UNITED STATES OF AMERICA, Plaintiff-Appellee, v. SHENGYANG ZHOU a/k/a TOM, Defendant-Appellant.
No. 11-1261
UNITED STATES COURT OF APPEALS TENTH CIRCUIT
June 10, 2013
Before KELLY, SEYMOUR, and TYMKOVICH, Circuit Judges.
PUBLISH. Appeal from the United States District Court for the District of Colorado (D.C. No. 1:10-CR-00226-PAB-1).
SEYMOUR, Circuit Judge.
Mr. Shengyang Zhou pled guilty to trafficking and attempted trafficking of counterfeit goods in violation of
I.
Mr. Zhou‘s plea agreement set forth a lengthy statement of facts which the parties agreed the government‘s evidence would establish. The following facts are taken from the plea agreement or from undisputed portions of the presentence report, which the district court adopted. See
Between December 2008 and March 2009, the Food and Drug Administration (FDA) issued a series of nationwide broadcast alerts on its website advising the public that the agency had identified over seventy-two purported weight loss products containing undeclared active pharmaceutical ingredients (APIs) that could put consumers’ health at risk. One of the undeclared APIs was Sibutramine, a Schedule IV non-narcotic controlled substance that was at the time approved by the FDA only for the treatment of obesity in a patented drug commonly known as “Meridia.” The alerts stated that the listed products posed serious health risks and advised consumers to immediately stop taking them and to consult a medical professional.
Starting in January 2010, the FDA issued a separate series of broadcast alerts on its website regarding the marketing and sales of counterfeit versions of a weight loss product known by its brand name, “Alli,” which had also been found to contain dangerous levels of Sibutramine. The genuine product is manufactured by
During all periods relevant to this case, the name “Alli” and certain stylized versions of that name were trademarks registered by GSK on the principal register of the United States Patent and Trademark Office. GSK used these registered trademarks on the labels affixed to the bottles in which the Alli capsules were contained, on the associated boxes and related packaging, and on patient literature enclosed with the product.
The investigation of Mr. Zhou was initiated by federal agents from the FDA Office of Criminal Investigations (OCI), Immigration and Customs Enforcement (ICE), and the Postal Inspection Service after a controlled delivery in April 2009 to a Broomfield, Colorado resident identified as J.K. The parcel contained hundreds of boxes of “Super Slim” and “Meizitang,” two of the purported weight loss products listed in the FDA alerts as containing undeclared APIs. J.K. advised the agents that he operated an internet-based business selling these purported weight loss products to consumers throughout the United States. He informed the agents that one of his suppliers was a Chinese national ultimately identified by the agents as Mr. Zhou. J.K. told the agents that he had previously purchased from Mr. Zhou commercial quantities of these products, as well as “2 Day Diet,” another product listed in the FDA alerts. He admitted that he had continued to purchase these products after learning about the FDA warnings and corresponding with Mr. Zhou about the alerts.
Starting in August 2009, an FDA-OCI undercover agent began contacting Mr. Zhou through email, first portraying himself as J.K. and then also as J.K.‘s business partner. In November 2009, the undercover agent placed an order with Mr. Zhou for 500 boxes of Super Slim. Mr. Zhou filled this order during late November and early December by causing six parcels to be mailed from various addresses in China to an undercover address in Littleton, Colorado. The parcels contained more than 18,000 capsules of Super Slim in blister packs, samples of which were determined in FDA laboratory testing to contain Sibutramine. In exchange, agents paid Mr. Zhou $2,500 via two Western Union payments sent to an individual in China later identified by Mr. Zhou as his girlfriend.
In January 2010, the undercover FDA-OCI agent, acting as J.K.‘s business partner, placed a second order with Mr. Zhou for 200 boxes of Super Slim and 100 boxes each of Meizitang and 2 Day Diet. In addition, having learned that Mr. Zhou also sold commercial quantities of purported Alli, the agent requested fifty boxes of Alli. Mr. Zhou fulfilled this order, causing five parcels containing the requested quantities of the drugs and accompanying packaging and leaflets to be mailed from China to the undercover address in Littleton, Colorado. Tested samples from these parcels were determined to contain Sibutramine.
One of these five parcels contained approximately 6,000 capsules of purported
In February 2010, Mr. Zhou agreed to meet with the FDA-OCI undercover agent in Bangkok, Thailand for the ostensible purpose of negotiating future sales of larger volumes of counterfeit weight loss products, as well as to introduce Mr. Zhou to a second undercover agent, a Postal Inspector, posing as the owner of a chain of grocery and health food stores in the United States. During the meetings, which were video and audio recorded, Mr. Zhou portrayed himself as the manufacturer and supplier of the counterfeit weight loss products and acknowledged that they contained Sibutramine and were the subject of FDA alerts in the United States. He told the agents that he sold commercial quantities of these products to various re-distributors in the United States, including in Colorado and Pennsylvania. Mr. Zhou and the agents discussed the various defects in his last batch of counterfeit Alli, and Mr. Zhou promised to correct these problems in the next batch of 10,000 boxes he planned to manufacture.
The undercover agents indicated they were interested in purchasing larger volumes of counterfeit Alli but wanted Mr. Zhou to send it as air cargo with the help of a collusive private customs broker, actually another undercover FDA-OCI agent, who would assist in the plot. At the meeting in Bangkok, the undercover agents placed an order for 100 boxes each of 2 Day Diet and Super Slim to be shipped through the mail, as well as 1,000 boxes of counterfeit Alli to be shipped as air cargo. The agents paid Mr. Zhou $5,500 as half payment for the order.
Following the meeting in Bangkok, the FDA-OCI undercover agent posing as J.K.‘s associate exchanged several emails with Mr. Zhou regarding the progress of this third order. In early March 2010, a parcel containing approximately 2,994 capsules of Super Slim, along with 100 boxes and related materials, was received at the Littleton, Colorado undercover address from co-defendant Ms. Qingming Hu, Mr. Zhou‘s Houston, Texas-based redistributor. The following day, a second parcel was received from China containing the order of 2 Day Diet and associated packaging materials. Samples from each of these parcels were found to contain Sibutramine.
In an email sent March 2, 2010, Mr. Zhou asked the undercover agents to consider increasing their order of counterfeit Alli to cover his entire batch of 10,000 boxes, containing a total of 1.2 million capsules. The agents agreed to do so but they wanted additional assurances the defects in the boxes, bottle labels, and customer pamphlets noted in the previous batch of counterfeit Alli had been corrected. Mr. Zhou agreed to send the agents samples of the new batch and also to show the agents samples at a meeting in Honolulu, Hawaii later that month.
Thereafter, Mr. Zhou mailed from Kunming, China to Littleton, Colorado a parcel containing five sets of purported Alli boxes, the accompanying customer product pamphlets, and a sheet of bottle labels. The items bore GSK‘s registered trademarks for the Alli product and were devoid of the defects and mistakes present in the previous batch of counterfeit Alli.
In addition, Mr. Zhou showed the undercover agents a set of counterfeit boxes, bottle labels, and customer pamphlets he had brought with him to the meeting, noting the defects that had been corrected since his last batch. Mr. Zhou also related to the agents his prior experience manufacturing counterfeit Alli. He told them his first batch had consisted of approximately 2,000 bottles and boxes, most of which had already been sold in the United States and the United Kingdom through his commercial customers. He again acknowledged that the counterfeit Alli, like the other weight loss products he sold, contained Sibutramine and told the agents that the batch he was currently producing would contain even more Sibutramine.
Mr. Zhou reviewed with the alleged private customs broker the logistics of shipping the 10,000 counterfeit Alli boxes as air cargo. He filled out customs and shipping documents, claiming falsely in the forms that the cargo would be “rice,” and providing fictitious contact information for the shipper. Mr. Zhou told the undercover agents that by April 10, eighteen days after the meeting, the order would be complete and ready to ship. As the meeting ended, one of the agents handed Mr. Zhou a stack of U.S. currency which was purportedly part of the $55,000 the agents had promised to pay him that day. Mr. Zhou was arrested after he accepted the money.
During a series of post-arrest interviews, Mr. Zhou told agents that he had, in fact, been planning on completing the 10,000 unit order of counterfeit Alli and shipping the products to the undercover agents. He acknowledged that the contents of the capsules he had been distributing, and had been preparing to again provide, did not contain the same API as genuine Alli but instead contained Sibutramine. Mr. Zhou explained that he outsourced the fabrication of the various components of the products to associates in China. He also acknowledged being aware that the products he manufactured were the subject of FDA alerts and that the sale of these products in the United States violated United States law.
During the course of the investigation of this case, the government identified several people in the United States who had purchased commercial quantities of Mr. Zhou‘s products and then redistributed them to consumers. In addition to J.K. in Colorado, the government identified a Pennsylvania resident, referred to herein as W.C., and a Tennessee resident, referred to herein as K.S., as redistributors for Mr. Zhou. Both W.C. and K.S. purchased counterfeit Alli and other weight loss products from Mr. Zhou and resold retail amounts to consumers through internet
Mr. Zhou was charged with fifty-nine counts relating to the trademark infringement, counterfeit production, and trafficking of weight loss drugs, including Alli. In accordance with his plea agreement, he entered a guilty plea as to count 41 of the superseding indictment for trafficking and attempted trafficking of Alli using counterfeit marks registered with the United States Patent and Trademark Office, in violation of
The pre-sentence report (PSR) calculated Mr. Zhou‘s base offense level under
Having no criminal history in the United States, Mr. Zhou‘s criminal history category was I. Under the sentencing guidelines, an offense level twenty-seven combined with a category I criminal history provides for an advisory guideline range of seventy to eighty-seven months’ imprisonment. Mr. Zhou objected to the recommended enhancements for the infringement amount calculated in the PSR, the four-level enhancement for being a leader or organizer, the two-point enhancement for consciousness of a risk of death or serious bodily injury, and the amount of restitution ordered.
At sentencing, the district court found the recommended enhancements in the PSR appropriate and concluded that a sentence at the top of the advisory guideline range was justified, sentencing Mr. Zhou to eighty-seven months’ imprisonment and three years’ supervised release. The court also ordered Mr. Zhou to pay a total of $507,568.39 in restitution to the victims. Of that amount, $417,396.39 was to be paid to GSK and $90,172 to five individuals who had consumed the counterfeit products.
II.
Mr. Zhou raises four issues on appeal. He reiterates his objection to the district court‘s calculation of the infringement amount, contending the court erred by including the not-yet-completed order of 10,000
A. Infringement Amount
Mr. Zhou first contends the district court erred in imposing a 14-level enhancement to his offense level by miscalculating the “infringement amount” under
A case under
18 U.S.C. § 2318 or§ 2320 that involves a counterfeit label, patch, sticker, wrapper, badge, emblem, medallion, charm, box, container, can, case, hangtag, documentation, or packaging of any type or nature (I) that has not been affixed to, or does not enclose or accompany a good or service; and (II) which, had it been so used, would appear to a reasonably informed purchaser to be affixed to, enclosing or accompanying an identifiable, genuine good or service. In such a case, the “infringed item” is the identifiable, genuine good or service.
U.S. SENTENCING GUIDELINE MANUAL § 2B5.3, app. note 2(A)(vii) (2012). The court held this application note squarely applies to the facts at hand because it is undisputed that the counterfeit boxes, booklets, and labels for the 10,000 units had already been produced and were in Mr. Zhou‘s control at the time of his arrest. The court therefore calculated the infringement amount as the average retail price of a genuine unit of Alli (120-count refill pack) at the relevant time, $51, multiplied by the 666 units that had actually been completed and shipped to the United States plus the 10,000 units which Mr. Zhou had agreed to complete and send, for a total of $543,966. Applying the chart at
Mr. Zhou asserts the court erred in calculating the infringement amount by not taking into account the law of attempt and
for clear error, “giving due deference to the district court‘s application of the guidelines to the facts.” Id.
According to its title,
The cases cited by Mr. Zhou to support his argument against this conclusion are not persuasive. Both United States v. Guerra, 293 F.3d 1279 (11th Cir. 2002) (prosecution must establish with “reasonable certainty” that infringing items were close to completion), and United States v. Sung, 87 F.3d 194 (7th Cir. 1996) (same), were decided under an earlier version of
Mr. Zhou also contends the district court neglected to make a finding that the completed packaging materials “would appear to a reasonably informed purchaser to be affixed to, enclosing or accompanying an identifiable, genuine good” as required by
B. Mr. Zhou as Organizer or Leader
Mr. Zhou next argues that the district court failed to articulate a sufficient basis for finding he was “an organizer
The commentary accompanying
the exercise of decision making authority, the nature of participation in the commission of the offense, the recruitment of accomplices, the claimed right to a larger share of the fruits of the crime, the degree of participation in planning or organizing the offense, the nature and scope of the illegal activity, and the degree of control and authority exercised over others.
U.S. SENTENCING GUIDELINES MANUAL § 3B1.1, cmt. n.4 (2012). More than one person can qualify as a leader or organizer of a single criminal association or conspiracy and “a defendant need not lead or organize at least five individuals. . . A defendant may be eligible for the leader or organizer enhancement if he leads or organizes even one other participant.” United States v. Damato, 672 F.3d 832, 847 (10th Cir. 2012) (citing United States v. Hamilton, 587 F.3d 1199, 1222 (10th Cir. 2009)).
Contrary to Mr. Zhou‘s contention, the record supports the district court‘s conclusion that he was a leader or organizer for purposes of
district court in coming to this determination was largely undisputed, consisting mainly of Mr. Zhou‘s own recorded statements from his
At the sentencing hearing, the government offered to call agents to testify to these facts and also to testify that Mr. Zhou claimed to have had approximately twenty employees and that he personally had come up with the idea to produce counterfeit Alli and sell it in the United States. Although in his appeal Mr. Zhou attempts to paint a different picture, the transcript of the sentencing hearing makes sufficiently clear that when the court asked Mr. Zhou if he contested these assertions, his counsel indicated he did not and that he would accept the government‘s proffer of evidence. See n.3, infra. The district court did not spend much time discussing this uncontested evidence, but it found that the leader or organizer prong was satisfied, stating that “of course, here we know that [Mr. Zhou] was a leader or organizer of at least one person, namely the co-defendant, Ms. Hu. So in that sense that requirement has been satisfied.”3 Rec., vol. II at 107.
The government also made a proffer that agents would testify to the extensive nature of the criminal activity and the existence of four or more additional people involved in the enterprise. Again, Mr. Zhou‘s counsel indicated that he would accept the proffer and that it would not be necessary for the government to call witnesses to testify to these allegations. The district court then proceeded to name four individuals in addition to Mr. Zhou who were “underlings at least” and participants in the criminal enterprise. Id. at 107-08. The court further found that due to the sophistication and international scope of the criminal enterprise the “otherwise extensive” prong of
It would have been preferable if the district court had been more thorough in articulating the reasons for the enhancement and in identifying which of the “organizer or leader” factors supported its finding, but the court‘s findings were specific enough to provide “a clear picture of the reasoning [the court] employed . . . .” United States v. Pelliere, 57 F.3d 936, 940 (10th Cir. 1995) (internal quotation marks omitted); see also United States v. Wacker, 72 F.3d 1453, 1476 (10th Cir. 1995) (holding district court‘s factual findings sufficient for a
In sum, we conclude the district court made sufficient “specific findings and advance[d] a factual basis to support [the] enhancement under
C. Conscious or Reckless Risk of Death or Serious Injury
Mr. Zhou also challenges the two-level increase applied to his offense level based on the district court‘s finding that his conduct involved “the conscious or reckless risk of death or serious bodily injury” pursuant to
We have not yet addressed what mental state is required to qualify for the
We examined the mental state required for the theft and fraud enhancement in United States v. Maestas, 642 F.3d 1315 (10th Cir. 2011), and held the guideline to “require the defendant to have been conscious of or reckless as to the existence of the risk created by his or her conduct.” Id. at 1321 (emphasis in original). We explained:
Generally, recklessness is an objective standard, and we interpret “reckless risk” to describe objectively culpable conduct. We hold that a defendant‘s conduct involves a conscious risk if the defendant was subjectively aware that his or her conduct created a risk of serious bodily injury, and a defendant‘s conduct involves a reckless risk if the risk of bodily injury would have been obvious to a reasonable person.
The district court applied this enhancement after finding that Mr. Zhou was consciously
The district court‘s findings are supported by sufficient evidence and are not clearly erroneous. In arguing that he was not consciously aware his conduct created a risk of death or serious bodily injury, Mr. Zhou highlights several comments he made to the undercover agents during their meeting in Bangkok when he assured the undercover agents that he had tested the drugs and no one would die from taking them. He also claimed the FDA issued warnings for any product coming from China. The district court was not persuaded by this argument, noting that Mr. Zhou made these comments as a salesman in the process of selling counterfeit drugs to potential buyers and thus they must “be taken with a grain of salt.” Id.
It was reasonable and not clear error for the district court to infer that because Mr. Zhou was aware of the FDA warnings, he was also subjectively and consciously aware of the information contained in the warnings that the counterfeit drugs he was manufacturing and distributing created a risk of death or serious bodily injury. See Maestas, 642 F.3d at 1322 (allowing reasonable inference from defendant‘s history that he had a conscious awareness his conduct involved a risk of death or serious bodily injury). It was therefore appropriate to add the two-level increase to Mr. Zhou‘s offense level in accordance with
D. Restitution
Mr. Zhou‘s final argument is that the district court erred in ordering him to pay $417,396.39 in restitution to GSK under the Mandatory Victims Restitution Act (“MVRA“),
The MVRA mandates, in part, that a district court order a defendant to pay restitution when he is convicted of an offense “in which an identifiable victim . . . has suffered a physical injury or pecuniary loss.”
It is uncontested that the MVRA applies to this case. The district court ordered Mr. Zhou to pay GSK restitution in the amount of $32,179.64 for lost sales, which Mr. Zhou does not challenge, and a further $385,216.75 for expenses incurred by GSK in responding in various ways to the counterfeit Alli, which Mr. Zhou appeals. These sums were based on a letter submitted by GSK to the probation officer and appended to the PSR, which describes the response efforts the company undertook when it learned that counterfeit Alli, produced and distributed by Mr. Zhou, was being sold in the United States. These efforts included: alerting consumers to the dangers posed by, and how to identify, the fraudulent drugs; monitoring and tracking consumer reports of the counterfeit product; and retaining the services of a public relations firm to assist with this crisis management. The public relations campaigns focused on providing consumers with “complete and accurate information about the problem [of counterfeit Alli]” through an ad campaign and by optimizing internet search engine results. Rec., vol IV at 144. The letter explains that GSK employees “collaborate[d] closely with the FDA and other officials on the rapidly evolving crisis” and “cooperated closely with the FDA-OCI in their investigation.” Id. It also states that “[t]he sales of counterfeit versions of our products threatens not only our hard-earned reputation but potentially imperils the health and safety of patients.” Id. at 143.
Attached to the letter is a spreadsheet detailing the expenses incurred by GSK as a result of Mr. Zhou‘s counterfeiting activities, which it describes as “Alli counterfeit management costs.” Id. at 143. The letter highlights that the expenses shown on the spreadsheet were “out-of-pocket sums” and did not include “the additional personnel time and other internal resources and expenses” the company dedicated to dealing with the counterfeit Alli. Id. at 145. Nor did the company seek to actually quantify the “damage to the reputation of the brand caused by Mr. Zhou‘s activities,” id., which presumably would have been very difficult if not impossible. The spreadsheet itself provides the following “project descriptions” for the expenses: “issue management,” “website technical execution,” “website development,” “extended coverage for 1-800 phone line,” “the counterfeit Alli campaign for all three [search] engines,” and “omnibus study.” Id. at 146.
In determining the amount of restitution it ordered Mr. Zhou to pay GSK, the district court adopted the amounts from the spreadsheet, finding
they [are] the types of expenses that you would anticipate a manufacturer of a FDA approved drug would incur if it realized that someone was out there counterfeiting its product, especially counterfeiting the product in a way that
could be harmful to the consumers and therefore not only hurt people, but also severely damage the brand name and as a result all of the trademarks, undercut the good will of the company . . . the fact that the company incurred all those different expenses which amount to quite a bit of money [is] perfectly reasonable.
Rec., vol. II at 121. The district court further found that the restitution was a “direct result of the defendant‘s activities and the company‘s reasonable reaction to counterfeit Alli products of the defendant getting into the United States.” Id. at 121-22.
Mr. Zhou contends the district court erred by ordering restitution for expenses not authorized under the MVRA. “Courts have no inherent power to order restitution; they may only do so as authorized by statute.” United States v. Gordon, 480 F.3d 1205, 1210 (10th Cir. 2007). The MVRA therefore sets the outer limits on the type of damages that are compensable in this case. We have held that “the MVRA does not provide incidental, consequential, or pain and suffering awards,” United States v. Serawop, 505 F.3d 1112, 1124 (10th Cir. 2007), but it does entitle victims to recover losses “‘actually caused by the defendant‘s offense.” Id. at 1123; see also United States v. Patty, 992 F.2d 1045, 1049 (10th Cir. 1993); United States v. Quarrell, 310 F.3d 664, 680 (10th Cir. 2002) (“A restitution order must be based on actual loss.“) (emphasis in original).
Mr. Zhou‘s main problem on appeal is that he failed to object to the requested restitution for GSK other than the vague general assertion that it was “speculative.” He now argues that the restitution for GSK‘s public relations and other expenses included in the $385,216.75 are consequential in nature and do not fall within the losses covered by
To the extent Mr. Zhou is making a legal argument he failed to raise in district court, we review only for “particularly egregious or obvious and substantial legal error, which our failure to consider would result in a miscarriage of justice.” Patty, 992 F.2d at 1049 (internal quotation marks omitted). To establish plain legal error, Mr. Zhou must show an error, clear and obvious under current law, that affects substantial rights. United States v. Hughes, 191 F.3d 1317, 1322 (10th Cir. 1999). To the extent Mr. Zhou is attempting to raise unpreserved factual errors, we have held under the plain error standard that failure to assert a factual dispute at sentencing waives the challenge because it prevented the probation officer from reviewing and the district court from resolving the fact issue. Overholt, 307 F.3d at 1253.
We first address Mr. Zhou‘s assertion that there is no indication the expenses claimed by GSK were “incurred during participation in the investigation or prosecution of the offense” as required by
Mr. Zhou also argues that the government failed in its burden to establish he caused all of the claimed damages. Whether the government established causation is a fact issue that Mr. Zhou failed to raise and has thus waived. See Overholt, 307 F. 3d at 1253 (defendant‘s argument that damage to victim‘s property “came from other sources” is a “purely factual issue[]” and is waived if not raised below).
Mr. Zhou contends in addition that many of the listed expenses are not covered by
The district court found that the expenses GSK requested were reasonable and directly related to the damage done by Mr. Zhou to GSK‘s property through his counterfeiting activities, specifically mentioning that Mr. Zhou‘s counterfeiting activity was done in a way that would “severely damage the brand name and . . . undercut the good will of the company,” indicating that the court was ordering restitution pursuant to
Restitution under
District courts have “abundant discretion” in determining the amount of damage done to a victim‘s property. Serawop, 505 F.3d at 1124. We and other courts have held that a restitution order under
The expenses listed by GSK in the letter and spreadsheet can be characterized as “cleanup or repair costs” directly related to Mr. Zhou‘s counterfeiting activities. While the expenses incurred by GSK seeking to mitigate and repair the damage done by Mr. Zhou are not an exact measure of the harm he caused to GSK‘s property, they serve as an acceptable proxy which is much easier to quantify and verify than the actual damage to GSK‘s trademarks, reputation, and goodwill. See Barton, 366 F.3d at 1167 (instructing district court to order MVRA restitution from defendant convicted of setting fire to inflammable materials on federal lands in amount spent by Forest Service on revegetating burned area despite difficulty in quantifying the actual value of the damage done to the property). Indeed, as noted above, a district court has broad discretion in crafting a restitution order under the MVRA, Serawop, 505 F.3d at 1124, and at the sentencing hearing here the district court found the mitigation expenses were “reasonable” and incurred as “a direct result of the defendant‘s activities . . . .” Rec., vol. II at 122; see Patty, 992 F.2d at 1049 (losses must be “directly related” to defendant‘s criminal conduct). This damage was thus not incidental or consequential to Mr. Zhou‘s counterfeiting, but rather, as determined by the district court, was “direct,” causing actual losses to GSK. Rec., vol. II at 121.
In sum, although we doubt there was any error at all, we affirm the restitution order “because if there was error, it was not clear or obvious under current law.” Overholt, 307 F.3d at 1253 (internal quotation marks omitted).
We AFFIRM.