Court Opinion

ID: 9487786
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:26:27.093551+00
Date Added: 2024-06-11T17:52:29.060132
License: Public Domain

MURNAGHAN, Circuit Judge,
dissenting:
Section 2F1.1 of the United States Sentencing Guidelines (“U.S.S.G.”) governs sentencing for offenses involving fraud or deceit, and grades the severity of all applicable offenses on the basis of the dollar value of the calculated “loss” caused by the fraud. The November 1987 version of § 2F1.1, applicable to the instant case, provides for a maximum enhancement of 11 offense levels in cases in which the total fraud “loss” exceeds $5 million.
The majority, and the Appellant, contend that the district court erred in calculating the “loss” under § 2F1.1 in the instant case as equalling the total dollar value of the drugs sold by Quad Pharmaceuticals as a result of the fraudulently obtained approval of certain drugs by the Federal Drug Administration (“FDA”). In particular, the majority argues that there was no actual “loss” to consumers as a result of the Appellant’s misrepresentations to the FDA because the drugs received FDA approval, posed no threat to the health and well-being of the consumers, and met all of the goals of the FDA requirements for safety and efficiency. Majority Opinion at *13441341.1 Underlying the majority's conclusion that there was no loss to the consumers is the contention that the drugs had some actual measurable value to the consumers. Indeed, although the Appellant, in his Brief, suggests that the actual value received by the consumers was somewhat less than the value of the drugs had they been properly approved, the majority goes further and suggests that the value received by the consumers equalled the value of the drugs had they been properly approved. Majority Opinion at 1341. Because I find no logical basis for holding that the drugs sold as a result of fraudulently obtained FDA approval had some readily measurable “actual value” to the consumers, or for holding that there was subsequently no “loss” to the consumers, I respectfully dissent.
The majority’s opinion fundamentally turns on its argument that in the instant case, there was no loss inflicted upon the consumers as a result of the fraudulently obtained FDA approval of the drugs because “Quad’s products were exactly what they purported to be: vancomycin and ritodrine, approved by the FDA, manufactured in a certain strength and dosage, and producing the specified therapeutic benefits that FDA requirements were intended to ensure.” Majority Opinion at 1341. That conclusion, however, rests on two faulty assumptions, both of which are speculative and lack a clear basis in the record: (1) that “the safety and therapeutic value of the ritodrine were not affected by the additional .025 mg/ml of bisulfate,” and (2) 'that “the FDA would have approved the ANDA for vancomycin had the three-batch requirement been met and would have approved the formula change for ritodrine had Quad simply requested approval of the modification.” Majority Opinion at 1341.
The two assumptions underlying the majority opinion are fundamentally flawed for several reasons, and thus cast great doubt upon the majority’s ultimate conclusion. First, the majority’s contention that the fraudulently approved drugs were bioequiva-lents of properly approved drugs, and thus imposed no actual loss to the consumers, is based solely on the absence thus far, of any reports that the consumers taking those drugs have been injured or harmed. The Guidelines surely, however, could not have intended for courts to wait for such crimes of fraud to result in actual, serious harm to consumers of medicines before the perpetrator of such a fraud is subject to a sentencing enhancement for fraudulent activity. Moreover, the concept of bioequivalency has no bearing on the gravity of the fraud committed; regardless of whether the fraudulently approved drugs ultimately did or did not cause harm to the consumers, Chatterji was willing to take the risk that such harm would occur simply in order to expedite the receipt of his own profits from the sales of the drugs. He simply transferred the risk to the public whose members relied on proper FDA approval to feel comfortable in taking the drugs. The FDA regulations set out with specificity the procedures which should be followed in order to ensure the complete safety of the drugs; Chatterji’s actions here were taken in complete and utter disregard of the precautionary and purposefully detailed regulations.2
Moreover, the majority’s second assumption — that there is no serious contention that the FDA would have approved the drugs had Chatterji in fact complied with the proper *1345FDA approval regulations — simply simply is unsupported by the record. Indeed, at sentencing, FDA employee, John Harrison, expressly stated that the FDA would not have approved Quad’s drugs for sales had it known that Quad had misled the FDA about the batches and formulaic makeup of the drugs.3 Thus, the majority’s argument is not only speculative, but runs contrary to the evidence contained in the record. Indeed, the evidence presented at sentencing supports the conclusion that, without proper FDA approval, the drugs on the market would be lacking in saleability, and hence lacking in monetary value.
These fundamental weaknesses in the majority’s logic cast great doubt upon its ultimate conclusion. More significant, in light of these weaknesses, it appears that the district court’s calculation of loss as equalling gross sales by Quad was indeed proper and well supported by the Guidelines.4
First, the commentary to the Guidelines5 specifically provides that “an offender’s gain from committing the fraud” is an alternative estimate to the calculation of loss. Application Note 8, U.S.S.G. § 2F1.1. In so providing, the commentary particularly states that, for the purposes of the calculation of a sentence under section 2F1.1(b)(1), the loss
need not be determined with precision. The court need only make a reasonable estimate of the loss, given the available information. This estimate, for example, may be based on the approximate number of victims and an estimate of the average loss to each victim, or on more general factors, such as the nature and duration from the fraud and the revenues generated by similar operations. The offender’s gain from committing the fraud is an alternative estimate that ordinarily will underestimate the loss.
Application Note 8, U.S.S.G. § 2F1.1 (emphasis added). The fact that the commentary itself notes that “revenues generated” is an appropriate measure of loss suggests that the district court’s calculation in the instant case was proper. Indeed, the Guidelines commentary clearly supports the district court’s decision to use Quad’s gross revenues from the sales of the fraudulently approved drugs as the best estimate of victim’s loss or alternatively, offender’s 'gain, in the instant case.
Second, the Guidelines commentary to § 2F1.1 provides that in calculating loss for the purposes of sentencing in a ease involving a misrepresentation “concerning the quality of a consumer product,” the actual loss can be measured by calculating the difference between the amount paid by the victim for the product and the “amount for which the victim could resell the product received.” Application Note 7(a), U.S.S.G. § 2F1.1 (emphasis added). Because it is reasonable to assume that a consumer knowing that the FDA had approved certain drugs as a result of misstatements and fraud would not be willing to purchase the drugs, it is doubtful that the fraudulently approved drugs in the instant case could have been resold at any price. Indeed, in light of the fact that the pharmaceutical industry is very tightly regulated, it was reasonable to assume that drugs not properly approved have no actual or resale value. Thus, under the assumption that the resale price of these fraudulently approved drugs would be zero, the district court’s calculation of loss as amounting to gross sales was not erroneous.
Even if the consumers suffered no “loss” under the Appellant’s, and the majority’s, argument that the drugs sold by Quad were in fact, safe, effective bioequivalents of prop*1346erly approved drugs, the alleged “zero” loss is not an appropriate measure of loss in this case because it would “tend not to reflect adequately the risk of loss created by the defendant’s conduct.” Indeed, this Court, in United States v. West, 2 F.3d 66 (4th Cir.1993), recently construed § 2F1.1 as allowing the calculation of loss, in cases involving the making of false statements to the government, to go beyond the actual loss to the victims when the risk of loss is great. In West, the appellants had been convicted of making false statements to the government in violation of 18 U.S.C. §§ 2, 371, and 1001. 2 F.3d at 67. In that ease, the appellants had violated certain federal regulations requiring that contractors of federal construction projects secure bonds guaranteeing then-performance of certain obligations; specifically, the regulations required a party wishing to qualify as an individual surety to file a Standard Form 28 Affidavit of Individual Surety, listing net worth, assets, and liability. Id. The appellants had served as matchmakers between contractors and individual sureties, and in that capacity, had filed false Form 28s. Id. at 68. The district court, in calculating the appellants’ sentences under U.S.S.G. § 2F1.1, had accepted the government’s loss as the $2.9 million it paid in brokerage fees for bonds secured through the falsified Form 28s, and had noted that although the actual loss in the “sense of belly up contracts” was well below $2 million, the “true governing consideration is that such an actual loss approach in this ease would ‘tend not to reflect adequately the risk of loss created by the defendant’s conduct.’ ” Id. at 71. At sentencing, the district court had additionally relied on Application Note 8, which allows the offender’s gain to be an alternative estimate of the loss, in reaffirming its calculation of the loss as $2.9 million. This Court, in affirming the district court’s sentencing calculation, stated:
[Appellants] contend that the government failed to prove either actual loss or risk of loss because it did not eliminate the possibility that, with respect to each of the fraudulently secured bonds, one of the two sureties might have had sufficient assets to cover a forfeiture. They urge that, when adequate sureties are factored into the equation, the risk of loss shrinks from $2.9 million to $429,154_ We disagree. As the district court noted, at the time [Appellants] engaged in their enterprise two individual sureties were required to secure a bond, each with a net worth equal to or exceeding the contract price. Thus, the court properly concluded that the government simply did not get what it paid for so that the amount paid out (or “the money ... unlawfully taken”) fairly constitutes actual loss under § 2F1.1. Nor do we find clear error in the district court’s conclusion, after a careful evaluation of the evidence before it, that the $2.9 million figure adequately represents “the risk of loss created by defendant[s]’ conduct.”
Id. (citations omitted) (emphasis added). In light of the West decision, it is clear that this Court has been, and should continue to be, willing to go beyond hypothesized actual losses in cases in which fraud on the government creates large risks of loss to the public which are inherently difficult to measure.
Such a result is also supported by the Ninth Circuit’s decision in United States v. Cambra, 933 F.2d 752 (9th Cir.1991), in which the Ninth Circuit addressed an appeal by a defendant who had pled guilty to various charges of violating the Food, Drug, and Cosmetic Act relating to the sale of anabolic steroids, which he labeled as though they had been produced by a recognized manufacturer of steroids. In calculating “loss” under section 2F1.1, the district court had found that the dollar value of the counterfeited steroids was $500,000, and sentenced the Appellant accordingly. Id. at 756. In affirming the district court’s sentencing calculation, the Ninth Circuit held:
The monetary table in the fraud guideline is intended to reflect the harm to the victim and the gain to the defendant. Federal agencies may be victims of fraud in counterfeiting and misbranding drugs. There is no meaningful distinction between government as victim and individual consumer victims- In this case, the district court found that Cambra intended to profit from his activity and that at least federal agencies were defrauded by his acts.
*1347Id. Accordingly, the Court found that the $500,000 figure was an appropriate measure of “loss” within the meaning of § 2F1.1 because it represented the retail value of the steroids. Id. In so holding, the Ninth Circuit did not insist that the district court subtract from this figure any “actual value” accruing to the consumers of the steroids. Thus, Cambra lends clear support to the district court’s use of the value of the drugs as a measure of loss, even assuming that consumers did not suffer directly.
Finally, the district court was entitled to depart upwardly from the range established by U.S.S.G. § 2F1.1, because the actual value of the drugs did not take into account the actual risk to society created by the scheme to defraud. Indeed, the commentary to § 2F1.1 expressly provides that in cases in which the loss determined under subsection (b)(1) does not “fully capture the harmfulness and seriousness of the conduct,” an upward departure may be warranted. Application Note 10, U.S.S.G. § 2F1.1. As examples of such cases, the commentary lists, among others: (1) instances in which the fraud “cause[s] or risk[s] reasonably foreseeable, substantial non-monetary harm,” and (2) offenses which cause “a loss of confidence in an important institution.” Application Note 10, U.S.S.G. § 2F1.1 (emphasis added). The fraud committed in the instant case not only created risks of potentially great harm to consumers of pharmaceutical products, but also severely diminished the confidence which consumers can justifiably have in the FDA approval process. Thus, an upward departure from the calculated guidelines range was plainly appropriate.
The majority’s holding in the instant case will send two harmful messages to the public. First, the majority has in essence established that consumers cannot, and should not, justifiably rely on the FDA approval process in evaluating the safety and efficacy of the drugs that they purchase. Second, the majority has fundamentally held that courts must wait until consumers are actually harmed in some physical or economic sense before a sentencing enhancement can be deemed warranted under section 2F1.1 of the Sentencing Guidelines. The Guidelines surely could not have intended such a result. I dissent.

. By analogy, that equates to a holding that no loss has occurred when a soldier acting as a sentry on patrol has gone to sleep when his company was resting, thus running the risk of infiltration by the enemy, because no enemy actually appeared on the sentry’s watch. However, that would overlook the adverse effect on all the other members of the company who would become aware that the safety of sleep when guarded by a sentry had been substantially diminished. The increase in the risk would be much greater if the army — especially the company commander— did not punish the delinquent sentry. There would clearly be loss from the sentry's defalcation in duty even though his watch was actually not disturbed by the enemy.

. For the majority to say that Chatterji meant no probable or intended loss is to ignore the principal congressional purposes in creating the FDA and granting it its powers. Indeed, the majority's suggestion that a drug is properly approved by the FDA until the FDA decides to withdraw such approval upon discovery of a material misrepresentation, would distort the meaning of the language relied on and diminish the purposes underlying the FDA approval process.

. Indeed, Mr. Harrison stated that if the FDA had known that Quad had reused vancomycin in creating “batches” for testing, "I don’t think that batch would have qualified.” Joint Appendix at 183.

. Note that the district judge, in addition to imposing a sentence of imprisonment, fined the Appellant in the amount of $100,000. Because total sales of the fraudulently approved drugs amounted to more than $13,000,000, the fine imposed in no way took away all of the profits gained from Quad’s drug sales.

. Note that the commentary to the Guidelines is binding unless inconsistent with the Constitution, federal statute, or the Guidelines themselves. Stinson v. United States, -U.S.-,-, 113 S.Ct. 1913, 1919, 123 L.Ed.2d 598 (1993); United States v. West, 2 F.3d 66, 71 n. 6 (4th Cir.1993).