U.S. v. Fallon

• Decision Date: 12 December 2006
• Docket Number: No. 03-4184.,03-4184.
• Citation: 470 F.3d 542
• Parties: UNITED STATES of America v. James C. FALLON, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

470 F.3d 542

UNITED STATES of America v. James C. FALLON, Appellant.

No. 03-4184.

United States Court of Appeals, Third Circuit.

Argued July 12, 2005^*.

Filed December 12, 2006.

Robert Epstein (Argued), Assistant Federal Defender, David L. McColgin, Supervising Appellate Attorney, Maureen Kearney Rowley, Chief Federal Defender, Federal Court Division, Defender Association of Philadelphia, Philadelphia, PA, Attorneys for Appellant.

Patrick L. Meehan, United States Attorney, Laurie Magid, Deputy United States

Attorney, for Policy and Appeals, Robert A. Zauzmer, Assistant United States Attorney, Senior Appellate Counsel, David Farnham (Argued), Trial Attorney, United States Department of Justice, Philadelphia, PA, Attorneys for Appellee.

Before SLOVITER, McKEE and ROSENN,^** Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Appellant James C. Fallon was convicted by a jury of one count of wire fraud and three counts of mail fraud in the United States District Court for the Eastern District of Pennsylvania. This is an appeal of the District Court's judgment of conviction and sentence entered on October 16, 2003.¹

I.

Fallon was the president of Derma Genesis, a company which manufactured and distributed microdermabradors under the name "Derma Peel."² Dermabradors are classified by the Food, Drug, and Cosmetic Act ("FDCA") as class I medical devices (a device which carries the lowest amount of medical risk). See generally 21 U.S.C. § 360c(a). Prior to February 18, 1998, manufacturers who wished to market a Class I device were required to first obtain a 510(k) letter from the Food and Drug Administration, indicating that the device was substantially equivalent to an existing device previously approved for distribution. See generally 21 U.S.C. § 360(k).³

In November 1997, the FDA received notice that Fallon was marketing Derma Peel without obtaining the requisite clearance from the FDA. By letter dated November 4, 1997, a representative of the FDA informed Fallon that this practice was prohibited; Fallon acknowledged receipt of the letter and filed a formal clearance application on November 19, 1997. On that date, the FDA assigned a unique computer-generated number to his application, and sent Fallon a letter instructing him to use the number on all future correspondence.

In January 1998, prior to obtaining 510(k) approval from the FDA, Fallon met with a group of medical-device salesman in an effort to promote the Derma Peel. In attendance was Michael Coffelt, director of medical sales for a company in the process of merging with American Business Leasing ("ABL"). Coffelt was impressed with Fallon's presentation and recommended to ABL that it enter into a vendor agreement with Derma Genesis, whereby ABL would buy Derma Peel devices and lease them to interested doctors.

ABL's credit personnel were reluctant to do business with Derma Genesis because Fallon had previously filed for bankruptcy protection, Derma Genesis was a start-up company with an unproven track record and unproven equipment, and because Fallon failed to provide certain requested tax and social security information. Coffelt, however, lobbied ABL to re-consider its decision.

On February 9, 1998, Fallon faxed to ABL, among other things, a purported 510(k) clearance letter on FDA letterhead. The government's evidence at trial demonstrated definitively that the letter was a fabrication. The November 4, 1997 date stamp of the letter was lifted from an earlier FDA correspondence to Fallon, which cautioned him not to market Derma Peel until he had obtained prior FDA clearance. Further, although the letter was purportedly signed by Consumer Safety Officer "Margaret Shuppers," FDA's records reveal that there has never been an FDA employee by that name. Finally, the letter bore Fallon's unique 510(k) application number, even though that number was not assigned to him until November 19, 1997, two weeks after the November 4 date stamp.⁴

In February of 1998, Alan Frankel, president of ABL, authorized the company to enter into a relationship with Fallon.⁵ Over the next several months, ABL purchased 70 microdermabradors from Derma Genesis which it planned to lease to physicians. ABL's relationship with Derma Genesis ended in October 1998, after ABL determined that the value of the devices had dropped significantly over the course of the year and that an abnormally high percentage of doctors were behind on their lease payments.

On June 4, 2002, Fallon was indicted by a grand jury and charged with one count of wire fraud, in violation of 18 U.S.C. § 1341, and four counts of mail fraud, in violation of 18 U.S.C. § 1343. A superseding indictment was returned on October 1, 2002, adding one count of witness tampering in violation of 18 U.S.C. § 1512. The basis for the fraud charges was the fabricated FDA clearance letter.

At trial, Frankel testified that ABL had a policy of requiring FDA clearance from medical device manufacturers which he claimed he had brought with him from his prior employer, Capelco Leasing. He further testified that he explicitly required Fallon to produce a 510(k) clearance letter as a condition to doing business with Derma Genesis. He stated that documentary proof of this statement was lost at the time of trial.

Fallon attempted to rebut Frankel's testimony through the testimony of Michael Coffelt and Joseph Nachbin. Coffelt testified that in his fifteen years experience in the medical leasing business, he had never requested nor seen an FDA clearance letter prior to this case.

Nachbin, a former Vice President and Chief Operating Officer at Capelco, was proffered as a fact witness⁶ to testify to the customs and practices of the medical leasing industry,⁷ and to rebut Frankel's assertion that Capelco had a policy of requiring FDA clearance before entering into leasing relationships with medical device suppliers. Before allowing Nachbin to testify at trial, the District Court made an in limine inquiry into his testimony outside the jury's presence.

Although the Court allowed Nachbin to testify to his personal experience at Capelco, it prohibited him from offering testimony on the custom and practice of the medical leasing industry, stating that:

I will not permit him to testify as to [the] industry, because he does not speak for an[d] cannot speak for the entire industry. And, beyond that, he cannot say that a particular company could not have, for a particular product or particular circumstances presented by the manufacturer, required a 510(k) clearance letter. And, he can't say what was, in fact, done by this particular leasing company.

App. at 867.

At the conclusion of trial the District Court dismissed Count Six (witness tampering) for insufficient evidence. The jury then returned a verdict of guilty on Count One (wire fraud) and on Counts Two through Four (mail fraud). Fallon was found not guilty on Count Five (mail fraud). On October 14, 2003, Fallon was sentenced to a term of imprisonment of twelve months and one day to be followed by a thirty-six month term of supervised release, a fine of $1,000, and restitution in the amount of $55,235.86.

Fallon filed a timely notice of appeal.

II.

Fallon argues that 1) The District Court committed reversible error by precluding him from eliciting Nachbin's testimony regarding the custom and practice of the medical leasing industry; and 2) the Court erred with respect to its order of restitution by adopting an unlimited theory of "but for" causation.⁸

A. Exclusion of Nachbin's Custom and Practice Testimony

We review a district court's decision to admit or exclude testimony for abuse of discretion. See United States v. Pelullo, 964 F.2d 193, 199 (3d Cir.1992). To the extent that these rulings are based on an interpretation of the Federal Rules of Evidence, however, our review is plenary. Id.

The critical issue at Fallon's trial was the materiality of the fabricated 510(k) letter. The jury was instructed, as part of the mail fraud counts, that:

[t]he Government has to prove . . . that the scheme to defraud employed false material misrepresentations. False embraces the concept that there was a fake FDA letter. Material means that the statement would have a natural tendency to influence or is capable of influencing the decision of a person or entity to which it is addressed. That it would have the tendency and is capable of influencing or causing another person to rely upon it, to act because of it.

App. at 1013a; see also Neder v. United States, 527 U.S. 1, 16, 119 S.Ct. 1827, 144 L.Ed.2d 35 (1999).

Fallon sought to introduce Nachbin's testimony regarding the custom and practice of the industry to rebut Frankel's assertions that ABL had a policy of requiring FDA clearance from device manufacturers (which he had brought from Capelco), and that he himself relied upon the fabricated 510(k) letter in entering into the business relationship with Derma Genesis.

This court has consistently allowed "testimony concerning business customs and practices." United States v. Leo, 941 F.2d 181, 196 (3d Cir.1991) (citation omitted) (providing that such evidence is relevant "both to explain the practice of the industry in which this prosecution arose and to establish what someone with Leo's extended background in the industry probably would know"); First Nat'l State Bank v. Reliance Elec. Co., 668 F.2d 725, 731 (3d Cir.1981) (per curiam) (permitting admission of evidence of customs and practices in the banking industry); see also Marx & Co., Inc. v. Diners' Club, Inc., 550 F.2d 505, 509 (2d Cir.1977) ("Testimony concerning the ordinary practices of those engaged in the securities business is admissible under the same theory as testimony concerning the ordinary practices of physicians or concerning other trade customs[.]"). Contrary to the District Court's understanding, a witness need not represent an entire industry in order to have sufficient knowledge of that industry's customs...