United States v. Marcus ( 1996 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v. No. 95-5600
JAY MARCUS,
Defendant-Appellant.
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Herbert N. Maletz, Senior Judge, sitting by designation.
(CR-93-286-PJM)
Argued: March 8, 1996
Decided: May 3, 1996
Before WIDENER, WILKINS, and MICHAEL, Circuit Judges.
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Affirmed by published opinion. Judge Wilkins wrote the opinion, in
which Judge Widener and Judge Michael joined.
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COUNSEL
ARGUED: William James Murphy, MURPHY & SHAFFER, Balti-
more, Maryland, for Appellant. Susan Leslie Strawn, Office of Con-
sumer Litigation, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee. ON BRIEF: John J. Connolly,
MURPHY & SHAFFER, Baltimore, Maryland, for Appellant. Lynne
A. Battaglia, United States Attorney, Maury S. Epner, Assistant
United States Attorney, Lawrence C. McDade, Deputy Director,
Office of Consumer Litigation, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for Appellee.
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OPINION
WILKINS, Circuit Judge:
Jay Marcus appeals the sentence imposed by the district court fol-
lowing his plea of guilty to one count of conspiracy to defraud the
United States. See 18 U.S.C.A. § 371 (West 1966). He maintains that
the lower court erred in finding that the victims of his offense suffered
an economic loss in excess of $10 million, resulting in the application
of a 15-level enhancement to his base offense level pursuant to United
States Sentencing Commission, Guidelines Manual , § 2F1.1(b)(1)(P)
(Nov. 1992). We affirm.
I.
Marcus was president and chief executive officer of Halsey Drug
Company, Inc., a manufacturer of generic drugs. After obtaining
approval from the United States Food and Drug Administration
(FDA) to manufacture and market quinidine gluconate (a time-
released medication used in the treatment of certain cardiac arrhyth-
mias) pursuant to an FDA-approved formula and process, Halsey
began to "scale up" operations. This procedure involved increasing
the amount of the drug that was produced from the relatively small
quantities prepared during testing to larger production-sized batches.
However, problems with dissolution tests1 performed on the quinidine
gluconate manufactured in these larger amounts led Halsey employ-
ees to modify the approved formula by adding two inactive ingredi-
ents, or excipients--magnesium stearate and stearic acid. This change
in formulation did not result in any modification of the active ingredi-
ents of the drug.
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1 Regulations prescribing good manufacturing practices for production
and process controls require testing of the time and rate of dissolution of
drug products from each batch during the manufacturing process to
assure the uniformity and integrity of the drugs. See 21 C.F.R.
§ 211.110(a)(4) (1995).
2
Marcus was not initially aware of the modification, but when he
learned of it, he elected not to inform the FDA or to seek approval
for the revision for fear that the FDA would consider the change to
be significant and require additional bioequivalence testing,2 likely
resulting in a long and expensive delay in marketing. It was undis-
puted that Halsey's gross sales from the quinidine gluconate manufac-
tured in accordance with the unapproved formula exceeded $10
million.
Marcus reached an agreement with the Government under which
he would plead guilty to one count of conspiracy to defraud the
United States. The parties stipulated to the material facts and agreed,
in the main, to the appropriate application of the sentencing guide-
lines. However, the parties reserved the right to present differing
views on the proper application of the loss enhancement provision of
§ 2F1.1(b)(1)--the Government taking the position that Marcus'
offense level should be increased by 15 levels based on a loss in
excess of $10 million and Marcus arguing that a loss enhancement of
far less was appropriate.
During the initial sentencing hearing, the district court held that the
amount of Halsey's gross sales was the appropriate measure of loss
under § 2F1.1(b)(1) and imposed the 15-level enhancement to Mar-
cus' base offense level. It accepted the Government's argument that
economic gain to the manufacturer was the proper measure of loss on
the theory that because the drug did not meet FDA specifications, it
had no value. Relying on this finding, the district court determined
that Marcus' guideline range was 41-51 months imprisonment and
imposed a sentence at the low end of this range.
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2 When submitting an abbreviated new drug application seeking FDA
approval to market a generic drug, an applicant must demonstrate, inter
alia, that the drug formulation that it proposes to use is bioequivalent to
the name-brand drug. See 21 C.F.R. § 314.94(a)(7) (1995). Generally
speaking, "[b]ioequivalence means the absence of a significant difference
in the rate and extent to which the active ingredient or active moiety in
pharmaceutical equivalents or pharmaceutical alternatives becomes
available at the site of drug action when administered at the same molar
dose under similar conditions in an appropriately designed study." 21
C.F.R. § 320.1(e) (1995) (emphasis omitted).
3
While Marcus' appeal of his sentence was pending before this
court, we issued our decision in United States v. Chatterji, 46 F.3d
1336 (4th Cir. 1995). In light of Chatterji, we granted Marcus' unop-
posed motion to remand for reconsideration. On remand, the Govern-
ment continued to maintain that the gain to Halsey was an appropriate
measure of the consumers' economic loss, pointing to the factual dif-
ferences underlying this case and Chatterji. Declining to hear testi-
mony from the parties as to the safety and efficacy of the altered
quinidine gluconate, the district court agreed with the Government
that Chatterji did not dictate the conclusion that Halsey's gross sales
were not an appropriate measure of loss. Instead, it reasoned that
unlike Chatterji, the change in formula undertaken by Halsey had ren-
dered the quinidine gluconate something other than what it purported
to be because the altered formula had not been approved by the FDA
and was of unknown safety and efficacy. Under these circumstances,
the court concluded, the drug was worthless, and accordingly Hal-
sey's gross sales of the drug were the appropriate measure of loss.
The lower court, therefore, reaffirmed the sentence it had previously
imposed. Marcus again appeals, asserting that the economic loss cal-
culation was erroneous.
II.
Recognizing that federal fraud statutes are broadly written and
apply to a large range of conduct of varying severity, the United
States Sentencing Commission designed § 2F1.1"to apply to a wide
variety of fraud cases." U.S.S.G. § 2F1.1, comment. (backg'd.).
Because empirical analysis by the Commission demonstrated that
under preguideline practice the amount of the loss and the nature of
the conduct--i.e., whether the offense consisted of an isolated crime
of opportunity as opposed to one that was sophisticated or repeated--
were considered the two most significant factors in determining the
length of the sentence imposed, the Commission formulated the fraud
guideline around these two factors. Id.
With respect to the amount of the loss, § 2F1.1(b)(1) provides for
increases in a defendant's base offense level corresponding to the
amount of economic loss suffered by victims of the defendant's rele-
vant criminal conduct. See U.S.S.G. § 2F1.1(b)(1). A determination of
the amount of the loss suffered focuses, as it does in theft cases, on
4
"the value of the money, property, or services unlawfully taken." Id.,
comment. (n.7). In general, "[l]oss under§ 2F1.1(b)(1) is the actual,
probable, or intended loss to the victims." Chatterji, 46 F.3d at 1340.
We have recognized, though, that in some instances gain may prove
to be an appropriate alternative measure of loss. Id. It is not, however,
a proxy for loss if there is none. Id. Thus, gain, measured either by
gross sales or by some other gauge, does not support a loss enhance-
ment under § 2F1.1(b)(1) if there was no actual, probable, or intended
loss to the victims. Id.
Marcus maintains that the district court improperly substituted Hal-
sey's gain as a proxy for loss without any factual showing that this
was an appropriate measure of some actual, probable, or intended loss
to the consumers who purchased Halsey's quinidine gluconate. Fur-
ther, he asserts that the consumers suffered no loss because the drug
Halsey marketed was exactly what it purported to be--a safe, effec-
tive, FDA-approved generic drug.
In Chatterji, this court addressed an argument similar to that raised
by Marcus. In seeking approval to manufacture vancomycin, an
injectable antibiotic, Chatterji submitted records to the FDA purport-
ing to show the results of three separate batch tests when in fact three
separate tests had not been performed. Id. at 1339. Additionally, he
failed to report to the FDA as required that he had directed that the
amount of an inert antioxidant in another drug his company manufac-
tured, ritodrine hydrochloride, be increased above the amount speci-
fied in the FDA-approved formula. Id. In sentencing Chatterji, the
district court concluded that the effect of his regulatory fraud was to
invalidate the FDA approval to market the drugs. Id. at 1340. Conse-
quently, it found that because they lacked FDA approval, the drugs
were without value to the consumers who purchased them. Id. Under
this theory, the entire amount paid by consumers--i.e., the manufac-
turer's gross sales--constituted the appropriate measure of loss. Id.
Accordingly, the sentencing court applied a loss enhancement pursu-
ant to § 2F1.1(b)(1), calculating the amount of the loss as the gross
sales of the two drugs. Id.
We rejected the Government's argument that Chatterji's fraudulent
conduct voided FDA approval for the drugs ab initio, rendering the
drugs without value to consumers. Id. at 1341. Recognizing that statu-
5
tory and regulatory provisions required the FDA to withdraw its
approval in the event that it found that a false statement of material
fact had been made, and refusing to render these provisions superflu-
ous, we held that although Chatterji had not performed one of the
batch tests for vancomycin and had failed to report the increase of an
inert antioxidant in ritodrine, the marketed drugs did not lack FDA
approval. Id. Moreover, we determined that the record would not sup-
port a conclusion that consumers of the drugs had suffered any eco-
nomic loss, because the drugs "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." Id. In dif-
ferentiating the facts before the court from ones in which a product
would not be considered to be exactly what it purported to be, we
emphasized that it was undisputed that the "vancomycin performed
according to FDA specifications" and "that the safety and therapeutic
value of the ritodrine were not affected by the addition 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." Id. And,
finally, we explained that there was no question that had a third batch
of vancomycin been separately tested and reported and had a request
for approval of the insignificant formula change to ritodrine been
requested, the FDA would have granted approval. Id. We concluded:
In sum, this is not a situation in which a drug with
fraudulently-obtained FDA approval harms consumers, fails
to produce its intended effects, or is something less than it
is represented to be. We have little doubt that economic loss
would exist in such situations. But, when a drug possesses
FDA approval, poses no threat to the health and well-being
of the consumer, and meets all of the goals of FDA require-
ments for safety and efficiency, there can be no actual, mon-
etary loss attributable to the regulatory fraud by which FDA
approval was obtained. Economic gain to the manufacturer
therefore is not the appropriate measure of loss in such a sit-
uation.
Id. at 1342.
6
Marcus contends that as in Chatterji, the addition of unapproved
excipient ingredients to the Halsey drug produced no economic loss
to consumers because it was exactly what it purported to be--
quinidine gluconate possessing FDA approval, posing no threat to the
health and well-being of the consumer, and meeting all of the goals
of FDA requirements for safety and efficiency. The gist of Marcus'
argument is that, just as in Chatterji, the active ingredients in the
quinidine gluconate were not changed and the addition of the two
unapproved excipient ingredients had no effect on the actual thera-
peutic performance of the drug.
Marcus, however, fails to grasp the critical difference between the
formula change at issue in Chatterji and the one at issue here. In
Chatterji, the modification of the formula for ritodrine was merely an
insignificant change that implicated only the shelf life of the drug; it
was undisputed that the modification in no way could have affected
the bioequivalence of the drug and thereby its safety or therapeutic
value. Here, however, Marcus stipulated that the reason for the modi-
fication to the formula was the problem experienced by the quinidine
gluconate in passing dissolution tests, a problem bearing on the thera-
peutic value of a time-released drug. Further, Marcus conceded that
the modification would have been viewed by the FDA as significant
enough to require additional bioequivalence testing--testing that
would not have been necessary if there had been no possibility that
the change could have affected the safety or therapeutic value of the
drug.
This distinction is pivotal. Since the modification to the formula for
ritodrine in Chatterji had no potential to affect the bioequivalence or
therapeutic value of the drug, not only was the ritodrine actually safe
and effective, but it also was known to be safe and effective when
marketed. Marcus, on the other hand, agreed that the change in the
formula for quinidine gluconate posed the potential to affect the bioe-
quivalence of the drug. Accordingly, the drug was of unknown safety
and efficacy. Thus, even if further testing of the quinidine gluconate
would have shown that the modified formula was bioequivalent to the
name-brand drug, Marcus had no way of knowing that the drug was
safe and effective without conducting that additional testing. Conse-
quently, the modification to the FDA-approved formula undertaken
by Halsey undoubtedly had an unknown effect on the safety and effi-
7
cacy of the drug; and, as such, consumers did not receive that for
which they bargained--an FDA-approved drug of known safety and
efficiency.3 Cf. United States v. Castner, 50 F.3d 1267, 1276 & n.8
(4th Cir. 1995) (distinguishing Chatterji and holding that the Navy
suffered actual loss when defendant supplied parts that did not meet
bargained-for specifications even though it was claimed that the parts
supplied actually performed as well as those that did meet the specifi-
cations).
Because we did not address in Chatterji a situation in which a mod-
ification to an FDA-approved formula posed the potential to affect the
safety, therapeutic value, or bioequivalence of the drug, we conclude
that the facts presented here are distinguishable from those at issue in
Chatterji. The marketing of a drug employing an unapproved and
untested formula, when the modification presents the potential to
affect the safety, therapeutic value, or bioequivalence of the drug, ren-
ders the drug of unknown efficacy and safety; the sale of a drug repre-
sented to possess FDA approval under those circumstances does not
provide consumers with the benefit of their bargain. In other words,
such a change prevents the drug from being that which it purports to
be. Given the unchallenged finding that consumers would not pur-
chase a drug of unknown safety and efficacy at any price, the district
court correctly concluded that Halsey's gross sales were the appropri-
ate measure of the actual loss suffered by consumers of the quinidine
gluconate under such facts. Accordingly, we affirm.
AFFIRMED
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3 Because we conclude that irrespective of whether the quinidine gluco-
nate manufactured by Halsey was actually safe and effective, customers
suffered a loss by not receiving a drug of known safety and efficacy, we
need not address Marcus' argument that the district court erred in failing
to entertain testimony on this issue.
8