997 F.3d 231
5th Cir.2021Background:
- Shults and Herrig (owners of Gas Pipe, Inc. and Amy Lynn, Inc.) operated smoke shops selling synthetic-cannabinoid "spice" labeled "Not for Human Consumption," but intended and marketed for smoking.
- DEA undercover buys (34 controlled buys) and lab analyses found synthetic cannabinoids in products; DEA executed search warrants June 4, 2014; over $40 million in spice sales alleged.
- A Third Superseding Indictment charged defendants with multiple counts; jury convicted on Count One (conspiracy in violation of 18 U.S.C. § 371) alleging (1) conspiracy to defraud the FDA and (2) conspiracy to commit felony misbranding under the FDCA.
- District court sentenced Shults and Herrig to 36 months’ imprisonment (upward variances) and fined the corporate defendants; appellants appealed challenging indictment theory, jury instructions, sufficiency of evidence, and sentence reasonableness.
- Fifth Circuit affirmed: § 371’s "defraud" clause covers schemes to impair or obstruct agency functions; misbranding instruction error (if any) was harmless; evidence sufficient to support conspiracy-to-defraud conviction; sentences substantively reasonable.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of "defraud" in 18 U.S.C. § 371 | "Defraud" reaches schemes to impair, obstruct, or defeat government agency functions | Should be limited to cheating government out of money/property or require Marinello-style nexus to a particular proceeding | Court rejects limitation; follows precedent that § 371 covers impairing agency functions and declines to extend Marinello nexus requirement |
| Jury instructions on conspiracy-to-defraud | Instructions correctly defined "defraud" to include impairing agency functions | District court erred by not limiting "defraud" to pecuniary loss or giving a Marinello nexus instruction | Instructions were correct statements of law; no reversible error |
| Felony misbranding: materiality & definition of "intent to defraud or mislead" | Any omission of materiality harmless; existing instructions adequately conveyed fraudulent intent | Materiality is element (per Neder/Watkins) and jury should be told "intent to deceive or cheat connected with misbranding" | Even if materiality is an element, omission was harmless on the record; instruction adequately covered defendants' proposed wording |
| Sufficiency of evidence for Count One | Testimony (supplier & manager), undercover buys, lab results show intent to evade FDA regulation; supports conspiracy-to-defraud | Insufficient: no proof of FDA investigation or nexus; no proof of intent to defraud FDA | Evidence sufficient as to conspiracy to defraud the FDA; supports Count One conviction |
| Reasonableness of 36-month sentences | Sentences justified by § 3553(a) factors as upward variances | Challenged as substantively unreasonable / mischaracterized as departure | Sentences affirmed as substantively reasonable; defendants waived some sentencing arguments |
Key Cases Cited
- Marinello v. United States, 138 S. Ct. 1101 (2018) (interprets omnibus clause in § 7212(a) to require nexus to a tax-related proceeding)
- Neder v. United States, 527 U.S. 1 (1999) (materiality is an element of common-law "scheme to defraud" offenses)
- Hammerschmidt v. United States, 265 U.S. 182 (1924) (§ 371 covers conspiracies to impair or defeat governmental functions)
- Haas v. Henkel, 216 U.S. 462 (1910) ("defraud" need not contemplate pecuniary loss)
- United States v. Haas, 171 F.3d 259 (5th Cir. 1999) (FDCA "intent to defraud" instruction need not include exact "deceive or cheat" phrasing)
- United States v. Arlen, 947 F.2d 139 (5th Cir. 1991) (felony misbranding reached misbranding with specific intent to defraud or mislead an agency)
- United States v. Clark, 139 F.3d 485 (5th Cir. 1998) (§ 371 reaches conspiracies designed to avoid regulatory contact)
- United States v. Dessart, 823 F.3d 395 (7th Cir. 2016) (§ 333(a)(2) applies where defendant intended to deceive consumers or the FDA)
- United States v. Mauskar, 557 F.3d 219 (5th Cir. 2009) (general guilty verdict on multi-object conspiracy may stand if at least one object is supported)