United States v. Ferro

• Decision Date: 09 January 2001
• Docket Number: No. 00-2467,00-2467
• Citation: 252 F.3d 964
• Parties: (8th Cir. 2001) UNITED STATES OF AMERICA, PLAINTIFF - APPELLANT, v. LOUIE A. FERRO, JR.; LOUIE A. FERRO, SR.; WILBUR SWIFT; KEVIN D. STALEY, DEFENDANTS - APPELLEES. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 964

252 F.3d 964 (8th Cir. 2001)

UNITED STATES OF AMERICA, PLAINTIFF - APPELLANT, v. LOUIE A. FERRO, JR.; LOUIE A. FERRO, SR.; WILBUR SWIFT; KEVIN D. STALEY, DEFENDANTS - APPELLEES.

No. 00-2467

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: January 9, 2001

Filed: June 7, 2001

Appeal from the United States District Court for the Western District of Missouri.

Before Loken, Heaney, and Bye, Circuit Judges.

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 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.

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...