U.S. v. Fredette

• Decision Date: 02 January 2003
• Docket Number: No. 01-8090.,01-8090.
• Citation: 315 F.3d 1235
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Derek A. FREDETTE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

315 F.3d 1235

UNITED STATES of America, Plaintiff-Appellee, v. Derek A. FREDETTE, Defendant-Appellant.

No. 01-8090.

United States Court of Appeals, Tenth Circuit.

January 2, 2003.

COPYRIGHT MATERIAL OMITTED

Submitted on the briefs:^* Susan L. Foreman, Boulder, CO, for the Defendant-Appellant.

Matthew M. Mead, United States Attorney, and Lisa E. Leschuck, Assistant United States Attorney, Cheyenne, WY, for the Plaintiff-Appellee.

Before EBEL, PORFILIO and LUCERO, Circuit Judges.

LUCERO, Circuit Judge.

Consumers love coupons; this case is about coupons. Having duped numerous automobile dealerships into spending millions of dollars to purchase enticing "fuel vouchers" to provide to their customers — vouchers that proved to be virtually worthless — Derek A. Fredette was convicted of conspiracy to commit mail and wire fraud under 18 U.S.C. § 371, mail fraud under 18 U.S.C. § 1341, and wire fraud under 18 U.S.C. § 1343. He appeals his conviction and sentence. We exercise jurisdiction pursuant to 28 U.S.C. § 1291 and 18 U.S.C. § 3742(a), and affirm.

I

On April 28, 2000, Fredette incorporated National Fuels Corporation ("NFC"), a company that sold fuel vouchers to automobile dealerships. Although NFC was physically located in Holiday, Florida, NFC's promotional materials falsely claimed that it was based in Seattle, Washington and had offices in Chicago, Toronto and Munich. Elaborate mail and telephone routing systems were developed to give the impression that NFC was in fact based in Seattle, and employees were instructed to speak and act as though they were in Seattle. Fredette and his key associates used aliases to hide their true identities, and Fredette himself used at least five different false names.

NFC employed twelve to fourteen telemarketers, who telephoned automobile dealerships and other businesses nationwide, marketing to them fuel vouchers at substantially discounted prices. Vouchers were to be provided by the dealerships to their customers as a sales incentive. Fredette prepared a script for these telephone calls. During the course of the telephone conversations, NFC employees falsely stated that NFC maintained close relationships with major oil companies that were offering the vouchers at a substantial discount in order to establish brand loyalty. NFC employees also advised dealerships that NFC was a member of the North American Fuels Marketing Association, actually an organization Fredette created that consisted solely of an answering service in Washington, D.C.

In order to collect on their vouchers and receive reimbursement for gasoline purchases, customers were required to complete a registration card and send it to NFC. NFC's program was designed so that, upon receipt of the cards, NFC would issue each customer a letter containing a "PIN number ... to put on their receipts when they mailed them in to get their gas refunds." (7 R. at 251.) This letter directed customers to write assigned PIN numbers on their receipts for gasoline purchases and return the receipts to NFC for reimbursement.

While registration cards noted that they must be returned by registered mail, NFC employees informed dealers that cards sent through certified mail would be accepted, although they would take longer to process. Despite assurances by NFC employees to the contrary, vouchers that were not submitted through registered mail were never reimbursed. Under NFC's program, reimbursements were supposed to be issued within ten working days after NFC received receipts for gasoline purchases. NFC required registration cards to be submitted unfolded, which, due to the odd size of the card, required a special envelope. NFC's stated purpose for this requirement was that each reimbursement card had a special bar code at the bottom that could not be read if the card was folded. In reality, these bar codes served no purpose and were not used to process the reimbursement cards.

On the rare occasions when customers were actually reimbursed, checks were sent out in envelopes bearing a picture of a missing child and providing phone numbers for the Center for Missing and Exploited Children. Letters containing the PIN number were also sent out in these envelopes. Nothing on the envelope indicated that it was sent from NFC or contained a letter with a PIN number or a reimbursement check — presumably, in order to cause people to discard the letters as "junk mail."

Although NFC sold approximately 30,000 to 35,000 vouchers to car dealers, NFC issued only 613 redemption checks. Customers who threatened legal action were more likely to be reimbursed, as were customers of dealerships who had the potential to reorder vouchers. Of the $2,045,991.54 received from dealerships and deposited in a bank account by NFC, approximately $10,478 was used to reimburse customers. Fredette transferred $957,500 to a trust controlled by his ex-wife, who had no known connection with NFC.

Fredette was indicted for conspiracy along with two co-conspirators. Fredette was also indicted for mail fraud and wire fraud. The other two co-conspirators pled guilty and testified against Fredette. At trial, Fredette defended NFC's practices by referring to the concept of "breakage," which he claimed was fundamental to the rebate industry. "Breakage" is a concept that relies on the fact that "only a relatively small percentage of people that get a coupon or rebate actually use it or, frankly, jump through the hoops that are associated." (7 R. at 226.) Fredette sought to call an "expert witness" who would testify about the concept of breakage, but the district court held that the proposed testimony did not satisfy the requirements of the Federal Rules of Evidence.

The jury found Fredette guilty on all counts, and he was sentenced to sixty months' imprisonment on the conspiracy count and twenty-four months on the other two counts, to run concurrently with each other but consecutively to the conspiracy sentence. The court also sentenced Fredette to three years' supervised release and ordered him to pay special assessments and restitution. We consider his direct appeal.

II

As his first argument, Fredette contends that the district court erred in refusing to admit expert testimony from James D. Feldman. "We review the district court's decision to admit expert testimony for abuse of discretion, and we reverse a decision only if it is `manifestly erroneous.'" United States v. McPhilomy, 270 F.3d 1302, 1312 (10th Cir.2001) (quoting General Elec. Co. v. Joiner, 522 U.S. 136, 141-42, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997)). The law "grants a district court the same broad latitude when it decides how to determine reliability as it enjoys in respect to its ultimate reliability determination." Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 142, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999).

Rule 702 sets forth the standard for admission of expert testimony:

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based on sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.

Fed.R.Evid. 702. In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), the Supreme Court interpreted this rule in the context of scientific evidence, holding that Rule 702 "assign[s] to the trial judge the task of ensuring that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand." These two requirements of reliability and relevance were extended by Kumho Tire, 526 U.S. at 141, 119 S.Ct. 1167, to all expert testimony. In reviewing the district court's exclusion of Feldman's testimony, therefore, we consider whether the proposed testimony was reliable or relevant to the instant case.

In an effort to rebut the government's assertion that his "rebate program" was specifically designed to pay virtually no rebates, Fredette sought to submit testimony from Feldman, a "marketing expert who makes himself available for counseling and consulting and trial testimony." (10 R. at 950.) Feldman intended to compare the "breakage rules and requirements" of Fredette's program to other programs, based upon his purported knowledge of standards in the rebate industry. (10 id. at 937.)

With regard to the first Daubert factor, the district court found Feldman's testimony to be unreliable. Feldman's proposed testimony might have established that other rebate programs took into account the concept of "breakage," i.e., that not all rebate recipients would collect on the rebate. Feldman admitted at the Daubert hearing, however, that the NFC program was unusual and that he had never before encountered a rebate program like NFC's where $500 or more was offered over a twelve-month period. In light of the unusual nature of Fredette's program, Feldman conceded that applying "an industry standard doesn't really work," and proposed to evaluate the program based on whether the rules and regulations "were adhered to or not." (10 id. at 939, 945.) Feldman's alleged expertise with regard to other programs gave him no special insight into whether NFC adhered to its rules and regulations. Evidence at trial established that the rules were not in fact adhered to, and Feldman could not have rebutted this testimony by describing other rebate programs with which he was familiar.

Fredette argues on appeal that the district court failed to appreciate that Feldman's proposed testimony was based on "personal knowledge or experience," rather than scientific evidence. (Appellant's Br. at 17.) Under Kumho Tire, a district court "may focus upon personal knowledge or...