UNITED STATES of America, Plaintiff-Appellee, v. Dulal CHATTERJI, Defendant-Appellant.
No. 94-5379.
United States Court of Appeals, Fourth Circuit.
Decided Feb. 7, 1995.
SUR PETITION FOR REHEARING March 7, 1995
46 F.3d 1336
The information provided by Shiley was intended to affect a doctor‘s choice of a heart valve for Michael. Shiley distributed its literature containing heart valve information for that very purpose—to encourage doctors to continue implanting the Shiley valve. The record, read in the light most favorable to Michael, suggests that the doctors, who advised Michael, relied on Shiley‘s disclosures. Accordingly, Shiley‘s letters and promotional materials likely affected the choice to implant the Shiley valve in Michael.
We conclude that Michael has produced sufficient evidence to raise a genuine issue of fact on her claim of fraud and we will reverse the district court‘s February 25, 1994 orders of summary judgment on that claim.
VII
Having considered the record and the arguments of the parties, we will affirm the district court‘s grant of summary judgment on Michael‘s claims of negligence (both manufacturing and design), strict product liability, and breach of implied warranties—all of which we hold are pre-empted by
We will reverse the district court‘s February 25, 1994 order granting summary judgment to Shiley on Michael‘s breach of express warranty claim (see section IV.B. & VI.A. supra) and her fraud claim insofar as she proceeds on the basis of Shiley‘s representations in its advertising and promotional materials. (See section V.B. & VI.B. supra).
We will remand the case to the district court for further proceedings consistent with the foregoing opinion.
Before: SLOVITER, Chief Judge, BECKER, STAPLETON, MANSMANN, GREENBERG, HUTCHINSON, SCIRICA, COWEN, NYGAARD, ALITO, ROTH, LEWIS, McKEE, SAROKIN and GARTH, Circuit Judges.
SUR PETITION FOR REHEARING
March 7, 1995
The petition for rehearing filed by appellees in the above-entitled case having been submitted to the judges who participated in the decision of this Court and to all the other available circuit judges of the circuit in regular active service, and no judge who concurred in the decision having asked for rehearing, and a majority of the circuit judges of the circuit in regular active service not having voted for rehearing by the court in banc, the petition for rehearing is denied. Judge Roth would have granted the petition for rehearing.
Argued Dec. 9, 1994.
ARGUED: Mark Daryl Rasch, Arent, Fox, Kintner, Plotkin & Kahn, Washington,
Before ERVIN, Chief Judge, and MURNAGHAN and WILKINS, Circuit Judges.
Vacated and remanded by published opinion. Judge WILKINS wrote the majority opinion, in which Chief Judge ERVIN joined. Judge MURNAGHAN wrote a dissenting opinion.
OPINION
WILKINS, Circuit Judge:
Dulal Chatterji appeals the sentence imposed by the district court after he pled guilty to conspiring to defraud the United States, see
I.
Chatterji was a cofounder and 10% owner of Quad Pharmaceutical Company, Inc. (Quad), a company that manufactured generic drugs. As head of research and development, Chatterji supervised the creation and testing of various generic drugs for which Quad hoped to obtain marketing approval from the Food and Drug Administration (FDA). The two generic drugs that were the subject of his guilty plea were identified as, for purposes of this appeal, vancomycin and ritodrine hydrochloride.
A. Vancomycin
In 1987, Quad submitted an abbreviated new drug application (ANDA) to the FDA in an attempt to obtain that agency‘s approval to market vancomycin, an injectable antibiotic. See
a specific quantity of a drug or other material that is intended to have uniform character and quality, within specified limits, and is produced according to a single manufacturing order during the same cycle of manufacture.
Id. at 3 (quoting
The batch process for vancomycin is relatively simple. Powdered vancomycin, purchased from an FDA-approved supplier, is tested and weighed. Water is then added to make 10 liters of a vancomycin solution, which is placed into vials and freeze-dried in a process known as lyophilization. The resulting sterile powder is tested for stability, and the data is submitted to the FDA as a “batch record.”
Chatterji‘s participation in the conspiracy as related to vancomycin consisted of the following. Chatterji first prepared 10 liters of vancomycin solution, which he then divided into two “fill sizes” of 10 ml and 5 ml labeled as 488A and 488B. Because the separate fill sizes were portions of the same batch, they were “lots” as defined by the FDA. See id.
Chatterji then forwarded these test results to Dilip Shah, Quad‘s head of regulatory affairs, who submitted Quad‘s ANDA for vancomycin claiming that 488A and 488B were separate batches and failing to reveal to the FDA that 495A had been made with reprocessed vancomycin. Therefore, when submitted, Quad‘s ANDA for vancomycin included records for three purported batches, when in fact only one acceptable batch had been produced. Although it was not required to do so, Quad later prepared and tested another batch of vancomycin and forwarded the results to the FDA.
The FDA subsequently approved Quad‘s marketing of vancomycin based on the records for lots 488A, 488B, and 495A, as well as the later-submitted record. Thus, the FDA‘s approval was based on two valid batch records. Repeated tests of vancomycin produced by Quad after FDA approval revealed that in every instance the drug met all FDA requirements for safety and effectiveness. Indeed, the Government does not dispute that Quad‘s vancomycin had full therapeutic value and posed no danger to consumers. Quad‘s gross sales of vancomycin totalled approximately $8 million.
B. Ritodrine Hydrochloride
The FDA also approved Quad‘s application to market ritodrine hydrochloride (ritodrine), an injectable muscle relaxant. The ANDA for ritodrine submitted by Quad specified the addition of 1 mg/ml of sodium metabisulfate (bisulfate), an inert antioxidant. In its approval of the ANDA, the FDA allowed an overage of up to 1.05 mg/ml of bisulfate. Because the amount of bisulfate diminishes over time, the FDA also specified that ritodrine produced by Quad should contain no less than .7 mg/ml of bisulfate at the end of its shelf life.
Once the FDA has approved the manufacture and marketing of a generic drug according to a certain formula, a manufacturer is required to seek FDA approval before making any modification to that formula regardless of how insignificant the modification may be. See
C.
The charges to which Chatterji pled guilty arose from an FDA audit of Quad‘s research and development department, which apparently revealed the discrepancies in the batch
The plea agreement between Chatterji and the Government stipulated to the material facts, but left open the question of the appropriate economic loss calculation. The parties agreed that U.S.S.G. § 2F1.1, with a base offense level of 6, applied to Chatterji‘s offense. The parties disagreed, however, as to whether the base offense level should be enhanced pursuant to § 2F1.1(b)(1) for economic loss caused by the fraud. The district court rejected Chatterji‘s argument that there was no economic loss attributable to the fraud, finding instead that the effect of the regulatory fraud was that the FDA had never approved Quad‘s marketing of vancomycin and ritodrine and that the drugs therefore were without value to the consumers who purchased them. Based on this reasoning, the district court measured the “loss” attributable to Chatterji‘s conduct by Quad‘s gross sales of vancomycin and ritodrine—approximately $13.4 million—and accordingly increased Chatterji‘s base offense level by 11 levels for fraud loss in excess of $5 million. See U.S.S.G. § 2F1.1(b)(1)(L). The district court made several other adjustments to reach a final adjusted offense level of 19.5 That offense level, combined with a Criminal History Category I, resulted in a guideline range of 30-37 months imprisonment. The district court sentenced Chatterji to 30 months imprisonment and imposed a $100,000 fine.
II.
Chatterji first challenges the application of the loss enhancement pursuant to U.S.S.G. § 2F1.1(b)(1). While the question of the amount of loss is generally one of fact subject to review only for clear error, the application of a loss enhancement to undisputed facts is a question of law which we review de novo. See United States v. Toler, 901 F.2d 399, 402 (4th Cir.1990). Loss under § 2F1.1(b)(1) is the actual, probable, or intended loss to the victims of the fraud.6 See U.S.S.G. § 2F1.1 comment. (n. 7). In appropriate circumstances, a defendant‘s gain may provide an estimate of the loss. See U.S.S.G. § 2F1.1 comment. (n. 8). However, gain is only an alternative measure of some actual, probable, or intended loss; it is not a proxy for loss when there is none. See United States v. Haddock, 12 F.3d 950, 960 (10th Cir.1993). Thus, a defendant‘s gain “may not support an enhancement on its own if there is no actual or intended loss to the victims.” Id.
The Government contends that the regulatory fraud automatically voided any FDA approval of vancomycin and ritodrine. Because unapproved drugs may not be marketed, it continues, Quad‘s products had no market value, and loss under § 2F1.1(b)(1) properly should be measured by Quad‘s gain from the sale of the drug. The Government points to
Based on the record before us, no quantifiable, actual loss can be attributed to Chatterji‘s conduct. Although an agency may suffer economic loss as a result of regulatory fraud (for example, costs of an investigation), the Government has not argued that Chatterji‘s fraud caused any such loss. Moreover, there was no loss to the consumers of vancomycin and ritodrine. Quad‘s products were exactly what they purported to be: vancomycin and ritodrine, approved by the FDA, manufactured in a certain strength and dosage, and producing the specified therapeutic benefits that FDA requirements were intended to ensure. We emphasize that we therefore are not presented with a product substitution case in which the product sold is something other than what it is claimed to be. It is undisputed that Quad‘s vancomycin performed according to FDA specifications despite the fact that records for only two batches, rather than three, were submitted to the FDA prior to its approval of vancomycin. Further, there is no dispute that the safety and therapeutic value of the ritodrine were not affected by the addition of an additional .025 mg/ml of bisulfate—an inclusion of only 2.3% more of an inert inactive ingredient than allowed under the FDA-approved formula that was intended to ensure that the drug would retain full potency over the course of its shelf life. Finally, there is no serious question that the FDA would have approved the ANDA for vancomycin had the three-batch requirement been met and would have approved the formula change for ritodrine had Quad simply requested approval of the modification.8
The dissent points to United States v. West, 2 F.3d 66 (4th Cir.1993), in which this court rejected the defendants’ contention that the district court had misapplied § 2F1.1. The district court in West determined the defendants’ sentences on two bases. First, relying on U.S.S.G. § 2F1.1, comment. (n. 7(b)) (1992), the district court concluded that the actual loss resulting from the defendants’ fraud “‘tend[ed] not to reflect adequately the risk of loss created by the defendant‘s conduct.‘”9 West, 2 F.3d at 71 (quoting presentence letter to counsel from district court). Second, the district court relied on U.S.S.G. § 2F1.1, comment. (n. 8) (1992), which provides that the defendant‘s gain may be used as an alternative estimate of loss, and found that the amount of the brokerage fees the Government had paid to the defendants was an appropriate alternative measure of the Government‘s actual loss. West, 2 F.3d at 71; see U.S.S.G. § 2F1.1, comment. (n. 8) (1992) (“The offender‘s gain from committing the fraud is an alternative estimate that ordinarily will underestimate the loss.“).
The dissent‘s reliance on West is misplaced. Here, the district court did not base its sentence on an upward departure, and thus the question of the appropriateness of a departure is not before us.10 Consequently, we may not affirm Chatterji‘s sentence on this basis, as the dissent suggests. Cf. Williams v. United States, 503 U.S. 193, 200-03, 112 S.Ct. 1112, 1120, 117 L.Ed.2d 341 (1992) (“When a district court has not intended to depart from the Guidelines, a sentence is imposed ‘as a result of an incorrect application of the Guidelines when the error results in the district court selecting a sentence from the wrong guideline range.‘“). Moreover, unlike West, there was no risk of loss that resulted from Chatterji‘s conduct. The dissent does not, because it cannot, point to any evidence in the record that would indicate that consumers were at risk as a result of using the products in question. Most significantly, the district court made no findings that consumers were exposed to a risk of harm.
Regarding the second basis for the sentence in West, the enhancement provided in § 2F1.1(b)(1), as noted above, applies when a victim has suffered economic loss. A defendant‘s gain may be an appropriate estimate of loss only when there is some actual, intended, or probable loss. Because we have concluded that Chatterji‘s conduct occasioned no such loss, gain may not be used as an alternative basis for calculating loss.
We do not in any way denigrate the seriousness of Chatterji‘s offense, and we note that he will not go unpunished merely because application of the economic loss enhancement is inappropriate under these circumstances. See United States v. Smith, 951 F.2d 1164, 1169 (10th Cir.1991). An en
III.
Chatterji also appeals the fine imposed by the district court, arguing that it improperly departed upward from the applicable fine range of $6,000-$60,000. During the sentencing hearing, the Government urged an upward departure to the maximum fine provided for Chatterji‘s conviction, $250,000. See
It appears that the district court applied the Guidelines Manual effective November 1, 1993 in determining Chatterji‘s fine and considered the fine imposed an upward departure from the fine range of $6,000-$60,000 provided in U.S.S.G. § 5E1.2 (Nov.1993). However, the conclusory statements by the district court do not afford us a meaningful opportunity to determine whether the departure was based on “a factor not adequately considered by the Sentencing Commission in formulating the applicable guidelines range.” United States v. Graham, 946 F.2d 19, 21 (4th Cir.1991). While the Government argued before us that the district court apparently increased the amount of the fine above the range applicable under the 1993 Guidelines Manual to provide for reimbursement to the Government of the cost of Chatterji‘s incarceration, this position is based on speculation for the district court articulated no such finding. And, the district court gave no indication that it was applying U.S.S.G. § 5E4.2(c) (Oct.1987)12 in determining the amount of the fine. Therefore, in addition to remanding for resentencing, we remand to the district court to provide it the opportunity to make appropriate findings and articulate a more complete explanation of the reasons for the fine it imposes. See United States v. Harvey, 885 F.2d 181, 182-83 (4th Cir.1989).
VACATED AND REMANDED.
MURNAGHAN, Circuit Judge, dissenting:
Section 2F1.1 of the United States Sentencing Guidelines (“U.S.S.G.“) governs sentencing for offenses involving fraud or deceit, and grades the severity of all applicable offenses on the basis of the dollar value of the calculated “loss” caused by the fraud. The November 1987 version of § 2F1.1, applicable to the instant case, provides for a maximum enhancement of 11 offense levels in cases in which the total fraud “loss” exceeds $5 million.
The majority, and the Appellant, contend that the district court erred in calculating the “loss” under § 2F1.1 in the instant case as equalling the total dollar value of the drugs sold by Quad Pharmaceuticals as a result of the fraudulently obtained approval of certain drugs by the Federal Drug Administration (“FDA“). In particular, the majority argues that there was no actual “loss” to consumers as a result of the Appellant‘s misrepresentations to the FDA because the drugs received FDA approval, posed no threat to the health and well-being of the consumers, and met all of the goals of the FDA requirements for safety and efficiency. Majority Opinion at
The majority‘s opinion fundamentally turns on its argument that in the instant case, there was no loss inflicted upon the consumers as a result of the fraudulently obtained FDA approval of the drugs because “Quad‘s products were exactly what they purported to be: vancomycin and ritodrine, approved by the FDA, manufactured in a certain strength and dosage, and producing the specified therapeutic benefits that FDA requirements were intended to ensure.” Majority Opinion at 1341. That conclusion, however, rests on two faulty assumptions, both of which are speculative and lack a clear basis in the record: (1) that “the safety and therapeutic value of the ritodrine were not affected by the additional .025 mg/ml of bisulfate,” and (2) that “the FDA would have approved the ANDA for vancomycin had the three-batch requirement been met and would have approved the formula change for ritodrine had Quad simply requested approval of the modification.” Majority Opinion at 1341.
The two assumptions underlying the majority opinion are fundamentally flawed for several reasons, and thus cast great doubt upon the majority‘s ultimate conclusion. First, the majority‘s contention that the fraudulently approved drugs were bioequivalents of properly approved drugs, and thus imposed no actual loss to the consumers, is based solely on the absence thus far, of any reports that the consumers taking those drugs have been injured or harmed. The Guidelines surely, however, could not have intended for courts to wait for such crimes of fraud to result in actual, serious harm to consumers of medicines before the perpetrator of such a fraud is subject to a sentencing enhancement for fraudulent activity. Moreover, the concept of bioequivalency has no bearing on the gravity of the fraud committed; regardless of whether the fraudulently approved drugs ultimately did or did not cause harm to the consumers, Chatterji was willing to take the risk that such harm would occur simply in order to expedite the receipt of his own profits from the sales of the drugs. He simply transferred the risk to the public whose members relied on proper FDA approval to feel comfortable in taking the drugs. The FDA regulations set out with specificity the procedures which should be followed in order to ensure the complete safety of the drugs; Chatterji‘s actions here were taken in complete and utter disregard of the precautionary and purposefully detailed regulations.2
Moreover, the majority‘s second assumption—that there is no serious contention that the FDA would have approved the drugs had Chatterji in fact complied with the proper
These fundamental weaknesses in the majority‘s logic cast great doubt upon its ultimate conclusion. More significant, in light of these weaknesses, it appears that the district court‘s calculation of loss as equalling gross sales by Quad was indeed proper and well supported by the Guidelines.4
First, the commentary to the Guidelines5 specifically provides that “an offender‘s gain from committing the fraud” is an alternative estimate to the calculation of loss. Application Note 8, U.S.S.G. § 2F1.1. In so providing, the commentary particularly states that, for the purposes of the calculation of a sentence under section 2F1.1(b)(1), the loss
need not be determined with precision. The court need only make a reasonable estimate of the loss, given the available information. This estimate, for example, may be based on the approximate number of victims and an estimate of the average loss to each victim, or on more general factors, such as the nature and duration from fraud and the revenues generated by similar operations.
Application Note 8, U.S.S.G. § 2F1.1 (emphasis added). The fact that the commentary itself notes that “revenues generated” is an appropriate measure of loss suggests that the district court‘s calculation in the instant case was proper. Indeed, the Guidelines commentary clearly supports the district court‘s decision to use Quad‘s gross revenues from the sales of the fraudulently approved drugs as the best estimate of victim‘s loss or alternatively, offender‘s gain, in the instant case.
Second, the Guidelines commentary to § 2F1.1 provides that in calculating loss for the purposes of sentencing in a case involving a misrepresentation “concerning the quality of a consumer product,” the actual loss can be measured by calculating the difference between the amount paid by the victim for the product and the “amount for which the victim could resell the product received.” Application Note 7(a), U.S.S.G. § 2F1.1 (emphasis added). Because it is reasonable to assume that a consumer knowing that the FDA had approved certain drugs as a result of misstatements and fraud would not be willing to purchase the drugs, it is doubtful that the fraudulently approved drugs in the instant case could have been resold at any price. Indeed, in light of the fact that the pharmaceutical industry is very tightly regulated, it was reasonable to assume that drugs not properly approved have no actual or resale value. Thus, under the assumption that the resale price of these fraudulently approved drugs would be zero, the district court‘s calculation of loss as amounting to gross sales was not erroneous.
Even if the consumers suffered no “loss” under the Appellant‘s, and the majority‘s, argument that the drugs sold by Quad were in fact, safe, effective bioequivalents of prop
[Appellants] contend that the government failed to prove either actual loss or risk of loss because it did not eliminate the possibility that, with respect to each of the fraudulently secured bonds, one of the two sureties might have had sufficient assets to cover a forfeiture. They urge that, when adequate sureties are factored into the equation, the risk of loss shrinks from $2.9 million to $429,154.... We disagree. As the district court noted, at the time [Appellants] engaged in their enterprise two individual sureties were required to secure a bond, each with a net worth equal to or exceeding the contract price. Thus, the court properly concluded that the government simply did not get what it paid for so that the amount paid out (or “the money ... unlawfully taken“) fairly constitutes actual loss under § 2F1.1. Nor do we find clear error in the district court‘s conclusion, after a careful evaluation of the evidence before it, that the $2.9 million figure adequately represents “the risk of loss created by defendant[s]’ conduct.”
Id. (citations omitted) (emphasis added). In light of the West decision, it is clear that this Court has been, and should continue to be, willing to go beyond hypothesized actual losses in cases in which fraud on the government creates large risks of loss to the public which are inherently difficult to measure.
Such a result is also supported by the Ninth Circuit‘s decision in United States v. Cambra, 933 F.2d 752 (9th Cir.1991), in which the Ninth Circuit addressed an appeal by a defendant who had pled guilty to various charges of violating the Food, Drug, and Cosmetic Act relating to the sale of anabolic steroids, which he labeled as though they had been produced by a recognized manufacturer of steroids. In calculating “loss” under section 2F1.1, the district court had found that the dollar value of the counterfeited steroids was $500,000, and sentenced the Appellant accordingly. Id. at 756. In affirming the district court‘s sentencing calculation, the Ninth Circuit held:
The monetary table in the fraud guideline is intended to reflect the harm to the victim and the gain to the defendant. Federal agencies may be victims of fraud in counterfeiting and misbranding drugs. There is no meaningful distinction between government as victim and individual consumer victims.... In this case, the district court found that Cambra intended to profit from his activity and that at least federal agencies were defrauded by his acts.
Finally, the district court was entitled to depart upwardly from the range established by U.S.S.G. § 2F1.1, because the actual value of the drugs did not take into account the actual risk to society created by the scheme to defraud. Indeed, the commentary to § 2F1.1 expressly provides that in cases in which the loss determined under subsection (b)(1) does not “fully capture the harmfulness and seriousness of the conduct,” an upward departure may be warranted. Application Note 10, U.S.S.G. § 2F1.1. As examples of such cases, the commentary lists, among others: (1) instances in which the fraud “cause[s] or risk[s] reasonably foreseeable, substantial non-monetary harm,” and (2) offenses which cause “a loss of confidence in an important institution.” Application Note 10, U.S.S.G. § 2F1.1 (emphasis added). The fraud committed in the instant case not only created risks of potentially great harm to consumers of pharmaceutical products, but also severely diminished the confidence which consumers can justifiably have in the FDA approval process. Thus, an upward departure from the calculated guidelines range was plainly appropriate.
The majority‘s holding in the instant case will send two harmful messages to the public. First, the majority has in essence established that consumers cannot, and should not, justifiably rely on the FDA approval process in evaluating the safety and efficacy of the drugs that they purchase. Second, the majority has fundamentally held that courts must wait until consumers are actually harmed in some physical or economic sense before a sentencing enhancement can be deemed warranted under section 2F1.1 of the Sentencing Guidelines. The Guidelines surely could not have intended such a result. I dissent.
WILKINS
CIRCUIT JUDGE