United States v. Townsley

Decision Date01 August 2012
Docket NumberNo. C 10-00428 CRB,C 10-00428 CRB
CourtU.S. District Court — Northern District of California
PartiesUNITED STATES OF AMERICA, Plaintiff, v. PETER TOWNSLEY, Defendant.

UNITED STATES OF AMERICA, Plaintiff,
v.
PETER TOWNSLEY, Defendant.

No. C 10-00428 CRB

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

Dated: August 1, 2012


ORDER RE LOSS CALCULATION

On February 22, 2012, pursuant to a Rule 11(c)(1)(A) & (B) plea agreement with the government, defendant Peter Townsley entered guilty pleas to Counts Two and Four of the superseding indictment, each of which charges a mail fraud in violation of 18 U.S.C. § 1341. Plea Agreement Dkt. 100. In pleading guilty, Townsley admitted that from approximately April 200 through December 2006, he engaged in a scheme to defraud customers of his organic fertilizer manufacturing business, California Liquid Fertilizer ("CLF"), by (1) falsely representing that the ingredients in CLF's fertilizer, Biolizer XN, were fish, feathermeal, and water when that was not true and that instead Biolizer XN contained chemicals prohibited for use in organic farming, and (2) falsely representing that the formulation of Biolizer XN had been approved by the Organic Materials Review Institute for use in organic farming. Plea Agreement at ¶ 2(e)-(j). Townsley admitted that CLF's gross revenue from the sale of Biolizer XN during that time period was between $6.5 million and $6.9 million. Id. ¶ 2(k).

As part of the plea agreement, the parties agreed to some aspects of the sentencing

Page 2

guidelines calculations. Id. ¶ 7. However, the parties did not reach an agreement as to the methodology that should be employed for calculating loss pursuant U.S.S.G. § 2B1.1. The Court ordered the parties to submit legal memoranda on the proper methodology for determining loss based on the facts present in this case. The Court held two hearings, and requested supplemental briefing from the parties on the issue. The Court now resolves the issue of the proper method for calculating loss in this case, and determines the proper loss calculation number for sentencing purposes.

I. FACTUAL BACKGROUND

A. Federal Regulatory Framework for Organic Agriculture

Congress established federal authority over organic agriculture production and handling with the passage of the Organic Foods Production Act (OFPA) in 1990. Congress passed the OFPA in order to establish uniform national standards for the production and handling of foods labeled as "organic" and "to assure consumers that organically produced products meet a consistent standard." 7 U.S.C. § 6501.2 In addressing "national standards for organic production," the OFPA specifically included regulation of materials that farmers applied to the soil such as fertilizers:

To be sold or labeled as an organically produced agricultural product under this title, an agricultural product shall —
(1) have been produced and handled without the use of synthetic chemicals, except as otherwise provided in this title;
(2) except as otherwise provided in this title and excluding livestock, not be produced on land to which any prohibited substances, including synthetic chemicals, have been applied during the 3 years immediately preceding the harvest of the agricultural products; and
(3) be produced and handled in compliance with an organic plan agreed to by the producer and handler of such product and the certifying agent.

7 U.S.C. § 6504 (the word "and" between sections 2 and 3 was added by amendment in 1991) (emphasis added).

The OFPA granted the Secretary of Agriculture ("the Secretary") the broad authority to issue regulations to implement the Act; establish an organic certification program for producers of agricultural products that are produced using organic methods as provided

Page 3

for in the Act; and implement the organic certification program through "certifying agents." 7 U.S.C. §§ 6503(a) & (d), 6521(a). "Certifying agents" are defined in the OFPA as private entities or state officials who are accredited by the Secretary for the purpose of certifying that a farm is producing agricultural products in a manner that fully complies with the provisions of the national program. 7 U.S.C. § 6502(3). California Certified Organic Foundation, also known as CCOF, is one such entity operating in California; it has been a USDA-accredited certifying agent since 2002. Lewin Decl (dkt. 44) ¶ 2. Also as part of setting national standards for organic agricultural production, the OFPA required the Secretary to establish a "National List"of substances that farmers were allowed to use, and were prohibited from using, in production. 7 U.S.C. § 6517.

As required by the OFPA, in 2001 the USDA established the National Organic Program. The regulations establishing the National Organic Program (NOP) and all facets of its operation are found at 7 CFR Part 205, effective 2/20/2001 ("the NOP regulations"). The NOP regulations issued by the USDA established "national standards for the production and handling of organically produced products, including the National List of substances approved for and prohibited from use in organic production and handling." 7 CFR Part 205, Final Rule With Request for Comments, Summary. While fertilizer manufacturers such as Defendant's CLF were not directly subject to the NOP regulations, the fertilizers that organic farmers were permitted to apply to their soil were subject to regulation. Therefore, Defendant would not have been able to market his fertilizer to organic farmers unless he could satisfy them and the certifying agents who certified farms as NOP-compliant that his product fully complied with the NOP regulations.

The penalties and financial repercussions for using a prohibited substance as a fertilizer were, and remain, potentially severe. The NOP regulations provide that any operation that knowingly sells or labels a product as organic, except as in accordance with the OFPA, is subject to a civil penalty of up to $10,000 per violation. 7 CFR § 205.100(c)(1). Furthermore, the regulations provide that any field or farm parcel used to produce an organic crop must have been managed in such a way so that it had "no prohibited

Page 4

substances, as listed in § 205.105 [which references the National List] applied to it for at least 3 years prior to harvest of the crop." 7 C.F.R. § 205.202(b). In addition, producers of organic agricultural products "must not use . . . any fertilizer or composted plant and animal material that contains a synthetic substance" unless that synthetic substance is specifically allowed on the National List. 7 CFR § 205.203 (emphasis added).

The NOP regulations provide that, as a general rule, all natural (non-synthetic) substances are allowed in organic production and all synthetic substances are prohibited. See NOP website, Background Information; Ex. 2 ¶ 3. The National List of Allowed Synthetic and Prohibited Non-Synthetic Substances ("the National List") contains the specific exceptions to the rule. 7 C.F.R. § 205.601. Ammonium chloride and ammonium sulfate, the substances which Defendant has admitted using in Biolizer XN from April 2000 through December 2006, were not - and are not - allowed synthetic substances. Id.; see also Plea Agreement at 2(g) & (h).

As with many regulatory systems, enforcement of the NOP regulations is accomplished through inspection, review, and certification. To a large extent, the effectiveness of those efforts depends on the candor and honesty of the participants in the system. Pursuant to the NOP regulations, farmers who wish to market their products as "organic," must subject their operations to inspection on an annual basis by USDA-accredited certifying agents. These certifying agents, also known as certifiers, act as the NOP's agents for enforcing and implementing the national regulations. Lewin Decl. ¶ 4; McEvoy Decl. (dkt. 45) ¶ 4.

The NOP regulations require organic farmers to establish, implement, and maintain an "organic production system plan," which must include a list of each substance, such as a fertilizer, that is used in the farming operation. 7 C.F.R. § 205.201; § 205.400. During annual on-site inspections, the certifiers are required to verify the information in the farmer's organic production plan and ensure that "prohibited substances have not been and are not being applied to the operation . . . ." 7 C.F.R. § 205.403(c). The integrity of this system relies in part on farmers being honest about what substances they are using in their

Page 5

agricultural production. The farmers, in turn, must rely on the honesty of fertilizer manufacturers in reporting exactly what ingredients are contained in their product. Even though ingredients in a fertilizer may be listed on the product's label, some manufacturers of formulated brand name fertilizers are not willing to disclose the specific formulas for their products to farmers or certifiers because they consider that information confidential proprietary information. Lewin Decl. ¶ 5; McEvoy Decl. ¶ 8. However, if the manufacturer is not willing to disclose information about what ingredients are in its product, there is no way for the farmer or certifier to know that the product complies with the NOP regulations. Id. Because of the financial risk that accompanies a violation of the NOP regulations, farmers would not be willing to use a product unless the farmer could be assured that the product would be approved by certifiers during annual inspection and certification. McEvoy Decl. ¶ 8. This is where the Organic Materials Review Institute (OMRI) fits into the federal framework for organic agricultural...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT