major- Why wouldn't you agree? [00:17:37] Speaker 04: I think the reason I would not agree is that you're still [00:17:40] Speaker 04: in the universe, where the first act was taken by the branded drug company, which included the patents in the Orange Book, essentially asserting that these are patents which reasonably could be asserted. [00:17:50] Speaker 05: But Congress basically demanded in my version of the Hatch-Waxman Act that it is you, the generic manufacturer, that has to go to court, that has to file the claim, in order to get any kind of ultimate FDA approval. [00:18:06] Speaker 04: That makes it closer to the example that Judge Stark was talking about, [00:18:09] Speaker 04: that was discussed in the Third Circuit's decision with the notice letters, where that's actually required by the statute as an integral component of the application itself. [00:18:18] Speaker 04: So I do think it's a different case, but it's closer to the line of having to be capitalized. [00:18:25] Speaker 04: But what all the courts who've looked at this situation. [00:18:28] Speaker 05: What it said within the Treasury regulation? [00:18:31] Speaker 04: It may very well, in that situation, fit within the Treasury regulation. [00:18:35] Speaker 04: What really distinguishes this case, though, is that it's within the control of the branded drug company, whether to sue or not. [00:18:39] Speaker 04: They don't know that. [00:18:41] Speaker 05: Just sticking with my little hypothetical, we've said DJ actions are just mirror images of gone variety patent infringement civil actions. [00:18:53] Speaker 05: So if we are in a territory that [00:18:56] Speaker 05: a DJ action by the generic manufacturer would be understood as an expense in pursuit of an acquisition of a intangible, then it seems like the mirror image would also apply. [00:19:14] Speaker 04: That's why I think it's relevant that you only are in this universe if patents have been listed by the Branded Drug Company in the Orange Book as patents that reasonably could be asserted against a generic applicant. [00:19:26] Speaker 04: And I don't want to get into the constitutional issues here, too. [00:19:29] Speaker 04: But I think even for Congress to create that cause of action, you'd have to have an actual controversy between the parties. [00:19:35] Speaker 04: And so for a DJ action, I think you would have to show that there was some credible threat by the branded drug company to bring the action. [00:19:42] Speaker 04: And so it's still ultimately a claim by the branded. [00:19:45] Speaker 04: Even though it's in the form of a DJ action, it's still ultimately a claim that is a claim by the branded drug company. [00:19:51] Speaker 04: We think our patent covers your product. [00:19:54] Speaker 04: And you're bringing it as a DJ. [00:19:55] Speaker 04: But as in the Urquhart case from the Third Circuit, which was a DJ action, that should not matter for tax purposes that it's a DJ action. [00:20:03] Speaker 04: What should really matter is what is the true essence of this claim? [00:20:06] Speaker 04: And it's, in effect, a tort claim by the brand. [00:20:09] Speaker 01: So you did argue that the origin of the claim test is what's applicable here. [00:20:13] Speaker 01: Do you think a different result would be reached under the regulation? [00:20:16] Speaker 04: Not at all, Judge Cunningham. [00:20:17] Speaker 04: Again, we have multiple statements by the government that there's no meaningful difference between the two standards. [00:20:24] Speaker 04: The examples of litigation which appear in the regulation are origin of the claim cases. [00:20:30] Speaker 04: Obviously, they have, as example four, under subsection four, that's the Woodward case. [00:20:36] Speaker 04: They also, in subsection five, have the American Stores case. [00:20:40] Speaker 04: That's an origin of the claim test case. [00:20:43] Speaker 04: When you look at the notice of proposed rulemaking, I'm not sure how I didn't notice this before, but the notice of proposed rulemaking cites the Woodward case in introducing [00:20:51] Speaker 04: the need for transaction costs to be capitalized. [00:20:53] Speaker 04: That's the one case they cite. [00:20:55] Speaker 04: It also cites the AIDS Daily case from the Seventh Circuit, which is an origin of the claim case. [00:21:00] Speaker 04: So there's nothing in the regulation itself which suggests that there was a desire to move away from the origin of the claim test. [00:21:11] Speaker 04: It just says, consider all the facts and services. [00:21:12] Speaker 01: Do you have a response on the definition of the intangible asset? [00:21:15] Speaker 01: Do you have a response to what opposing counsel said? [00:21:17] Speaker 04: And we would agree that the intangible asset is ultimately a granted ANDA. [00:21:23] Speaker 04: Where we disagree is that the timing component matters. [00:21:27] Speaker 04: An ANDA that's granted today is not a different ANDA than an ANDA that's granted a week from today. [00:21:33] Speaker 04: What happens, and I think as your honors all know, what happens under the Hatch-Waxman Act is that the FDA is reviewing your application. [00:21:40] Speaker 04: And it will, at some point, grant you either a tentative or a final, or it denies it. [00:21:46] Speaker 04: Let's stick with grants. [00:21:48] Speaker 04: If you lose the litigation, they don't actually, in my understanding, revoke the ANDA. [00:21:53] Speaker 04: What they do is convert it to a tentative ANDA. [00:21:55] Speaker 04: It's still approved. [00:21:56] Speaker 04: It's just the question becomes, when will it actually be issued to you? [00:22:00] Speaker 04: And there are lots. [00:22:01] Speaker 04: I think Judge Stark may have asked a question along these lines. [00:22:04] Speaker 04: There are lots of reasons why an ANDA might be issued today as opposed to a month from now. [00:22:09] Speaker 04: They're reviewing, among other things, what facility you plan on manufacturing the drug in. [00:22:14] Speaker 04: making sure that that facility is up to snuff and will produce the drug in a safe fashion. [00:22:20] Speaker 04: Maybe there's an environmental issue with that plant. [00:22:23] Speaker 04: So then FDA is waiting to see, well, what will resolve that environmental issue? [00:22:27] Speaker 04: Have you cleaned that up yet? [00:22:29] Speaker 02: There's no evidence in our record that the FDA treats Paragraph 4 and is any differently in terms of how quickly they process them than, say, a Paragraph 3 or even an NDA, is there? [00:22:44] Speaker 04: Nothing I'm aware of, Your Honor. [00:22:45] Speaker 04: And again, going back to the legislature, this is discussed below. [00:22:49] Speaker 04: It's somewhere in the record, and I apologize for not having the site. [00:22:52] Speaker 04: But there was evidence from the legislative history of the Hatch-Waxman Act that they settled on the 30-month stay period, because the assumption was that's about how long it takes to review an ANDA. [00:23:02] Speaker 04: So the timing component here was really just an effort by Congress to be more efficient, to make it more likely that you'll have generic drugs on the market competing with branded drugs, bringing prices down. [00:23:14] Speaker 04: Congress certainly did not, we think, intend to change the tax treatment of generic drug companies to make it less favorable. [00:23:21] Speaker 04: than it would have been before the Hatch-Waxman Act in an action brought under 271A pursuant to this court's precedent in Roche v. Bolar. [00:23:30] Speaker 02: After you submitted Mylan, the government wrote us a letter. [00:23:34] Speaker 02: And they said, and I think this point was made today, the only reason a paragraph four applicant defends against a Hatch-Waxman suit is to obtain FDA approval that is effective prior to the patent expiration date. [00:23:48] Speaker 02: I think you have to agree that's true. [00:23:50] Speaker 02: And doesn't that strongly support their view that these things are, again, they're entirely intertwined? [00:23:57] Speaker 04: So we would agree it's true that that is the motive. [00:24:00] Speaker 04: But as the Supreme Court has said time and again in cases like Woodward and Gilmore, the very last thing you should be looking at is the subjective motivation of the defendant in the lawsuit. [00:24:09] Speaker 04: You're looking at the objective origin and character of the claim. [00:24:12] Speaker 04: The origin and character of the claim, it's a tort claim brought by a property owner [00:24:17] Speaker 04: seeking to protect its own business. [00:24:19] Speaker 04: Its character is identical to an action under 271A, and so it should not be treated differently. [00:24:24] Speaker 04: And the government has repeatedly acknowledged, not only in its briefing at this court, for example, in its reply, where it said that the two tests are not meaningfully different, but also in the legal memoranda, which came out prior to the litigation, where the government itself, on three separate occasions, said that you apply the origin of the claim test first. [00:24:43] Speaker 04: The origin of the claim test is the controlling test. [00:24:46] Speaker 04: And under that test, you do not look at exactly what Your Honor just pointed to. [00:24:50] Speaker 05: The Third Circuit went with the regulation, though, right? [00:24:52] Speaker 04: They did. [00:24:53] Speaker 05: I mean, there was a footnote for origin of the claim. [00:24:55] Speaker 05: So I guess the Third Circuit goofed? [00:25:00] Speaker 04: Methodologically, I think that the way the Court of Claims approached it is the proper way. [00:25:05] Speaker 04: That's the way that, again, that the government approached it and all of its memoranda before the litigation started. [00:25:10] Speaker 04: At the end of the day, the outcome is no different because the two tests are the same. [00:25:15] Speaker 04: As the government has said, the origin of the claim test gets subsumed into the regulation, and the outcome is the same. [00:25:22] Speaker 04: The regulation itself, nowhere in the notice of proposed rulemaking, nowhere in the regulation, is there a suggestion that while Woodward said ignore subjective motivation, the regulation was intended to make subjective motivation paramount, which is basically what their argument boils down to. [00:25:39] Speaker 04: It would have been really strange for the agency to cite Woodward [00:25:44] Speaker 04: in the notice of proposed rulemaking, make one of the examples Woodward if they intended to depart from the core holding of Woodward, which is it's the objective origin of the claim, which matters, not the consequences for the taxpayer of losing the case. [00:25:58] Speaker 02: I think you said the court of federal claims got the analysis, the analytical framework right. [00:26:03] Speaker 02: Do you mean the sort of hybrid two-part test that the court of federal claims here applied? [00:26:10] Speaker 04: Right, I think the best way to approach this would be to look at the origin of the claim test, which is the test that has governed litigation costs for decades. [00:26:18] Speaker 04: Answer the question under the origin of the claim test. [00:26:21] Speaker 04: Look at the regulation and say, is there anything in this regulation which requires a different outcome here? [00:26:27] Speaker 04: And the answer should be, in most cases, no. [00:26:29] Speaker 04: It might be the case that in the regulation, there's a cargo. [00:26:34] Speaker 04: So maybe the origin of the claim test says, [00:26:37] Speaker 04: you would capitalize. [00:26:38] Speaker 02: Is this what you're outlining? [00:26:39] Speaker 02: Is that the process that you think the Court of Federal Claims went through here? [00:26:44] Speaker 02: Or is this yet another framework that you would propose? [00:26:47] Speaker 04: No, I think this is what the Court of Claims did. [00:26:49] Speaker 04: It's what we suggested doing in our briefing to the Court of Federal Claims. [00:26:53] Speaker 04: This is our argument and our complaint. [00:26:55] Speaker 04: And it's the way that the government approached it in its 2011, 2014, and 2015 legal memoranda that preceded this litigation kicking off [00:27:08] Speaker 02: I don't know if this hypothetical has any implications, but let me ask you anyway. [00:27:14] Speaker 02: Oftentimes in a district court and a case, there's multiple filers. [00:27:20] Speaker 02: And the generics view one another as opponents as much as they view the branded patentee as an opponent. [00:27:31] Speaker 02: And sometimes a lot of time can be spent [00:27:34] Speaker 02: dealing with arguments amongst the generics that might have competing claim construction positions. [00:27:41] Speaker 02: Some might file motions to dismiss that others don't. [00:27:44] Speaker 02: There might be discovery disputes between them or protective order disputes between them. [00:27:49] Speaker 02: From your perspective, do the litigation expenses that are incurred when there's multiple paragraph four filers that are expended on attacking one another as opposed to attacking the branded? [00:28:03] Speaker 02: Are they treated just the same? [00:28:04] Speaker 02: Are there any implications for how those are treated for the dispute we have in front of us? [00:28:09] Speaker 04: Yeah, I think under the government's theory, then you might have to start parsing issues like that. [00:28:13] Speaker 04: From our perspective, you don't, because they're all deductible at the end of the day. [00:28:17] Speaker 04: Most large complex litigations will have those kinds of subsidiary issues, discovery fights, disputes among defendants. [00:28:29] Speaker 04: These sorts of disputes are helping put my kids through college, so I appreciate their existence. [00:28:35] Speaker 04: So yeah, from our view, those shouldn't matter. [00:28:38] Speaker 04: It's all part of the tort litigation. [00:28:40] Speaker 02: It should be true. [00:28:41] Speaker 02: From your perspective, is it potentially yet another problem with the government's view here that taxpayers may have to really parse their own legal fees and say which fees were incurred [00:28:54] Speaker 02: fighting another generic versus which we're incurring fighting. [00:28:57] Speaker 04: I think that's a fair point, Judge Stark. [00:28:59] Speaker 04: There was a similar argument they made below and haven't really been advancing now on appeal, which was that the possibility of getting generic exclusivity is a factor that supports capitalization. [00:29:11] Speaker 04: Now, not every generic will get generic exclusivity. [00:29:14] Speaker 04: And their position is that all generic defendants need to capitalize. [00:29:17] Speaker 04: And I think that might be why they've dropped it now on appeal. [00:29:20] Speaker 04: But you have the potential of exclusivity. [00:29:23] Speaker 04: You might lose it if another first file gets out ahead of you. [00:29:26] Speaker 04: There could be forfeiture events. [00:29:27] Speaker 04: So these are very complex issues. [00:29:29] Speaker 04: And that's why we think the Supreme Court in cases like Woodward and Gilmore has said, do not focus on the consequences of the case on the fortunes of the defendant. [00:29:41] Speaker 04: Really just drill into, is this claim part of the acquisition process? [00:29:45] Speaker 04: And if it's not, if it's not a case like Woodward where you actually had to figure out what the price of the asset was so the sale could occur, then you don't require a capitalization. [00:29:56] Speaker 05: Thank you, Your Honors. [00:29:57] Speaker 05: Thank you, Mr. Martin. [00:30:00] Speaker 05: Three minutes for Mr. Carpenter. [00:30:08] Speaker 03: Thank you, Your Honors. [00:30:09] Speaker 03: I think I'll start with the end first. [00:30:12] Speaker 03: I don't think that there would be any need to sort of parse different pieces of the litigation. [00:30:19] Speaker 03: All of the defense of the suit is occurring in the process of pursuing the acquisition of the asset. [00:30:26] Speaker 03: Now, there may be disagreements among different defendants, different applicants. [00:30:35] Speaker 03: The defense of the suit is still all occurring in that process of pursuing the effective FDA approval. [00:30:47] Speaker 03: Judge Chen, your point about a DJ action. [00:30:50] Speaker 03: I think this really is a mirror image, and I think Congress could have done what you did, and they probably wisely said, [00:30:55] Speaker 03: Well, no, let's do it the other way. [00:30:57] Speaker 03: And that way, the patent holders can decide if they care enough or if they want to dispute this. [00:31:03] Speaker 03: But that illustrates why it shouldn't matter who sues who. [00:31:07] Speaker 03: And and we certainly don't read Woodward or any of the case law to suggest that That that both sides have to their their their expenses have to be treated identically that Woodward certainly doesn't say that and you know if you look at one word the the plaintiff had to capitalize its expenses because it incurred these costs in the in the in the process of acquiring this stock [00:31:36] Speaker 03: Well, the other side, they didn't have to capitalize their expenses because they were trying to acquire stock. [00:31:43] Speaker 03: They weren't trying to acquire stock. [00:31:44] Speaker 03: Now, as a point of tax law, they probably did have to capitalize their expenses. [00:31:49] Speaker 03: But it was for a different reason that there's a rule that you have to generally capitalize costs incurred in selling capital assets. [00:31:57] Speaker 03: But they didn't have to capitalize them for the same reason. [00:32:00] Speaker 03: If you look at American stores, it's the same situation. [00:32:06] Speaker 03: under activists' reading in American stores, the defendant's expenses wouldn't have to have been capitalized because the plaintiff didn't have to capitalize their expenses. [00:32:20] Speaker 03: That's not how tax law works, really, in any scenario that I'm aware of. [00:32:23] Speaker 03: You focus on the circumstances in which the taxpayer acquired the expenses. [00:32:29] Speaker 03: In most litigation, the general capitalization rules are going to apply in a way that most of the time both sides can either deduct them or occasionally both sides will have to capitalize, like in Woodward, although in that case it was for different reasons. [00:32:47] Speaker 03: But there's no special rule of capitalization for patent cases or for any other kind of case. [00:32:53] Speaker 03: It's the same rule. [00:32:53] Speaker 03: If you incur under the origin of the claim, if the origin of the claim litigated is in the process of acquisition, under the regulation, if you incur under the origin of the claim, if the origin of the claim litigated is in the process of acquisition, under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the regulation, if you incur under the [00:33:14] Speaker 03: No, no. [00:33:15] Speaker 03: And I certainly don't dispute that ordinarily, in the 271A, that they are deductible. [00:33:20] Speaker 03: But it's the reason that matters. [00:33:22] Speaker 03: The reason they're deductible is not because there's something special about patent litigation, but because in ordinary patent litigation, neither side is trying to acquire a capital asset. [00:33:35] Speaker 03: And so there's nothing to capitalize in those cases. [00:33:39] Speaker 03: In cases where you have a fight over who owns a patent, for example, then there does have to be capitalization. [00:33:45] Speaker 03: I'm out of time. [00:33:46] Speaker 03: Thank you, Your Honors. [00:33:47] Speaker 03: We ask that the decision below be reversed. [00:33:49] Speaker 05: OK. [00:33:50] Speaker 05: Thank you very much. [00:33:51] Speaker 05: The case is submitted.