A seller of illegal products satisfies the FDCA felony element of "intent to defraud" if he cheats his customer(s) or if he takes affirmative steps to mislead, or evade detection by, regulatory authorities, who are thereby "defrauded." This is true even if the customers of the products are well aware of their violative status. See, e.g., United States v. Arlen, 947 F.2d 139, 143 (5th Cir. 1991); United States v. Cambra, 933 F.2d 752, 755 (9th Cir. 1991); United States v. Bradshaw, 840 F.2d 871, 874 (11th Cir. 1988); see also United States v. Mitcheltree, 940 F.2d 1329, 1350-51 (10th Cir. 1991) (adopts the Bradshaw analysis concerning "intent to defraud or mislead" but adds a refinement pertinent to misbranding offenses); United States v. Milstein, 401 F.3d 53, 69 (2d Cir. 2005) (consumers or government regulators can be object of fraudulent intent in drug pedigree offense); United States v. Ellis, 326 F.3d 550, 555 (4th Cir. 2003) (failure to register drug manufacturing facility a felony when done with intent to evade FDA scrutiny).
There must be some connection between the intent to defraud and the violation in question. The principle that "knowledge of the essential nature of the alleged fraud is a component of the intent to defraud" applies in an FDCA prosecution. United States v. Hiland, 909 F.2d 1114, 1128 (8th Cir. 1990). Thus, in United States v. Goldberg, 538 F.3d 280 (3d Cir. 2008), the court reduced misbranding convictions related to sales of drugs to an undercover agent to misdemeanors because, inter alia, evidence the government relied upon to show fraudulent intent did not relate to the drugs the agent purchased. Id. at 289-90. Similarly, in United States v. Geborde, 278 F.3d 926 (9th Cir. 2002), the court reversed the felony aspect of a conviction for failing to register a drug manufacturing facility with FDA. The court did so because, in the court's view, the only evidence of fraudulent intent related to intent to deceive the defendant's customers to whom he distributed the drugs rather than fraudulent intent in failing to register. Id. at 930. These cases demonstrate that there must be a nexus between fraudulent intent and the FDCA offense charged. However, the defendant still need not know the specific provisions of law for there to be a violation Ã¾ even under the FDCA, the rule remains that ignorance of the law is no excuse. Hiland, 909 F.2d at 1129 n. 21; United States v. Cabrera, 284 Fed. Appx. 674, 686 (11th Cir. 2008) (2008 WL 2607711).
Developing evidence sufficient to establish "loss" for purposes of § 2B1.1(b)(1)the "loss table"should be an integral part of all FDCA felony investigations.
Where the government is the defrauded party, no less than where consumers have been defrauded, it is settled that § 2B1.1 [formerly § 2F1.1] applies by virtue of the cross-reference from § 2N2.1. E.g., United States v. Kimball, 291 F.3d 726, 733 (11th Cir. 2002); United States v. Andersen, 45 F.3d 217, 200 (7th Cir. 1995); United States v. Arlen, 947 F.2d 139, 143-44, 146-47 (5th Cir. 1991); United States v. Cambra, 933 F.2d 752, 756 (9th Cir. 1991). And while measuring the amount of fraud "loss" in such cases is sometimes difficult, 2001 amendments to the Guidelines resolved some of the major problems that had developed in the case law.
The kind of evidence needed to establish fraud loss in an FDCA prosecution varies with the facts. In conventional consumer fraud casesas those involving a food represented to be something better and different than it wasa reasonable approximation of "loss" may be the amount the defendant saved by substituting inferior ingredients. E.g., United States v. Kohlbach, 38 F.3d 832 (6th Cir. 1994); see also U.S.S.G. 2B1.1 Application Note 3(v)(I), which makes relevant the cost of substitute transactions and disposal costs. If the product as sold was not a lawful product, however, then the entire value of the product is the appropriate measure of loss. United States v. Gonzalez-Alvarez, 277 F.3d 73, 78 (1st Cir. 2002).
In cases where regulatory authorities have been defrauded (for instance, by conscious efforts to evade detection, by false statements, or by other obstruction of agency proceedings), the Department has long argued that gross revenue from the sale of illegal products is the appropriate measure of "loss." See United States v. Cambra, 933 F.2d 752, 756 (9th Cir. 1991). The basis of this theory of "loss" is that those who employ fraud to handicap FDA's ability to protect the public visit a harm on the public that is fairly approximated by the amount of sales.
Similarly, the Department has argued that FDCA violations involving fraud in the drug approval process, or fraudulent representations regarding the approved status of a product, generate loss measured by gross sales. In 2001, the Sentencing Commission incorporated this theory into the Guidelines. U.S.S.G. § 2B1.1 Application Note 3(F)(v) now states:
In a case involving a scheme in which . . . (II) goods were falsely represented as approved by a governmental regulatory agency; or (III) goods for which regulatory approval by a governmental agency was required but not obtained, or was obtained by fraud, loss shall include the amount paid for the property, services or goods transferred, rendered, or misrepresented, with no credit provided for the value of those items or services.
This Application Note deprives cases such as United States v. Chatterji, 46 F.3d 1336 (4th Cir. 1995), of their force. In Chatterji, the Fourth Circuit said there was no loss resulting from sale of a drug that was not shown to be actually or potentially deficient in quality, notwithstanding that the defendant had resorted to fraud to procure or expedite required regulatory approval. The Application Note dictates a result more like that in United States v. Marcus, 82 F.3d 606 (4th Cir. 1996), which distinguished Chatterji and used gross sales to measure loss where the defendant committed fraud in the drug approval process.
The Application Note above should also dictate the result in cases involving the sale of unapproved products to willing buyers, where only FDA is defrauded of regulatory oversight. Compare United States v. Andersen, 45 F.3d 217, 221-22 (7th Cir. 1995) (no loss because consumers got what they paid for in purchase of unlawful animal drugs), to United States v. Haas, 171 F.3d 259, 270 (5th Cir. 1999) (loss to FDA, which was defrauded, from illegal drug importation scheme may be measured by gain to defendants). The Application Note dictates loss based on gross sales in such cases, because the defendants sold "goods for which regulatory approval by a government agency was required but not obtained[.]" The principle articulated in Gonzalez-Alvarez, that loss should be calculated on a zero-value basis for products that are unlawful for sale, is consistent with this result.
Other provisions of U.S.S.G. § 2B1.1 may also be relevant. If the offense involved the conscious or reckless risk of death or serious bodily injury, as may occur when unapproved, misbranded, or adulterated drugs or devices are placed in commerce, a two-level increase under § 2B1.1(b)(13) would apply. If the defendant violated a prior specific judicial or administrative order, a two-level enhancement under § 2B1.1(b)(8)(C) would apply. The Third Circuit has observed that the courts have applied this enhancement where "meaningful negotiation or interaction led [an] agency to issue a directive that the defendant subsequently violated." United States v. Goldberg, 538 F.3d 280, 291 (3d Cir. 2008). However, the enhancement does not apply where FDA merely issued a Section 305 Notice (inviting the defendant to attend a meeting with FDA employees to discuss alleged violations prior to referral to DOJ) or other agency acts short of interaction with the defendant followed by a clear directive. Id. at 291- 92, and cases cited. Because many FDCA defendants have advanced degrees or training in fields such as medicine, veterinary medicine, pharmacy, or pharmaceutical chemistry, prosecutors should also consider seeking an enhancement under § 3B1.3 for use of a special skill. See United States v. Kaminski, 501 F.3d 655, 666-69 (6th Cir. 2007) (applying enhancement to misdemeanor conviction of defendant who merely pretended to be a physician).
Organizational defendants convicted of felony FDCA offenses will generally be subject to the fine provisions of Chapter Eight (§§ 8C2.2 through 8C2.9), since § 2B1.1the applicable Chapter Two offense guidelineis specifically listed in § 8C2.1 as being covered. In the typical case, "base fine" for purposes of § 8C2.4 will be highest if it is calculated based upon the organization's pecuniary gain. With organizational defendants, therefore, no less than with individual defendants, developing evidence of the full extent of unlawful conduct is integral to the sentencing process. Although organizational defendants convicted of FDCA misdemeanor offenses are not technically subject to the fine provisions of Chapter Eight (§ 2N2.1 is not listed in § 8C2.1 as being covered) courts will often resort to Chapter Eight as a framework for considering appropriate fine amounts.
[updated April 2009] [cited in USAM 4-8.250]