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.
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
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.
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.53See 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.
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).
United States Sentencing Commission