United States v. Gas Pipe, Inc.

• Decision Date: 06 May 2021
• Docket Number: No. 19-11145,19-11145
• Parties: UNITED STATES of America, Plaintiff—Appellee, v. GAS PIPE, INCORPORATED; Amy Lynn, Incorporated; Gerald Shults; Amy Herrig, Defendants—Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

997 F.3d 231

UNITED STATES of America, Plaintiff—Appellee,

v.GAS PIPE, INCORPORATED; Amy Lynn, Incorporated; Gerald Shults; Amy Herrig, Defendants—Appellants.

No. 19-11145

United States Court of Appeals, Fifth Circuit.

FILED May 6, 2021

Stephen S. Gilstrap, Amber Michelle Grand, Attorney, Leigha Amy Simonton, Assistant U.S. Attorney, U.S. Attorney's Office Northern District of Texas, Dallas, TX, for Plaintiff - Appellee.

John D. Cline, San Francisco, CA, for Defendants - Appellants Gas Pipe, Incorporated, and Amy Lynn, Incorporated.

Michael Mowla, Cedar Hill, TX, George Rankin Milner, III, Milner Finn, Dallas, TX, for Defendant - Appellant Gerald Shults.

John D. Cline, San Francisco, CA, Michael Mowla, Cedar Hill, TX, George Rankin Milner, III, Dallas, TX, for Defendant - Appellant Amy Herrig.

Before Haynes, Higginson, and Oldham, Circuit Judges.

Stephen A. Higginson, Circuit Judge:

Appellants Gerald Shults and Amy Herrig, along with two corporate entities that they owned and controlled, owned and operated a chain of smoke shops in Texas and New Mexico. The stores sold synthetic cannabinoids branded as "herbal incense," "potpourri," or "aroma therapy products." These products, commonly known as "spice," were labeled "not for human consumption" even though the appellants intended them for exactly that. In late 2013, the Drug Enforcement Administration initiated an undercover investigation into the appellants’ spice sales, eventually resulting in their arrest and prosecution. After a three-week trial, a jury convicted the appellants of one count of conspiracy to defraud the United States, based on their efforts to defraud the Food and Drug Administration and to misbrand drugs.

On appeal, the appellants argue that the district court erred by failing to strike the fraud theory of the indictment, by incorrectly instructing the jury, and by denying their motion for acquittal due to insufficient evidence. Shults and Herrig also challenge the substantive reasonableness of their 36-month sentences. For the reasons articulated below, we AFFIRM.

I.

Appellants Gas Pipe, Inc., Amy Lynn, Inc., Gerald Shults, and Amy Herrig owned and operated a chain of smoke shops in Texas and New Mexico.¹ Among the products on offer at Gas Pipe stores were synthetic-cannabinoid products branded as "herbal incense," "potpourri," or "aroma therapy

products," commonly known as "spice." Spice, when smoked, produces a stimulant, depressant, or hallucinogenic effect on the central nervous system.

For the past decade, the federal government has scheduled various synthetic cannabinoids as illegal controlled substances. Given that there are more than 700 known synthetic cannabinoids, the process of scheduling is iterative, with more synthetic cannabinoids being scheduled as the Drug Enforcement Administration ("DEA") and Food and Drug Administration ("FDA") analyze them and their effects. But regardless of whether a synthetic cannabinoid has been scheduled, it may not be sold for human consumption absent FDA approval and proper labeling.

The appellants labeled their products as "not for human consumption." But, as the appellants stipulated at trial, they knew that the spice products sold by Gas Pipe stores were mislabeled because they were intended for human consumption. Indeed, Gas Pipe's spice products were sometimes rated based on their "strength," meaning how "high" it would get the user. Between 2011 and 2014, the appellants sold more than two million units of spice totaling more than $40 million in revenue.

In late 2013, the DEA started an undercover investigation into the appellants’ spice sales. DEA agents posed as customers and made 34 "controlled buys" to determine whether the appellants were selling spice for human consumption. The agents had the spice analyzed by a lab, and results revealed that the spice contained various synthetic cannabinoids. On June 4, 2014, DEA agents executed search warrants at all of the appellants’ stores and warehouses and seized spice containing synthetic cannabinoids, some of which had already been scheduled as controlled substances.

A grand jury returned a Third Superseding Indictment in September 2016. The indictment charged the appellants and six of their employees with 11 counts.² Count One charged the appellants with violating 18 U.S.C. § 371, which, inter alia, prohibits conspiracies to "defraud the United States." Specifically, this Count alleged that the appellants (1) conspired to defraud the FDA and (2) conspired to commit felony misbranding under 21 U.S.C. §§ 331, 333(a)(2), and 352 "by introducing or delivering an adulterated or misbranded drug into interstate commerce with the intent to defraud or mislead."

After a three-week trial, the jury found the appellants guilty on Count One and acquitted them on the remaining counts.³

Subsequently, after a two-day hearing, the district court sentenced Shults and Herrig to 36 months’ imprisonment, two years’ supervised release, and a $100 special assessment. The court sentenced each of the corporate entities, Gas Pipe and Amy Lynn, to a $25,000 fine.

II.

The appellants first make two arguments as to why Count One of the indictment was legally insufficient. Because they preserved their challenges, we review them de novo. United States v. Anderton , 901 F.3d 278, 282 (5th Cir. 2018).

First, the appellants argue that the word "defraud," as used in 18 U.S.C. § 371, should be cabined to its common law meaning of cheating the Government out of property or money. It cannot, they say, reach agreements for the purpose of impeding a government agency's functions. As the appellants acknowledge, however, a long line of Supreme Court and circuit precedent holds otherwise, and we reject this argument as foreclosed.⁴

Second, the appellants argue that this court should impose a "limiting principle" on § 371 ’s defraud clause in light of the Supreme Court's recent construction of purportedly similar language in another federal criminal statute. Specifically, they ask this Court to extend a rule announced in Marinello v. United States , ––– U.S. ––––, 138 S. Ct. 1101, 200 L.Ed.2d 356 (2018) —that to convict under 26 U.S.C. § 7212(a) ’s omnibus clause, the Government must show a "nexus" between the defendant's conduct and a pending or reasonably foreseeable tax-related administrative proceeding, such as an investigation or audit, id . at 1109–10 —and apply it to § 371. A recent case, United States v. Herman , No. 19-50830, 997 F.3d 251 (5th Cir. May 6, 2021), controls. In Herman , we rejected an identical argument and declined to extend the Marinello nexus requirement to § 371 ’s defraud clause, and we reject the appellants’ arguments as foreclosed here.

These same two legal arguments also form the basis of the appellants’ challenge to the district court's conspiracy-to-defraud jury instructions, and thus that challenge also fails. The appellants preserved their objections to the conspiracy-to-defraud instructions. We ordinarily review jury instructions for abuse of discretion. But when, as here, the appellants argue that the instruction misstates an element of the offense, that is an issue of statutory construction, which we review de novo subject to harmless error review.

United States v. Garcia-Gonzalez , 714 F.3d 306, 312 (5th Cir. 2013) ; United States v. Guevara , 408 F.3d 252, 257 (5th Cir. 2005).

Specifically, the appellants argue that the district court committed reversible error in its conspiracy-to-defraud jury instructions by (1) failing to limit the defraud theory to agreements to cheat the Government out of money or property and (2) refusing to provide a Marinello instruction that the Government must prove a nexus between the conspiracy and a particular administrative proceeding. Because we rejected the appellants’ two legal arguments above about the scope of § 371 ’s defraud clause and the effect of Marinello , we accordingly hold that the district court's conspiracy-to-defraud jury instructions were correct statements of law.

III.

The appellants next challenge the district court's jury instructions about felony misbranding in two respects. First, they argue that 21 U.S.C. § 333(a)(2) ’s requirement that a violation be committed with "intent to defraud or mislead" incorporates a separate materiality element that was not included in the jury charge. Second, the appellants contest the district court's refusal to instruct the jury that an "intent to defraud or mislead" under § 333(a)(2) requires "an intent to deceive or cheat connected with the misbranding."

A.

The appellants’ first claim of instructional error—that the district court failed to include materiality as an element of felony misbranding—asserts misstatement of an element and hinges on statutory interpretation. The court's review is therefore de novo, subject to harmless error analysis. See Garcia-Gonzalez , 714 F.3d at 312 ; Guevara , 408 F.3d at 257.

Section 333 of the Food, Drug, and Cosmetic Act ("FDCA") imposes felony liability for misbranding drugs with the "intent to defraud or mislead." 21 U.S.C. § 333(a)(2). Invoking Neder v. United States , 527 U.S. 1, 119 S.Ct. 1827, 144 L.Ed.2d 35 (1999), and United States v. Watkins , 278 F.3d 961 (9th Cir. 2002), the appellants argue that this FDCA provision requires proof of materiality. In general, a statement is material if it has "a natural tendency to influence, or [is] capable of influencing, the decision of the decisionmaking body to which it was addressed." Neder , 527 U.S. at 16, 119 S.Ct. 1827 (alteration in original) (quoting United States v. Gaudin , 515 U.S. 506, 509, 115 S.Ct. 2310, 132 L.Ed.2d 444 (1995) ); see also United States v. Arlen , 947 F.2d 139, 143 (5th Cir. 1991) (finding felony misbranding when the defendant, inter alia, acted with the "specific intent to defraud or mislead an identifiable government agency " (emphasis added)). Thus, if applicable here, proof of materiality would require demonstrating that the appellants’ misbranding had a...