In United States v. Scully, 16-3073-cr (Pooler, Lynch, Cogan[1]), the Second Circuit vacated the defendant’s conviction for various offenses, including mail and wire fraud, conspiracy to defraud the United States, the sale of misbranded and unapproved drugs, and the unlicensed wholesale distribution of prescription drugs, finding that the District Court erred in excluding evidence related to his advice-of-counsel defense.  The opinion provides a helpful overview of the requirements of Rule 403 balancing and the nature of the burden in establishing an advice-of-counsel defense.

Background

William Scully’s conviction arose out of a drug distribution company—Pharmalogical—that he founded in 2002.  Although Pharmalogical was initially set up as a wholesale distributor, when that business model did not prove sufficiently lucrative, Scully began using the company to import foreign versions of FDA-approved drugs and medical devices at reduced prices for resale in the United States at slightly below the prevailing market rate. 

When one of Pharmalogical’s first customers expressed a concern that the labels on the products were missing a National Drug Code, Scully consulted an attorney—Richard Gertler—to research whether Pharmalogical could legally resell the products it imported in the U.S. market.  Gertler produced an opinion letter stating that Pharmalogical was in full compliance with U.S. laws and regulations.  When Scully later received a letter from the FDA indicating that foreign-made versions of FDA-approved drugs are considered unapproved new drugs, Scully again approached Gertler, who prepared a second opinion letter indicating that Pharmalogical’s business model did not violate any federal criminal laws.  Scully continued to import and resell foreign drugs and medical devices despite increased scrutiny from the FDA.  Eventually the FDA raided Pharmalogical’s offices and Scully and his business partner were indicted.

The trial and conviction

At his trial, Scully sought to advance an advice-of-counsel defense, arguing that because he relied in good faith on advice from Gertler and another attorney—Peter Tomao—he lacked the requisite intent for the crimes with which he had been charged.  Scully called Gertler as a witness, but the Government was able to successfully undermine the defense on cross examination, establishing that Scully had only consulted Gertler after he started his importing business and that he had provided Gertler with incomplete and false information when seeking an opinion. 

Although defense counsel did not call Tomao as a witness, Scully sought to introduce evidence of Tomao’s legal advice through his own testimony.  The Government moved to strike Scully’s testimony on this issue as hearsay and the District Court granted the objection.  The next day, Scully moved for reconsideration on the grounds that the testimony about Tomao’s advice to Scully was not being offered for the truth of the matter asserted, but to establish Scully’s state of mind in connection with the advice-of-counsel defense.  The District Court agreed that the testimony was not hearsay, but still upheld the Government’s objection under the balancing test of Rule 403, noting that although the challenged testimony was important to Scully’s defense, its probative value was outweighed by the prejudice to the Government, especially in light of the fact that Tomao was available to offer direct testimony on the subject. 

When the case was submitted to the jury, the District Court included an explanation of the advice-of-counsel defense in the jury instructions and on the verdict form.  The instructions stated that Scully bore the burden of producing evidence in support of the defense, but noted that the Government bore the burden of proof in the case.  With respect to the verdict form, the District Court directed the jury to first consider whether Scully was guilty on a particular count, and if he was, to then consider whether the advice-of-counsel defense was established, in which case Scully would be acquitted on that particular charge.  Scully was ultimately convicted on almost all counts. 

The appeal: Conviction reversed and remanded

Scully appealed his conviction based mainly on the grounds that the District Court improperly excluded his testimony regarding Tomao’s advice, and that the District Court’s instructions to the jury on the advice-of-counsel defense had been improper.  

The district court erred in excluding evidence relevant to the advice of counsel defense

In addressing Scully’s evidentiary arguments, the Court remarked that although the District Court abandoned its initial hearsay ruling, hearsay concerns “permeated the court’s reasoning” with respect to the Rule 403 balancing.  The Court held that these concerns were misplaced because circumstantial evidence of the defendant’s state of mind is by definition not hearsay since it is not offered for the truth of the matter asserted.  Because this evidence was completely beyond the scope of the hearsay rule and its exceptions, the Court found that it was error for the trial court to weigh this factor in the Rule 403 balancing. 

The Court also held that it was inappropriate for the District Court to require Scully to call Tomao to ensure the reliability of his own testimony.  Although Scully’s credibility may have been doubtful, that was an issue for the jury to decide.  Thus, it was inappropriate for the trial court to weigh the risk that Scully’s testimony might be false if uncorroborated as part of the prejudice to the Government in the Rule 403 balancing process.  The Court also noted that Scully’s proffered testimony about Tomao’s advice was not cumulative of Gertler’s testimony because the Government had successfully cross-examined Gertler and thus the testimony regarding Tomao’s advice remained vital for establishing Scully’s advice-of-counsel defense.  For these reasons, the Court concluded that the District Court erred in balancing the probative value and prejudicial effect of this testimony.

The Court further concluded that this error was not harmless, noting that courts weigh several factors in the harmless error analysis, including the extent to which the defendant was otherwise permitted to advance the defense and the overall strength of the prosecution’s case.  Here, the Court found that evidence of Tomao’s advice was necessary to rebut the Government’s case with respect to Scully’s intent.  Although Tomao’s direct testimony would have been the most persuasive evidence on this subject, Scully was competent to testify as to his own state of mind and it was for the jury to determine whether his testimony was credible.  The Court therefore held that Scully was entitled to a new trial.

The district court’s jury instructions regarding advice of counsel constituted error

The Court next turned to Scully’s challenge to the District Court’s jury instructions regarding the advice-of-counsel defense.  The Court held that Scully had waived his right to challenge the instructions because he failed to object to them during the trial.  Because the case was being remanded for a new trial on other grounds, however, the panel decided to provide some guidance to the trial court on the issue. 

Specifically, the Court explained that although a defendant bears the burden of establishing an affirmative defense at trial, in a fraud case such as the one at bar, the claimed advice of counsel is not an affirmative defense.  Rather this evidence is used to establish reasonable doubt with respect to the mens rea element of the crime. The Court also noted that because an advice-of-counsel instruction should only be given where there are sufficient facts in the record to support the defense, it can be confusing to instruct the jury that the defendant bears the burden of producing evidence to satisfy the elements of the defense.

The panel thus noted that on remand, the jury should be instructed that the Government bears the burden at all times of establishing that Scully had the requisite intent.  The panel further explained that the jury should not receive a verdict form requiring them to determine whether Scully is guilty before considering the advice-of-counsel defense.  The Court specifically cited Sand’s pattern jury instructions[2] and the Seventh Circuit’s model jury instructions[3] as acceptable for use in this case, and noted that any instructions on the advice-of-counsel defense should include the admonition that a defendant need not establish his good faith.

The Circuit rejected the argument that Scully’s acts were not criminal in nature and also found sufficient evidence of guilt

At the end of its opinion, the panel addressed Scully’s two substantive challenges to his conviction:  (1) that all counts premised on the distribution of drugs not bearing English-language labeling should be dismissed because these requirements are imposed by FDA regulation and therefore cannot serve as the basis for a crime; and (2) that there was insufficient evidence to convict him of two counts related to sales to a certain Dr. Jacob because Dr. Jacob did not testify at trial.  The Court rejected both arguments.

With respect to the labelling charges, the Court noted that a drug is misbranded if it lacks adequate instructions for use or fails to bear the admonition “Rx only.”  Because the Bill of Particulars alleged that each of the drugs Scully sold lacked the “Rx only” label, and Scully did not claim otherwise during trial or on appeal, the evidence of his guilt on these charges was sufficient.  The Court also noted that the Government’s theory with respect to foreign-language labels was also sufficient to establish a crime since drugs bearing labels in languages other than the prevailing language in the market lack adequate instructions for use.

Finally, the Court rejected Scully’s arguments with respect to the charges related to sales to Dr. Jacob.  The Court noted that the victim’s reliance is not an element of felony introduction of misbranded drugs into commerce and thus the fact there was no evidence that Dr. Jacob relied on Scully’s misrepresentations when purchasing the drugs at issue was immaterial.  The Court further explained that the Government need not call each of Scully’s victims to establish its case, since it introduced ample evidence of Scully’s fraudulent scheme through other witnesses.

Conclusion

There are several takeaways from this relatively rare decision reversing a conviction and remanding for a new trial.  Most of them relate to the advice-of-counsel defense, which is infrequently presented in part because it depends on the defendant having disclosed all relevant facts to counsel, and in part because it can be a complicated defense for a jury to understand.

First, the advice-of-counsel defense typically involves testimony from the attorney who gave the relied upon advice.  However, there is no requirement that this be so, and the Court of Appeals frowned on the District Court’s attempt to make this into a requirement.  The hearsay rule does not apply at all when the statement is offered for a non-hearsay purpose, as here.  It was error for the district court to have imported hearsay-like reasoning when it excluded the defense testimony.

Second, in an era in which there is increasingly complicated regulation of private conduct, it is to be expected that more defendants will want to present an advice of counsel defense.  In some cases, the defense may be less strong than in other cases.  It is hard to say whether the defense would have been meritorious in this case, but as the Circuit explains, the question is up to the jury to decide.  There are no summary judgment motions in criminal cases.

Third, when the advice-of-counsel defense is present, care must be taken not to make the jury think that the defendant has a burden of persuasion, as it might in the context of affirmative defense.  The advice-of-counsel defense is meant to permit the defendant to negate criminal intent.  It is not hard to see why the jury—already having checked the “guilty” box on the verdict form—would not have reversed itself based on the advice-of-counsel defense.

Fourth, the Court gave the misbranding statutes a broad but logical reading when it stated that it would be sufficient under the statute if the label was not written in English, even if it did convey adequate directions for use in another language.  Although many people in the United States are fluent in other languages, the Court concluded that “medical products bearing labels in languages other than the prevailing language in the relevant marketplace . . . are, in effect, not labelled at all.”  Individuals who would resell products made for use outside of the United States will often be subject to a misbranding prosecution on this theory alone.  In general, products made for sale outside of the United States should not be sold within the United States.  Contracts often prohibit such resales, and the Second Circuit has interposed another barrier to this practice.