**Food and Drug Working Group **
**Final Report**

**I. INTRODUCTION**

 The Food and Drug Working Group was established as a two-year working		group to study the feasibility of developing organizational guidelines for		offenses covered by 2N2.1. During its first year, the group studied food and		drug offenses and the operation of 2N2.1 as it applied to individual		defendants. The group used the second year to focus more specifically on the		formulation of organizational guidelines.See Appendix A. In February 1994, the		group submitted a Preliminary Report to the Commission.

 This Final Report summarizes the information that the group reviewed in		studying food and drug offenses and the application of 2N2.1. The report		includes: (1) an overview of 2N2.1 and the most commonly prosecuted crimes		sentenced under it; (2) a description and analysis of food and drug cases		involving individuals sentenced under 2N2.1 in fiscal years 1991, 1992, and		1993; (3) a description of food and drug cases involving organizational		defendants sentenced under pre-guidelines law; (4) a review of organizational		cases sentenced under Chapter Eight; (5) an examination of relevant case law;		and (6) an analysis of application issues under 2N2.1 necessary before		organizational guidelines are developed. 

 Based on the research conducted during the past two years, the working		group will now begin the process of drafting proposals for the Commission's		consideration to ensure that the food and drug guidelines operate effectively		for both individuals and organizations. 

**II. BACKGROUND**

 In 1991, the Commission adopted Chapter Eight of the Sentencing		Guidelines, addressing the sentencing of organizational defendants. According		to the Commission's Supplementary Report on Sentencing Guidelines for		Organizations, "most food, drug, and agricultural products offenses (Part N		of Chapter Two) were excluded" from the operation of the fines provisions (Part		C) of Chapter Eight "pending additional discussion and research on appropriate		fine determinants."United States Sentencing Commission, Supplementary Report		on Sentencing Guidelines for Organizations, August 30, 1991, p. 8. As a		result, fines for organizational defendants convicted of offenses covered by		2N2.1 continue to be determined under pre-guidelines law.

**III. SCOPE OF 2N2.1**

 A. Guideline

 Section 2N2.1 has been in effect since November 1, 1987, and was		intended to cover violations of "statutes and regulations dealing with any		food, drug, biological product, device, cosmetic, or agricultural product." The		base offense level is 6 and no specific offense characteristics are set forth		in the guideline. The commentary to 2N2.1 indicates that a downward departure		may be warranted only if negligent conduct was involvedSee USSG 2N2.1, comment.		(n.1)., and an upward departure may be warranted if "death or bodily injury,		extreme psychological injury, property damage or monetary loss resulted".See		USSG 2N2.1, comment. (n.3).

 Effective November 1, 1992, two cross references were added to		2N2.1(b). First, "if the offense involved fraud," the fraud guideline, 2F1.1,		is to be used. Second, "if the offense was committed in furtherance of, or to		conceal, an offense covered by another offense guideline," that offense		guideline is to be used if the resulting offense level would be greater.See		USSG App. C, amend. 451. Prior to November 1, 1992, Application Note 2 to 2N2.1		contained a similar, but more limited cross reference instruction. However,		this cross reference was moved directly to the text of the guideline to ensure		consistent application. 

 The guideline has otherwise changed very little since it was first		adopted. Effective November 1, 1990, the list of statutory provisions was		augmented to indicate that subsections (a)(1), (a)(2), and (b) of 21 U.S.C. 333		were included.See USSG App. C, amend. 359. Application Note 4 also was added to		the commentary to explain that the Commission had not promulgated a guideline		for anabolic steroids and, according to the explanation for the amendment, that		2N2.1 does not apply to convictions under 21 U.S.C. 333(e) which involve		steroids.See USSG App. C, amend. 340. 

 Effective November 1, 1991, Application Note 1 was amended in two		respects. First, it changed the phrase "anabolic steroids" to "human growth		hormones," thus indicating that 2N2.1 does not apply to offenses involving		human growth hormones. Second, it added the cross reference to Chapter Two,		Part D for offenses involving steroids and to 2F1.1 for offenses involving		counterfeit steroids.See USSG App. C, amend. 432. This amendment also modified		Application Note 1 to indicate that the guideline covered reckless as well as		knowing conduct. 

 B. Statutes

 In fiscal years 1991 - 1993, the most frequently used statutes in cases		sentenced under 2N2.1 were those relating to adulterated or misbranded meat,See		21 U.S.C. 610. and those relating to adulterated or misbranded food, drugs,		cosmetics, or devices.See 21 U.S.C. 331. A description of these statutory		provisions is useful in evaluating the operation of 2N2.1.

 Section 610 prohibits a variety of acts relating to the production of		meat products from cows, horses, sheep, swine, goats, and mules. Subsection (a)		prohibits slaughtering these animals or preparing human food products from them		amidst conditions that do not comply with the statutory requirements for meat		production (such as inspection and sanitary conditions). Subsection (b)		requires adherence to humane methods of slaughter. Subsection (c) prohibits		selling, transporting, and offering or receiving for sale or transportation,		any meat products capable of use as human food that are adulterated or		misbranded, or articles required to be inspected that have not passed		inspection. Finally, subsection (d) prohibits, during the period that meat		products capable of use as human food are being transported or held for sale,		taking any action that is intended to cause or has the effect of causing the		products to become adulterated or misbranded. 

 The terms "adulterated" and "misbranded" are defined in 21 U.S.C.		610(m) and (n), respectively. Adulterated generally refers to the presence of		impermissible contaminants or the presence of permissible contaminants at		impermissible levels. Misbranding, on the other hand, generally refers to acts		that misrepresent or fail to disclose accurately the content of meat products.		

 Depending upon the nature of the conduct, a violation of section 610		may be a misdemeanor or a felony. Misdemeanor violations of section 610 are		punishable by imprisonment for a maximum of one year, a fine of up to $100,000		(for individuals), or both. See 21 U.S.C. 676(a). The fines reported here are		those set forth in 18 U.S.C. 3571, rather than in the particular statutes under		discussion. Under section 3571, fines for Class A misdemeanors committed by		individuals are $100,000, and $250,000 for felonies committed by individuals.		For organizations, section 3571 sets the maximum fines at $200,000 for Class A		misdemeanors and $500,000 for felonies, with an alternative fine schedule based		on twice the gross gain or gross loss. These fines apply unless the statute		defining the offense expressly exempts the offense from the application of		section 3571. An examination of the cases revealed that, in most instances,		section 3571 set the statutory fine parameters. If, however, the violation		"involves intent to defraud, or any distribution or attempted distribution of		an article that is adulterated," the penalty increases to a maximum		imprisonment term of three years, a fine of $250,000 (for individuals), or		both. The three-year maximum penalty does not apply to cases in which the		offense involved the distribution or attempted distribution of a product that		is adulterated because "a valuable constituent" was left out, a substance was		substituted for it, "damage or inferiority has been concealed in any manner,"		or any substance has been added or mixed or packed so as to increase its bulk		or weight or reduce its quality or strength or make it appear better or of		greater value than it is. Furthermore, section 676(a) contains a proviso that		no criminal penalty attaches for receiving for transportation any meat product		in violation of the law, if such receipt was made in good faith (unless		accompanied by refusal to furnish relevant information about the shipment).		

 Similar prohibitions and penalties apply in the case of poultry		products.See 21 U.S.C. 458, 461. With respect to egg production, 21 U.S.C. 1037		and 1041, for the most part, track the requirements and penalties pertaining to		meat production.

 The Food, Drug, and Cosmetic ActSee 21 U.S.C. 301, et seq.		prohibits a number of acts relating to any adulterated or misbranded food,		drug, device, or cosmetic. The prohibited acts cover a wide range of behavior,		such as adulterating or misbranding; counterfeiting trademarks; revealing trade		secrets; failing to enclose necessary information in shipments of prescription		drugs; and failing to register as a drug producer.See 21 U.S.C. 331. The terms		"adulterated" and "misbranded" are defined in 21 U.S.C. 342 and 343,		respectively, for food; in 21 U.S.C. 351 and 352, for drugs and devices; and in		21 U.S.C. 361 and 362, for cosmetics. Although "adulteration" generally relates		to safety or wholesomeness while "misbranding" relates to the accuracy of the		labeling of the product, certain acts of misbranding can implicate the safety		of the product for its intended use. For example, misbranding may occur through		the failure to disclose an ingredient. If that ingredient is one to which		certain persons may be allergic, the misbranding could create a health risk.		

 Other prohibitions relating to prescription drugs can be found in 21		U.S.C. 353. For example, it is unlawful to sell or purchase drug samples, or to		dispense certain drugs without a prescription. 

 Depending upon the nature of the conduct, a violation of the Food,		Drug, and Cosmetic Act may be a felony or a misdemeanor. Misdemeanor violations		of section 331 are punishable by a maximum prison sentence of one year and a		maximum fine of $100,000.See 21 U.S.C. 331(a)(1); supra n.1. If, however, the		violation is committed after the defendant has been convicted of another		violation of section 331, or is committed with intent to defraud or mislead,		the offense is a felony punishable by a maximum prison term of three years, and		a maximum fine of $250,000.See 21 U.S.C. 333(a)(2). Certain acts relating to		prescription drugs are punishable by a maximum prison term of ten years, and a		maximum fine of $250,000.See 21 U.S.C. 333(b). 

**IV. PROFILE OF INDIVIDUALS SENTENCED UNDER 2N2.1**

 A. Monitoring Data18 The statistical profile of cases from the		monitoring data include only those cases where the Commission received complete		documentation and 2N2.1 produced the highest offense level of all guidelines		applied in the case. See Appendix B for a statistical profile of cases		sentenced during fiscal years 1991, 1992, and 1993 that met these selection		criteria. 

 The monitoring data for fiscal years 1989 and 1990 also were reviewed.		The availability of information for these cases, however, was limited for		several reasons. First, for both years a

 high percentage of cases were excluded because information in the case		files was incomplete. Second, fiscal year 1989 produced only ten cases. Third,		certain variables relevant to the group's analysis were not collected in the		monitoring data set until fiscal year 1991. Accordingly, the working group		concluded that the data for fiscal years 1989 and 1990 were of limited utility		and elected not to present them in this report.

 The monitoring data for fiscal year 1993 reveal that relatively few		cases have been sentenced under 2N2.1.A total of 29 cases were sentenced under		2N2.1 (FY 1993). In 27 cases for which the Commission received complete		documentation, 2N2.1 produced the highest offense level of all guidelines		applied in the case. The mean final offense level for these offenders was 4.4,		and the median 4.0. The majority of defendants were in Criminal History		Category I (*n* = 24); two defendants were in Criminal History Category		II, and one defendant was in Criminal History Category III. A majority of cases		involved persons charged with a single count (85.2%, *n* = 23). Only three		defendants (11.1%) received a prison sentence (mean = 4.0 months; median = 3.0		months), and two received a sentence of probation with conditions of		confinement (7.4%). 

 None of the fiscal year 1993 cases resulted in an offense level higher		than 6, and no defendants received departures. Most cases received adjustments		for acceptance of responsibility (92.6%, *n* = 25). Three cases received		adjustments for aggravating role (11.1%), three cases received adjustments for		mitigating role (11.1%), and one case received an adjustment for abuse of trust		(3.7%). Fines were imposed in 17 cases (62.9%), with the mean fine $2,841 and		the median fine $2,000 (minimum = $250; maximum = $15,800). 

 Monitoring data for fiscal year 1992 also revealed that relatively few		cases were sentenced under 2N2.1.A total of 40 cases were sentenced under 2N2.1		(FY 1992). In 26 cases for which the Commission received complete		documentation, 2N2.1 produced the highest offense level of all guidelines		applied in the case. The mean final offense level for these offenders was 5.2,		and the median 4.0. All defendants were in Criminal History Category I. A		majority of cases involved persons charged with a single count (57.7%, *n*		= 15). Only two defendants (7.7%) received a prison sentence (mean and median =		4.5 months), and two received a sentence of probation with conditions of		confinement. 

 None of the fiscal year 1992 cases resulted in an offense level higher		than 10, and two received downward departures (one for substantial assistance;		the other for general mitigating circumstance). All cases received adjustments		for acceptance of responsibility. Six cases received adjustments for abuse of		trust (23.1%), two cases received adjustments for aggravating role (7.7%), and		one case received an adjustment for official victim (3.9%). Fines were imposed		in 17 cases (65.4%), with the mean fine $4,150 and the median fine $2,000		(minimum = $250; maximum = $20,000). 

 In fiscal year 1991, 2N2.1 resulted in the highest offense level of all		guidelines applied in 38 cases.A total of 42 cases were sentenced under 2N2.1		(FY 1991). Of those 38 cases, a majority involved persons in Criminal History		Category I (97.4%, *n* = 37), persons charged with a single count (71.1%,		*n* = 27), and individuals receiving sentences of probation (81.6%, n =		31). Prison sentences were given to only three defendants (mean and median = 4		months). Probation with conditions of confinement was imposed in four cases		(10.1%). 

 None of the fiscal year 1991 cases resulted in an offense level higher		than 6. There were no departures. In most cases, the defendant received a		reduction for acceptance of responsibility (89.5%, *n* = 34). An		adjustment for official victim was given in one case. Fines were imposed in 29		cases (76.3%), with the mean fine $3,006 and the median fine $3,000 (minimum =		$200; maximum = $10,000).

 B. Case Review

 In order to further study cases sentenced under 2N2.1, the working		group reviewed the case files for fiscal years 1991, 1992, and 1993.The		monitoring data reported in Part IV (A), supra, is comprised of only those		cases in which 2N2.1 produced the highest offense level of all guideline counts		and for which the Commission received complete documentation. The data include		cases involving steroids. In this supplemental case review project, the working		group looked at all available cases in which 2N2.1 produced the highest offense		level, regardless of whether the documentation was complete. The group,		however, excluded cases involving steroids. As a result, the totals reported in		this section of the report do not match those reported in section IV (A). A		number of variables were coded, including the type of conduct, risks associated		with the defendant's conduct, number of counts, plea bargaining, application of		the grouping rules, and the defendant's culpability.See Appendix C for the		coding instrument. 

 The group reviewed 22 fiscal year 1993 cases, 24 fiscal year 1992		cases, and 20 fiscal year 1991 cases in which 2N2.1 was applied. The results of		the coding project are described in greater detail below.

 1. Conduct Involved

 Seventeen of the 22 cases in fiscal year 1993 involved		misbranded/diverted prescription drugs, or adulterated meat. The group found		that a range of conduct was covered by the cases sentenced under 2N2.1. For		example, five cases involved the misbranding, sale, and implantation of		pacemakers. Within the category of offenses relating to prescription drugs,		conduct included such acts as: receipt of misbranded prescription drugs in		interstate commerce, drug diversion whereby Medicaid customers sold		prescription drugs to diverters, purchase/sale of misbranded animal drugs, and		transportation of veterinary drugs from a foreign country into the United		States (drug not for sale in the U.S.). Meat offenses ranged from sale of		adulterated meat, to transportation of brucellosis-exposed cattle in interstate		commerce, to failure to quarantine infected cattle (sale of cattle at auction		without required identification).

 In 17 cases, the offense conduct occurred in a business setting. The		defendants in these cases occupied positions as pharmacists (3), salespeople		(3), employees (3), managers (2), cattle buyers (2), proprietors (1),		auctioneers (1), cashiers (1), or clerical workers (1). In most of the		offenses, persons other than the defendant also participated.

 Fifteen of the 24 cases in fiscal year 1992 involved adulterated or		misbranded meat, egg products, or drugs. The group found that a fair range of		conduct was covered by the cases sentenced under 2N2.1. Within the category of		offenses relating to meat production, the conduct included such acts as:		assaulting a Department of Agriculture inspector, adding sodium sulfite to meat		(an outlawed additive that enhances the appearance of meat and thus diminishes		the appearance of spoilage and aging), producing meat products without federal		inspection, mislabeling products containing beef as "all pork," and selling		meat contaminated by fecal matter and slaughtered in unsanitary conditions.		Drug offenses ranged from possession of a device to counterfeiting a drug		trademark, and from diversion of prescription drugs to distribution of an		unapproved new drug.

 In 15 cases, the offense conduct occurred in a business setting. The		defendants in these cases occupied positions as presidents (2), vice presidents		(1), secretaries (1), sole proprietors (7), sales managers (1), managers or		co-managers (2), or butchers (1). In most of the offenses, persons other than		the defendant also participated.

 Of the 20 fiscal year 1991 cases, 14 involved adulterated or misbranded		meat or drugs. Two additional cases involved the sale of uninspected meat.		Three cases involved the sale of drug samples. The final case involved the		forgery of U.S. Department of Agriculture tobacco inspection certificates.		Again, these general offenses included a wide range of conduct: adding sodium		sulfite to meat, selling as "all beef" meat products containing beef hearts and		pork, selling meat products without federal inspection, selling out-dated or		rancid meat, and selling products containing meat from cancer-eyed or downed		cattle.

 Every offense in fiscal year 1991 occurred in a business setting. The		defendants in these cases occupied positions as presidents (2), vice-presidents		(2), sole proprietors or co-owners (10), sales representatives or sales		managers (3), unit managers (2), or butchers (1). Again, in most of the		offenses, persons other than the defendant also participated.

 2. Culpability24Case analyses of defendant culpability were based on		defendant admissions.

 The working group found that most offenses in fiscal year 1993 (86.4%,		*n* = 19) involved conduct that was purposeful or intentional. Of the 19		cases, 14 (63.6%) involved some element of risk to public health or safety, a		risk known to the defendant. Offenses included sale of sample pharmaceuticals,		attempts to enhance business profitability, and attempts to circumvent federal		inspections. 

 All of the offenses in fiscal year 1992 (*n* = 24) involved		conduct that was purposeful or intentional. Of these, 16 (66.7%) involved some		element of risk to health or safety known to the defendant. Typically, the		offenses were committed to enhance the profitability of the business by		extending the product's shelf-life, by obtaining some return on spoiled		products that could not otherwise be sold, or by substituting cheaper		ingredients. 

 The working group found that most offenses in fiscal year 1991 (90.0%,		*n* = 18) involved purposeful or intentional conduct. Of the 18 cases, 13		(72.2%) involved some element of risk to public health or safety. Offenses		included: attempts to circumvent federal inspections, attempts to enhance		business profitability by extending product shelf-life, and the sale of sample		pharmaceuticals. 

 3. Plea Bargaining

 In fiscal year 1993, most of the cases (81.8%, *n* = 18) resulted		in a plea of guilty pursuant to a plea agreement. Four cases went to trial. In		several cases, specific agreements regarding sentencing were included, such as:		government agreement to sentence within the lower 50 percent of the applicable		guideline range; dismissal of pending indictment(s); specific sentence		recommendations (e.g., no more than three months imprisonment and a $2,000		fine); recommendation that the defendant receive a two-level reduction for		acceptance of responsibility; or agreement to a particular final offense		level.

 In fiscal year 1992, most of the cases (95.8%, *n* = 23) resulted		in a plea of guilty pursuant to a plea agreement. Only one case went to trial.		In several cases, specific agreements regarding sentencing were included, such		as: the government would not recommend incarceration or would not oppose the		defendant's request for a particular sentence; a specific sentence should be		imposed (e.g., probation and a $1,000 fine), or incarceration not exceed a		certain amount (e.g., three months); the government would seek a downward		departure based on the defendant's substantial assistance; the defendant would		not seek a downward departure; the government would recommend that the		defendant receive a two-level reduction for acceptance of responsibility; or		agreement to a particular final offense level.

 In fiscal year 1991, most of the convictions (90%, *n* = 18)		resulted from a guilty plea. Of the 18 cases involving a guilty plea, 15		(83.3%) involved a written plea agreement. Two cases went to trial. The plea		agreements contained recommendations regarding sentence similar to those cases		in fiscal years 1992 and 1993.

 4. Misdemeanor/Felony; Number of Counts

 The working group found that five cases in fiscal year 1993 involved		felony convictions. Sixteen cases involved misdemeanors. One case included both		felony and misdemeanor counts. Seventeen of the cases involved a single count		(five felonies and 12 misdemeanors), and the remaining five cases involved		multiple counts.

 Half the cases in fiscal year 1992 involved conviction of one or more		felony counts, while the other half involved misdemeanor dispositions. Eleven		of the cases involved a single count, five were felonies, and six were		misdemeanors. The other 13 cases involved multiple counts, either mixed felony		and misdemeanor counts or multiple felony or misdemeanor counts.

 In fiscal year 1991, nine of the cases involved a conviction for one or		more felony counts. Ten cases involved misdemeanors. One case included both		felony and misdemeanor counts. Twelve of the cases involved a single count (six		felonies and six misdemeanors), and the remaining eight cases involved multiple		counts.

 C. Cross References

 As noted above, 2N2.1 contains cross references to other offense		guidelines. Section 2N2.1 refers the court to 2D1.1 for cases involving		steroids, to 2F1.1 for cases involving counterfeit steroids, and to 2F1.1 for		fraud cases. In addition, there is a general instruction to cross reference to		another offense guideline if the offense was committed in furtherance of, or to		conceal that other offense and the offense level is higher than that resulting		from the application of 2N2.1. The working group reviewed the operation of		these cross references.

 1. 2N2.1 and Steroids

 The 1988 Drug Abuse Act created 21 U.S.C. 333(e) specifically to		address the distribution of or possession with intent to distribute steroids.		Effective February 27, 1990, anabolic steroids became a Schedule III controlled		substance, and section 333(e) was amended to cover human growth hormones rather		than steroids.1990 Crime Control Act 1902(d), P.L. 101-647. As noted, 2N2.1 was		not intended to cover offenses involving either steroids or human growth		hormones; however, commentary to that effect was not added to 2N2.1 until 1990.		Before that change, offenses involving steroids were sentenced under 2N2.1		because they were prosecuted under 21 U.S.C. 331 or 333, statutes for which		2N2.1 is listed in the statutory index as the applicable guideline. 

 In fiscal years 1991, 1992, and 1993, a number of cases involving		steroids continued to be sentenced under 2N2.1. Although it is not entirely		clear from the case files why this occurred, it appears that, with three		exceptions,26In one case, the date of the offense was November 2, 1990, the day		after the effective date of the 1990 amendments. The remaining two cases		documented use of the 1992 Guidelines Manual. steroid cases sentenced		under 2N2.1 were those involving offenses that were committed before November		1990. In these cases, courts apparently sentenced under 2N2.1 because they used		a version of the Guidelines Manual that predated the addition of		commentary regarding steroids. The working group located a total of 22 such		cases for fiscal year 1991, eight such cases for fiscal year 1992, and seven		such cases for fiscal year 1993. In fiscal year 1992, one case was cross		referenced to 2D1.1 from 2N2.1. In fiscal year 1991, two cases involving		steroids were cross referenced to 2F1.1 from 2N2.1. No cases involving steroids		were cross referenced in fiscal year 1993.

 2. 2N2.1 and Fraud

 As noted above, 2N2.1 contains a cross reference to 2F1.1 for cases		involving fraud. The working group's review of the cases involving individuals		reveals what could be considered inappropriate failure to cross reference to		the fraud guideline. For example, in some of the cases involving adulterated		meat, the defendant purposely adulterated the product by adding sodium sulfite,		a substance that preserves fresh appearance and increases shelf life. Adding		sodium sulfite also can conceal an inferior product. Despite the obvious		fraudulent conduct in some of these offenses, however, the court failed to		cross reference to the fraud guideline.

 Another example of possible inappropriate failure to cross reference to		2F1.1 involved cases where the defendant intentionally mislabeled meat		products. In one case, the defendant caused sausage containing beef product to		be labelled "all pork." In another case, the defendant added beef hearts and		pork to a product labelled "all beef."

 The impact of sentencing under 2F1.1 rather than 2N2.1 can be dramatic,		since the offense level in 2F1.1 is increased depending on the amount of		"loss." In United States v. West, 942 F.2d 528 (8th Cir. 1991), for		example, the defendant was sentenced under 2F1.1 for selling adulterated meat.		Under 2F1.1, his offense level was apparently 16,27This represents a base		offense level of six, plus seven offense levels for "loss," plus two offense		levels for "more than minimal planning," plus three offense levels for		"aggravating role," minus two offense levels for "acceptance of		responsibility." The offense level should have been 17, but there was an		apparent arithmetical error. 942 F.2d at 530, 531-32 n.3. high enough to		generate a 21-month sentence, compared to the probable sentencing range of 1 -		7 months under 2N2.1.28This represents a base offense level of six, plus three		offense levels for "aggravating role," minus two offense levels for "acceptance		of responsibility." 

 Furthermore, sentencing under 2F1.1 allows a wider range of "relevant		conduct" than 2N2.1. Under 1B1.3(a)(2), "relevant conduct" includes "all acts		and omissions" that the defendant committed or willfully caused "that were part		of the same course of conduct or common scheme or plan as the offense of		conviction," but "solely with respect to offenses of a character for which		3D1.2(d) would require grouping of multiple counts." While 2F1.1 is listed as		such an offense in 3D1.2(d), 2N2.1 is not. The impact of "relevant conduct" may		be quite substantial in increasing the offense level for multiple sales of		adulterated products sentenced under 2F1.1. 

 3. Other Cross References

 Prior to November 1, 1992, 2N2.1 required a cross reference to another		guideline if the offense was committed in furtherance of or to conceal another		offense. In fiscal year 1992, two 2N2.1 cases were cross referenced to 2B1.1.		Effective November 1, 1992, application of the cross reference is required only		when the other guideline results in a higher offense level.

 The cases reviewed can be placed in three general categories: (1) cases		involving fraud (e.g., product substitution, counterfeit steroids); (2) cases		involving steroids; and (3) cases involving regulatory violations of food and		drug statutes or requirements. Generally, the cases in the first category		should be sentenced pursuant to a cross reference to 2F1.1; the cases in the		second category should be sentenced pursuant to a cross reference to 2D1.1; and		the cases in the final category should be sentenced pursuant to 2N2.1. However,		the cases reviewed did not appear to reflect a consistent application of the		cross references in keeping with these general categories.

 As described above, whether or not a cross reference to another offense		guideline is applied correctly can have a dramatic impact on the resulting		sentence. Therefore, the correct application of cross references can affect		similarly the evaluation of whether 2N2.1 provides adequate penalties.

 D. Case Law

 No cases containing a substantive discussion of 2N2.1 were uncovered.		However, a number of cases have addressed the application of 2F1.1 in the		context of food and drug offenses involving fraud. A brief discussion of the		major issues related to the application of 2F1.1 in this context therefore is		appropriate.

 The circuit courts that have addressed the issue have uniformly held		that, whether or not consumers were defrauded, 2F1.1 is applicable to a food or		drug offense when a fraud is perpetrated against a government agency - i.e.,		the FDA.See United States v. Van Damme, Nos. 94-1866, 94-1926, 1995 U.S.		App. LEXIS 911 (7th Cir. Jan. 18, 1995); United States v. Arlen, 947		F.2d 139 (5th Cir. 1991); United States v. Cambra, 933 F.2d 752 (9th		Cir. 1991). The courts have reasoned that regulatory fraud alone is a		sufficient basis for the application of 2F1.1 because "[t]he FDA represents the		public, and a deliberate attempt to mislead the agency should be considered as		clearly a fraud as are attempts to mislead customers or other individuals."See,		e.g., Van Damme, 1995 U.S. App. LEXIS 911, at *9.

 In applying 2F1.1 to food and drug offenses, the courts have defined		loss in a variety of ways. When the victims were retailer buyers of misbranded		meat, the court in United States v. Strassburger, 26 F.3d 860, 863 (8th		Cir. 1994) defined the loss as the actual loss - i.e., the price the defendant		charged the retailers for the "choice" meat they requested, minus the value of		the non-choice meat the defendant actually provided to them. In United		States v. Kohlbach, 38 F.3d 832, 839 (6th Cir. 1994), the victims were		consumers who had purchased the adulterated orange drink manufactured by the		defendants. In that case, the court equated the loss with the cost savings or		"gain" accruing to the defendants by virtue of their unlawful substitution of		the less expensive beet sugar for orange juice solids in the adulterated		mixtures.Id.

 Defining loss has proven more difficult in cases applying 2F1.1 to food		and drug offenses when the victim is the regulatory agency. For example, in		Cambra, 933 F.2d 752, the defendant pleaded guilty to the unlawful sale		of counterfeit steroids. The court found that the loss was equivalent to the		monetary value of the counterfeit steroids the defendant illegally sold.Id. at		756. Rejecting the defendant's argument that a theory of fraud on an		enforcement agency does not involve monetary loss, the court concluded that		"'[t]here is no meaningful distinction between the government as victim and		individual consumer victims . . . [the defendant] intended to profit from his		activity and . . . federal agencies were defrauded. Adjusting the guideline		range based on the amount involved is therefore appropriate."Id. 

 In Van Damme, 1995 U.S. App. LEXIS 911, on the other hand, the		Seventh Circuit held that the district court erred in calculating loss under		2F1.1 by equating it with the defendants' gain. In Van Damme, the		defendants pleaded guilty to unlawfully manufacturing veterinary drugs in their		basement and failing to register the site with the FDA. The district court		determined that, for purposes of 2F1.1, the loss was equivalent to the $400,000		net profit the defendants realized over four years.Id. at *9-10. In rejecting		that calculation, the Seventh Circuit noted that, although gain normally may		prove an adequate surrogate for loss, the use of gain is appropriate only when		there is in fact a loss and only when the use of the gain results in a		"reasonable estimate of the loss."Id. at *11 (citing USSG 2F1.1, comment. (n.		8)). The Van Damme court found that the use of gain was inappropriate in		that case because, although there was evidence of fraud against the FDA, there		was "no clear evidence that customers or consumers suffered any loss."Id. As a		result, the court held that the 2F1.1(b)(1) loss table did not apply.Id. The		court suggested, however, that the amount of harm the defendant caused to the		public could be addressed appropriately through an upward departure.Id. at		*16-17. 

 Likewise, in United States v. Chatterji, No. 94-5379, U.S. App.		LEXIS 2803 (4th Cir. Feb. 7, 1995), the court refused to apply the 2F1.1(b)(1)		loss table in determining the defendant's sentence for conspiring to defraud		the FDA and obstructing proceedings before the FDA. The defendant in		Chatterji fraudulently obtained FDA approval of one generic drug and		made a false statement to the FDA concerning another generic drug.Id. at		*3-8. Notwithstanding the defendant's fraud, it was undisputed that both drugs		met all FDA requirements for safety and effectiveness.Id. Thus, the court held,		"the defendant's conduct occasioned no [economic] loss."Id. at *17. Because		there was no loss, the court continued, the defendant's economic gain could not		substitute as an alternative basis for calculating loss, and the 2F1.1(b)(1)		loss table was inapplicable.Id. 

**V. PRE-GUIDELINE FOOD AND DRUG CASES INVOLVING INDIVIDUALS AND ORGANIZATIONS**

 To gain more information about the sentencing of defendants convicted		of pre-guideline food and drug offenses, the working group explored three		sources: the Administrative Office's FPSSIS data, case law, and case review.		The results of this research are set forth below.

 A. FPSSIS Data

 The Administrative Office's Federal Probation Sentencing and		Supervision Information System (FPSSIS) data represent individual and		organizational offenses from 1984 through 1990. The data reveal that most food		and drug cases involved adulterated or misbranded meatSee 21 U.S.C. 610. or		drugs.See 21 U.S.C. 331, 333. Due to FPSSIS data limitations, it is unknown how		many of these cases involved steroids.

 Set forth below is a chart depicting primary offense food and drug		cases sentenced from 1984 through 1990 and the sentences imposed in those		cases.Sentences imposed prior to the guidelines, of course, were subject to		early release on parole.

 B. Case Law 

 Although there are many pre-guideline food and drug cases involving		organizational defendants, reported decisions typically are not exhaustive, nor		do they typically deal with sentencing issues. A noteworthy case, however, is		the prosecution of the Beech-Nut company for its sales of misbranded and		adulterated apple juice.See United States v. Beech-Nut Nutrition Corp.,		659 F. Supp. 1487 (E.D.N.Y. 1987), aff'd in part, rev'd in part, 871 F.2d 1181		(2d Cir. 1989). Beech-Nut marketed its product as pure apple juice with no		sugar added. It became aware, however, that the product it was receiving from		its sole supplier, whose price for the concentrate was $0.50 to $1 per gallon		lower than Beech-Nut's previous supplier, was almost pure corn syrup. Beech-Nut		nonetheless continued to sell the product as pure apple juice due to economic		pressures.Id. at 1185. The defendants in that case included (among others) the		corporation, its president, and its vice president. The corporation pleaded		guilty to 215 felony violations of the Food, Drug and Cosmetic Act,See 21		U.S.C. 331(a), 333(b). and was sentenced to a fine of $2 million and ordered to		pay the Food and Drug Administration (FDA) for the costs of the		investigation.See Beech-Nut Nutrition Corp., 871 F.2d, at 1187.

 C. Case Review

 In connection with the research that led to the development of Chapter		Eight, the Sentencing Commission studied presentence reports for organizational		defendants. Thirty of the cases studied related to food and drug offenses and		are summarized in Appendix D. The 30 cases mirror the kinds of conduct found in		cases relating to individual defendants in that the predominant offenses were		those involving adulterated or misbranded meat products, foods, or drugs. Ten		cases involved a felony disposition. Fines in these ten cases ranged from		$1,200 to $623,000. The median fine was $52,500 and the mean $121,820. Sixteen		cases involved a misdemeanor disposition. The highest fine imposed in these 16		cases was $50,000 and the lowest $100. The median fine was $8,562.50 and the		mean $11,785.94. The remaining four cases did not involve a fine. Overall,		there was a fairly wide variation in sentences among seemingly similar cases.		There was no apparent pattern to explain why a case was resolved as a felony or		as a misdemeanor or to explain the number of counts of conviction.

 With respect to felony cases, two cases involving large corporations		represent the high end of the spectrum. One involved misbranded and adulterated		drugs, the other adulterated and misbranded devices, and both involved false		statements to the government. In the first case (No. 97), one of two corporate		defendants50Although two separate entities were named as defendants, they were		considered to be essentially interchangeable. repeatedly had been investigated		by the FDA for violating the requirements relating to the production of drugs.		These investigations led to a suit by the FDA for an injunction to halt the		production of drugs. Under the terms of a settlement agreement, the company was		not permitted to manufacture injectable drugs, but was allowed to produce a		test batch of liquid penicillin. This test batch was grossly contaminated with		bacteria, but the company falsified and hid records to prevent the FDA from		learning that the company had produced five additional batches of penicillin in		violation of the settlement agreement. Although none of these contaminated		injectable drugs was ever marketed (because the FDA was alerted to the		falsification of records), the company repeatedly sought permission to market		contaminated drugs on the basis of records the company knew to be false. 

 The second company sought the FDA's approval to put aspartame in its		penicillin to mask the bitter taste of the drug. The FDA disapproved the		application, in part, because of the failure to warn of the possibility of		irreversible brain damage in a small segment of the population sensitive to		excess amounts of aspartame. Notwithstanding the FDA's disapproval of its		application, the corporation put aspartame in its penicillin and falsified		records to hide that fact. Each company was convicted of two felony counts of		distributing misbranded drugs and adulterating drugs under 21 U.S.C. 331(a) and		(k). Each was fined $185,000.

 Case No. 346 involved a company that produced pacemakers and pacemaker		programmers. The company distributed a number of pacemakers that had the		potential to fail suddenly or that had batteries with the potential to deplete		sooner than represented. It also distributed a number of pacemaker programmers		without the FDA's approval and falsely reported to the FDA that there were no		reports of medical complications with its pacemakers and pacemaker programmers.		The organization was convicted of 25 counts of transporting adulterated and		misbranded pacemakers and pacemaker programmers with the intent to defraud and		of making false statements to the FDA (in violation of 21 U.S.C. 331(a) and		(q)(2)), and was fined $623,000 and ordered to pay costs of $141,000.

 The lower end of the spectrum is represented by case No. 1 in which a		successor corporation was convicted for the acts of its predecessor in		distributing adulterated wheat. The predecessor company hid 185,500 pounds of		insect-damaged wheat inside a shipment of 607,570 pounds of wheat. The FDA		approved repacking and selling the remaining 422,070 pounds of wheat for human		consumption, but the damaged wheat was to be sold only for livestock feed. An		overpayment of $8,448 was attributable to the damaged wheat. The defendant was		convicted of one misdemeanor count of distributing adulterated wheat, in		violation of 21 U.S.C. 331(a), and was fined $100.

 Cases No. 33 and No. 176 are more typical of the misdemeanor cases.		Case No. 33 involved a corporation engaged in the wholesale distribution of		meat and poultry products that sold almost 1,000 pounds of meat contaminated		with rodent feces and gnaw marks, and another 800 pounds of uninspected meat		packed in boxes originally used for household cleaning products. The		corporation had earlier offered uninspected meat for sale by repacking it in		used boxes containing meat inspection labels from contents previously packed in		them. The defendant was convicted of three counts and fined $30,000.

 In Case No. 176, a meat production company was convicted of one count		of preparing misbranded meat by offering for sale 1,000 pounds of corned beef		that contained excess water. The company was fined $10,000.

**VI. ORGANIZATIONS SENTENCED PURSUANT TO CHAPTER EIGHT**

 Since November 1, 1991, the Commission has received six food and drug		cases involving organizations sentenced under the Chapter Eight guidelines. To		learn more about sentencing under Chapter Eight, the working group reviewed		each case.See Appendix E. Each case review presents a summary of the facts,		victim impact information, and sentences imposed on the organization.		Sentencing information on the individual codefendants also is presented. In one		case the sentencing information on the individual was not available. Each		review summarizes the court's actual application of the guidelines and notes		any pertinent guideline application issues for discussion. 

 In addition, the working group applied the fine provisions of Chapter		Eight to each case to determine what the fine range would be if the current		Chapter Eight fine provisions applied (see Appendix E sections entitled		"Hypothetical Chapter Eight Application Under the 1994 Guidelines		Manual"). Applying the provisions of Chapter Eight was difficult because		the presentence reports were not written with the application of the fine		provisions of Chapter Eight in mind. Important information necessary to		correctly apply all provisions was not always available (e.g., number of		employees in the company, loss and gain figures). Therefore, it was necessary		at times to infer certain information from the case file to apply the fine		provisions of Chapter Eight. 

 The actual fines imposed ranged from no fine for organizational		defendants #1 and #6 to $175,000 for organizational defendant #5. The		hypothetical Chapter Eight application resulted in fine ranges from $3,000 -		$6,000 (Organizational Defendants #2, #3, and #4) to $105,000 - $210,000		(Organizational Defendant #5). In five out of the six cases, the organization		was placed on probation. 

 In one case (Organizational Defendant #2) there was a misapplication of		the guidelines in that the court used Chapter Eight to determine the fine		range. In two of the cases (Organizational Defendants #1 and #3) the		hypothetical analysis raises the issue of whether counts should be subject to		grouping. The decision to group the counts ordinarily will have the effect of		lowering the fine range.

 The conduct involved in these cases included distribution of		adulterated poultry, manufacture of nonsterile drugs, sale of sample drugs,		selling prescription drugs without being an authorized distributor of record,		and distribution of unapproved new drugs. Organizational defendants #1, #3, and		#4 involve at least one count that is a felony. None of these cases appear to		involve an intent to defraud that would require application of the cross		reference to 2F1.1. In each case, files suggest that a principal of the company		was convicted in a related prosecution.

**VII. ISSUES RELATING TO 2N2.1**

 A. Cross References

 As previously mentioned in this report, the working group found what		appeared to be inconsistent application of the cross references in 2N2.1. This		obviously could affect resulting fines for organizations. This issue should be		revisited when the Commission evaluates appropriate penalties. If the fraud		guideline were cross referenced appropriately, it may be that the fine		determinants under 2F1.1 would provide appropriate sanctions. For those food		and drug cases in which guideline application is appropriate under 2N2.1, the		issue remains whether this guideline as currently drafted provides for adequate		fines and whether any further commentary or specific offense characteristics		would be useful. Thus, the core of the problem may lie with the interpretation		of the cross references under 2N2.1.

 Likewise, it also should be considered whether 2F1.1 as currently		drafted results in appropriate sentences for food and drug cases and whether		any further commentary or specific offense characteristics would be useful. For		example, certain characteristics associated with food and drug cases, such as		risk of illness, may not be adequately accounted for under the fraud guideline.		Moreover, determination of loss under 2F1.1 when the fraud is against the		regulatory agency has proven problematic.

 B. Grouping Rules 

 There were five multiple count cases in fiscal year 1993, 13 in fiscal		year 1992, and eight in fiscal year 1991. Review of these cases reveals		apparent inconsistencies in how the grouping rules were applied. 

 In some cases involving multiple counts, there was no mention of the		grouping rules which suggest the possibility of inconsistent application.		Further, there was apparent inconsistency in the context of cases involving		multiple counts of adulterated meat or other food products such as eggs. While		most of these cases resulted in grouping under 3D1.2, some multiple count cases		were not grouped which resulted in greater sentences. 

 Another issue related to grouping multiple counts of conviction is the		identification of the "victim" in the counts of conviction. Determination of		one or more victims influences which, if any, grouping rules will apply. The		working group found that in several cases multiple counts were grouped under		3D1.2(b) because they were viewed as multiple acts connected by a common		criminal objective with a single societal victim. Although it may be		appropriate to treat "society" as the victim in offenses involving technical or		simple regulatory violations of Food and Drug regulations (involving no actual		threat to human health), there is reason to question whether "society" is the		victim in a case involving the sale of adulterated products. For instance, who		is the victim when multiple sales were made to a single retail outlet for		ultimate resale to consumers? Even if the individual consumers who purchased		the adulterated items cannot be identified, they nonetheless exist and are		"victims" of the offense in addition to the retail distributor. This raises		questions as to the appropriateness of grouping under this rule.

 The Commission may wish to address whether, and to what extent,		multiple counts of conviction under 2N2.1 should result in incremental		punishment. The existing 2N2.1 contains no specific offense characteristics for		multiple victims or ongoing offenses.Unlike 2F1.1, which enhances both for		"loss" and for repeated acts (by means of the "more than minimal planning"		specific offense characteristic), there is no mechanism in 2N2.1 to distinguish		between multiple sales of adulterated products and a single sale of such		products. The only mechanism for increasing the guideline range and providing		additional punishment is to determine that each count results in an additional		harm and therefore should not be grouped. Accordingly, 3D1.4 would be applied		and the offense level increased. 

 One way of addressing the issue of grouping multiple counts is to		specifically provide that offenses under 2N2.1 be grouped under 3D1.2(d). This		grouping rule calls for multiple counts to be grouped if the offense level is		based primarily on quantity or contemplates ongoing or continuous behavior.		Section 2N2.1 could be amended to consider appropriate increases based on		relevant measures of aggregate harm. Quantifiable aspects of the defendant's		offense conduct (e.g., number of victims, repetitive conduct, risk of harm)		could result in appropriate increases through specific offense characteristics		under 2N2.1.

 C. Statutory Maximum Fines

 Because of the high percentage of misdemeanor dispositions among food		and drug cases, the statutory maximum fine amount may be a critical issue in		developing organizational sanctions.53*See* supra, n. 11. As a practical		matter, however, the charging pattern may influence the options available under		any guideline. Because of the statutory maximum, a defendant permitted to plead		to a single misdemeanor count cannot be fined more than $200,000 (for a Class A		misdemeanor) or $10,000 (for a Class B or C misdemeanor), irrespective of the		operation of Chapter Eight.54Higher statutory maximum penalties apply if the		offense results in death or involves substantial pecuniary loss or gain.

**VIII. CONCLUSIONS**

 As mentioned in the Introduction of this report, the working group is		prepared to begin the process of drafting proposals for the Commission's		consideration. To ensure that the food and drug guidelines operate effectively		for both individuals and organizations, the working group will draft proposals		that focus primarily on the following issues:

 1) proper application of the cross references; 

 2) consistent application of the grouping rules;

 3) how to adequately address the risk of harm; and

 4) whether the incorporation of the current version of 2N2.1 into		8C1.2(a) would result in adequate fines for organizations convicted of food and		drug offenses.

 The working group will continue to consult with various outside groups		for input and expertise (e.g., the Office of Consumer Litigation at the		Department of Justice).

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*United States Sentencing Commission*