2008 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit 10-15-2008 

# U SA v . F allon P r e c e de nt i al or N on-P r e c e de nt i al : N on-P r e c e de nt i al D ocke t N o . 07-2350

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w . vi ll anova . e du . Re c omme nde d C it at ion " U SA v . F allon" (2008). 2008 D e cisio n s . P ape r 365. http://d i git alc ommon s .l a

w . vi ll anova . e du/thir dc ir c uit_2008/365NOT P RE CE DE NT I AL UN I TED STATES CO UR T OF A PP EALS F O R T H E T H IR D C IR C U IT N o. 07- 2350 UNI TE D ST ATE S OF AM ERI CA

v. J AM E S C. F AL L ON,

A ppel l ant O n A p p ea l from the U n it ed S tat es D istri ct C o u rt f o r th e E a ste rn D istric t o f P e n n sy lv a n ia D . C . C r i m i nal N o. 02- cr - 00324 (H on orabl e Jam es T . G i l es) A r gued Sept ember9, 2008 B e f o re : S C IR IC A , C hi ef

Judge , M c K E E a n d S M IT H , C i r cui tJudges . Fi l ed: O ct ober15, 2008 RO BE RT E P S T E I N, E S QUI RE ( AR GUE D) D e f e n d e r A ss o c iatio n o f

P h ilad e lp h ia Feder al C our tD i vi s i on T he C urt i s C enter , S uit e 54 0 W est 601 W al nutSt r eet Phi l adel phi a, Penns y l vani a 19106 A t t or neyforA ppel l ant BE RN ADE T T E A. M c KE ON, E S QUI RE ( AR GUE D) CHRI S TI NE E . S YKES , ES QUI RE ROBER T A. ZAUZM ER, ES QUI RE O ffi ce of U ni t ed St at es A t t or ney 615 C hes t nutSt r eet , Sui t e 1250 Phi l adel phi a, Penns y l vani a 19106 A t t or neyforA ppel l ee2 OPI NI ON O F THE COURT S C IR IC A , C hi ef

Judge . A ppel l antJ ames C. Fal l on w as convi ct ed bya j uryof one c ountof w i r e fr aud and t hr ee c ount s of m ai l fr aud. I n addi t i on t o a pr i s on s ent ence of tw el ve mont hs and a da y ( fol l ow ed byt hi r t y - s i x m ont hs of pr obat i on) , Fal l on w as or der ed t o payr es t i tut i on i n t he amount of $55, 235. 86. O n appea l , w e af fi r m ed Fal l on’ s convi ct i on and s ent ence , but v a c a te d th e D is tr ic t C o u rt ’s re s titu tio n o rd e r. U ni t ed Stat es v. Fal l on , 470 F. 3d 542 ( 3d C i r . 2006) . O n r emand, t he D i s t r i ctC our ti m pos ed an a m ended r es t i tut i on or deri n t he amount of $57, 437. 80. Fal l on now appea l s the C our t ’ s r es t i tut i on cal cul at i on. Forthe f o l l o wi n g r e a s o n s , we wi l l a f f i r m. I . Fal l on i s t he form erpr es i dentof D erm a G enes i s , the manufactur erand di s t r i but or of “D erm a Peel , ” a de r m at ol ogi cal devi ce. O n N ovember4, 1997, the Food and D rug A dm i ni s t r at i on ( “FD A ”) not i fi ed Fal l on he coul d notl egal l ym arketD erm a Peel w i t hout fi r s tobt ai ni ng cl ear ance fr om t he age ncy . N evert hel es s , i n J anuary1998, Fal l on began pr om ot i ng D erm a Peel w i t houtFD A cl ear ance . Soon aft er , Fal l on began ne got i at i ons w i t h a medi cal devi ce f i nanci er , A m er i can Busi nes s L eas i ng, ( “A B L ”) t o pur chas e the d e v i c e s . To s e c u r e a n a g r e e me n t , F a l l o n f r a u d u l e n t l ys u b mi t t e d a f o r g e d l e t t e rt o ABLO n February18, 1998, s hor t l yaft erFal l on s ubm i t t ed the fa br i cat ed l et t ert o A B L , t he 1 p assa g e o f th e F o o d an d D rug M o d ern izati o n A ct ex em p ted D erm a P ee l from the F D A ’s cl ear ance r equi r ement . T hough Fal l on coul d now l egal l ym arketD erm a Peel w i t hout FD A cl ear ance , t he D i s t r i ctC our tfound Fal l on’ s r epr es ent at i on of FD A appr oval r emai ned mat er i al t o A B L ’ s deci s i on t o pur chas e the devi ce. Fur t herm or e, the D i s t r i ct Cou r tf o u n d i twas ma t e r i a l t o c e r t a i n d o c t o r s ’ d e c i s i o n s t o l e a s e th e d e v i c e f r o m A BL.

“ W e re v iew a re stitu tio n o rd e r u n d e r a b if u rc a ted sta n d a rd : p len a ryre v iew a s to 2 w hetherres t i tuti on i s perm i t t ed b yl aw , and abu se of d i scr et i on as t o the app ropri at eness of the part i cul araw ar d. ” U ni t ed Stat es v. Q ui l l en , 3 3 5 F . 3 d 2 1 9 , 2 2 1 (3d C ir . 2 0 0 3 ). ( i nt ernal quot at i ons om i t t ed) . A di s t r i ctcour t ’ s fac tual fi ndi ng r egar di ng the amountof lo s s is re v ie w e d f

o r c le a r e rr o r. U

n itedS ta tes v . V

iti llo , 4 9 0 F .3 d 3 1 4 , 3 3 0 (3 d C ir . 2 0 0 7 ). 3 w hi ch cl ai m ed t o pr ovi de FD A appr oval fordi s t r i but i on of D erm a Peel . T hi s l et t er form ed the evi dent i arybas i s of the governm ent ’ s s ucce s s ful pr os ecut i on of Fal l on. R el y i ng upon t he for ged l et t er , A B L pur chas ed s eventy - ei ghtD erm a Peel
m ac h ines fro m F all o n fo r l ea se to m ed ical pro fe ssion als. A B L b ec am e a w are o f F all o n ’s 1 f r a u d i n S e p t e mb e r1 9 9 8 , a n d s h o r t l yth e r e a f t e re n d e d i t s r e l a t i o n s h i p wi t h De r ma G enes i s . Fal l on w as i ndi ct ed i n 2002 and the D i s t r i ctC our tent er ed the j udgm entof c o n v i c t i o n a n d s e n t e n c e o n Oc t o b e r1 6 , 2 0 0 3 . F a l l o n a p p e a l e d h i s s e n t e n c e a n d we vaca t ed the r es t i tut i on amount and r emanded back t o t he D i s t r i ctC our t . A ft erthe amended r es t i tut i on or derw as i m pos ed, Fal l on agai n appea l ed the j udgm ent , di s put i ng th e m e th o d o f

c a lcu latio n u se d b yth e D istric t C o u rt. O n ap p ea l, w e c o n side r th e D istri ct C o u rt ’s am en d ed resti tuti o n o rde r. 2T he def endantpr ovi ded evi dence t o r ebutthe pr oxi m at e ca us at i on i nfer ence fort he 3 o th e r l e a s e s in th e f

ir s t s e n te n c in g h e a ri n g . See Fal l on , 470 F. 3d at549. ( “A s not ed, appr oxi m at el y$34, 000 of the D i s t r i ctC our t ’ s $55, 235. 86 r es t i tut i on j udgm entcan be at t r i but ed t o l eas e paym ent s m i s s ed bytw o doct or s , one dea d and one w ho fi l ed for b an k rup tcy . ”) See a l

so U ni t ed Stat es v. Fal l on , N o . 0 2 -32 4 -1, 20 0 7 U . S . D ist . L E X IS 3 2 9 8 6 , at *4 (E . D . P a. M ay3 , 2 0 0 7 ). (“O n lylease ag ree m en ts as to the three en ti ti es a re (c o n tin u e d ...) 4 II. T he D i s t r i ctC our tdi d noterri n confi ni ng the r es t i tut i on cal cul at i on t o t he four unenfor ced l eas e agr eement s . Fal l on cont ends the D i s t r i ctC our ts houl d have a ggr egat ed A B L ’ s pr ofi t s and l os s es fr om al l of the l eas es t o det erm i ne the r es t i tut i on amount . U nder Fal l on’ s appr oach, t her e w oul d be no r es t i tut i on aw ar d as i ti s undi s put ed A B L gener at ed a netpr ofi tfr om t he l eas es . H ow ever , underthe M andat oryV i ct i m s R es t i tut i on A ct (“ M V R A ” ), a d e f

e n d a n t is re q u ire d to p a yre stitu tio n to a v ictim f o r lo ss e s p ro x im a tely caus ed byt he def

endant ’ s unl aw ful conduct . 18 U . S. C . § 3663( a) ( 1) ( A ) . I n Fal l on , we i ns t ruct ed that“w her e . . . t he governm entdemonstr at es thata bus i nes s tr ans act i on w as cons um m at ed due t o fr aud byt he def endant , a comm ons ens e butr ebut t abl e i nfer ence a rise s th a t su b se q u e n t lo ss e s s u f f e re d b yth e v ictim o f

th e f ra u d a re su f

f icie n tlylin k e d to t he under l y i ng fr aud t o s uppor tan aw ar d of r es t i tut i on. ” 470 F. 3d at549. O n r emand, as di r ect ed, t he D i s t r i ctC our tcorr ect l yfocus ed j us ton t hos e l eas es w h ich th e g o v ern m en t dem o n str ated w ere p rox im atelyca u sed b ythe d ef en d an t’ s u n law f u l co n d u c t and forw hi ch the def endantdi d notpr ovi de evi dence t o r ebutthe i nfer ence i n favorof the pr os ecut i on. B eca us e Fal l on fai l ed t o demonstr at e ther e w as an 3( . . . cont i nued) 3 now ati s s ue. . . . A s t o eac h of the fourdevi ces ati s s ue, D efe ndanthas pr es ent ed no evi dence ort es t i m onyfr om anyof the contr act i ng par t i es thatthe devi ces w er e r eturned forr eas ons ot herthan the mi s r epr es ent at i on r egar di ng FD A appr oval . ”) T he D i s t r i ctC our t ’ s r es t i tut i on cal cul at i on i s as fol l ow s : the governm entpr es ent ed 4 unr efut ed evi dence t hatA B L w as unabl e t o col l ect$24, 743. 64 fr om the C os m et i c Lase r C en ter, $ 4 2 , 6 4 6 . 1 0 o n tw o lease s fro m D r. G ri ff in, and $ 4 8 . 0 6 fro m the P last ic S u rge ry C ent er . T he t ot al l os s es w er e found t o be $67, 437. 80. T he courtthen off s etthe r es t i tut i on am o u n t by$ 2 , 5 0 0 , the re sidu al va lue o f e ac h o f th e f o u r m ac h ines af

ter th e lea ses w ere t erm i nat ed and the machi ne w as r eturned t o A B L , as s t i pul at ed i n t he contr act . T he t ot al re s titu tio n a m o u n t is th e re f o re $ 5 7 ,4 3 7 .8 0 . Fal l on cl ai m s he s houl d notbe r es pons i bl e forthe r es ul t i ng l os s es beca us e i tw as 5 po ssi ble for A B L t o en force t he o uts t and i ng l ease agreem ents againstthe d octor s. Fal l on’ s ar gum enti s t hr ee- fol d: ( 1) A B L ’ s l eas e agr eement s cont ai ned a s o- cal l ed “he l l or (c o n tin u e d ...) 5 in ter v e n in g c a u se f

o r th e se lo ss e s o th e r th a n h is f ra u d , the D istric t C o u rt w a s c o rre c t in onl yi ncl udi ng t he fourl eas es i n t he r es t i tut i on aw ar d. 4 A . T h e D istric t C o u rt d id n o t ab u se its d isc re tio n in f in d in g A B L m a d e a re a so n a b le bus i nes s deci s i on nott o enfor ce i t s fi nanci ng agr eement . Fal l on ar gues A B L coul d have en fo rce d the o u tst an d ing lease ag ree m en ts, m it igating their l o sses . B u t th e D istri ct C o u rt cr edi t ed the t es t i m onyof A B L ’ s at t or neythathe advi s ed the companyi tcoul d fac e al l egat i ons of fr audul enti nducementi f i tat t empt ed t o enfor ce the l eas e agr eement s for D erm a Peel . A ccor di ngl y , A B L deci ded nott o att empt t o enfor ce the out s t andi ng l eas es b e c a u se A B L ’s c o n tra c tu a l re latio n sh ip w ith its c u sto m e rs in c lu d e d a d u tyo f g o o d f a ith and fa i rdeal i ng. See, e. g. , D i C ar l o v. St . Mar y H os p. , N o . 0 5 -1 6 6 5 , 2 0 0 6 U .S . D ist. 5( . . . cont i nued) 5 hi gh w at er ” pr ovi s i on, w hi ch pr ot ect ed A B L fr om l i abi l i t y( t he l eas e s t at ed A B L di d not ens ur e the qual i t yof the pr oduct s i tfi nance d) , ( 2) A B L di d notengage i n fr audul ent co n d u ct be ca u se th e d ev ice w as e x em p ted f rom the F D A ’s cleara n ce req u ir em en t bef o re i tw as pur chas ed byA B L , and ( 3) A B L di d notm ake i t s fr audul entr epr es ent at i ons know i ngl y . W e fi nd t hes e ar gum ent s t o be w i t houtm er i t . T o compel a companyt o pur s ue lit ig a tio n to e n f

o rc e a n a g re e m e n t w h ich it su sp e c ts w a s f ra u d u len tlye n ter e d in to is u n r e a s o n a b l e a n d n o ta r e c o g n i z a b l e l e g a l d u t y. I ni t i al l yw e s t at ed, “W hethert he doct or s m ayhave ha d col or abl e fr audul ent 6 i nducementcl ai m s i s farfr om cert ai n. ” Fal l on , 470 F. 3d at550. N evert hel es s , gi ven the pr es um pt i on t hatFal l on w as t he pr oxi m at e ca us e of A B L ’ s l os s es , Fal l on s t i l l has the b u rd e n o f

p ro v in g A B L w a s u n re a s o n a b le in f a ilin g to e n f

o rc e th e o u ts ta n d in g le a s e s . Fal l on di d notm eett hi s bur den. A B L pr es ent ed unr efut ed evi dence atl eas tone doct or t hr eat ened t o t ake l egal act i on agai ns tA B L forfr audul ent l yi nduci ng the l eas e agr eement if A B L a ttem p ted to e n f

o rc e th e D e rm a P e e l lea se a g re e m e n t. F a llo n w ish e s th is C o u rt to r equi r e A B L t o l i t i gat e ea ch cl ai m , a cos t l y , i m pr act i cal , and unpr edi ct abl e demand. E ven i f, as Fal l on pr edi ct s , A B L ’ s l eas e agr eement s w er e l egal l yenfor cea bl e, i tw oul d be im p ro p e r a n d o v e rre a c h in g to re q u ire a f ra u d v ictim to p u rsu e e v e ryp o ss ib le a v e n u e to mi t i g a t e t h e c o s t s o f

t h e c r i me p e rp e t r a t e d u p o n th e m. 6 L E X IS 4 9 0 0 0 , a t * 2 0 , (D .N .J . J u ly 1 9 , 2 0 0 6 ), a d o p te d b y D iC a r lo v . S t. Ma r

y H o s p ., 530 F. 3d 255, 260 ( 3d C i r . 2008) ( “A pl ai nt i ff maybe ent i t l ed t o r el i ef unde rthe cove nant[of good fai t h and fa i rdeal i ng] i f i t s r eas onabl e expe ct at i ons ar e des t r oy ed w hen a de fenda nt act s w i t h i l l m ot i ves and w i t houtanyl egi t i m at e purpos e. ” ( ci t at i on om i t t ed) ) . H avi ng di s cover ed i t s cus t om er s m ayhave be en fr audul ent l yi nduced t o pur chas e D erm a Peel m achi nes , A B L act ed i n acc or d w i t h i t s dut i es i n decl i ni ng t o enfor ce the out s t andi ng l eases. 6 B . T he D i s t r i ctC our tdi d noterrbydeduct i ng onl ythe def aul tr es i dual val ue of D erm a Peel m achi nes fr om t he r es t i tut i on aw ar d. Fal l on ar gues the C our ts houl d have7

ded ucted the resi du al value of the dev i ces atthe ti m e A B L st op ped enfo rci ng the leas e agr eement s . U ndert he M V R A , t he val ue of pr oper t yatthe t i m e i ti s r eturned t o t he v ic tim m u s t b e d e d u c te d f ro m th e re s titu tio n a w a rd . 1 8 U .S .C . § 3 6 6 3 (b )( I) (B )( ii) . F al l on argues A B L shou l d h ave sou gh tt o h ave the m achines r eturned im m ediat el yso t heycou l d b e res old or l eased. F al l on cl ai m s m achines r eturned b efore t heirl ease agr eement s w er e s ett o expi r e had a hi gherr es i dual val ue than $2, 500 beca us e theyhad been us ed fe w ert i m es t han expe ct ed, and thi s extr a val ue s houl d be deduc t ed fr om the re stitu tio n a m o u n t. T h e D istric t C o u rt d isa g re e d a n d c re d ited F a llo n f o r th e d e f

a u lt m inim al residu al va lue o f th e f o u r m ac h ines as stipu lat ed in the co n tr ac t ( $ 2 , 5 0 0 ea ch ). A s not ed, Fal l on has t he bur den of r efut i ng the pr es um pt i on thatA B L ’ s l os s es w er e due t o hi s fr aud. Fal l on , 4 7 0 F .3 d a t 5 4 9 . T o sa tisf yth is b u rd e n , h e w o u ld h a v e to es t abl i s h t hati f the D erm a Peel m achi nes w er e r eturned t o A B L , theycoul d have be en r es ol d orr el eas ed ata val ue hi gherthan $2, 500. I n otherw or ds , he w oul d need t o s how A B L c o u ld h a v e m iti g a ted its lo ss e s, b u t d id n o t. Fal l on di d notm eett hi s bur den. T he D i s t r i ctC our tcr edi t ed the t es t i m onyof a pr os ecut i on w i t nes s , FD A Speci al A gentD ougl as L ovel and, w ho s t at ed the devi ces w o u ld h a v e b e e n re tu rn e d to th e d e v ice d istrib u to rs w h o w o rk e d f o r F a llo n , rath e r th a n to A B L . Fal l on pr es ent ed no evi dence i ndi cat i ng the machi nes w er e r eturned t o A B L r ather t han the di s t r i but or , oreven thatA B L w oul d have be en abl e t o r es el l orr el eas e the m ac h ines fo r m o re tha n $ 2 , 5 0 0 to rec o v er so m e o f it s lost pro fit s. T h e D istri ct C o u rt8

cr edi t ed Fal l on $2, 500 fort he mi ni m al r es i dual val ue of e ach machi ne as s t i pul at ed i n the contr act . T hi s pl ace d A B L i n t he pos i t i on i tw oul d have be en i n had the contr act s been full yperform ed. A s such, w e see no err or i n the D i stri ctC ou rt ’s fi nd i ng s. A ccor di ngl y , w e w i l l aff i r m the r es t i tut i on aw ar d as det erm i ned bythe D i s t r i ct C o u rt.