United States v. Landers ( 1995 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
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No. 94-11056
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UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
CLAUDE EDWARD LANDERS,
Defendant-Appellant.
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Appeal from the United States District Court
for the Northern District of Texas
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October 31, 1995
Before SMITH, BARKSDALE, and BENAVIDES, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Claude Landers appeals his sentence for one count of conspir-
acy to pay and accept illegal bribes in violation of 18 U.S.C.
§ 371 (1993), amended by 18 U.S.C. § 371 (1995), and one count of
paying bribes in violation of 41 U.S.C. §§ 53 and 54 (1995).
Landers argues that the district court misapplied U.S.S.G. § 2B4.1
(1994) by deducting only the cost of goods sold (“CGS”) from the
gross value of the wrongfully-obtained supply contracts.1 Landers
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The CGS, in a merchandising company, is the price the company pays for
the products that it sells.
contends that overhead costs should also be deducted from gross
value to determine the appropriate enhancement under U.S.S.G.
§ 2F1.1 (1994). Because the trial court correctly interpreted the
sentencing guidelines, we affirm.
I.
Landers was a sales representative for Electro Enterprises,
Inc. (“EEI”), a representative for distributors and manufacturers
of aerospace and avionics equipment. EEI supplies parts to Bell
Helicopters Textron, Inc. (“Bell”), and other businesses throughout
the country. EEI does not manufacture the parts it sells.
From December 1989 until September 1992, Landers made cash
bribes totaling approximately $10,000 to employees of Bell, as a
result of which EEI netted over $1 million in contracts. The
bribes also led to a five-count indictment against Landers and two
other defendants.
Pursuant to a plea agreement, Landers pleaded guilty to one
count of conspiracy to solicit and accept kickbacks in connection
with defense contracts and one count of soliciting and accepting
kickbacks in connection with defense contracts. At sentencing, the
district court determined that EEI had made a gross profit of
$204,071 from contracts obtained by Landers. The court arrived at
the gross profit figure by deducting the CGS from the contract
price. Landers objected, but to no avail; the court used the gross
profit figure to enhance his sentence under §§ 2B4.1 and 2F1.1.
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II.
The only issue on appeal is whether the district court
correctly applied § 2B4.1. Landers argues that the court should
have used a net profit figure for sentencing. In particular, he
asserts that the court should arrive at a net profit figure by
deducting the CGS and a share of EEI’s overhead from the gross
value of the contracts.
A district court’s interpretations of the sentencing guide-
lines are conclusions of law, reviewed de novo. United States v.
McCaskey, 9 F.3d 368, 372 (5th Cir. 1993). The guidelines set a
base offense level of 8 for cases of commercial bribery. When “the
greater of the value of the bribe or the improper benefit to be
conferred exceed[s] $2,000,” the level should be increased
according to the table in § 2F1.1. U.S.S.G. § 2B4.1.
We must discern the meaning of the phrase “value of the
improper benefit to be conferred.” The phrase could mean gross
value, net profits, or some intermediate result reached by
deducting some but not all costs from gross value. The meaning of
the phrase is not obvious, but the commentary provides insight:
“The ‘value of the improper benefit to be conferred’ refers to the
value of the action to be taken or effected in return for the
bribe.” U.S.S.G. § 2B4.1, application note 2. For further
clarification, the commentary cross-references U.S.S.G. § 2C1.1
(1994), covering bribery involving public officials.
Application note 2 of the commentary to § 2C1.1 states:
The value of “the benefit received or to be received”
means the net value of such benefit. Examples: (1) A
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government employee, in return for a $500 bribe, reduces
the price of a piece of surplus property offered for sale
by the government from $10,000 to $2,000; the value of
the benefit received is $8,000. (2) A $150,000 contract
on which $20,000 profit was made was awarded in return
for a bribe; the value of the benefit received is
$20,000. Do not deduct the value of the bribe itself in
computing the value of the benefit received or to be
received. In the above examples, therefore, the value of
the benefit received would be the same regardless of the
value of the bribe.
The very use of the adjective “net” before “value” implies that
some costs should be deducted.
This is supported by the two examples in note 2. In both
examples, costs are deducted from gross value. Finally, the
instructions in note 2 that the value of the bribe should not be
deducted from gross value implies that something else should be
deducted; if no deductions were allowed, then there would be no
need to prohibit the deduction of bribes.
Although the guidelines do not explicitly state which costs
should be deducted, the commentary demonstrates that, at the least,
direct costs are deductible.2 In this case, the CGS is certainly
a direct cost.
Both examples in the commentary deduct direct costs from gross
value in order to determine a net value. In particular, the second
example equates a $20,000 profit on a $150,000 contract with the
value of the benefit received. The language of the note leaves no
2
We define direct costs as all variable costs that can be specifically
identified as costs of performing a contract. This might include, for example,
transportation costs for the goods in question. Thus, variable overhead costs
that cannot easily be identified to a specific contract are not direct costs.
This definition differs from the accounting term “direct costs” in that it
excludes those variable costs that cannot readily be apportioned to the contract.
We also note that under § 2F1.1 application note 8, sentencing courts are not
required to make precise calculations.
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doubt that direct costs should be deducted from the gross value of
the contract. No other interpretation of profits makes sense.
Finally, deducting direct costs is consistent with the
language of the guidelines that net value measures the “benefit
received.” Any benefit from a contract is reduced by the direct
costs of performing the contract. This is so because direct costs
have no independent value; the only benefit from direct costs is
that they are necessary to secure the value of the contract over
and above those costs.
The district court arrived at a gross profit of $204,071 by
deducting the CGS from the contract price. Landers admits that EEI
incurred no other direct costs. Because Landers failed to
establish that EEI incurred any direct costs other than the CGS,
the district court’s gross profit finding accurately represents the
gross value of the contracts minus all direct costs associated with
performing the contracts.
III.
The only remaining question is whether indirect costs should
also be deducted from gross value,3 or to put it another way,
whether “net value” means “net profits.” Landers points to the
second example in application note 2 of § 2C1.1 for textual support
that net profits is the correct measure of net value.
3
Indirect costs (fixed costs) are the costs incurred independently of
output. For example, rent and debt obligations are costs a business incurs no
matter how many contracts it receives. For the most part, overhead costs are
fixed costs. The marginal increase in variable overhead costs from a wrongfully
obtained contract is normally so de minimis that accounting for them during
sentencing would be impractical.
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The guidelines do not support Landers’s position. Although
the second example in note 2 uses profit interchangeably with net
value, it leaves the phrase undefined. The one-time use of the
word “profit” is an unconvincing indication that “net value” means
“net profits.” If the Sentencing Commission wanted courts to use
a “net profit” figure, presumably it would have employed that term.
Instead, the Commission chose to use “net value” throughout the
commentary.
The Commentary’s treatment of bribes provides textual support
for refusing to deduct indirect costs. The background to the
commentary to § 2C1.1 states: “In determining the net value of the
benefit received or to be received, the value of the bribe is not
deducted from the gross value of such benefit; the harm is the same
regardless of value of the bribe paid to receive the benefit.”
(Emphasis added.) In this passage, the Commission rejects using
net profits to measure the value of the benefit received. It does
so implicitly by noting that one type of direct costs, bribes, is
not deductible from gross profits.
The Commission’s stated reason for not deducting bribes
informs us in analyzing whether indirect costs should be deducted.
The reason bribes are not deducted from gross profits is that the
remaining measure does not adequately reflect the harm from the
bribe. As a sister circuit explained, “This concept of ‘net value
received’ has nothing to do with the expense incurred by the
wrongdoer in obtaining the net value received. This is clear from
the Note’s instruction that the value of the bribe is not to be
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deducted in calculating the ‘net value.’” United States v.
Schweitzer, 5 F.3d 44, 47 (3d Cir. 1993) (refusing to deduct the
amount a defendant paid a government employee for confidential
information).
The harm caused by a bribe is the value lost to a competing
party had the bribe not been paid. See, e.g., United States v.
Ford, 986 F.2d 1423 (6th Cir. 1993) (table) (rejecting the
contention that the benefit should be measured by the difference
between what the government paid under the contracts and what it
would have paid had it not been for the bribes). That harm is
independent of the value of the bribe.
The rationale for refusing to deduct the amount of a bribe
from gross value applies equally to indirect costs. Like a bribe,
indirect costs have no impact on the harm caused by the illegal
conduct. This is true whether one considers the pecuniary benefit
to the bribing party or the pecuniary loss to a competitor. For
both parties, the benefit of an additional contract is measured by
gross revenue minus direct costs. By definition, indirect costs do
not affect that value.
Excluding indirect costs is also consistent with the guide-
lines’ general goals of achieving “reasonable uniformity in
sentencing by narrowing the wide disparity in sentences imposed for
criminal offenses committed by similar offenders” and
“proportionality in sentencing through a system that imposes
appropriately different sentences for criminal conduct of differing
severity.” U.S.S.G. ch.1, pt. A.3. Allowing a wrongdoer to deduct
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indirect costs would result in differing culpability not only for
similar acts, but also for the very same act.
Take for example a case in which two defendants bribe the same
government official for the same contract. If indirect costs were
deductible, the defendants could receive different sentences if one
of them worked for a company with higher indirect costs. Although
the harm is the same, deducting indirect costs would result in
disparate “net value” calculations and different enhancements under
the guidelines. Respective defendants would receive different
enhancements for the same crime and harm.
IV.
For the foregoing reasons, we conclude that the “value of the
improper benefit to be conferred” is measured by deducting direct
costs from the gross value received. Because we are convinced that
the district court in this case correctly excluded deductions of
overhead and allowed only a deduction for direct costs, the
judgment of sentence is AFFIRMED.
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