Significant Factors That Affect Sentencing in FDCA Cases
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 þ 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
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]