Opinion ID: 358
Heading Depth: 2
Heading Rank: 2

Heading: The Landers Approach

Text: Lianidis takes issue with two aspects of the District Court's application of Landers in calculating benefit received. First, Lianidis asserts that, under our decision in Pena, 268 F.3d 215, the proper measurement of benefit received is the gross revenue less legitimate costs of the SMA contracts, which Lianidis suggests is slightly distinct from the Landers approach. Second, Lianidis argues that, even following Landers, the District Court erred in refusing to include her and her husband's salaries and DMS overhead as direct costs of the SMA contracts. The Government maintains that the District Court's analysis is sound.
Although this Court has addressed the scope of benefit received, or net value, in some instances, we have yet to define the calculation of benefit received in a case where, as here, the contract underlying the bribery is legal. We first examined net value in United States v. Schweitzer, where a defendant bribed a public official to obtain confidential information held by the Social Security Administration. 5 F.3d 44, 45 (3d Cir.1993). There, we held that the benefit received is the market value of the information secured for [the defendant's] client. Id. at 47. We declined to subtract the value of the bribe in calculating benefit received because the concept of `net value received' has nothing to do with the expense incurred by the wrongdoer in obtaining the net value received. Id. This, we continued, is clear from the Note's instruction that the value of the bribe is not to be deducted in calculating the `net value.' Id. (referencing U.S.S.G. § 2C1.1 cmt. n. 3 (Do not deduct the value of the bribe itself in computing the value of the benefit received or to be received.)). We extended Schweitzer in Pena, which, like Schweitzer and unlike the instant case, concerned an illegal underlying transaction: the defendant police officer accepted bribes in return for permitting illegal gambling machines to operate without interference. Pena, 268 F.3d at 216. In calculating the benefit received, we refused to subtract operation costs when the transaction was illegal: the concept of netting out costs to arrive at profit is inappropriate under the Guidelines section when the transactions are entirely illegitimate. Id. at 219. We expressly declined to follow United States v. Sapoznik, where the Seventh Circuit, in another case involving illegal gambling, remanded for re-sentencing because the government had not set forth evidence regarding the costs of the illegal enterprise, which, according to the Seventh Circuit, prevented the calculation of net value. Id. (citing Sapoznik, 161 F.3d 1117, 1119-20 (7th Cir.1998)). We explained in conclusion that the `net value' of the `benefit' received does not mean `net proceeds.' Rather, it means benefit received after netting out the value of what-if anything-of legitimate value, was provided. Id. at 221. We found that there was no such value in that case. Id. Lianidis hones in on the Pena phrase legitimate value. However, contrary to Lianidis's characterization, Pena does not stand for the proposition that net value is necessarily calculated by subtracting all legitimate costs from gross revenue. Rather, Pena held that it is inappropriate to subtract the costs of illegal transactions in calculating net value. Since the Pena court did not give meaningful discussion to the costs of legal transactions, nor to whether any differentiation between direct and indirect costs should exist, the precise calculation of net value under § 2C1.1(b)(2) when the underlying transaction is legal is still, at the very least, an open issue for this Court. We can look to our sister circuits for guidance. The seminal case is Landers, the Fifth Circuit decision applied here by the District Court. Similar to the instant case, the defendant in Landers made cash bribes to obtain favorable contracts for the company he represented. 68 F.3d at 883. The district court calculated net value by subtracting the costs of the goods sold from the gross value of the contracts. Id. at 884-85. On appeal, the defendant argued that the district court should have subtracted both the cost of the goods sold and a share of his company's overhead from the contract price. Id. at 884. In a well-reasoned opinion, the Fifth Circuit agreed with regards to the cost of the goods sold, but not with regards to the overhead. Id. at 886. To start, the Fifth Circuit determined that the use of the adjective net before value, as well as the examples in the § 2C1.1 application notes, implies that some costs should be deducted in the calculation of benefit received. Id. at 884. The court then drew a line between direct costs, which it held were deductible, and indirect costs, which it held were not. [5] Id. at 884-86. The court's rationale was two-fold. First, the court analogized indirect costs to the bribe itself, which application note 3 of § 2C1.1 states is not subtracted in the calculation of net value: The rationale for refusing to deduct the amount of a bribe from gross value applies equally to indirect costs. Like a bribe, indirect costs have no impact on the harm caused by the illegal conduct. This is true whether one considers the pecuniary benefit to the bribing party or the pecuniary loss to a competitor. For both parties, the benefit of an additional contract is measured by gross revenue minus direct costs. By definition, indirect costs do not affect that value. Id. at 885. Second, the court held that excluding indirect costs is consistent with the Guidelines' general goal of achieving reasonable uniformity in sentencing because [a]llowing a wrongdoer to deduct indirect costs would result in differing culpability not only for similar acts, but also for the very same act. Id. The court provided a hypothetical as an example: Take for example a case in which two defendants bribe the same government official for the same contract. If indirect costs were deductible, the defendants could receive different sentences if one of them worked for a company with higher indirect costs. Id. at 886. In conclusion, the court calculated net value by subtracting the costs of the goods sold, but not the company's overhead. Id. Landers has not fallen on deaf ears. The Courts of Appeals that have addressed this issuethe Second, Seventh, and Eleventh Circuitshave cited Landers with approval. See United States v. Glick, 142 F.3d 520, 525 (2d Cir.1998) (In calculating the amount of `improper benefit[]' [under § 2E5.1(b)(2)] [6] only direct costs, not indirect costs, should be subtracted from the gross value received.); Sapoznik, 161 F.3d at 1119 (agreeing that fixed costs should be included in net value but finding it unclear whether the costs at issue were indeed fixed); United States v. DeVegter, 439 F.3d 1299, 1304 (11th Cir. 2006) (We agree with the Fifth Circuit's approach which subtracts direct costs, but not indirect costs, from profits to determine the net improper benefit [under § 2B4.1(b)(1)].). [7] See also Cohen, 171 F.3d at 803 (citing Landers generally); United States v. Leon, 2 F.Supp.2d 592, 596 (D.N.J.1998) (I hold that only `direct costs' are deductible in calculating the amount of the benefit conferred [under § 2B4.1(b)(1)].... Indirect costs are not deductible.). We agree that the Fifth Circuit's reasoning is sound: indirect costs, like bribes, do not impact the harm caused by the bribery, and allowing the deduction of indirect costs would foster inconsistency in sentencing. Accordingly, we will adopt the Landers approach and subtract only direct costs, and not indirect costs, when calculating net value under § 2C1.1(b)(2).
Lianidis also challenges the District Court's application of Landers. Lianidis asserts that both the overhead of the DMS office, which Lianidis alleges only serviced the SMA contracts, and her and her husband's reasonable salaries under the SMA contracts are direct costs of the SMA contracts. In response, the Government argues that it would be misleading to claim that one hundred percent of the DMS overhead can be attributed to the SMA contracts and that Lianidis's and her husband's salaries must be included in benefit received as a matter of law. [8] We hold at the outset that, although it is the Government's burden to show net value, Pena, 268 F.3d at 220, the defendant bears the burden of producing the necessary documents. To hold otherwise would, in practice, prevent the Government from meeting its burden of proof. In applying the Landers rule, we will look to the Fifth Circuit's sound definitions of direct and indirect costs. We hold that direct costs are all variable costs that can be specifically identified as costs of performing a contract. This might include, for example, transportation costs for the goods in question. Thus, variable overhead costs that cannot easily be identified to a specific contract are not direct costs. This definition differs from the accounting term `direct costs' in that it excludes those variable costs that cannot readily be apportioned to the contract. Landers, 68 F.3d at 884 n. 2. Indirect or fixed costs are, on the other hand, the costs incurred independently of output. For example, rent and debt obligations are costs a business incurs no matter how many contracts it receives. For the most part, overhead costs are fixed costs. The marginal increase in variable overhead costs from a wrongfully obtained contract is normally so de minimis that accounting for them during sentencing would be impractical. Id. at 885 n. 3. Put succinctly, whether a cost is direct or indirect depends on whether it can be easily attributed to the specific contract at issue. Here, the District Court, after summarizing Lianidis's proposed additional direct costs, merely concluded without explanation, I do not find that that is direct cost. (App. at 15.) Because the Court did not engage in the foregoing analysis, we will remand for the District Court to consider whether any portion of the DMS overhead or Lianidis's and her husband's salaries can be easily attributed to solely the SMA contracts.