Jury Was Entitled to Hear Advice-of-(Second)-Counsel Defense: Conviction Reversed

The U.S. Court of Appeals for the Second Circuit issued a decision a couple of weeks ago reversing the conspiracy conviction of a defendant for distribution of unapproved drugs, among other things.  The trial court had rejected evidence relating to an advice-of-counsel defense asserted by the defendant.  The Second Circuit’s decision is important to the issue of the advice of counsel in connection with regulatory decisions.

A summary of the factual background included in the appellate decision follows:

• Mr. Scully was one of the founders of “Pharmalogical, Inc.,” named either pursuant to a dastardly misspelling of “pharmacological” or as a clever marketing device.
• The company registered with New York State authorities as a wholesale distributor of pharmaceutical products.
• Mr. Scully managed the day-to-day operations of the company, which imported European or Canadian versions of FDA-approved drugs and medical devices at prices substantially below what the products are available for in the United States, and resold the products to customers in the United States.
• Mr. Scully sought and received from a lawyer a letter that the Second Circuit found led Mr. Scully to believe he was authorized to import and sell the products. The opinion said, according to the Second Circuit, that Pharmalogical had not received any notification from FDA that it was operating in violation of the Federal Food, Drug, and Cosmetic Act, and that Pharmalogical had “no reason to believe it was not operating in compliance” with that statute.
• If Mr. Scully, the lawyer, the trial judge, or members of the Second Circuit panel deciding the case were regular and longstanding readers of this blog, they may have remembered that FDA has steadfastly asserted that the importation of prescription drugs into the United States is illegal, either because the drugs are drugs that are reimported into the United States, or because they are unapproved new drugs, or because they lack adequate directions for use (see our previous posts here, here, and here).
• Mr. Scully used the letter to convince customers that it was legal for him to wholesale Botox (a prescription drug).
• Mr. Scully then decided to branch into the importation from Europe of Mirena intrauterine contraceptive devices (medical devices), which he wholesaled in the United States without registering as being the initial importer of those devices. He secured a similar letter from the same lawyer asserting that “the importation of Mirena . . . from Finland into the United States by Pharmalogical, Inc. for resale to the end user, would not violate the criminal laws of the United States.”
• Mr. Scully then branched into the importation of oncology products, according to the Second Circuit.

At trial, the lawyer who provided the advice discussed above testified and was cross-examined. Following traditional prosecutorial tactics, the government established the Mr. Scully had not shared pertinent information with the attorney, including that he advertised products as being FDA-approved when they were not, and that U.S. customs officials had seized some of the drugs Mr. Scully attempted to import because they had foreign-language labeling that was not consistent with FDA-approved versions of the drugs.

Mr. Scully’s attorney also attempted to introduce evidence from Mr. Scully’s testimony that a second lawyer had also told Mr. Scully that Mr. Scully’s conduct was not illegal (the lawyer did not call that lawyer as a witness). The trial judge refused, at first, to allow hearsay testimony from Mr. Scully about the second lawyer’s opinion.  Then, the trial judge reconsidered, conceding that the defense lawyer was correct that the evidence was not inadmissible as hearsay (it was not offered for the truth of the matter asserted), but ruled the testimony was inadmissible because it was unduly prejudicial.

Mr. Scully was convicted by a jury after a five-week trial on several counts of mail and wire fraud, conspiracy to defraud the federal government, illegal distribution of unapproved drugs, unregistered wholesale distribution of drugs, and distribution of misbranded drugs. He was sentenced to 60 months in prison.

Mr. Scully then argued to the Second Circuit that the second lawyer’s opinion was important, and should not have been excluded. The Second Circuit agreed.

The Second Circuit went on to discuss the jury instruction delivered by the trial judge, saying it inappropriately placed the burden on the defendant to prove advice of counsel. The Second Circuit panel reiterated the standards set forth by its predecessor in United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181 (2d Cir. 1989), a decision on a criminal trial handled by John Fleder, one of our esteemed Senior Counsel, when he worked for the Department of Justice.  The discussion is informative and interesting for those who are concerned about clients’ reliance on attorney advice, in our field.  But you can read the decision, or read Beech-Nut, or call John, because the length of this blog post already exceeds the extent of concentration appropriate for a blog post.  Mindful of that, we are still persuaded by John to add the following points.  In industries closely regulated by FDA, companies and individuals can get important protection from abusive criminal prosecutions by establishing that their actions were taken in good-faith reliance on advice given by legal counsel, as long as:

(1)       That advice is rendered by a lawyer, not a non-lawyer consultant;

(2)       The client discloses all material facts to the lawyer before the client undertakes the activity in question, rather than afterwards; and

(3)       The advice is legal advice, not business advice.

John also suggests making a contemporaneous record that the client has disclosed all material facts to the lawyer before acting and that the lawyer in good faith tells the client that the proposed conduct is legal. Even if the lawyer’s advice is not legally correct or is inconsistent with how FDA construes the relevant law, the defense should still be available.  But a court is more likely to conclude the advice was sought and rendered in good faith if the client solicits the advice from a recognized expert in the field.

Mr. Scully will get a new trial, unless the government settles or decides not to pursue a second trial.