Judge Strikes Down FBI’s Use of ‘National Security Letters’

In a recent decision, U.S. District Judge Susan Illston of the Northern District of California struck down the FBI’s use of National Security Letters (NSLs) as unconstitutional. Unbeknownst to most Americans, the FBI has been issuing thousands of NSLs every year. The letters demand that recipients, such as banks and telephone companies, provide customers’ information such as their transactional records, phone numbers dialed, and email addresses mailed to and from. This doesn’t involve the content of the phone calls or emails but does involve the names of addressees or participants. One reason most Americans didn’t know about these letters is because more than 95 percent of them contain gag orders, barring the recipient from disclosing their content or even their existence.

This case began nearly two years ago, in May 2011, when a nonprofit advocacy group, the Electric Frontier Foundation (EFF), filed suit on behalf of an unnamed telecom company that had received an NSL. In defense of the NSLs, the government argued that this level of secrecy is necessary to protect the nation against potential security threats. NSLs were designed in the 1970s as a means to gather information on suspected foreign spies during terrorism and espionage investigations. However, the Patriot Act greatly expanded their reach to allow the FBI to secretly compel companies to provide data on American citizens.

The constitutionality of NSLs is dubious for two distinct reasons. Not only does the nondisclosure clause infringe on their recipients’ free speech, but, unlike a standard subpoena or search warrant, the NSLs do not have to be authorized by a judge. Accordingly, Illston concluded that NSLs and their nondisclosure provisions violate the First Amendment and separation of powers principles, and she ordered the FBI to stop issuing NSLs and cease enforcing all gag provisions. That said, we are uncertain whether Illston’s order will ever go into effect. Due to the gravity of the First Amendment and national security issues at stake, Illston issued a 90-day stay, giving the government time to appeal her decision to the U.S. Court of Appeals for the 9th Circuit.

Although the lawsuit was filed anonymously, various media sources have suggested that the unnamed defendant may be Credo Mobile, a phone provider that supports progressive causes. The day after the ruling was released, Credo’s CEO Michael Kieschnick released the following statement:

“This decision is notable for its clarity and depth. From this day forward, the US government’s unconstitutional practice of using national security letters to obtain private information without court oversight and its denial of the first amendment rights of national security letter recipients have finally been stopped by our courts.”

According to Matt Zimmerman, an EFF attorney, the NSL gags “have truncated the public debate on these controversial surveillance tools,” and his unnamed client “looks forward to the day when it can publicly discuss the issue.”

As we await the higher court’s ruling, which we hope leaves Illston’s decision in place, one thing has already been accomplished of a positive nature. A federal district judge has shined some light on a little-known and highly dubious federal law enforcement technique.

Was This Identity Theft? Sixth Circuit Should Limit Meaning of That Term

What’s in a name?

When you think of identity theft, you typically think of someone taking a person’s name plus some other identifiers, like their address and Social Security number or credit card number, to go on a spending spree or drain the victim’s bank account. You may think of fraudulent impersonation. But what if someone falsely stated that another person gave him permission to use their joint property as collateral on a loan? That sounds like a false statement but not a case of stolen identity. Yet a federal district court in Tennessee found that just this scenario constituted identity theft in a current case against real estate broker David Miller.

Perhaps the court’s holding doesn’t sound too troubling. After all, identity theft is a crime and it’s clearly behavior that we want to deter. But expanding the reach of what may fall under the federal identity theft laws doesn’t really deter the behavior that Congress sought to address by statute. It just makes it harder to anticipate the bounds of the law, and that is troubling.

Congress passed the Identity Theft and Assumption Deterrence Act of 1998 in order to address the growing problem of fraudsters taking people’s personal information to either steal from their existing accounts or to run up debt in the victims’ names. The act criminalized fraud in connection with the theft and misuse of personal identifying information. (Before the law was passed, only fraud in connection with identification documents was a federal crime.) But there was some concern that prosecutors were not vigorously going after identity theft cases. So Congress passed the Identity Theft Penalty Enhancement Act of 2004. Again, this measure was aimed squarely at penalizing identity thieves who were attacking consumers’ financial accounts and credit. The bill’s sponsor, Rep. John Carter (R-Tex.), said identity theft is “a crime that we need to address and address seriously … for the protection of the credit of American citizens.”

Years later, the Department of Justice appears to have gotten the message and is actively prosecuting identity theft cases. All is well and good with the DOJ’s ordinary efforts in this area. On its website, the DOJ discusses identity theft issues in a familiar context, relating concerns over the misuse of “your Social Security number, your bank account or credit card number, your telephone calling card number, and other valuable identifying data.”

It also provides exemplary cases, which are again in keeping with the general understanding of what constitutes identity theft: (1) a woman pleaded guilty for using a stolen Social Security number to obtain thousands of dollars in credit and then filing for bankruptcy in the name of her victim; (2) a man pleaded guilty after obtaining private bank account information about an insurance company’s policyholders and using that information to deposit counterfeit checks; (3) a defendant was indicted on bank fraud charges for obtaining names, addresses, and Social Security numbers from a Web site and using those data to apply for a series of car loans over the Internet.

So with a pretty clear understanding of congressional intent and a fairly clear depiction of the scope of federal identity theft laws, it seems a bit like prosecutorial overreach for the DOJ to turn around and use these laws in a case like that against David Miller. Not in keeping with the sample cases above, Miller’s “theft” involved him “using the names of two individuals in a document that stated Miller had the authority to pledge real property as collateral for the loan when he had no such authority.” He was not trying to impersonate them to create new accounts or steal from their existing accounts. There are other laws to prosecute what Miller did – and he was found guilty of making false statements to a bank.

The concern here is that adding the identity theft count to Miller’s sentence is a misuse of the Identity Theft Penalty Enhancement Act and an overexpansion of what behavior falls under the rubric of identity theft. What is next? Will the department uses this law to prosecute those who lie about references on a job application?

The general rule is that criminal laws should be strictly construed in favor of the defendant. The ruling against Miller seems a case in point where the Rule of Lenity was not applied. Miller has appealed to the U.S. Court of Appeals for the Sixth Circuit, which will hopefully bring the law back within its intended scope.

This Gaming Case Didn’t Have to Be Prosecuted

A Nevada man now has a criminal record – simply because he placed a bet in a casino in Las Vegas and a casino employee didn’t ask him enough questions.

Robert Walker recently pleaded guilty in federal court to one misdemeanor count involving a record-keeping violation and was sentenced to one year of unsupervised probation. He was also ordered to pay a $250 fine and agreed to forfeit a $32,400 bet he made in March 2011.

Walker was a member of Acme Trading Group, a company whose members placed bets for several years at a number of casinos on Acme’s behalf. Acme is structured in a way that allows individuals to invest in the company, and bets are made on behalf of the company.

Messenger betting is a crime under Nevada law that occurs when wagers are placed at sports books by individuals on behalf of others. Thus far, Acme Trading Group has not been prosecuted for messenger betting, although Walker and others have clearly been subject to law enforcement scrutiny.

In November 2011, Walker was indicted on four felony counts under 31 U.S.C. 5313(a) for causing a domestic financial institution to fail to file an accurate currency transaction report. Walker faced a maximum of 20 years in prison and a $1 million fine if convicted of all charges.

The indictment alleged that on four occasions, Walker went to the Golden Nugget Casino Race & Sports Book and placed a bet of more than $10,000, and that when he was asked by the employee taking the bet if he was gambling on behalf of anyone else, he said that he was not.

Under federal law, all financial institutions, which include casinos, must file reports of any currency transactions over $10,000. The casino must also verify the name and the address of the individual placing the bet and the taxpayer identification information of the person on whose behalf the bet is being placed.

Walker’s attorneys contended in court filings that the burden is on the casinos, and not the individual bettor, to determine whether the individual is placing the bet on behalf of himself or a third party. Walker’s attorneys stated that Golden Nugget personnel never asked him if he was placing bets on behalf of someone else, and if they had asked him, he would have informed them that he was wagering on behalf of Acme. He had been instructed by his employer, he said, that if asked, he should reply to casino personnel that he was placing the bet on behalf of Acme.

Attorneys for Walker also stated in court papers that they hired an investigator who went to the Golden Nugget and engaged in at least seven transactions that required reporting under federal law. In none of those transactions did casino personnel ever ask the investigator if he was placing the wager for himself or on behalf of someone else.

This is a case that simply did not need to be prosecuted. Factually, there were very serious questions raised regarding the role that the casino played in trying to obtain the information necessary to file the reports and regarding the issue of who is responsible for making sure that information is reported.

Walker accepted a plea that would grant him a year of unsupervised probation; the indictment he was originally facing had a maximum sentence of 20 years in prison. Walker now has a criminal record as the result of very aggressive and unnecessary prosecution. Is this the type of case that the government’s limited prosecutorial resources should be focused on?

DOJ Brief Tries to Keep N.J. Sports Gaming Law Out of Bounds

On Friday, February 1, 2013, the U.S. Department of Justice filed a brief in the U.S. District Court for the District of New Jersey defending the constitutionality of the Professional and Amateur Sports Protection Act of 1992 (PASPA), the hotly contested federal law that prohibits sports betting in most states. New Jersey is seeking to have the court find this law unconstitutional. A win for the state would have far-reaching ramifications by eliminating the primary hurdle that individual states have in implementing legal sports betting within their borders.

PASPA prohibits any state from offering sports betting unless that state had a sports betting scheme in place between 1976 and 1990. New Jersey had a one-year period to enact sports betting, but its legislature failed to act. Delaware, Oregon and Montana have limited sports betting schemes in place, and Nevada is the only state that is authorized to offer single-game sports betting under the law.

On January 22, DOJ announced that it planned to intervene in the lawsuit brought by the four major professional sports leagues and the NCAA challenging the New Jersey state law. DOJ could have brought a case when the law was initially passed, but chose not to.

The DOJ brief raises three main constitutional issues: the anti-commandeering principles of the Tenth Amendment, Congress’s power to regulate sports wagering under the Commerce Clause and the applicability of the uniformity and equal sovereignty principles under the Commerce Clause, and due process and equal protection clause issues under the Fifth Amendment.

DOJ argues in its brief that the anti-commandeering principle applies only when a federal statute requires specific, affirmative action by a state and that since PASPA does not require New Jersey to take any action but merely to refrain from starting a betting program, the principle is inapplicable.

New Jersey replies that the anti-commandeering principle does apply because a federal law is imposing constraints on the state. PASPA’s stated purpose is “to require States to govern according to Congress’ instructions.” The Supreme Court case that established the anti-commandeering principle, New York v. United States (1992), states that “the Constitution has never been understood to confer upon Congress the ability to require the States to govern according to Congress’ instructions.”

Additionally, under the Tenth Amendment, the power of the federal government is limited. Courts have typically viewed the ability to raise revenue, such as through gambling, as one of those rights reserved to the states. New Jersey has successfully regulated gambling for decades but has been prohibited from regulating sports betting simply because it did not have a betting scheme in place before enactment of PASPA over 20 years ago.

DOJ argues that PASPA is a valid exercise of federal power under the Commerce Clause because sports gambling has an effect on interstate commerce and PASPA is a rational method of achieving regulation of it. DOJ also does not give any credence to the argument that the law violates the principle of equal sovereignty.

New Jersey argues that the principle of equal sovereignty does apply under the Commerce Clause. The plain text of the Commerce Clause does not make clear that all states must be treated uniformly, but the state believes that the case law makes it applicable.

New Jersey argues that contrary cases cited by DOJ deal with regulations that fell unevenly on the states because of circumstances that were not spread through the country, largely based on geography. However, the rationale for allowing some states to authorize sports betting and not others was the pre-existing scheme in place before PASPA and nothing else. The grandfathering clause of PASPA has served to grant a monopoly to Nevada while discriminating against all other states. This federal government-sponsored monopoly denies to the states the equal sovereignty that they are guaranteed under the Constitution.

The DOJ brief states that the arguments that PASPA violates the due process and equal protection guarantees of the Fifth Amendment are inapplicable because they protect only “persons” and not states from actions of the federal government. New Jersey argues that the discrimination between the states that PASPA has produced, by essentially granting Nevada a monopoly on single games sports betting, rises to the level of “injurious character” as to violate due process. This is likely the weakest argument that the state is making, and the court will likely rule in favor of DOJ on this point.

When PASPA was being debated in Congress, DOJ sent a letter to then Senator Joseph Biden (D-Del.), then the Judiciary Committee chairman, discussing the views of DOJ on PASPA. The letter noted that determinations of how to raise revenue are typically left to the states and since PASPA was seeking to regulate how states generate revenue, “it raises federalism issues.” DOJ chose not to address that letter in its brief.

New Jersey and the New Jersey Thoroughbred Horseman’s Association will have an opportunity to file a reply brief with the court by February 8. Oral arguments on the constitutionality of PASPA will be held on February 14.

The arguments made in the DOJ brief, for the most part, have already been made by counsel for the sports leagues. However, it remains to be seen if the court will give the arguments more weight because they were made by the U.S. government.

If the court accepts any of the arguments made by New Jersey that PASPA is unconstitutional, then New Jersey will prevail. It remains to be seen how the court will rule, but the constitutionality of PASPA will surely be tested and the consequences of this ruling will be very far-reaching. Whichever side loses the battle in the district court will likely appeal, meaning it may be some time before it is settled whether New Jersey can proceed with its plan to implement sports betting.

DOJ Plans to Intervene in N.J. Sports-Betting Case

The U.S. Department of Justice announced on January 22, 2013, that it plans to intervene in the lawsuit brought by the four major professional sports leagues and the NCAA challenging a New Jersey state law that legalized sports betting in the state.

The leagues have argued in court papers that the New Jersey law is invalid because it directly contravenes a 1992 federal law, the Professional and Amateur Sports Protection Act (PASPA) that imposes a ban on sports betting unless the individual state had its own sports betting scheme in place between 1976 and 1990. New Jersey was given a one year window to put in place a sports betting scheme, but the legislature failed to act.

The DOJ has requested that it have until February 1 to respond to the two briefs that challenge the constitutionality of PASPA. The DOJ has also requested the opportunity to participate in oral argument on the constitutionality of PASPA on February 14.

A year ago, New Jersey Governor Chris Christie signed legislation allowing sports betting in New Jersey after it was approved by a 2-1 margin in a nonbinding voter referendum in November 2011.

The DOJ could have brought this lawsuit when the law was initially passed, but chose not to. Instead, the case was brought by the four major professional sports leagues and the NCAA. New Jersey has argued that the leagues lacked standing to bring the suit. However, last month, after briefs were filed an oral arguments were held, a district court judge in New Jersey ruled that the leagues do have standing to bring the suit.

When PASPA was being debated in Congress, the DOJ sent a letter to then Senator Joseph Biden (D-Del.), then the Judiciary Committee chairman, discussing the views of the DOJ on PASPA. The letter noted that determinations of how to raise revenue are typically left to the states and since PASPA was seeking to regulate how states generate revenue “it raises federalism issues.”

A successful outcome for New Jersey in this case would allow for other states to pursue legalized sports betting. We support New Jersey’s efforts to legalize sports betting and generate needed revenue and jobs for the state.

What Lessons Can Be Learned From Tragic Death of An Internet Activist?

There can be no dispute that the death of Aaron Swartz – the Internet activist who took his own life on Friday, January 11 – is tragic. There can also be no dispute that the grief and anger his family feel is very real. The question is what the appropriate focus for that anger should be in order to give meaning to Swartz’s life – and death.

Swartz, who had blogged about his own battles with depression, was a leading activist involved with the movement to make information freely available on the internet, and is credited with helping to lead the protests that ultimately defeated the Stop Online Piracy Act (SOPA) – a statute that would have significantly broadened law enforcement powers in policing internet content that may violate U.S. copyright laws.  Swartz’s suicide came as he faced federal charges of wire fraud and computer fraud arising from his alleged efforts to make freely available an enormous archive of research articles and similar documents offered by JSTOR, an online academic database, through computers at the Massachusetts Institute of Technology. The allegations in the indictment he faced were a tribute to Swartz’s computer acumen, describing the technological means that Swartz had used to access and download approximately 2 million documents from the JSTOR subscription archive by unauthorized access to the computers at MIT.

Swartz’s family has released a statement in which they blame his death on the decision by federal prosecutors in the District of Massachusetts to pursue “an exceptionally harsh array of charges, carrying potentially over 30 years in prison, to punish an alleged crime that had no victims.” Contrary to the family’s assertion that the prosecution caused Swartz to take his own life, we suggest that the appropriate focus here is not on prosecutorial overreaching, but rather on Congress’s decision to criminalize certain conduct and to set sentencing guidelines that would likely have led to imprisonment if Swartz were convicted.

It is true that the maximum statutory sentence of imprisonment for the wire fraud charge in the indictment against Swartz is 30 years. But there is no question that the likely sentence that Swartz would have faced if convicted of wire fraud and/or the other charges in the indictment would have been far less than that. The advisory range under the U.S. Sentencing Guidelines would have depended on the loss (or intended loss) suffered, among other things, but Swartz likely faced (based on back of the envelope calculations) a sentence of no more than two to four years in prison – a fact that he almost certainly knew from the lawyer who represented him. While four years in federal prison is significant, it is much less than the 30-year sentence mentioned by the family.

It is also not entirely clear that the prosecutors’ decision to pursue charges against Swartz was unreasonable. This is not just a case alleging the distribution of materials protected by copyright law – an issue on which there is fair debate as to whether conduct should be criminalized. Rather, in this case, Swartz was accused of having accessed the MIT computer systems and the JSTOR subscription (for which MIT paid approximately $50,000) through illicit means. There were also allegations that Swartz’s computer intrusions crashed some computers and caused some legitimate subscribers to the JSTOR service to lose access for a period of time. Thus, assuming the truth of the allegations in the indictment, the alleged crime here was not entirely victimless. Moreover, everyone agrees that illegally accessing a computer system is not conduct that should be condoned. For these reasons, Swartz’s family’s attacks on the prosecutors as overreaching – while understandable given their grief and anger – may actually be misplaced.

On the other hand, there is a fair question whether the conduct with which Swartz was charged is really the kind of conduct for which we need to send a person with no other criminal record to prison for a period of years. That, however, is not an issue of decision-making by the prosecutor’s office. Rather, that is a question for Congress, both in terms of establishing criminal liability and in terms of setting astronomical maximum statutory sentences (which increased the base offense level for this crime). And it is a question for the U.S. Sentencing Commission, which has raised Guidelines levels over the years. It is also a question for Congress in terms of setting Guidelines scoring that increasingly fails to reflect any expertise of the Sentencing Commission, but rather reflects only a congressional mandate to support increasingly harsh advisory sentences under the Guidelines for white-collar offenses.

Prosecutors may have been justified in seeking charges against Swartz for his conduct. But if his family, friends and supporters wish Swartz’s death to have as much meaning as his life, they should focus instead on the decisions that created the harsh potential penalties that Swartz faced.

Online Pharma Exec Gets 4 Years in Prison for Selling Foreign Drugs in U.S.

Andrew Strempler, a Canadian citizen who helped to pioneer the cross-border online pharmacy industry, was sentenced on January 9, 2013, to four years in prison in connection with allegations that his former company sold fake and misbranded drugs to U.S. citizens.

The sentence follows Strempler’s guilty plea in October in federal court in Miami to a charge of conspiracy to commit mail fraud. Strempler also agreed to forfeit $300,000 and pay a $25,000 fine. A hearing will be held to determine if Strempler will also need to pay restitution.

Strempler operated companies that sold foreign pharmaceuticals to consumers in the United States, where drug costs are significantly higher than in other countries. The drugs were obtained in markets with lower prices on drugs, but the U.S. government has long taken the stance that selling these drugs is illegal because the sources of the drugs could not be assured.

Under the plea agreement, the guidelines range for Strempler’s sentence would be 46 to 57 months, on a charge that carries no mandatory minimum sentence. The government recommended a sentence of 57 months. Prosecutors had originally sought up to 20 years in prison and the forfeiture of $95 million.

Counsel for Strempler asked the court for a downward variance and a sentence of 24 months. Strempler’s attorneys argued that since he is a Canadian citizen, any sentence imposed on him would be more difficult and onerous than an identical sentence imposed on an American citizen. They contended that he would likely not be assigned to a minimum security prison, even though he would likely otherwise qualify based on the nature of the offense and his lack of criminal history. Additionally, as a Canadian citizen Strempler would not be allowed to participate in an early release to a community corrections facility. After he serves his sentence he will be sent to immigration custody, where he will likely be held until his removal from the country.

Strempler’s attorneys also noted that the pre-sentence investigation report states that “there is no evidence that any victim sustained an actual loss or physical injury as a result of this offense.” Additionally, the forfeiture judgment of $300,000 to the government that Strempler agreed to pay prior to sentencing was nearly doubled the agreed-to loss amount.

According to court papers, Strempler believed that the drugs his company was selling were “safe and effective,” and his attorneys noted that he purchased the same drugs for his family and had sample drugs tested by a lab in Canada. His attorneys argued that he did not act with malice and had no actual belief that the drugs were fake and ineffective. He believed that the drugs were safe because they were purchased in accordance with the regulations of foreign countries.

The court essentially rejected the arguments by Strempler for a more lenient sentence and went along with the government’s request for a lengthy sentence. It appears to us that Strempler received a long sentence for a first-time nonviolent offender who did not act with malice. It seems that this is more of a regulatory violation parading in the clothing of a criminal case.

By asking for such a significant sentence, the government may have been trying to serve notice that this type of case will not be taken lightly. Given the stance taken by the prosecution in this case, it will be interesting to see if this leads to further prosecutions for related offenses.

Are the Feds Enlisting FedEx to Police the Illegal Pharma Market?

The government may be coming up with a new cost-effective measure to help balance the federal budget – enlisting private companies to do their policing. A 2011 settlement between the Justice Department and Google for $500 million is one recent example. Under the settlement, Google acknowledged responsibility for improperly aiding rogue pharmacies by allowing the pharmacies to post ads through the search engine’s AdWords program. Google not only agreed to forfeit this sizable sum (one of the largest in history by a U.S. company), it also agreed to new compliance and reporting measures. And that is after the company, on its own initiative, took steps to block foreign-based pharmacies from advertising in the United States.

Currently in the works are similar investigations by the Drug Enforcement Agency of FedEx and UPS. The shipping companies have been targets of a criminal probe dating more than four years into whether they aided and abetted illegal drug sales from online pharmacies. As the investigations are still ongoing, it is unclear what the extent or type of evidence against them may be. What is clear is that at least one of the targets is asserting its innocence and plans to defend itself vigorously. While UPS has announced that it is in settlement talks that would involve upgrading its compliance program, FedEx has come out with gloves on, pronouncing that “settlement is not an option when there is no illegal activity.”

UPS’ (and Google’s) course of action is understandable: Companies commonly do a cost-benefit analysis between settling and defending and determine that settlement is a better business decision. But it is good to see FedEx taking the higher, though riskier, road. A brief review of relevant law supports FedEx’s stance. For instance, common carriers are specifically excluded from liability under the Prescription Drug Marketing Act (PDMA): the implementing regulations provide that “distributing” under the Act does not include “[d]elivering or offering to deliver a drug by a common carrier in the usual course of business as a common carrier.” Interestingly enough, the FDA “on its own initiative” had revised its final rule to exclude common carriers.

The FDA’s earlier determination to exclude common carriers made sense, as it would be prohibitively expensive and potentially crippling to put shipping companies on the hook for packages that pass through their system. But the tides are changing, and federal agencies seem less concerned with the broad and adverse economic impact upon private companies and are more focused on how they may use those companies to do their bidding. As FedEx spokesman Patrick Fitzgerald noted, the government wants to “deputize” FedEx delivery to help “catch criminals.”

This type of effort by the feds can be quite effective, as can be seen from the Google settlement and impending UPS settlement. A federal enforcement agency launches an investigation that may be both extensive and costly to a company. The company does its cost-benefit analysis and determines it more efficient to simply pay a fine and institute a government-directed compliance program than to defend itself. The government thereby has a direct and simplified road to instituting new policies, company-by-company, through its settlement agreements. And all this can be accomplished without having to trouble itself with notice and rulemaking procedures. This process plays out frequently, which is what makes FedEx’s stance so refreshing.

Court’s Strict Interpretation of Bank Fraud Law May Rein In Prosecutors

A recent interpretation of the federal bank fraud statute by the United States Court of Appeals for the Second Circuit may prove to be a useful check to overreaching by federal prosecutors, who have tended to use that statute in the past as a catch-all law enforcement tool.

In United States v. Nkansah, the Court reviewed the conviction of a defendant for bank fraud and other crimes arising from a scheme in which the defendant and others stole identification information and used that information to file fraudulent tax returns from which they obtained tax refunds. The depositing of the refund checks involved forgery of endorsements and/or the use of false identification.

On appeal, the defendant challenged his bank fraud conviction on the ground that the government had failed to carry its burden of proof that he intended to victimize the banks, as opposed to the U.S. Treasury that issued the refund checks. Defendant argued that no such evidence of intent to defraud a bank was presented, nor did the government prove that the banks themselves actually lost any money.

The court agreed. In its opinion reversing the bank fraud conviction, the appeals court noted that “the bank fraud statute is not an open-ended, catch-all statute encompassing every fraud involving a transaction with a financial institution” but rather “a specific intent crime requiring proof of an intent to victimize a bank by fraud.” For this reason, the court specifically held that “[t]he government had to prove beyond a reasonable doubt that appellant intended to expose the banks to losses,” and noted that, if that intent were proved, there was no need for proof of actual or even possible loss.

The court noted that the evidence upon which the government relied – conversations among the participants about avoiding detection by the banks – was not sufficient to satisfy this required element of proof. The court acknowledged that, in some cases, the fact that a bank may suffer a loss based on the negotiation of a check with a forged endorsement permits an inference of intent. But, in this case, given that the checks at issue were genuine Treasury checks, the actual exposure of a bank to losses is “unclear, remote, or non-existent” because the banks could be deemed to be holders in due course of the checks, with the risk of loss borne entirely by the Treasury. Under such circumstances, the permissible inference urged by the government was far from sufficient to constitute proof beyond a reasonable doubt of the defendant’s intent.

The Second Circuit’s holding in this case is significant because of federal prosecutors’ frequent use of bank fraud charges when banks were part of the transactions included in the allegedly wrongful conduct but were not the intended victims of that conduct. Prosecutors like the bank fraud statute because it carries a hefty maximum statutory sentence of 30 years imprisonment. Bank fraud can also form the predicate (as it did in Nkansah) for other charges such as aggravated identity theft – a crime for which probation is prohibited and for which a defendant must receive a consecutive sentence to the punishment he receives for conviction of any other offense. By holding prosecutors to the strict requirements of the bank fraud statute, the Second Circuit may limit the ability of federal law enforcement to use that statute as leverage in its prosecutions.

‘Off-Label’ FDA Cases Can Run Afoul of First Amendment, Appeals Court Holds

A recent decision by the U.S. Court of Appeals for the Second Circuit may significantly curtail enforcement efforts relating to the so-called “off-label” use of drugs approved by the Food and Drug Administration for specific uses and/or populations. Finding that the government’s prosecution of promotional statements supporting off-label use of an FDA-approved drug would violate the First Amendment, the court ruled that the Federal Drug and Cosmetic Act (FDCA) must be construed narrowly to avoid unconstitutionally prohibiting such statements.

As we have explained in previous blog posts, when the FDA approves use of a drug, it does so for a specific illness or condition and/or for certain populations. It is not illegal for physicians to prescribe approved drugs for off-label use, and such uses sometimes constitute commonly recommended courses of treatment. Law enforcement efforts (both criminal and civil) have focused on the marketing and promotion of drugs for off-label use by pharmaceutical manufacturers and their representatives.

Civil and criminal enforcement against promotion of off-label use has been extensive in recent years and has resulted in some massive fines for pharmaceutical manufacturers. But in United States v. Caronia, decided December 3, 2012, the government’s enforcement efforts ran smack into the First Amendment’s protection of speech, including commercial speech.

The government prosecuted Alfred Caronia, the representative of a pharmaceutical manufacturer, for conspiracy to introduce a misbranded drug into interstate commerce, a misdemeanor violation of the FDCA, 21 U.S.C. sections 331(a) and 333(a)(1). Under this section of the FDCA, a drug is “misbranded” if, among other things, its labeling fails to bear “adequate directions for use,” 21 U.S.C. section 352(f), and FDA regulations define this term as “directions under which the lay[person] can use a drug safely and for the purposes for which it is intended.” 21 C.F.R. section 201.5.

FDA regulations permit the use of promotional statements as evidence of the intended use for this purpose and, because off-label use is (by definition) neither approved by the FDA nor addressed on the label authorized for the drug by the FDA, the FDA has concluded that “[a]n approved drug that is marketed for an unapproved use . . . is misbranded because the labeling of such drug does not include ‘adequate directions for use.’ ” The prosecution of Caronia was based on his statements to a government cooperator in which he promoted the use of a drug for off-label use by a segment of the population for which the FDA had not approved the drug.

After rejecting the government’s claim on appeal that it had used Caronia’s statements merely as evidence of intent, the appeals court found that the government’s interpretation of the FDCA as criminalizing Caronia’s statements would violate the First Amendment’s protection of free speech. The court began with the expression of principle in the Supreme Court’s decision in Sorrell v. IMS Health, Inc., 131 S.Ct. 2653 (2011) that “[s]peech in aid of pharmaceutical marketing . . . is a form of expression protected by the Free Speech Clause of the First Amendment.”

The court found that the restriction on speech that would result if the FDCA were read as prohibiting Caronia’s statements was content-based because it disfavored the point of view he expressed (supporting off-label use) and was speaker-based because other actors (such as physicians and academics) were free to make similar statements without fear of prosecution. Accordingly, the court found that the restriction on the speech was subject to heightened scrutiny.

The court then found that it was unnecessary to determine what level of heightened scrutiny would apply because the government’s proposed restriction did not satisfy even the least exacting level of heightened review. First, the court found that the restriction on off-label promotional speech did not directly and effectively advance the government’s justifiable interest in drug safety. The court noted that the FDA’s approval process contemplates that there will be off-label use of approved drugs and even includes a safe harbor for manufacturers to make statements about such uses. The court concluded that a prohibition of truthful statements about off-label use paternalistically interfered with the ability of doctors and patients to make well-informed choices about treatment and did not reduce the risk that patients would be exposed to unsafe or ineffective drugs. Second, the court found that a prohibition on such statements – and criminalization of that conduct – was not a narrowly drawn restriction on speech, and noted a number of other approaches that could more narrowly limit such speech in the interest of promoting the FDA’s goals.

The court unequivocally rejected the ability of the government to pursue criminal prosecution of this conduct, writing;

Accordingly, even if speech can be used as evidence of a drug’s intended use, we decline to adopt the government’s construction of the FDCA’s misbranding provisions to prohibit manufacturer promotion alone as it would unconstitutionally restrict free speech. We construe the misbranding provisions of the FDCA as not prohibiting and criminalizing the truthful off-label promotion of FDA-approved prescription drugs. Our conclusion is limited to FDA-approved drugs for which off-label use is not prohibited, and we do not hold, of course, that the FDA cannot regulate the marketing of prescription drugs. We conclude simply that the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.

The court’s decision clearly leaves the FDA with significant power to regulate and punish pharmaceutical companies in connection with its oversight over the approval and marketing of prescription drugs – for example, in cases in which manufacturers make false statements about off-label use of their products. But, assuming that other courts reach similar conclusions, the ability of the federal government to act against off-label promotion may be significantly diminished.