United States v. Shengyang Zhou , 717 F.3d 1139 ( 2013 )

FILED
United States Court of Appeals
Tenth Circuit
June 10, 2013
Elisabeth A. Shumaker
Clerk of Court
PUBLISH
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v. No. 11-1261
SHENGYANG ZHOU a/k/a TOM,
Defendant-Appellant.
Appeal from the United States District Court
for the District of Colorado
(D.C. No. 1:10-CR-00226-PAB-1)
Jessica E. Yates of Snell & Wilmer L.L.P. , Denver, Colorado, for Defendant-
Appellant.
James C. Murphy, Assistant U.S. Attorney (John F. Walsh, United States
Attorney, with him on the brief), Denver, Colorado, for Plaintiff-Appellee.
Before KELLY, SEYMOUR, and TYMKOVICH, Circuit Judges.
SEYMOUR, Circuit Judge.
Mr. Shengyang Zhou pled guilty to trafficking and attempted trafficking of
counterfeit goods in violation of 18 U.S.C. § 2320 and § 2. He was sentenced to
eighty-seven months’ imprisonment and three years’ supervised release, and he
was ordered to pay restitution of $507,567. Mr. Zhou contends the district court
made a number of errors in sentencing him. We disagree and affirm.
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 F ED . R. C RIM . P. 32(i)(3) (“At
sentencing, the court: (A) may accept any undisputed portion of the presentence
report as a finding of fact. . . .”).
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
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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 the pharmaceutical company Glaxo Smith Kline (GSK) and contains Orlistat as
its API, not Sibutramine, and is approved by the FDA for over-the-counter sales.
The alerts indicated that the counterfeit Alli was typically being sold to
consumers on internet auction websites and looked similar to the authentic Alli
weight loss drug, including the Alli name and trademarks, but contained certain
enumerated defects. The alerts further warned that consumers who took
counterfeit versions of the drug in accordance with the GSK dosing directions for
genuine Alli could be ingesting up to twice the recommended maximum dosage
for Sibutramine, resulting in a myriad of health risks.
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
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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
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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 Alli, along with fifty folded boxes, bottles, and consumer product
literature bearing the registered trademarks and other markings of the authentic
Alli product (each bottle and corresponding box were to contain 120 capsules).
On close inspection, the capsules, bottles, and related packaging and literature
were found to share the same defects and errors detected in the counterfeit Alli
products that were the subject of the FDA warnings. The agents paid Mr. Zhou
$4,000 for these shipments via Western Union wire transfers to Mr. Zhou’s
girlfriend in China.
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
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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
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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.
On March 23, 2010, Mr. Zhou arrived in Honolulu and was met at the
airport by the undercover FDA-OCI agent posing as J.K.’s associate and the
Postal Inspector posing as the grocery and natural food stores owner. They went
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to a hotel where they met with a second undercover FDA-OCI agent, portraying
himself as the collusive private customs broker. The meeting was video and
audio recorded. Mr. Zhou told the agents that the boxes, bottle labels, and
customer product pamphlets had been completed for the 10,000 counterfeit boxes
of Alli the agents had ordered, and were in his control, but that he was still
awaiting the fabrication of the counterfeit capsules themselves. As proof of his
progress, he showed the agents a video clip that showed Mr. Zhou in an
apartment, presumably in China, filled with stacks of large packages in plain
brown wrappers. In the video, Mr. Zhou opened several of the packages, which
contained folded Alli boxes, sheets of bottle labels, and product pamphlets, all
displaying the GSK registered Alli trademarks affixed in the appropriate
locations.
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
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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
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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 auctions on eBay and other websites. Federal agents located and
interviewed several consumers who had purchased counterfeit Alli through K.S.,
W.C., and Zhou’s other redistributors. Many of these individuals had retained
some of the purported Alli capsules, samples of which were tested by the FDA
and found to contain Sibutramine. The bottles and accompanying packaging were
inspected and, although they bore GSK’s registered trademarks, they were found
to exhibit the same defects noted in the FDA alerts and presented on the bottles
supplied by Mr. Zhou to the undercover agents in January 2010.
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 18 U.S.C. § 2320(a)(1) and § 2. As part of his
plea agreement, Mr. Zhou agreed that restitution was mandatory and that while he
had pled guilty only to count 41 of the superseding indictment, restitution would
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be calculated based on the losses sustained as a result of his commission of all
offenses charged, including relevant conduct. Mr. Zhou reserved the right to
assert any arguments regarding the calculation of his sentencing guideline range
that were factually consistent with the terms of his guilty plea.
The pre-sentence report (PSR) calculated Mr. Zhou’s base offense level
under U.S.S.G. § 2B5.3(a) to be eight. The PSR recommended several increases
based on specific offense characteristics: a fourteen-point increase pursuant to §
2B1.1 for the infringement amount, which the government calculated to be
$661,292; a two-point increase pursuant to § 2B5.3(b)(3)(A) reflecting the
manufacture and importation of the infringing items; a further two-point increase
pursuant to § 2B5.3(b)(5)(A) because the offense involved the conscious or
reckless risk of death or serious bodily injury; and a four-point increase pursuant
to § 3B1.1(a) because Mr. Zhou was an organizer or leader of criminal activity
that involved five or more participants or was otherwise extensive. Finally, the
PSR recommended a three-point downward adjustment for acceptance of
responsibility, resulting in a total recommended offense level of twenty-seven.
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
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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 bottles of counterfeit Alli
without making findings regarding whether the sentencing guidelines provision on
attempt, U.S.S.G. § 2X1.1, was satisfied. He contests the four-level enhancement
for being an “organizer or leader” under U.S.S.G. § 3B1.1(a), claiming the court
failed to articulate the factual basis for this enhancement. He also challenges the
district court’s application of U.S.S.G. § 2B5.3(b)(5), asserting there was
insufficient evidence he was consciously aware of a risk of death or serious
bodily injury and arguing the court failed to apply the correct standard of
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“recklessness” in making this determination. Finally, Mr. Zhou contends the
district court incorrectly included $385,217 of what he calls “public relations”
expenses in the restitution he was ordered to pay GSK, asserting such costs are
not compensable under the Mandatory Victims Restitution Act, 18 U.S.C. §
3663A. We address each argument in turn.
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 U.S.S.G. § 2B5.3(b)(1). The dispute centers on whether the final order of
10,000 units of counterfeit Alli, which had not been delivered to the undercover
agents at the time of Mr. Zhou’s arrest, should be included in the infringement
amount. In determining that the 10,000 units should be included, the district
court relied on Application Note 2(A)(vii) to § 2B5.3, which states:
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. S ENTENCING G UIDELINE M ANUAL § 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
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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 § 2B1.1(b)(1), this
amount of more than $400,000 but less than $1 million corresponded to the 14-
level increase the court imposed.
Mr. Zhou asserts the court erred in calculating the infringement amount by
not taking into account the law of attempt and U.S.S.G. § 2X.1.1, the general
guideline for attempt, solicitation and conspiracy. He claims that under § 2X.1.1,
in order to include the 10,000 unfinished units in the infringement amount, the
district court was required to determine it was “reasonably certain” that Mr. Zhou
was about to complete all the acts necessary for successful completion of these
units but for the fact that he was arrested. 1 We review legal questions regarding
the application of the sentencing guidelines de novo. United States v. Brown, 314
F.3d 1216, 1222 (10th Cir. 2003). We review the district court’s factual findings
1
Section 2X1.1 provides, in pertinent part, that when a defendant is
convicted of an attempt crime, the base offense level of the substantive offense is
decreased by 3 levels “unless the defendant completed all the acts the defendant
believed necessary for successful completion of the substantive offense or the
circumstances demonstrate that the defendant was about to complete all such acts
but for apprehension or interruption by some similar event beyond the defendant’s
control.” U.S. S ENTENCING G UIDELINES M ANUAL § 2X1.1(b)(1) (2012).
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for clear error, “giving due deference to the district court’s application of the
guidelines to the facts.” Id.
According to its title, § 2X1.1 applies to attempts “not covered by a
specific offense guideline.” § 2X1.1. See United States v. Martinez, 342 F.3d
1203, 1205 (10th Cir. 2003) (“[W]here a defendant is convicted of an attempt
crime not itself covered by a specific offense guideline, calculation of the
defendant’s sentence must be pursuant to § 2X1.1.”). The obvious corollary to
this rule is that when an attempt crime is covered by a specific guideline, that
guideline applies and § 2X1.1 does not. § 2X1.1(c)(1) (“When an attempt . . . is
expressly covered by another offense guideline section, apply that guideline
section.”). The district court determined that § 2B5.3 Application Note 2(A)(vii)
constituted a specific guideline covering attempt in the context of trafficking
counterfeit goods and accordingly applied it in lieu of § 2X1.1. See United States
v. Mojica, 214 F.3d 1169, 1171 (10th Cir. 2000) (“District courts are obliged to
follow the explanatory application notes unless they are plainly erroneous,
inconsistent with the guidelines, or violative of the Constitution or a federal
statute.”).
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.
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1996) (same), were decided under an earlier version of § 2B5.3 that did not
include Application Note (2)(A)(vii). This application note squarely addresses
the circumstances here and, as admitted by Mr. Zhou in his opening brief, was
added in direct response to Sung and similar cases. The district court did not err
in relying on the specific offense guideline rather than the general attempt
guideline.
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 § 2B5.3, Application Note 2(A)(vii). The record shows
otherwise. Undisputed portions of the PSR and Mr. Zhou’s plea agreement
recount that the completed packaging for the 10,000 units in question bore GSK’s
registered trademarks for Alli in the same location as the genuine packaging.
Samples of this packaging were sent to GSK employees who determined that,
while counterfeit, the packaging was identical to or substantially indistinguishable
from genuine packaging materials. Mr. Zhou did not object to these portions of
the plea agreement or the PSR, the undisputed portions of which were adopted by
the court as findings of fact at sentencing. The fact that the counterfeit package
was virtually indistinguishable from the authentic items supports the district
court’s application of Application Note 2(A)(vii).
B. Mr. Zhou as Organizer or Leader
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Mr. Zhou next argues that the district court failed to articulate a sufficient
basis for finding he was “an organizer or leader of a criminal activity that
involved five or more participants or was otherwise extensive,” and for imposing
the accompanying four-level role enhancement pursuant to U.S.S.G. § 3B1.1(a).
We review the district court’s factual finding that the defendant acted as a leader
or organizer under § 3B1.1 for clear error. United States v. Snow, 663 F.3d 1156,
1162 (10th Cir. 2011). “Under this standard, we will not reverse the district
court’s finding unless, ‘on the entire evidence, we are left with the definite and
firm conviction that a mistake has been committed.’” United States v. James, 592
F.3d 1109, 1113 (10th Cir. 2010) (quoting United States v. Wilfong, 475 F.3d
1214, 1218 (10th Cir. 2007)).
The commentary accompanying § 3B1.1 instructs a sentencing court to
consider the following factors to distinguish a leadership or organizational role
from one of mere management or supervision:
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. S ENTENCING G UIDELINES M ANUAL § 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. . .
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. 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 § 3B1.1(a). The PSR
recommended this enhancement and Mr. Zhou initially objected. But at the
sentencing hearing Mr. Zhou’s counsel retreated from his earlier objection, stating
that he would leave the matter to the court’s discretion in light of Mr. Zhou’s own
recorded statements entered into evidence. 2 Indeed, the evidence relied on by the
2
When asked by the district court whether he had any objection to the leader
or organizer enhancement under § 3B1.1(a), Mr. Zhou’s counsel replied, “I will
leave that to the Court’s discretion because what [Mr. Zhou] says in the DVD
[recording the various meetings between Mr. Zhou and the undercover federal
agents], I think he does say that there was certainly more than four people.
Obviously, Ms. Hu is one person who we have that the Court is aware of, but the
two people that were redistributors I assume the Court is going to say were part of
the same thing that I heard, the organizer or organization of Defendant Zhou. So
I have nothing more to submit on that. The DVD speaks for itself.” Rec., vol. II,
at 102-03. After the prosecution offered a detailed description of the evidence
they would produce showing Mr. Zhou qualified as a leader or organizer for
purposes of § 3B1.1(a), the court asked Mr. Zhou’s attorney “do you contest?” to
which he answered, “No.” Id. at 106. The court then clarified that the
prosecution “may want to put on those witnesses unless there is no contested facts
in terms of those people [whom the prosecution had alleged Mr. Zhou had led or
organized].” Id. Mr. Zhou’s counsel replied “I am well aware of what my client
told the government during its ‘debriefing’ and I would certainly acknowledge the
government has sufficient – I should indicate when I filed the objections, I didn’t
have access to the DVD nor my client. That’s why I went out to the joint to go
talk to him and it appears what he said we are stuck with. And obviously he says
that, and four or more, and the distinction, I mean obviously is a distinction
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district court in coming to this determination was largely undisputed, consisting
mainly of Mr. Zhou’s own recorded statements from his meeting with the
undercover agents in Bangkok, Thailand and from the meeting and subsequent
post-arrest interviews with agents in Honolulu, Hawaii. During these encounters,
Mr. Zhou told the agents that he owned two companies producing and distributing
both the counterfeit Alli and the other weight loss drugs he sold to the undercover
agents, that he was “the boss” of this enterprise, and that he had no other partners
in the venture. Rec., vol. III at 41. He assured the undercover agents that he had
no need to ask permission or seek approval from anyone else involved in the
enterprise when he agreed to supply the counterfeit Alli and other weight loss
drugs. Even after Mr. Zhou was arrested, he did not attempt to deny or minimize
the leadership role he played in the production of the counterfeit drugs. Mr. Zhou
explained to the agents in the course of several post-arrest interviews that while
he outsourced the fabrication of the various components of the drugs to associates
in China, he was solely responsible for the overall manufacture and distribution of
the counterfeit products.
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
without meaning.” Id.
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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 § 3B1.1(a) was also
satisfied.
3
Uncontested portions of the PSR and the plea agreement establish that Ms.
Hu, based in Houston, Texas, was an employee of Mr. Zhou who facilitated the
distribution of counterfeit drugs within the United States.
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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 §
3B1.1(a) enhancement even though court did not explicitly discuss which
“organizer or leader” factors supported its finding). The court’s findings on this
matter are supported by substantial uncontested evidence. See Wacker, 72 F.3d at
1476. Moreover, given that Mr. Zhou’s attorney withdrew his objection to this
enhancement, it is understandable that the court did not make more detailed
findings on this point.
In sum, we conclude the district court made sufficient “specific findings
and advance[d] a factual basis to support [the] enhancement under U.S.S.G. §
3B1.1,” United States v. Ivy, 83 F.3d 1266, 1292 (10th Cir. 1996) (internal
quotation marks omitted), and that the court’s finding that Mr. Zhou qualifies as a
leader or organizer under § 3B1.1(a) was not clearly erroneous.
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
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reckless risk of death or serious bodily injury” pursuant to U.S.S.G. §
2B5.3(b)(5). 4 Mr. Zhou objected to the recommendation for this enhancement
contained in the PSR and renewed his objection at the sentencing hearing. In this
appeal, Mr. Zhou claims the evidence relied on by the district court does not
support the finding that he was consciously aware of the serious health risks
posed by the counterfeit Alli he was producing. He further asserts the court
misapplied the “recklessness” prong of § 2B5.3(b)(5), arguing that the court
utilized a negligence standard rather than a recklessness standard and therefore
erred as a matter of law. As explained above, we review legal questions
regarding the sentencing guidelines de novo and factual findings for clear error,
“giving due deference to the district court’s application of the guidelines to the
facts.” United States v. Doe, 398 F.3d 1254, 1257 (10th Cir. 2005) (internal
quotation marks omitted).
We have not yet addressed what mental state is required to qualify for the §
2B5.3(b)(5) enhancement. The wording of this enhancement is identical to the
enhancement for theft and fraud offenses in U.S.S.G. § 2B1.1(b)(14), however,
and the commentary background to §2B5.3 notes that “[t]his guideline treats
copyright and trademark violations much like theft and fraud.” § 2B5.3 cmt.
4
Section 2B5.3, Criminal Infringement of Copyright or Trademark, provides,
in relevant part, that “[i]f the offense involved [] the conscious or reckless risk of
death or serious bodily injury . . . increase [the offense level] by 2 levels.” U.S.
S ENTENCING G UIDELINES M ANUAL § 2B5.3(b)(5) (2012).
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background. In light of this cross-reference and the identical wording of these
two enhancements, we hold that the mens rea requirement of § 2B5.3(b)(5) is the
same as the mens rea requirement for § 2B1.1(b)(14).
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.
Id.The district court applied this enhancement after finding that Mr. Zhou was
consciously aware of both the FDA alerts describing the serious health risks
posed generally by drugs containing Sibutramine as an undisclosed API, and the
warnings specifically addressing the health risks of the counterfeit Alli he was
producing and distributing. 5 In light of the uncontested evidence that Mr. Zhou
5
The warnings noted, inter alia, that individuals taking counterfeit Alli in
accordance with the established dosage instructions may have been taking three
times the usual daily dose, which is twice the recommended maximum daily dose.
The warnings explained that such high doses could cause anxiety, nausea, heart
palpitations, tachycardia (a racing heart), insomnia and small increases in blood
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discussed these warnings with undercover agents in person in Bangkok and
Hawaii, and also via email before those meetings took place, Mr. Zhou’s counsel
accepted the government’s proffer that Mr. Zhou was aware of these warnings
during the relevant time period. The court found that Mr. Zhou “had no reason to
discount the validity of [the warnings] given the fact that they came from the
FDA,” and concluded that Mr. Zhou was consciously aware of the risk of death or
serious bodily injury from producing and distributing the counterfeit Alli. Rec.,
vol. II at 116.
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
pressure in healthy people. In those with a history of cardiovascular disease, it
could lead to elevated blood pressure, stroke, or heart attack.
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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
§ 2B5.3(b)(5).
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”), 18 U.S.C. § 3663A. We review the legality of a restitution order
de novo. United States v. Quarrell, 310 F.3d 664 (10th Cir. 2002). “We review
the factual findings underlying a restitution order for clear error and the amount
of restitution imposed for abuse of discretion.” United States v. Bowling, 619
F.3d 1175, 1187 (10th Cir. 2010). Where the defendant failed to object, however,
we review only for plain error. United States v. Overholt, 307 F.3d 1231, 1253
(10th Cir. 2002) (stating plain error standard).
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.” 18 U.S.C. § 3663A(c)(1)(B)
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The statute requires restitution for a number of types of losses. As relevant here,
§ 3663A(b)(1) mandates restitution “in the case of an offense resulting in damage
to or loss or destruction of property of a victim of the offense . . . .” In addition,
§ 3363A(b)(4) provides that a defendant is required to “reimburse the victim for
lost income and . . . other expenses incurred during participation in the
investigation or prosecution of the offense or attendance at proceedings related to
the offense.” The only instances in which restitution is not required under the
MVRA are if “the number of identifiable victims is so large as to make restitution
impracticable,” or if “determining complex issues of fact related to the cause or
amount of the victim’s losses would complicate or prolong the sentencing process
to a degree that the need to provide restitution to any victim is outweighed by the
burden on the sentencing process.” §§ 3663A(c)(3)(A), (B).
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
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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
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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.
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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 § 3663A(b)(1). He also contends the district
court erred by accepting GSK’s calculation of its expenses without any supporting
information from invoices, sworn statements, or the like, and that there was
insufficient evidence Mr. Zhou caused these losses. He further asserts that the
claimed expenses were not all incurred during participation in the investigation or
prosecution of the offense and thus are not authorized for reimbursement under §
3663A(b)(4).
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
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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 § 3663A(b)(4). In the district court,
Mr. Zhou made no specific objection to the GSK letter or spreadsheet provided by
GSK and relied on by the district court. It is clear from the letter that at least
some of the disputed $385,216.75 in expenses were incurred by GSK during
participation in the investigation of Mr. Zhou, which was occurring at the same
time as GSK’s crisis management. See, e.g., United States v. Phillips, 477 F.3d
215, 224-25 (5th Cir. 2007) (affirming MVRA restitution to victim investigating
harm from theft of its computer data for expenses incurred notifying other victims
and determining extent of damage suffered). In imposing the restitution order,
however, the district court did not mention GSK’s role in the government’s
investigation or make a specific finding that the expenses were incurred during
participation in that investigation. But Mr. Zhou did not object to the requested
restitution on this basis. Whether all of the expenses were incurred by GSK
during the government’s investigation or prosecution of this matter is a fact
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question which Mr. Zhou has waived by his failure to object.
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 § 3663A(b)(1), which provides restitution for damage to property. At
sentencing, Mr. Zhou did not object to the recommended GSK restitution on the
basis that it was not authorized under the MVRA. We therefore review this
alleged legal error only if it is clear and obvious under current law, which is the
plain error standard he must meet. Id.
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 § 3663A(b)(1)(B). See supra at 28. GSK’s
property, its registered trademarks for Alli and the reputation and goodwill of the
company, was the subject of Mr. Zhou’s offense. See United States v. Shepard,
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269 F.3d 884, 887 (7th Cir. 2001) (restitution under MVRA is limited to the
“property subject to the offense”) (citing United States v. Arvantis, 902 F.2d 489,
497 (7th Cir. 1990)).
Restitution under § 3663A(b)(1)(B) is not limited to damage done to a
victim’s tangible property; it also includes damage to intangible property. See,
e.g., Overholt, 307 F.3d at 1254 (noting courts have allowed restitution under
MVRA for “purely financial losses,” collecting cases); United States v. Robers,
698 F.3d at 937, 955 (7th Cir. 2012) (allowing restitution under MVRA for
damage to capital in mortgage fraud scheme); Hosking, 567 F.3d at 332 (same for
damage to capital in embezzlement scheme). Accordingly, the district court
properly applied § 3663A(b)(1)(B) to the intangible property of GSK damaged by
Mr. Zhou’s counterfeiting activities.
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 § 3663A(b)(1)(B) can properly
include the cost of cleanup or repair of the damaged property because such costs
can serve as an “easily ascertained proxy for the loss sustained by the [victim] as
a result of [the defendant’s] crimes.” United States v. Barton, 366 F.3d 1160,
1167 (10th Cir. 2004); see also Quarrell, 310 F.3d at 680-81 (affirming MVRA
restitution in amount equal to costs incurred repairing archaeological site in
national forest) ; Overholt, 307 F.3d at 1254 (affirming, under plain error review,
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an MVRA restitution order directing defendants convicted of conspiring to
illegally dump petroleum-impacted wastewater to pay Coast Guard’s costs of
cleaning up pollution caused by defendants); United States v. Brock-Davis, 504
F.3d 991 (9th Cir. 2007) (“[C]lean-up or repair costs may be ordered under the
MVRA.”) (internal quotation marks omitted); United States v. Quillen, 335 F.3d
219, 226 (3d Cir. 2003) (holding “clean-up or repair costs may be ordered under
the MVRA, provided the defendant is not required to compensate the victim twice
for the same loss,” collecting circuit court cases).
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
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“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.
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