Lexington Insurance Company v. General Accident Insurance Company of AmericaLexington Insurance Company v. General Accident Insurance Company of America
Robert M. Elmer, with whom Allan E. Taylor and Taylor, Duane, Barton & Gilman, LLP were on brief, for appellee.
Before SELYA and LIPEZ, Circuit Judges, and PONSOR,s District Judge.
SELYA, Circuit Judge.
Defendant-appellant General Accident Insurance Company of America (General Accident) claims that it is entitled to reimbursement from plaintiff-appellee Lexington Insurance Company (Lexington) for a pro rata share of defense costs incurred on behalf of the parties’ mutual insured. The district court disagreed, and General Accident now appeals. We affirm.
The essential facts are not in dispute. General Accident issued a professional responsibility policy with an aggregate limit of liability of $10,000,000 to the law firm of Blank, Rome, Comisky & McCauley (Blank Rome). Desiring extra protection, the insured purchased four separate excess insurance policies. Lexington underwrote the first layer of excess coverage under a policy containing an aggregate liability limit of $15,000,000. Blank Rome procured second-layer excess policies from Safety National Insurance Company (Safety National), International Surplus Lines Insurance Company (ISLIC), and American Insurance Company (American), respectively. All five policies were in effect for a one-year period beginning April 8, 1984. They collectively afforded Blank Rome $50,000,000 in professional liability coverage.
During the currency of the policies, Blank Rome was rocked by a series of securities fraud suits arising out of the collapse of a failed financial institution. General Accident undertook Blank Rome‘s defense. That undertaking lasted until July 28, 1988, when Blank Rome assumed responsibility for its own defense.1 General Accident claims, without contradiction, to have incurred roughly $5,500,000 in legal fees and ancillary expenses while defending Blank Rome.
Unwilling to shoulder the load alone, General Accident sought to compel the four excess carriers to help defray the defense costs it had expended. Using limits of liability as a guide, it calculated each company‘s ratable share of the $5,500,000 total. Under this formula, it earmarked $1,650,000 (30% of the total) as Lexington‘s responsibility.
Lexington balked at this suggestion. It did, however, enter into an agreement with General Accident to toll the statute of limitations while the insurers “explore[d] the potential for resolution of General Accident‘s claims without resort to litigation.” Although General Accident eventually resolved its claims against Safety National, ISLIC, and American, its dispute with Lexington proved intractable.
In an effort to bring matters to a head, Lexington brought a diversity action in the United States District Court for the District of Massachusetts. See
... in accordance with the applicable insuring agreements, terms, conditions and exclusions of the Underlying Policy [i.e., the General Accident policy] ... except as regards the premium, the obligation to investigate and defend and for costs and expenses incident to the same,... and any other provision therein inconsistent with this policy.
Noting that its policy defined “costs” as “interest on judgments, investigations, adjustments and legal expenses” (emphasis supplied), Lexington contended that General Accident‘s expenditures — which were legal expenses incident to the insured‘s defense — were excluded.
General Accident took a different slant. It sought to have Lexington share in the legal expenses both as a matter of contract and under the doctrine of equitable contribution. The linchpin of General Accident‘s claim was an apportionment provision contained within the limits of liability section of its policy. That provision, entitled “Apportionment of Claims Expenses,” reads:
In the event payment for damages by the Insured, any other carrier on behalf of the Insured and the Company is in excess of the amount of the limit available under this policy, the Company shall be obligated to pay that proportion of claim expenses as the amount of damages paid by the Company bears to the total amount of damages.
In General Accident‘s view, this language imposed an expense-sharing obligation on Lexington both as a matter of contract and as a matter of equity.
In due season, the parties cross-moved for summary judgment. Lexington urged the district court to find that its policy exculpated it from any responsibility to share in the cost of Blank Rome‘s defense whereas General Accident exhorted the district court to find Lexington‘s policy ambiguous because it neither explicitly disclaimed a duty to reimburse the primary insurer nor specifically negated the applicability of the apportionment provision contained in the underlying policy. In this regard, General Accident posited that Lexington, as the second-in-time insurer, had the obligation to repudiate explicitly any language in the underlying policy that it found to be objectionable and to clarify that it was excepting itself from an otherwise comprehensive and integrated insurance program that followed the form of the underlying policy. As a fallback, General Accident invoked the doctrine of equitable contribution.
The district court resolved this clash in Lexington‘s favor. See Lexington Ins. Co. v. Gen. Accid. Ins. Co., Civ. No. 01-11556, slip op. (D. Mass. Dec. 20, 2002) (unpublished). The court concluded that Lexington‘s policy was unambiguous; that its language clearly established Lexington‘s intent not to participate in the payment of Blank Rome‘s defense costs; and that, therefore, Lexington was not obligated to reimburse General Accident for any part of the defense costs that it had incurred. Id. at 8. In addition, the court rejected General Accident‘s equitable contribution theory. Id. This timely appeal ensued.
This appeal presents a purely legal question. The facts are undisputed, and the district court had no occasion to engage in differential factfinding. The general rule is that orders granting summary judgment are reviewed de novo, e.g., Houlton Citizens’ Coalition v. Town of Houlton, 175 F.3d 178, 184 (1st Cir. 1999), and that standard applies here. In all events, a trial court‘s interpretation of an insurance contract is equally subject to de novo review. See Utica Mut. Ins. Co. v. Weathermark Invs., Inc., 292 F.3d 77, 80 (1st Cir. 2002); Greenly v. Mariner Mgmt. Group, Inc., 192 F.3d 22, 25-27 (1st Cir. 1999).
Before embarking upon our analysis, we pause to discuss a preliminary matter. It is a black-letter rule that state substantive law supplies the rules of decision for a federal court sitting in diversity jurisdiction. Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S. Ct. 817, 82 L. Ed. 1188 (1938); Crellin Techs., Inc. v. Equipmentlease Corp., 18 F.3d 1, 4 (1st Cir. 1994). Thus, the initial question involves which source of law should guide our interpretive efforts.
It is a well-established — and prudential — principle that when the result in a case will not be affected by the choice of law, an inquiring court, in its discretion, may simply bypass the choice. See, e.g., Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076, 1092 (1st Cir. 1989). That course is especially attractive where, as here, the parties have taken the position that either state‘s law will lead to the same result. Cf. Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir. 1991) (explaining that when the parties achieve a satisfactory consensus on choice of law, a federal court sitting in diversity jurisdiction is free, if it so elects, to forgo independent analysis and accept the parties’ agreement). Because the choice-of-law question in this case has been reduced to the point where nothing turns on a more precise refinement, we eschew any further inquiry. In the discussion that follows, we will cite interchangeably to applicable Pennsylvania and Massachusetts precedents.
The baseline rule in both Pennsylvania and Massachusetts is that insurance contracts must be interpreted to reflect the intention of the parties as manifested by the policy language. See Travelers Cas. & Sur. Co. v. Castegnaro, 565 Pa. 246, 772 A.2d 456, 459 (2001); Affiliated FM Ins. Co. v. Const. Reins. Co., 416 Mass. 839, 626 N.E.2d 878, 881 (1994). When the policy language is plain and admits of only one reasonable construction, a reviewing court must give effect to that construction. See Riccio v. Am. Repub. Ins. Co., 550 Pa. 254, 705 A.2d 422, 426 (1997); Cody v. Conn. Gen. Life Ins. Co., 387 Mass. 142, 439 N.E.2d 234, 237 (1982); accord GRE Ins. Group v. Metro. Boston Hous. P‘ship, Inc., 61 F.3d 79, 81 (1st Cir. 1995) (applying Massachusetts law). If, however, a policy provision is ambiguous, the court may take extrinsic evidence as to intent, and, absent clarification, ordinarily may adopt the interpretation that favors coverage (that is, the reading most beneficial to the insured). See Bateman v. Motorists Mut. Ins. Co., 527 Pa. 241, 590 A.2d 281, 283 (1991); Hazen Paper Co. v. United States Fid. & Guar. Co., 407 Mass. 689, 555 N.E.2d 576, 583 (1990); see also Merchants Ins. Co. v. United States Fid. & Guar. Co., 143 F.3d 5, 8 (1st Cir. 1998) (applying Massachusetts law).
We caution that an ambiguity is not created merely because an imaginative reader devises a way to split hairs. Nor is an insurance policy ambiguous simply because its terminology sparks a controversy between two parties, each of whom advocates an interpretation contrary to the other. See Citation Ins. Co. v. Gomez, 426 Mass. 379, 688 N.E.2d 951, 953 (1998); Riccio v. Am. Repub. Ins. Co., 453 Pa. Super. 364, 683 A.2d 1226, 1233 (1996), aff‘d, 550 Pa. 254, 705 A.2d 422 (1997). Absent a genuine issue as to meaning, there is no ambiguity. See, e.g., Suffolk Const. Co. v. Lanco Scaffolding Co., 47 Mass. App. Ct. 726, 716 N.E.2d 130, 133 (Mass. App. Ct. 1999) (stating that contract language is ambiguous only where “an agreement‘s terms are inconsistent on their face or where the phraseology can support reasonable difference of opinion as to the meaning of the words employed and the obligations undertaken“) (quoting Fashion House, 892 F.2d at 1083); Hutchison v. Sunbeam Coal Corp., 513 Pa. 192, 519 A.2d 385, 390 (1986) (similar).
If more were needed — and we doubt that it is — nothing in the policy itself obliged Lexington either to assume any responsibility for legal costs or to engage in expense-sharing with Blank Rome‘s other insurers. Nor does the fact that General Accident, rather than Blank Rome, was the party seeking reimbursement disguise the reality of events. The costs in question were incurred in the defense of Blank Rome, and, thus, were plainly excluded from the scope of Lexington‘s coverage.
By like token, the apportionment provision in General Accident‘s policy did not transform the legal landscape. That proviso does no more than disclaim any obligation on General Accident‘s part to pay more than its proportionate share of Blank Rome‘s defense costs; it does not impose on any excess carrier a duty to reimburse General Accident for a pro rata share of those costs.2 Given this circumstance, it was pointless (and, thus, unnecessary) for Lexington expressly to deny a non-existent obligation to indemnify General Accident.
That effectively ends the matter. In construing insurance contracts, courts have no warrant either to convolute the straightforward meaning of policy language or to endow the words with a gloss that is belied by the language itself. See 116 Commonwealth Condo. Trust v. Aetna Cas. & Sur. Co., 433 Mass. 373, 742 N.E.2d 76, 78 (2001); Loomer v. M.R.T. Flying Service, Inc., 384 Pa. Super. 244, 558 A.2d 103, 105 (1989). Like beauty, ambiguity sometimes lies solely in the eye of the beholder. Seaco Ins. Co. v. Davis-Irish, 300 F.3d 84, 87 (1st Cir. 2002). So it is here.
In an effort to blunt the force of this reasoning, General Accident musters a plethora of counter-arguments. We have carefully examined this asseverational array. We conclude that none of these counter-arguments carries the day.
We start with General Accident‘s contention that its policy and Lexington‘s must be read together as a part of a comprehensive, integrated insurance program. This may be true from Blank Rome‘s standpoint, but there is nothing in the record that justifies a conclusion that all four excess policies were written to follow the form of General Accident‘s underlying policy in all respects. The record merely shows five separate policies, independently issued. Each of the four excess carriers had the opportunity to write its own policy, and the ensuing policies were differently phrased. Each was subject to its own set of exclusions, exceptions, and limitations. It cannot be said that these policies uniformly follow the form of General Accident‘s policy. Consequently, General Accident‘s attempt to portray them as carbon copies is wholly unconvincing.
Next, General Accident points to the settlement and defense provision within Lexington‘s policy. That provision creates an option for participation in the insured‘s defense.3 General Accident twists this option like a pretzel and treats it as an obligation. Building on that shaky foundation, General Accident insists that the settlement and defense provision is incompatible with Lexington‘s present position. This is palpably incorrect.
General Accident derives an additional argument from the sprawl of previous litigation between it and Blank Rome‘s other excess insurers. This time, the emphasis is on the decision in Gen. Accid. Ins. Co. v. Safety Nat‘l Cas. Corp., 825 F. Supp. 705 (E.D. Pa. 1993). We are satisfied that this emphasis is misplaced.
In Safety National, the district court held that one of Blank Rome‘s second-layer excess insurers was obliged to pay General Accident a pro rata share of the defense costs that General Accident had incurred. See id. at 711. The court premised its decision on the fact that Safety National‘s policy not only incorporated all the terms of General Accident‘s primary policy (including the apportionment of claims provision) but also said nothing about the matter of defense costs. Id. at 708. This is a far cry from the scenario that confronts us, in which (a) Lexington‘s policy does not blindly follow the form of the underlying policy, and (b) Lexington took pains to protect itself against any obligation to pay defense costs. Indeed, the Safety National court, in a subsequent decision denying reconsideration, acknowledged that it would have been a different case had Safety National issued a policy along the lines of Lexington‘s. See Gen. Accid. Ins. Co. v. Safety Nat‘l Cas. Corp., 1993 WL 372279, at *5 n. 3 (E.D. Pa. Aug. 30, 1993) (noting that “had Safety National intended a different result, it could have simply issued an endorsement stating that its policy would follow only the terms and conditions of other excess policies, such as Lexington‘s“).
The final weapon in General Accident‘s armamentarium is an asseveration that it is entitled to reimbursement under the doctrine of equitable contribution. Broadly stated:
Equitable contribution is ... the right to recover ... from a co-obligor who shares such liability with the party seeking contribution. In the insurance context, the right to contribution arises when several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others.... Equitable contribution permits reimbursement to the insurer that paid on the loss for the excess it paid over its proportionate share of the obligation, on the theory that the debt it paid was equally and concurrently owed by the other insurers.
Truck Ins. Exch. v. Unigard Ins. Co., 79 Cal. App. 4th 966, 974, 94 Cal. Rptr. 2d 516 (2000); see also Hartford Cas. Ins. Co. v. Argonaut-Midwest Ins. Co., 854 F.2d 279, 283 (7th Cir. 1988). The right of equitable contribution does not depend on an express agreement between the parties to indemnify each other, but, rather, rests upon equitable principles that imply an obligation to contribute ratably toward the payment of a common obligation. Ohio Cas. Ins. Co. v. State Farm Fire & Cas. Co., 262 Va. 238, 546 S.E.2d 421, 423 (2001). Neither Pennsylvania nor Massachusetts has definitively adopted this doctrine in the insurance context.4
To say more on this point would be supererogatory. There are no exceptional circumstances here and Lexington‘s policy is unambiguous in respect to defense costs. Thus, the doctrine of equitable contribution does not come into play.5
We need go no further. For the reasons stated above, we hold that Lexington has no obligation to pay any portion of the defense costs incurred by General Accident in defending Blank Rome. Accordingly, the district court did not err in granting summary judgment in Lexington‘s favor.
Affirmed.
The indictment properly alleged at least eight overt acts within the limitations period.
Thurston did not raise the defense of statute of limitations either before or at trial, did not request an instruction on the defense, and did not object when the judge instructed without addressing the issue. Thurston first raised the issue by Rule 29 motion after the verdict. The government says Thurston raised the issue too late. There is a preliminary question of when such a motion should be raised, a question affecting our standard of review.
“The statute of limitations is a defense and must be asserted on the trial by the defendant in criminal cases....” Biddinger v. Comm‘r of Police, 245 U.S. 128, 135 (1917). Here the indictment adequately pled facts to establish that the crime was within the limitations period. Thurston was not required to raise the defense before trial under
Thurston mistakes these truisms for an argument that he need not raise the limitations defense at all before the jury delivers a verdict of guilt.
The government says Thurston has waived9 the issue and may not raise it at all. Absent an explicit agreement to waive the defense, we treat the issue as a forfeiture and not a waiver, contrary to the government‘s argument. This was not an intentional relinquishment or abandonment of a known right, the definition of a waiver. The issue of failure to assert the defense was viewed as forfeiture in United States v. O‘Bryant, 998 F.2d 21, 23 n. 1 (1st Cir.1993). The rule we use — that the defense of statute of limitations must be raised at trial and, if not, is forfeited but not waived — is the rule in most circuits. See United States v. Ross, 77 F.3d 1525, 1536 (7th Cir.1996) (“[I]t is widely accepted that a statute of limitations defense is forfeited if not raised at the trial itself.“) (citing cases).
Thurston has indeed forfeited10 the defense that the government did not prove facts that an overt act occurred within the limitations period. The defense should have been raised at trial. Waiting until after the jury has rendered a verdict of guilt to raise a limitations defense for the first time is inconsistent with the characterization of the statute of limitations as an affirmative defense and would unfairly sandbag the government.
Because this was a forfeiture and not a waiver, there is still plain error review available under
The government showed that labs overseen by Thurston (and his co-conspirators) submitted tens of thousands of reimbursement claims to Medicare after December 11, 1992 for ferritin tests conducted as part of LabScan orders. The government also presented ample evidence that many of these tests were medically unnecessary and were submitted by doctors unaware that Medicare would be charged separately for ferritin.11 It was not credible that the ferritin test, ordered less than two percent of the time, suddenly became medically necessary thirty to forty percent of the time within the life span of the conspiracy.
Thurston also argues he was entitled to a jury instruction on the limitations point. By failing to request a jury instruction and failing to object to the lack of an instruction, he has forfeited the argument.
B. Purported Lack of Criminal Intent and the Requested Reasonable Interpretation Regulation
Procedurally, the issue of reasonable interpretation comes up in two ways: denial of Thurston‘s Rule 29 motions and denial of his request for a jury instruction. Thurston‘s three Rule 29 motions — at the end of the government‘s case, at the end of the defense case, and after the verdict — all argued that he lacked the needed criminal intent. Our review is of whether a rational fact finder could conclude, beyond a reasonable doubt, that the government proved the elements of the crime, including intent. United States v. Moran, 312 F.3d 480, 487 (1st Cir.2002). Thurston also requested a jury instruction on reasonable interpretation of the law12 and preserved his objection to the court‘s rejection of the instruction.
Thurston argued he reasonably interpreted the law as requiring that the treating physician, not the test lab, certify to the HCFA that the test ordered was medically necessary and reasonable, and that he and the company were entitled to rely on that physician certification. Specifically, Thurston contended that in the relevant time period an independent clinical lab did not violate any aspect of Medicare law by: (1) providing physicians with a panel containing a ferritin test, so long as the physician was given reliable and accurate information about the test and could select the panel without the test; or (2) submitting a reimbursement claim, using a HCFA form or otherwise, so long as a physician ordered the test performed. This is one of his primary arguments on appeal.
Whether a particular defense doctrine is germane depends on the crime charged and the facts of the case. This is where Thurston‘s argument falters. He argues that he could not have had the needed intent because employees of clinical labs, including Thurston, “were unaware that they were actually certifying the medical necessity of each test performed for every patient” and they could reasonably interpret the law to mean that the treating physician, not the laboratory, made the certification. The argument is beside the point.13
Thurston was not charged with making a false statement to the United States, the falsity of which turned on an ambiguity in what the law required. Nor was he charged with failing to make a statement required by law in a situation of parallel ambiguity. He was not charged with falsely certifying the medical necessity of the tests ordered. He was charged with the crime of conspiracy to defraud the United States by inducing physicians through deceit and trickery into certifying tests as medically necessary when the ferritin tests were not necessary, thus leading Medicare to pay for unnecessary services.
Thurston‘s knowledge of the Medicare regulations and of the fact that the ordering physicians would certify the medical necessity of the tests was, ironically, part of the proof of the crime, not a defense. Thurston cannot, under
Thurston‘s reliance on United States v. Prigmore, 243 F.3d 1 (1st Cir.2001), is misplaced. Prigmore is part of a line of cases charging false statements or failure to make required statements, holding that intent should be measured against an objectively reasonable understanding of the legal requirements to be met, and that a statement is not in fact false or fraudulent if it is based on an objectively reasonable interpretation of that legal requirement. See id. at 17-18. This court first applied this principle in United States v. Rowe, 144 F.3d 15, 21-23 (1st Cir.1998), to a statement that was not in fact false under an objectively reasonable interpretation of a disclosure requirement. In Prigmore, the conspiracy charged was to defraud and impair the functioning of the Food and Drug Administration, in connection with its oversight and regulation of medical devices, through failure to file reports which were required under certain conditions. The fraud alleged was the failure to submit a pre-market approval information supplement to the FDA, but whether such a supplement was required depended on the interpretation of certain regulations. The same conditional requirement was true of certain testing reports. The question was whether defendants could objectively and reasonably understand one regulatory phrase, “affecting the safety or effectiveness of the device,” as being circumscribed by another regulatory phrase, “intended ... conditions of use.” See 243 F.3d at 15.
No similar question was presented here. Here, the underlying crime was one of manipulating doctors into making false certifications so Damon could receive unwarranted Medicare payments. There is no material question about ambiguity in the underlying legal requirements and no germane question about the meaning of the law. There was also no issue of lack of fair notice of what the law requires, a concern underlying the Prigmore/Rowe line of cases. A reasonable person knows it is wrong to trick others into doing something wrong which one does not do directly oneself, especially in order to obtain personal gain. The Prigmore doctrine has no application given the crimes charged and the facts involved. Because the nature of the crime charged made the reasonable interpretation doctrine irrelevant, the jury instruction issue disappears.
C. Failure of District Court to Respond To All of Thurston‘s Requested Instructions
Thurston argues that the district court violated
- In General. Any party may request in writing that the court instruct the jury on the law as specified in the request. The request must be made at the close of the evidence or at any earlier time that the court reasonably sets. When the request is made, the requesting party must furnish a copy to every other party.
- Ruling on a Request. The court must inform the parties before closing arguments how it intends to rule on the requested instructions.
Thurston is correct: the district court failed to inform the parties of how it intended to rule on each of the requested instructions before closing arguments, as required by the rule.
A description of the interactions of court and counsel sets the stage. Each side submitted extensive requests for instructions, and there were disagreements.14 The court did resolve the most serious disputes over some of the instructions (for instance, on the reasonable interpretation/Prigmore question) and told counsel these rulings before closing argument. The court did not, though, review all of the requests. Thurston‘s counsel did not object to this silence before giving his closing.
Defense counsel did raise an issue after closing, and before the jury was instructed, that he wanted to put on record his specific objections to the government‘s requests. He did not say he had been prejudiced in any way by the court‘s failure to rule on the requested instructions before he gave his closing. The court replied that it would neither rule on nor hear argument on the proposed instructions. Rather, the court stated its understanding that the appropriate time to object was at the end of the instructions. Nonetheless, it did hear argument on the government‘s Request No. 8 (the compelled witness rule), and declined to give the instruction. It also heard argument on the government‘s proposed instructions No. 18 (conspiracy); No. 19 (unlawful objectives); and No. 22 (overt act). The only proposed defense instruction called to the court‘s attention was No. 24, on missing witnesses.
The district court did not, as
Without addressing the issue of whether Thurston has thus forfeited the
An even more telling indicium of lack of prejudice is that Thurston‘s appellate counsel has been unable to identify any specific areas of prejudice occasioned by the trial court‘s lapse. While in theory such a lapse could cause prejudice, the most that is argued here is that there was “no detailed reference to important legal concepts regarding criminal conspiracy and the state of mind by which Thurston would be judged.” Appellate counsel does not identify those “important legal concepts,” and we see none. As to Thurston‘s state of mind, the trial judge did instruct on the government‘s burden to show Thurston had a specific intent to participate in the conspiracy and to defraud the United States. The court instructed the jury to consider Thurston individually to determine if he willfully joined the conspiracy. The court, in turn, defined “willfully.” The court also explicitly rejected Thurston‘s reasonable interpretation instruction, and it instructed on good faith. These circumstances belie any claim of prejudice and Thurston‘s claim fails.
D. Motion for New Trial Based on Dismissal of Apolipoprotein Charge
Thurston and his co-defendants were originally charged with conspiracy to commit fraud as to both the ferritin and the apolipoprotein tests. At the close of the government‘s case the court granted Thurston‘s motion for judgment of acquittal on the apolipoprotein test, struck those references from the indictment, and instructed the jury that this issue was no longer before it. The government did not thereafter refer to this issue.
Thurston now argues that the court should have granted Thurston a new trial after the jury returned because the apolipoprotein evidence irretrievably tainted the trial. The government rejoins that counsel should have raised the issue sooner.
Again, we bypass the issue of forfeiture and reject the argument that dismissal of the apolipoprotein charges tainted the proceedings. Thurston‘s argument that none of this evidence would have been admitted if the ferritin charges were tried alone is based on an unlikely premise. Where the evidence admitted as to a dismissed count would have been admissible as to a remaining count, the defendant has not suffered prejudice. United States v. Rooney, 37 F.3d 847, 855-56 (2d Cir.1994) (collecting cases); see United States v. Weiner, 3 F.3d 17, 22 (1st Cir.1993) (jury properly considered evidence relating to counts dismissed prior to verdict, since evidence was relevant to remaining counts).
The government would have introduced such evidence in any event as relevant to rebut central defense themes that, because Damon had such a decentralized decision-making structure, Thurston was not involved in key decisions. The apolipoprotein evidence contradicted Thurston‘s claims about the extent and consequences of Damon‘s decentralized approach to the make-up, pricing, and marketing of its panels.
There was little risk of prejudice for other reasons. The government did not mention the apolipoprotein evidence in its closing, and exhibits pertaining only to apolipoprotein were removed before the documents were submitted to the jury. Further, most of the testimony and documentary evidence in the first half of the case, before the court ruled on the Rule 29 motion, dealt with ferritin. These factors further minimized the likelihood of any taint.
Thurston‘s conviction is affirmed.
IV. Sentencing Appeals
A. Thurston‘s Appeal from Loss Calculation
Much of Thurston‘s guidelines sentence range (sixty-three to seventy-eight months) was driven by the loss calculation. Both the PSR and the government recommended an intended loss figure of more than five million dollars but less than ten million dollars. This resulted in a fourteen-level increase in the base offense level.
Thurston, not surprisingly, targets this loss calculation. He makes two arguments. The first is that the government was precluded by a comment to
The guidelines interpretation argument turns on a comment which provides:
Consistent with the provisions of
§ 2X1.1 (Attempt, Solicitation or Conspiracy), if an intended loss that the defendant was attempting to inflict can be determined, this figure will be used if it is greater than the actual loss.
Thurston argues that because the government did not show actual loss, it cannot turn to intended loss. The argument is simply wrong as a matter of the wording of the comment. The comment directs the use of an intended loss figure when it is greater than the actual loss figure; the comment does not restrict the sentencing court‘s ability to rely on intended loss when there is no actual loss calculation available. Defendant‘s reading also makes little sense: it may be easier as a matter of proof to show intended loss than actual loss. Conspirators are held accountable for the loss they intend to commit. Finally, it is obvious on these facts that the intended loss was greater than the actual loss — some doctors quit using Damon when, to their disgust, they realized what the scheme was.
Thurston next mounts a series of fact-based attacks on the intended loss figure of more than five million dollars. That figure is supported by the capital expenditure requests each of the labs prepared to obtain funding to buy the equipment needed to perform the increased ferritin testing the labs anticipated. Each CER included a financial analysis, one component of which was the estimated new revenue from bundling the tests. Thus, the intended loss calculation was based on the conspirators’ own financial calculations.
Thurston argues the CERs, being mere financial projections, are not an adequate basis for an intended loss figure; that the CERs were based on an assumed best case scenario in which no physician who ordered Labscans would decline to get ferritin tests; that, in any event, not all physicians who ordered the bundled test were tricked into doing so; that the conspiracy was not proven to last five years; that the conspiracy ended before five years had elapsed for several labs, given the different dates on which the labs bundled the tests; and that later, only one lab reported to Thurston.
A number of these are quickly dispatched. The jury verdict of guilt disposes of the question of the length of the conspiracy. Thurston‘s promotion out of management of three of the labs is irrelevant since he earlier conspired to produce losses intended to go on for years.
Thurston also argues the intended loss had to be reduced under
The closer question is the degree of precision the government must reach in showing intended loss. It is true that the CERs set forth best case scenarios which assumed all doctors would order the bundled test without culling out the ferritin test. If the CERs stood alone, defendant would have a better argument. But they are supplemented by the fact that Damon made it extremely difficult for doctors to cull out the ferritin and order the Labscan without a ferritin test.
Further, the conspirators tried to hide from doctors the fact that there was a significant cost to Medicare associated with the bundling. The conspirators were maximizing the probability that all doctors would accept the bundling, without culling and without protest. The fact that the conspirators were not entirely successful in fooling all doctors does not lessen their intent.
We have noted before that intended loss does not have to be determined with precision; the court needs only to make a reasonable estimate in light of the available information. United States v. Blastos, 258 F.3d 25, 30 (1st Cir.2001). There was good evidence of intent and some “prospect of success” for the fraud to reap over five million dollars, and that is all that the case law requires. United States v. Orlando-Figueroa, 229 F.3d 33, 48 (1st Cir.2000). The best case CER projection was a loss to Medicare over the charged five-year life of the conspiracy of $5,800,230. It was reasonable for the district court to estimate that the intended loss exceeded five million dollars, even allowing for the one to two percent normal order rate for ferritin tests. The government met its burden and Thurston offered little in rebuttal except his protestations of innocence. There was no clear error.
B. Government‘s Sentencing Appeal
Given an intended loss of five million dollars, Thurston‘s crime led to the statutory maximum sentence of five years. The district court departed downward from the Guidelines range by sixteen levels, however, sentencing Thurston to three months’ imprisonment to be followed by twenty-four months of supervised release. The court imposed no fine and recommended that the term of imprisonment be served in a halfway house.
a. Standard of Review: Effect of the PROTECT Act
On April 30, 2003, certain provisions of a new statute affecting the courts of appeals’ review of sentencing provisions became effective. The PROTECT Act changes the applicable standard of review on certain issues in appeals from departures from the sentencing guidelines.
Section 401 of the PROTECT Act amends
(e) Consideration. — Upon review of the record, the court of appeals shall determine whether the sentence —
....
(3) is outside the applicable guideline range, and
(A) the district court failed to provide the written statement of reasons required by section 3553(c); (B) the sentence departs from the applicable guideline range based on a factor that —
(i) does not advance the objectives set forth in section 3553(a)(2); or
(ii) is not authorized under section 3553(b); or
(iii) is not justified by the facts of this case; or
(C) the sentence departs to an unreasonable degree from the applicable guidelines range, having regard for the factors to be considered in imposing a sentence, as set forth in section 3553(a) of this title and the reasons for the imposition of the particular sentence, as stated by the district court pursuant to the provisions of section 3553(c);....
....
The court of appeals shall give due regard to the opportunity of the district court to judge the credibility of the witnesses, and shall accept the findings of fact of the district court unless they are clearly erroneous and, except with respect to determinations under subsection (3)(A) or (3)(B), shall give due deference to the district court‘s application of the guidelines to the facts. With respect to determinations under subsection (3)(A) or (3)(B), the court of appeals shall review de novo the district court‘s application of the guidelines to the facts.
(emphasis added).
This changed the prior law. Under Koon v. United States, 518 U.S. 81 (1996), the appellate courts were not to review a departure decision de novo, but were to ask whether the sentencing court abused its discretion.16 Id. at 91, 96-100. Where a district court grants a departure, we have, before the PROTECT Act, engaged in a three-part review: “(1) we determine whether the stated ground for departure is theoretically permissible under the guidelines; (2) if so, we examine the record to assess whether there is adequate factual support; and (3) we determine the appropriateness of the degree of departure.” United States v. Bogdan, 302 F.3d 12, 16 (1st Cir.2002). Whether a stated ground for departure was theoretically permissible (part (1)) was a question of law reviewed de novo. United States v. Bradstreet, 207 F.3d 76, 81 (1st Cir.2000); cf. United States v. Diaz, 285 F.3d 92, 98-99 (1st Cir.2002) (“We review de novo whether the district court utilized a proper basis for [an upward] departure.“). Under Koon, we then reviewed the remaining two parts for abuse of discretion. See Koon, 518 U.S. 96-100; United States v. Lujan, 324 F.3d 27, 31 n. 5 (1st Cir.2003); United States v. Martin, 221 F.3d 55 (1st Cir.2000).
The courts of appeals are now charged with de novo review of the second issue: whether the facts are exceptional (or outside the heartland), thus warranting consideration of a departure. Congress requires the courts of appeals to consider whether a sentence that departs from the applicable guideline range is based on a factor that:
- does not advance the objectives set forth in
section 3553(a)(2) ; or - is not authorized under
section 3553(b) ; or - is not justified by the facts of the case[.]
Thurston argues that the PROTECT Act should not be interpreted to apply to this case and that, if it did apply, it would be retroactive and invalid. He makes two statutory intent arguments: (1) that the internal structure of the statute means it should not be applied to cases already pending on appeal; and (2) that the presumption against retroactivity should apply.
First, Thurston argues that Congress meant application of the de novo review provisions in the PROTECT Act to be deferred until appeals arise from sentences entered after the Act became effective. This is evident, Thurston says, since the Act imposed a new requirement for the district judge to give a written statement of reasons. From this, Thurston argues, all provisions of the Act were meant to apply only to post-Act sentencing. The argument is plausible, but we are unpersuaded. Even before the PROTECT Act, a trial court was required to give some reasons, though not necessarily in writing, for a downward departure. See
Although the Act does not expressly say that its de novo review provision applies to pending appeals, it does give an effective date of April 30, 2003. The effective date of a statute does not by itself establish that it has any application to conduct that occurred at an earlier date. See INS v. St. Cyr, 533 U.S. 289, 317 (2001) (quoting Landgraf v. USI Film Prods., 511 U.S. 244, 257 (1994)). Still, we agree with the Eighth Circuit that the new statute applies to appeals pending as of the effective date of the statute. See United States v. Aguilar-Lopez, 329 F.3d 960, 962-63 (8th Cir.2003). Subject to constitutionally-based retroactivity concerns, it is certainly within Congress‘s power to change a standard of review. See, e.g., Hines v. Sec‘y of Dep‘t of Health & Human Servs., 940 F.2d 1518, 1523 (Fed. Cir.1991); Consumers Union of U.S. v. FTC, 801 F.2d 417 (D.C. Cir.1986); cf. Bierce v. Waterhouse, 219 U.S. 320, 336-37 (1911). Much of the conduct regulated by this part of the PROTECT Act is that of the courts of appeals (and indirectly, the district courts now under closer scrutiny), and that involves conduct dating from April 30, 2003 forward.
Thurston‘s fall-back argument is that applying a changed standard of review to a case already on appeal would have an impermissible effect on him under the Supreme Court‘s retroactivity jurisprudence. See Landgraf, 511 U.S. at 264. Not so. The change of a standard of appellate review is one in procedure for the courts; procedural changes that do not affect substantial rights are not usually considered retroactive. This legislation is little different than the Supreme Court‘s changing the standard of review by directing the courts of appeals to decide ultimate Fourth Amendment questions by de novo review. See Ornelas v. United States, 517 U.S. 690, 697 (1996). When the Supreme Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation that must be applied “retroactively” to all criminal cases on direct review. See Harper v. Va. Dep‘t of Taxation, 509 U.S. 86, 95 (1993) (citing Griffith v. Kentucky, 479 U.S. 314, 322 (1987)). Changing the appellate standard of review, as done here, could upset no legitimate reliance interest by a defendant,17 could not have induced alteration of the behavior that led to the crime, and could not have upset settled expectations. We see no unfairness to defendants in Congress‘s requiring a closer look by appellate courts at whether a district court committed an error in deciding that the guidelines permitted a departure. It is the substance of the sentencing rules, both Guidelines and statutory, that impacts defendants.
Thurston makes a cursory argument that the PROTECT Act presents serious constitutional separation-of-powers questions. At the request of the Senate, the Chief Justice, expressing the views of the U.S. Judicial Conference, did advise the Senate of the Conference‘s opposition to portions of the bill, including alteration of the standard of review. See Letter from Chief Justice William H. Rehnquist to Senator Patrick Leahy (undated). The U.S. Sentencing Commission requested that Congress not act until the Commission had the opportunity to analyze data and study the matter. See Letter from Judge Diana Murphy, Chair of the U.S. Sentencing Commission, et al. to Senators Orrin Hatch and Patrick Leahy (April 2, 2003). But judicial opposition to legislation on policy grounds is one thing, and unconstitutionality of the legislation is another. No real theory of unconstitutionality has been presented by this appeal, and so the issue is waived. See United States v. Zannino, 895 F.2d 1, 17 (1st Cir.1990).
b. Application of De Novo Standard of Review
i. Disparity With Co-Defendant
The district court felt there was an unfair disparity between a five-year sentence of imprisonment for Thurston and the three-year probation sentence for co-conspirator Isola. It viewed Isola as “the architect, at least the prime architect of this conspiracy.” Apparently the district court felt that Isola, Thurston‘s superior, was the guiltier of the two, and that this fact overshadowed other differences between their cases. Isola pled nolo contendere to willful blindness about the apolipoprotein conspiracy.
As the law of this circuit makes clear, basing the departure on grounds of disparity in sentence alone between Thurston and Isola was beyond the district court‘s authority. United States v. Wogan, 938 F.2d 1446, 1448 (1st Cir.1991); see also United States v. Romolo, 937 F.2d 20, 25 n. 5 (1st Cir.1991). Sidestepping circuit precedent, the district court referred to a statute that requires a sentencing court to consider not only the Commission‘s Sentencing Guidelines and policy statements, but also “the need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct.”
Yet the same statute also requires that the court “shall impose a sentence of the kind, and within the range [of the pertinent Guidelines], unless the court finds that there exists an aggravating or mitigating circumstance of a kind, or to a degree, not adequately taken into consideration by the Sentencing Commission.”
The “more” that is needed refers to circumstances not adequately considered by the Commission, and none have been shown here with regard to disparity. In the pre-Guidelines era, the district court‘s attempt to avoid perceived unfairness would have had greater weight. The Guidelines bind us and they bind the district court. The downward departure based on disparity in sentences among co-defendants was impermissible.
ii. Good Works
The second ground, based on Thurston‘s good works, poses the most difficult issue in the case. We have found disparity alone an impermissible ground; it is possible the trial court would not have granted so extensive a departure based on good works alone. It may also be that if the court had granted a modest departure on the second ground, the government would not have appealed. But the trial court did not differentiate and the government on appeal argues that any departure at all based on good works (like the departure for disparity) was contrary to law.
The Sentencing Guidelines discourage downward departures from the normal sentencing range based on good works — that is, civic, charitable, or public service.
In addition, Thurston has taken family members and others into his home and has been helpful to his neighbors. For example, the parents of a woman undergoing rehabilitation at a local medical center stayed at Thurston‘s home for several weeks. On another occasion, Thurston and his family laid sod for an infirm neighbor. Save for his crime, Thurston appears to have lived a creditworthy life.
The issue then becomes, as we engage in de novo review, the point of reference by which to determine whether Thurston‘s good works provide a basis for a departure. Earlier, under Koon, 518 U.S. 81, the very sensible rationale was that the district courts, which saw far more sentencing cases than the courts of appeals, were better positioned to determine what was exceptional, and appellate courts owed deference to that more expert determination. See id. at 96-100. The PROTECT Act has abrogated that deference. There are many policy arguments in favor of deference to the district court, which were presented to Congress by the Judicial Conference of the United States. But Congress chose to decide the balance differently, expressing concern that the departure rate for certain crimes and within certain districts threatened to undermine the Guidelines regime. See, e.g., H.R. Rep. No. 108-66, at 58-59; 149 Cong. Rec. H3059, H3066 (daily ed. April 10, 2003) (statement of Rep. Sensenbrenner).
In reviewing de novo whether any departure is permissible, the PROTECT Act and the case law require courts of appeals to consider three sources: other decisions under the Guidelines; the Commission‘s relevant Guidelines and statements; and the congressional purposes behind sentencing. Even before the PROTECT Act, the question of whether a discouraged factor was present in an exceptional way was determined in large part by comparison with other Guidelines cases. See Pereira, 272 F.3d at 80 (citing Koon, 518 U.S. at 98). Such other cases are not limited to cases involving convictions for the same offense. See United States v. DeMasi, 40 F.3d 1306, 1324 (1st Cir.1994). Second, appellate courts are also to consider policy statements and official commentary by the Sentencing Commission.
As to comparisons with other reported cases, each side has some circuit authority in support of its position; the government‘s cases are a closer fit. The government cites United States v. Morken, 133 F.3d 628, 629-30 (8th Cir.1998) (divided court reverses a downward departure because good works are not exceptional for someone of defendant‘s income and preeminence in a small town); United States v. Kolbach, 38 F.3d 832, 838-39 (6th Cir.1994) (vacating a good works departure because “it is usual and ordinary, in the prosecution of similar white collar crimes involving high-ranking corporate executives ... to find that a defendant was involved as a leader in community charities, civic organizations, and church efforts“); and United States v. Haverstat, 22 F.3d 790, 795-96 (8th Cir.1994) (vacating a departure for good works where the defendant‘s charitable and volunteer activities did not make him an atypical defendant in an antitrust price-fixing case).
In United States v. Bogdan, 284 F.3d 324 (1st Cir.2002), this court found no basis for a downward departure for a caring and generous father who made efforts to improve his relationship with his ex-wife and supported her financially and who was introspective and remorseful about his crime. Id. at 329-30. When the district court again granted a downward departure because it thought the sentence “unconscionable,” this court again reversed. United States v. Bogdan, 302 F.3d 12, 16-17 (1st Cir.2002).
In turn, Thurston relies on several circuit decisions affirming good works downward departures. These cases are less persuasive than those cited by the government, since the circuit courts merely hold that there was no abuse of discretion and since the facts are less analogous. See United States v. Serafini, 233 F.3d 758, 775-76 (3d Cir.2000) (affirming a downward departure based on exceptional charitable works in light of the defendant‘s meager resources); United States v. Woods, 159 F.3d 1132, 1136-37 (8th Cir.1998) (in a bankruptcy fraud case involving a defendant who transformed the lives of two girls and cared for an elderly friend, a one-level downward departure was not an abuse of discretion); United States v. Rioux, 97 F.3d 648, 662-63 (2d Cir.1996) (no abuse of discretion to depart downward based on a combination of medical condition and civic good deeds). We would find the expertise reflected in the decisions of the district courts to be useful as well in determining whether particular good works are exceptional. But the parties have not cited any such cases.
As the government‘s cases indicate, corporate executives are usually better situated to make large financial contributions and are often expected, by virtue of their positions, to engage in civic and charitable activities. The ability to make large contributions should not keep a defendant out of jail. See United States v. McHan, 920 F.2d 244, 248 (4th Cir.1990). And those whose place in life does not give them similar opportunities should not be disadvantaged. See
For similar reasons, we would be reluctant to find a defendant‘s good works exceptional solely on the basis of actions that were required or encouraged as a condition of membership in a religious institution. Such a result — which would seemingly entitle all members in good standing to a downward departure — could undercut the principle that religion (like socio-economic status) is a forbidden basis for departure. See
In sum, the comparison to other case law is not dispositive and is, in any event, only one part of the analysis. We move on to the Guidelines and to the purposes of sentencing.
Two salient principles emerge from the Guidelines: the goal of parity between white collar and other criminal defendants and the goal of discouraging departures based on good works. Congress and the Sentencing Commission were clear that under the pre-Guidelines regime, sentences for white collar crimes were too lenient.20 The Sentencing Commission intended to “equalize punishments for `white collar’ and `blue collar’ crime.” United States v. Rivera, 994 F.2d 942, 955 (1st Cir.1993) (Breyer, J.).
Viewing the departure in terms of the purposes of sentencing also militates against the departure. Thurston was convicted of a serious crime, a massive fraud at public expense involving deceit, trickery, and sophistication. The federal government spent approximately $249 billion on Medicare last year. One group has estimated that about three percent of the $1.4 trillion the country spent on health care in 2001 was lost to fraud.21 “A Sick Business,” The Economist, June 28, 2003, at 64 (citing data from National Health Care Anti-Fraud Association); see National Health Care Anti-Fraud Association, Health Care Fraud, at p. 2. The retribution and deterrent interests in sentencing would be significantly undercut by permitting a good works departure on this record.
“Good works” do not stand alone. They must be evaluated in the context of the crime and the purposes of sentencing. Health care fraud, a form of white collar fraud, is a serious national problem, affecting the financial integrity of programs meant to aid tens of millions of people in need of health care. Every dollar lost to fraud is a dollar that could have provided medical care to the elderly or the disabled. By definition, Medicare fraud will most likely be white collar fraud, committed by educated people with responsible jobs. Thurston‘s executive position at Damon, which gave him the resources to undertake many of his charitable works, also enabled him to perform the crime. Were it not for the statutory maximum, he would, under the Guidelines, have been sentenced to imprisonment for more than five years. A five-year term of imprisonment in light of the nature of the crime reflects the seriousness of the offense, the need for congruity with “blue collar” crime, and the need to deter other executives from similar law-breaking. Thurston‘s admirable good works simply are not so exceptional, in context, as to provide a basis to depart.
The government‘s argument that Thurston‘s conduct warranted an upward adjustment for obstruction of justice based on perjury at trial need not be resolved, given our disposition of the other issues. The statute caps his period of incarceration at sixty months. It is noteworthy, though, that Thurston‘s testimony on key matters of fact was contradicted by multiple witnesses.
c. Fine
The government argues that the sentencing judge erred by failing to impose a fine on Thurston in accordance with the Guidelines. Thurston argued, and the district court accepted, that he should not receive a fine because that would create an unacceptable disparity between his sentence and that of co-defendant Isola. Sentence disparity is an unacceptable basis for refusing to impose a fine and is plain error for the reasons discussed earlier.
Thurston contends that the government has forfeited its argument that a fine must be imposed by failing to object after the judge ruled. The government earlier took the position that a fine must be imposed and also argued that the court could not refuse to impose a fine on the basis of disparity — the only argument Thurston presented. In these circumstances, the issue was not forfeited. See Gallant, 306 F.3d at 1187-88 (holding that a sentencing issue was not forfeited as a result of counsel‘s failure to object after the court‘s ruling); cf. United States v. Meserve, 271 F.3d 314, 325 (1st Cir.2001) (motion to strike unnecessary to preserve evidentiary issue where party objected prior to trial court‘s ruling). Even were this an instance of forfeiture, the district court committed plain error in its rationale.
Before this court, Thurston attempts to defend the decision not to impose a fine on the basis that the statutory definition of his crime, which provides that a fine may be assigned, trumps the Guidelines, which provide that a fine must be assigned barring special circumstances. The crime of which Thurston was convicted,
Because the sentence fixed by
V. Conclusion
Thurston‘s conviction is affirmed. Thurston‘s sentence is vacated; the downward departure based on good works and purported disparity is reversed; and the order that no fine be imposed is reversed. The case is remanded for imposition of the statutory maximum sentence of sixty months in prison and for imposition of an appropriate fine. So ordered.
Notes
Anything in the Underlying Insurance to the contrary notwithstanding, the Company shall not be obligated to assume charge of the settlement or defense of any claim or suit brought or proceeding instituted against the Insured, but the Company, at its option but not being required to, shall have the right and be given the opportunity to associate with the Insured in the defense or control of any claim, suit or proceeding which appears reasonably likely to involve the Company, in which event the Insured and the Company shall cooperate in all things in the defense or control of such claim, suit or proceeding.
Mr. Thurston contends that an independent clinical laboratory does not violate any aspect of Medicare law in providing physicians with a profile or panel that contains a serum ferritin test, so long as the physician is given reliable and accurate information about the test and the choice to select the profile or panel with or without the added test.
Mr. Thurston also contends that an independent clinical laboratory does not violate any aspect of Medicare law in submitting a claim for reimbursement, using a HCFA form or otherwise, so long as the blood tests performed were ordered by a physician.
I instruct you as a matter of law that these are reasonable interpretations of the Medicare statutes, regulations and rules.
In order for you to find Mr. Thurston guilty on the basis that he caused physicians to order medically unnecessary tests for their patients, the government must prove beyond a reasonable doubt that these were not Mr. Thurston‘s interpretations of the pertinent Medicare laws.