U.S. v. Chatterji, 94-5379

• Decision Date: 07 February 1995
• Docket Number: No. 94-5379,94-5379
• Citation: 46 F.3d 1336
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Dulal CHATTERJI, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1336

46 F.3d 1336

UNITED STATES of America, Plaintiff-Appellee, v. Dulal CHATTERJI, Defendant-Appellant.

No. 94-5379.

United States Court of Appeals, Fourth Circuit.

Argued Dec. 9, 1994.

Decided Feb. 7, 1995.

ARGUED: Mark Daryl Rasch, Arent, Fox, Kintner, Plotkin & Kahn, Washington, DC, for appellant. Maury S. Epner, Asst. U.S. Atty., Baltimore, MD, for appellee. ON BRIEF: Marilyn Tiki Dare, Arent, Fox Before ERVIN, Chief Judge, and MURNAGHAN and WILKINS, Circuit Judges.

Kintner, Plotkin & Kahn, Washington, DC, for appellant. Lynne A. Battaglia, U.S. Atty., Baltimore, MD, for appellee.

Vacated and remanded by published opinion. Judge WILKINS wrote the majority opinion, in which Chief Judge ERVIN joined. Judge MURNAGHAN wrote a dissenting opinion.

OPINION

WILKINS, Circuit Judge:

Dulal Chatterji appeals the sentence imposed by the district court after he pled guilty to conspiring to defraud the United States, see 18 U.S.C.A. Sec. 371 (West 1966), and to obstructing proceedings before a federal agency, see 18 U.S.C.A. Sec. 1505 (West 1984). Chatterji challenges the determination of economic loss by the district court pursuant to United States Sentencing Commission, Guidelines Manual, Sec. 2F1.1(b)(1) (Oct.1987) ¹ and the amount of the fine imposed, see U.S.S.G. Sec. 5E4.2. ² Because we conclude that the district court improperly applied an economic loss enhancement under Sec. 2F1.1(b)(1) and failed to explain the basis for the fine imposed, we vacate Chatterji's sentence and remand.

I.

Chatterji was a cofounder and 10% owner of Quad Pharmaceutical Company, Inc. (Quad), a company that manufactured generic drugs. As head of research and development, Chatterji supervised the creation and testing of various generic drugs for which Quad hoped to obtain marketing approval from the Food and Drug Administration (FDA). The two generic drugs that were the subject of his guilty plea were identified as, for purposes of this appeal, vancomycin and ritodrine hydrochloride.

A. Vancomycin

In 1987, Quad submitted an abbreviated new drug application (ANDA) to the FDA in an attempt to obtain that agency's approval to market vancomycin, an injectable antibiotic. See 21 C.F.R. Secs. 314.2, 314.55 (1987). In order to gain approval, FDA guidelines required, inter alia, the submission of stability data from three different research batches of the drug. See Center for Drugs & Biologics, Food & Drug Admin., U.S. Dep't of Health & Human Servs., Guideline for Submitting Documentation for the Stability of Human Drugs and Biologics 25-26 (Feb.1987). A batch is defined as:

"a specific quantity of a drug or other material that is intended to have uniform character and quality, within specified limits, and is produced according to a single manufacturing order during the same cycle of manufacture."

Id. at 3 (quoting 21 C.F.R. Sec. 210.3(b)(2)).

The batch process for vancomycin is relatively simple. Powdered vancomycin, purchased from an FDA-approved supplier, is tested and weighed. Water is then added to make 10 liters of a vancomycin solution, which is placed into vials and freeze-dried in a process known as lyophilization. The resulting sterile powder is tested for stability, and the data is submitted to the FDA as a "batch record."

Chatterji's participation in the conspiracy as related to vancomycin consisted of the following. Chatterji first prepared 10 liters of vancomycin solution, which he then divided into two "fill sizes" of 10 ml and 5 ml labeled as 488A and 488B. Because the separate fill sizes were portions of the same batch, they were "lots" as defined by the FDA. See id at 5. ³ He then lyophilized the contents of each vial and tested the resulting powder. Further, because he had exhausted Quad's supply of powdered vancomycin in producing lots 488A and 488B, Chatterji did not have unprocessed vancomycin immediately available to create another batch. Rather than suffer the delay and expense of obtaining additional unprocessed vancomycin, Chatterji reconstituted the remaining lyophilized vancomycin from lots 488A and 488B, divided it again into two separate fill sizes labeled 495A and 495B, and lyophilized and tested them. ⁴ Rather than skewing the test results in Quad's favor, Chatterji's use of reprocessed vancomycin had the potential to make the substance used for the test less stable and hence less likely to meet FDA standards.

Chatterji then forwarded these test results to Dilip Shah, Quad's head of regulatory affairs, who submitted Quad's ANDA for vancomycin claiming that 488A and 488B were separate batches and failing to reveal to the FDA that 495A had been made with reprocessed vancomycin. Therefore, when submitted, Quad's ANDA for vancomycin included records for three purported batches, when in fact only one acceptable batch had been produced. Although it was not required to do so, Quad later prepared and tested another batch of vancomycin and forwarded the results to the FDA.

The FDA subsequently approved Quad's marketing of vancomycin based on the records for lots 488A, 488B, and 495A, as well as the later-submitted record. Thus, the FDA's approval was based on two valid batch records. Repeated tests of vancomycin produced by Quad after FDA approval revealed that in every instance the drug met all FDA requirements for safety and effectiveness. Indeed, the Government does not dispute that Quad's vancomycin had full therapeutic value and posed no danger to consumers. Quad's gross sales of vancomycin totalled approximately $8 million.

B. Ritodrine Hydrochloride

The FDA also approved Quad's application to market ritodrine hydrochloride (ritodrine), an injectable muscle relaxant. The ANDA for ritodrine submitted by Quad specified the addition of 1 mg/ml of sodium metabisulfate (bisulfate), an inert antioxidant. In its approval of the ANDA, the FDA allowed an overage of up to 1.05 mg/ml of bisulfate. Because the amount of bisulfate diminishes over time, the FDA also specified that ritodrine produced by Quad should contain no less than .7 mg/ml of bisulfate at the end of its shelf life.

Once the FDA has approved the manufacture and marketing of a generic drug according to a certain formula, a manufacturer is required to seek FDA approval before making any modification to that formula regardless of how insignificant the modification may be. See 21 C.F.R. Sec. 314.70 (1987). Soon after obtaining FDA approval for ritodrine, Chatterji directed that 1.075 mg/ml of bisulfate be used to ensure that the amount of bisulfate remaining at the end of the shelf life would comport with FDA requirements. Quad did not seek prior FDA approval for this formula change and falsely stated in a 1988 annual report to the FDA that no change in the formula for ritodrine had been made. It is not disputed that the minor formula change did not render Quad's ritodrine less effective or pose any danger to consumers who used the drug. Quad earned approximately $5.4 million in gross sales of ritodrine after the formula change.

C.

The charges to which Chatterji pled guilty arose from an FDA audit of Quad's research and development department, which apparently revealed the discrepancies in the batch records for vancomycin and the change in the ritodrine formula. Whether the FDA would have allowed Quad to continue marketing vancomycin and ritodrine cannot be determined because Quad voluntarily withdrew the drugs from the market after the audit.

The plea agreement between Chatterji and the Government stipulated to the material facts, but left open the question of the appropriate economic loss calculation. The parties agreed that U.S.S.G. Sec. 2F1.1, with a base offense level of 6, applied to Chatterji's offense. The parties disagreed, however, as to whether the base offense level should be enhanced pursuant to Sec. 2F1.1(b)(1) for economic loss caused by the fraud. The district court rejected Chatterji's argument that there was no economic loss attributable to the fraud, finding instead that the effect of the regulatory fraud was that the FDA had never approved Quad's marketing of vancomycin and ritodrine and that the drugs therefore were without value to the consumers who purchased them. Based on this reasoning, the district court measured the "loss" attributable to Chatterji's conduct by Quad's gross sales of vancomycin and ritodrine--approximately $13.4 million--and accordingly increased Chatterji's base offense level by 11 levels for fraud loss in excess of $5 million. See U.S.S.G. Sec. 2F1.1(b)(1)(L). The district court made several other adjustments to reach a final adjusted offense level of 19. ⁵ That offense level, combined with a Criminal History Category I, resulted in a guideline range of 30-37 months imprisonment. The district court sentenced Chatterji to 30 months imprisonment and imposed a $100,000 fine.

II.

Chatterji first challenges the application of the loss enhancement pursuant to U.S.S.G. Sec. 2F1.1(b)(1). While the question of the amount of loss is generally one of fact subject to review only for clear error, the application of a loss enhancement to undisputed facts is a question of law which we review de novo. See United States v. Toler, 901 F.2d 399, 402 (4th Cir.1990). Loss under Sec. 2F1.1(b)(1) is the actual, probable, or intended loss to the victims of the fraud. ⁶ See U.S.S.G. Sec. 2F1.1 comment. (n. 7). In appropriate circumstances, a defendant's gain may provide an estimate of the loss. See U.S.S.G. Sec. 2F1.1 comment. (n. 8). However, gain is only an alternative measure of some actual, probable, or intended loss; it is not a proxy for loss when there is none. See United States v. Haddock, 12 F.3d 950, 960 (10th Cir.1993). Thus, a defendant's gain "may not support an enhancement on its own if there is no actual or intended loss to the victims." Id.

The Government contends that the regulatory fraud automatically voided any FDA approval of vancomycin and ritodrine. Because unapproved drugs may not be...