U.S. v. Watkins

• Decision Date: 29 January 2002
• Docket Number: No. 00-50682.,No. 00-50656.,00-50656.,00-50682.
• Citation: 278 F.3d 961
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Jack WATKINS, Defendant-Appellant. United States of America, Plaintiff-Appellee, v. Cap Tab Nutritional Formulating and Manufacturing Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

278 F.3d 961

UNITED STATES of America, Plaintiff-Appellee, v. Jack WATKINS, Defendant-Appellant.

United States of America, Plaintiff-Appellee, v. Cap Tab Nutritional Formulating and Manufacturing Inc., Defendant-Appellant.

No. 00-50656.

No. 00-50682.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted September 14, 2001.

Filed January 29, 2002.

COPYRIGHT MATERIAL OMITTED

Eugene G. Iredale, Bethany O'Neill, San Diego, CA, for the defendant-appellant.

Patrick K. O'Toole, United States Attorney, Melanie K. Pierson, Assistant United States Attorney, United States Attorney's Office, San Diego, CA, for the plaintiff-appellee.

Appeal from the United States District Court for the Southern District of California; Napoleon A. Jones, District Judge, Presiding. D.C. Nos. CR-99-00024-J, CR-99-00024-NAJ.

Before: FERNANDEZ, KLEINFELD, and McKEOWN, Circuit Judges.

Opinion by Judge McKEOWN; Dissent by Judge FERNANDEZ.

McKEOWN, Circuit Judge.

Section 303 of the Food, Drug, and Cosmetic Act ("FDCA"), 21 U.S.C. § 333(a)(2), imposes felony liability for misbranding "with the intent to defraud or mislead." The question presented is whether this provision requires proof of materiality. We hold that materiality must be proven as an element of the offense under either a theory of intent to defraud or a theory of intent to mislead.

BACKGROUND

Jack Watkins is the president and majority owner of Cap Tab Nutritional Formulating and Manufacturing, Inc., a company that manufactures vitamins and nutritional supplements (collectively, "Watkins"). The subject of this appeal arises from Watkins' conditional guilty plea under the FDCA following a nineteen-count indictment. The indictment charged Watkins with conspiracy, mail fraud, wire fraud, and felony misbranding. According to the indictment, Watkins manufactured nutritional supplements by purposefully omitting, substituting, or using lesser amounts of certain ingredients. Specifically, the government alleged that one product, "C3D," did not contain acetyl L-carnitine as labeled. Rather, it contained L-carnitine, which was one of approximately six ingredients in the product. The government also claimed that two other products, "Neurotein" and "Energy," did not contain chromium picolinate as labeled. Rather, they contained chromium polyniconate, which was one of approximately eight ingredients in Nuerotein and one of approximately fifteen ingredients in Energy. The indictment further charged that Watkins concealed these facts, knowing that his actions constituted false and misleading labeling.

Before trial, the government filed a motion in limine, moving to exclude evidence that the substitutions were not material. Watkins responded by arguing that proof of materiality was required for conviction under the felony misbranding provisions of § 333(a)(2). Watkins also claimed that he believed that his substitution of ingredients did not constitute a material difference, despite admitting that he knew of the disparity between the labels and the actual ingredients. The district court granted the government's motion to exclude evidence of materiality. The same day, pursuant to a plea agreement, Watkins pled guilty to the three felony misbranding counts. The plea was conditioned upon the preservation of Watkins' right to appeal, under Federal Rule of Criminal Procedure 11(a)(2), the issue of "whether materiality must be proven for a conviction for the offense of a felony charge of misbranding."

The district court sentenced Watkins to five years supervised probation and imposed a $5,000 fine. Cap-Tab and Watkins appealed separately; we have consolidated their appeals. The sole legal issue, which we address de novo, is whether materiality constitutes an element of felony misbranding under the FDCA. See United States v. Steffen, 251 F.3d 1273, 1275 (9th Cir.2001); United States v. Douglass, 780 F.2d 1472, 1475 (9th Cir.1986).

DISCUSSION

I. FDCA OVERVIEW

The Food, Drug, and Cosmetic Act is a public welfare statute that imposes "the highest standard of care on distributors." Smith v. California, 361 U.S. 147, 152, 80 S.Ct. 215, 4 L.Ed.2d 205 (1959). It was enacted to enable purchasers to make intelligent choices, and, to that end, "[m]isbranding was one of the chief evils Congress sought to stop." United States v. 45/194 Kg. Drums of Pure Vegetable Oil, 961 F.2d 808, 812 (9th Cir.1992). The misbranding provision prohibits "[t]he introduction or delivery for introduction into interstate commerce of any food, drug, device, or cosmetic that is adulterated or misbranded." 21 U.S.C. § 331(a). "A food shall be deemed to be misbranded ... [i]f ... its labeling is false or misleading in any particular." 21 U.S.C. § 343(a)(1).

The FDCA provides two tiers of liability for misbranding violations under § 331(a). The misdemeanor provision imposes criminal liability in the form of imprisonment, fines, or both. See 21 U.S.C. § 333(a)(1) ("Any person who violates [§ 331(a)(1)] shall be imprisoned for not more than one year or fined not more than $1,000, or both."). An article may be misbranded pursuant to the misdemeanor provision "without any conscious fraud at all," thus creating a form of strict criminal liability. United States v. Dotterweich, 320 U.S. 277, 281, 64 S.Ct. 134, 88 L.Ed. 48 (1943) (quoting United States v. Johnson, 221 U.S. 488, 497, 31 S.Ct. 627, 55 L.Ed. 823 (1911)). Felony misbranding, on the other hand, requires a showing that the defendant acted "with intent to defraud or mislead":

Notwithstanding the provisions of paragraph (1), if any person commits such a violation after a conviction of him under this section has become final, or commits such a violation with the intent to defraud or mislead, such person shall be imprisoned for not more than three years or fined not more than $10,000 or both.

21 U.S.C. § 333(a)(2) (emphasis added). Thus, felony liability for misbranding requires an additional mens rea element that is absent from the broader-reaching misdemeanor provision. See United States v. Mitcheltree, 940 F.2d 1329, 1347 (10th Cir. 1991) (felony liability under § 333(a)(2) requires proof that defendant "consciously sought to mislead" authorities). The question we consider in this case is to what degree this additional element circumscribes felony liability for misbranding offenses.

II. FELONY LIABILITY FOR MISBRANDING REQUIRES PROOF OF MATERIALITY

Watkins admits that he knew the labels on his nutritional supplements misrepresented the ingredients actually in the product. Nonetheless, he argues that knowledge of falsity alone is not sufficient for conviction under § 333(a)(2). Watkins urges instead that "intent to defraud or mislead" means (1) the misrepresentation would have a material effect on any decision to buy or consume the product, or (2) the person who makes the misrepresentation has reason to believe that the misstatement would induce the reliance of others in making those decisions. Thus, Watkins argues on appeal that the district court erred in excluding evidence that he believed there was no material difference between the ingredients listed on the label and those actually in the product, and that buyers and consumers would perceive no such difference in choosing his product. The government responds that absent an explicit statutory requirement of "materiality," the intent element for § 333(a)(2) is satisfied by simply proving knowledge of falsity. We disagree with the government's overly-broad reading of this provision.

A. INTENT TO DEFRAUD

Our first charge is to divine the meaning of "intend to defraud" under § 333(a)(2). We are mindful of the rule that a court should not read words into a statute that are not there. See Aronsen v. Crown Zellerbach, 662 F.2d 584, 590 (9th Cir.1981) ("It is consistent with the general principle of statutory construction that a court should not add language to an unambiguous statute absent a manifest error in drafting or unresolvable inconsistency."); see also SUTHERLAND STAT CONST § 47.38. We do not do so. Rather, by examining the settled meaning of "intent to defraud," we conclude that this phrase requires materiality. Our conclusion is compelled by the Supreme Court's recent teaching in Neder v. United States, 527 U.S. 1, 119 S.Ct. 1827, 144 L.Ed.2d 35 (1999).

In Neder, the Court addressed whether a "scheme or artifice to defraud" under the federal mail, wire, and bank fraud statutes requires material falsehoods. Observing that "none of the fraud statutes defines the phrase `scheme or artifice to defraud,' or even mentions materiality," the Court concluded that "based solely on a `natural reading of the full text,' materiality would not be an element of the fraud statutes." 527 U.S. at 20-21, 119 S.Ct. 1827 (citations omitted). The Court's analysis, however, did not end with this literal reading of the statutory language. Rather, the Court continued by looking to the common-law meaning of "defraud," invoking the "well-established rule of construction that `[w]here Congress uses terms that have accumulated settled meaning under the... common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of those terms.'" Id. at 21, 119 S.Ct. 1827 (quoting Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322, 112 S.Ct. 1344, 117 L.Ed.2d 581 (1992)). Surveying the settled meaning of "fraud," the Court concluded that "the common law could not have conceived of `fraud' without proof of materiality." Neder, 527 U.S. at 22, 119 S.Ct. 1827 (citations omitted). In light of this settled meaning, the Court held that it "must presume that Congress intended to incorporate materiality unless the statute otherwise dictates." Id. at 23, 119 S.Ct. 1827.

In this case, the government relies primarily on the Eighth Circuit's decision in United States v. Jorgensen, 144 F.3d 550 (8th Cir.1998), to argue that materiality is not a requirement of § 333(a)(2). In J...