United States v. Louie Ferro

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 00-2467
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United States of America, *
*
Plaintiff - Appellant, *
* Appeal from the United States
v. * District Court for the
* Western District of Missouri.
Louie A. Ferro, Jr.; Louie A. Ferro, Sr.; *
Wilbur Swift; Kevin D. Staley, *
*
Defendants - Appellees. *
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Submitted: January 9, 2001
Filed: June 7, 2001
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Before LOKEN, HEANEY, and BYE, Circuit Judges.
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LOKEN, Circuit Judge.
The government appeals the dismissal of its fifteen-count indictment against
Louie A. Ferro, Jr., Louie A. Ferro, Sr., Wilbur Swift, and Kevin D. Staley (collectively
referred to as “defendants”). The indictment charged defendants with mail fraud,
transporting fraudulently obtained pharmaceuticals in interstate commerce, money
laundering, and conspiring to commit these offenses in violation of 18 U.S.C. §§ 371,
1341, 1956(a)(1)(A), 1956(h), and 2314. All the offenses are based upon the
government’s allegation that defendants defrauded various pharmaceutical sellers into
granting substantial discounts by misrepresenting that defendants were purchasing for
the “own use” of the Ferros’ institutional pharmacy or its customers. The district court
dismissed the indictment for failure to state an offense, finding the “own use”
misrepresentations to be immaterial as a matter of law.1 We review dismissal of an
indictment for failure to state an offense de novo. See United States v. Zangger, 848
F.2d 923, 924 (8th Cir. 1988). We reverse and reinstate the indictment.
The indictment alleges that Home Care Pharmacy (“HCP”), a for-profit
institutional pharmacy owned by the Ferros, purchased pharmaceuticals at substantial
discounts by misrepresenting to pharmaceutical sellers that HCP was buying for its
“own use,” or for the “own use” of its nursing home customers. Contrary to these
representations, HCP then resold the majority of the discounted pharmaceuticals to
various commercial wholesalers. Defendant Swift was associated with one of the
wholesalers that purchased discounted pharmaceuticals from HCP. Defendant Staley
managed the operations of FKC, Inc., a wholesale company established by the Ferros
to assist in distributing the discounted pharmaceuticals. The indictment alleges that
defendants resold in excess of $10 million worth of discounted pharmaceuticals
between May 1995 and January 1999.
Defendants moved to dismiss the indictment for failure to state an offense. They
did not argue that the indictment fails to allege the elements of a mail fraud offense,
including materiality, or that it fails to adequately inform them of the charges they must
defend -- the typical grounds for challenging the sufficiency of an indictment. See, e.g.,
Hamling v. United States, 418 U.S. 87, 117 (1974). Rather, defendants argued that the
1
In Neder v. United States, 527 U.S. 1, 25 (1999), the Supreme Court held that
materiality is an element of the federal mail fraud, wire fraud, and bank fraud statutes.
The government concedes it must prove material misrepresentations to convict
defendants of the three mail fraud counts. The government does not challenge the
district court’s conclusion that all the remaining counts of the indictment require proof
of mail fraud.
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alleged “own use” misrepresentations to pharmaceutical sellers were immaterial as a
matter of law, and that the sellers were engaged in Robinson-Patman Act violations that
should insulate defendants from charges of criminal fraud. A brief review of federal
price discrimination law and pricing practices in the pharmaceutical industry is
necessary to an understanding of these issues.
The Robinson- Patman Act makes it unlawful “to discriminate in price between
different purchasers of commodities of like grade and quality . . . where the effect of
such discrimination may be substantially to lessen competition.” 15 U.S.C. § 13(a).
The Non-Profit Institutions Act exempts from the Robinson-Patman Act goods
purchased “for their own use by schools, colleges, universities, public libraries,
churches, hospitals, and charitable institutions not operated for profit.” 15 U.S.C
§ 13c. The complex question of “own use” was addressed in detail by the Supreme
Court in Abbott Laboratories v. Portland Retail Druggists Association, 425 U.S. 1, 14
(1976). The Court concluded its opinion by cautioning that a pharmaceutical seller
who “seeks to enjoy . . . the benefits provided by § 13c” should “routinely obtain[] a
representation from its hospital customer as to the use of the products purchased.” 425
U.S. at 21.
Pharmaceutical sellers grant deep discounts to non-profit customers who provide
“own use” certifications. Like any two-tiered pricing system, this gives purchasers
who qualify for the discounted prices an incentive to create a “diversion market” in
which they resell pharmaceuticals purchased at a discount in competition with
pharmacies and other retailers who purchased at much higher wholesale prices. See
generally United States v. Costanzo, 4 F.3d 658, 659-60 (8th Cir. 1993); United States
v. Weinstein, 762 F.2d 1522, 1533 (11th Cir. 1985), cert. denied, 475 U.S. 1110(1986) (export diversion market). The government’s theory is that defendants
purchased pharmaceuticals at unwarranted discounts by making “own use”
misrepresentations and then resold those products in the diversion market.
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Defendants moved to dismiss on the following theory: pharmaceutical sellers
seek “own use” representations for the sole purpose of determining whether a
prospective purchaser qualifies for the Non-Profit Institutions Act exemption and
therefore may be granted a price discount free of Robinson-Patman Act compliance
concerns. The exemption is limited to non-profit organizations, and HCP disclosed to
sellers that it was a for-profit company. Because sellers knew that sales to HCP were
not exempt under the Non-Profit Institutions Act, any “own use” misrepresentations
were immaterial to their decisions to sell at discounted prices. The discounts simply
reflected the sellers’ intentional Robinson-Patman Act violations; no fraud occurred.
Though the district court accepted this theory, we conclude it is seriously flawed.
The critical flaw is defendants’ assumption that a price discount on pharmaceuticals is
either exempt from the Robinson-Patman Act, or it is unlawful.2 To the contrary, the
Act does not declare all non-exempt price differentials unlawful. Determining whether
a price discount will result in unlawful price discrimination requires careful analysis of
difficult, often-litigated issues such as whether the discount may substantially lessen
competition at any level of competition, whether the discount is cost justified, and
whether it is granted to meet lawful competition. See, e.g., Brooke Group Ltd. v.
Brown & Williamson Tobacco Corp., 509 U.S. 209, 219-20 (1993).
We know from prior cases that pharmaceutical sellers often grant discounts to
institutional customers such as hospitals, health maintenance organizations, and nursing
homes, without regard to whether they are non-profit or for-profit purchasers. See
Costanzo, 4 F.3d at 659; In re Brand Name Prescription Drugs Antitrust Lit., 186 F.3d
2Defendants’ materiality theory was presented to the district court by Dennis S.
Corgill, Associate Professor of Law at Widener University. The record before us
contains no foundation for the extraordinary legal opinions offered by this witness,
opinions that would find little or no support in Robinson-Patman Act treatises and
judicial opinions.
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781, 783-84 (7th Cir. 1999). See generally LEVY, THE PHARMACEUTICAL INDUSTRY:
A DISCUSSION OF COMPETITIVE AND ANTITRUST ISSUES IN AN ENVIRONMENT OF
CHANGE 74-92 (FTC Bureau of Economics Staff Report, Mar. 1999). This suggests
that sellers perceive other bases for justifying the discounts under the Robinson-Patman
Act, and therefore that the Non-Profit Institutions Act exemption is not the only
determining factor in making such sales. This further suggests that, even when dealing
with a for-profit institutional customer, a seller may wish to know, for Robinson-
Patman Act compliance purposes, whether the customer is purchasing for its “own
use.” In these circumstances, the materiality of an “own use” misrepresentation may
not be determined as a matter of law, and the district court erred in dismissing the
indictment.
The district court also erred procedurally in taking up this issue prior to trial. In
United States v. Gaudin, 515 U.S. 506, 523 (1995), the Supreme Court held that, when
materiality is an element of a criminal fraud offense, the question of materiality must
be submitted to the jury. Prior to Gaudin, our court considered materiality to be an
issue of law for the court in a criminal fraud prosecution, and we approved of the
district court holding a pretrial hearing on this question and dismissing the indictment
if the government failed to establish that an allegedly fraudulent statement was material.
See United States v. Bailey, 34 F.3d 683, 687 (8th Cir. 1994), applying United States
v. Lasater, 535 F.2d 1041 (8th Cir. 1976). After Gaudin, however, this procedure is
no longer appropriate, because materiality is an issue for the jury. Now, so long as the
indictment contains a facially sufficient allegation of materiality, federal criminal
procedure does not “provide for a pre-trial determination of sufficiency of the
evidence.” United States v. Critzer, 951 F.2d 306, 307-08 (11th Cir. 1992). As the
Third Circuit said in United States v. DeLaurentis, 230 F.3d 659, 661 (3d Cir. 2000):
In civil cases, of course, the summary judgment procedures
contemplated by Federal Rule of Civil Procedure 56 may be utilized to
test, pretrial, the sufficiency of the evidence to establish triable issues of
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fact; but there is no corollary in criminal cases. The government is
entitled to marshal and present its evidence at trial, and have its
sufficiency tested by a motion for acquittal pursuant to Federal Rule of
Criminal Procedure 29. . . . [W]e simply cannot approve dismissal of an
indictment on the basis of predictions as to what the trial evidence will be.
We acknowledge that an occasional case, such as United States v. DeSantis, 134 F.3d
760, 764 (6th Cir. 1998), has recognized the possibility that the government’s well-
pleaded allegation of materiality might be so factually weak as to permit a pretrial
determination that no reasonable jury could make the requisite finding of materiality.
But defendants have cited no decision since Gaudin in which a federal fraud indictment
was dismissed on this ground prior to trial. Whatever the theoretical possibility that
such a case may arise in the future, in this case we think it clear there must be a trial
on the issue of materiality at which the government may present pharmaceutical seller
witnesses to testify as to the materiality of any “own use” misrepresentations the
government is able to prove.
The judgment of the district court is reversed, and the case is remanded for
further proceedings not inconsistent with this opinion.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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