In the
United States Court of Appeals
For the Seventh Circuit

Nos. 94-1866 and 94-1926

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

CLINTON D. ANDERSEN and
DOUGLAS M. VAN DAMME,

Defendants-Appellants.


Appeal from the United States District Court
for the Western District of Wisconsin.
No. 93 CR 77--Barbara B. Crabb, Chief Judge.


ARGUED OCTOBER 4, 1994--DECIDED JANUARY 18, 1995


   Before CUDAHY and FLAUM, Circuit Judges, and
ROSZKOWSKI, Senior District Judge.*

   CUDAHY, Circuit Judge.

I.   FACTS

   The defendants-appellants Van Damme and Andersen
owned and operated a veterinary clinic, treating primar-
ily food-producing animals, especially dairy cattle. During
1984-1986 they also ran a "side business" in veterinary
drugs. They bought drugs in bulk, first from both legiti-
mate commercial suppliers and from illegitimate private
suppliers in the United States, and later from overseas.
Some were raw ingredients, which the defendants mixed
to form useful drug compounds, others they simply broke
down into smaller dosage units and repackaged. The pack-
aging used was clearly "homemade," (plastic tubs, old but-
ter containers, et cetera) and was hand-labeled with its
contents. These drugs were sold to customers and also
used in the defendants' veterinary practice.

   Van Damme and Andersen were popular with their cus-
tomers and purportedly got good results with the drugs
they used in their practice and sold to clients. However,
they did not have the site registration and the licenses
required by the Food and Drug Administration (FDA) for
drug manufacture and sale, nor had the FDA approved
many of the drugs sold for use in animals. While some
of the drugs prescribed by the defendants were apparent-
ly effective in treating certain diseases in cattle, they were
not approved for use in food-producing animals. There were
concerns about the residual effects of the drugs' enter-
ing the human food chain through meat or dairy products.
Other drugs sold by Van Damme and Andersen contained
ingredients similar to active ingredients in drug products
that were approved by the FDA for use in food-producing
animals. But the bulk drugs that the defendants used had
not been subjected to FDA required purity testing. The
defendants also attempted to conceal their drug business
from the FDA by coding and disguising information on in-
voices, rerouting shipments to avoid detection and customs
and misrepresenting their activities to the FDA.

   Van Damme and Andersen were indicted on July 20,
1993, and pleaded guilty to Count VII of the indictment,
charging them with manufacturing and compounding drugs
in their basement and failing, with the intent to defraud
and mislead, to register the site with the FDA in violation
of the Federal Food, Drug and Cosmetic Act, 21 U.S.C.
sec. 331(p) and sec. 333(a)(2). They were each sentenced to 15
months imprisonment and fined $250,000.

   They now challenge their sentences on grounds that they
should have been sentenced under United States Sentencing
Guideline sec. 2N2.1 rather than sec. 2F1, and that the sentence
should not have been enhanced based on their profits.

   We AFFIRM in part, VACATE in part, and REMAND.

II.   DISCUSSION
A.   Choice of Sentencing Guideline

   Van Damme and Andersen argue that the district court
erred in sentencing them under U.S.S.G. sec. 2F1.1 instead
of sec. 2N2.1. United States Sentencing Commission, Guide-
lines Manual, /82F1.1, sec. 2N2.1 (Nov. 1993). The district
court's choice of which guideline to apply is a question
of law, and we review this choice de novo. United States
v. Johnson, 965 F.2d 460, 468 (7th Cir. 1992).

   Section 2N2.1 covers "violations of statutes and regula-
tions dealing with any food, drug, biological product, de-
vice, cosmetic or agricultural product," and has a base
offense level of six. Section 2F1.1 has broader application
and deals with offenses involving fraud or deceit. It also
has a base offense level of six, but provides for substan-
tial increases in offense level based on the amount of loss.
The defendants argue that because they pleaded guilty
to a violation of the Food and Drug Act, 21 U.S.C. sec. 331
and sec. 333, sec. 2N2.1 is the most clearly applicable Guideline
and thus should have been used by the district court. See
U.S.S.G. sec. 1B1.2(a) (Guideline used should be that most
applicable to the offense of conviction). 

   The defendants are correct that sec. 2N2.1 applies directly
to violations of the Food and Drug Act. However, sec. 2N2.1
itself directs us to apply sec. 2F1.1 "if the offense involved
fraud." In addition, the Statutory Index to the Guidelines,
which specifies the Guideline "section or sections ordinar-
ily applicable to the statute of conviction," indicates that
both sec. 2F1.1 and /82N2.1 are ordinarily applied to 21
U.S.C. sec. 333(a)(2). U.S.S.G. Appendix A. 

   The district court here found "overwhelming" evidence
of fraud, Sent. Tr., R.O.A. 96, p.10, including mislabeling
drugs and altering invoices, rerouting shipments to avoid
detection and misrepresenting current and intended future
actions to the FDA. In addition, the defendants themselves
pleaded guilty to Count VII of the indictment, admitting
that they did fail to register their drug manufacturing "fa-
cility" (a bed-and-breakfast inn) with the FDA "with the
intent to defraud and mislead." Indictment, R.O.A. 1, p.
14 (emphasis added).

   Nevertheless, Van Damme and Andersen claim that this
evidence of fraud is insufficient to support the application
of sec. 2F1.1. They argue that the evidence establishes only
that they defrauded a regulatory agency, not their cus-
tomers, and that fraud on a regulatory agency does not
support the use of sec. 2F1.1. We also fail to find this argu-
ment persuasive. 

   Section 2F1.1 is "designed to apply to a wide variety
of fraud cases," U.S.S.G. sec. 2F1.1, comment. (backg'd), and
it does not specify that the victim must be a consumer
rather than a regulatory agency. As other circuits address-
ing this issue have held, "there is no meaningful distinc-
tion between the government as a victim and individual
consumer victims; . . . it is possible for either or both
to be defrauded." United States v. Cambra, 933 F.2d 752,
756 (9th Cir. 1991); United States v. Von Mitchell, 984
F.2d 338 (9th Cir. 1992); United States v. Arlen, 947 F.2d
139 (5th Cir. 1991), cert. denied, 112 S. Ct. 1480 (1992)./1

   In Cambra, 933 F.2d 752, the defendant sold misbranded
human growth hormones, which he counterfeited to repre-
sent different products made by reputable manufacturers.
He pleaded guilty to distributing misbranded hormones
with intent to defraud and mislead, and stipulated that
the dollar value of the counterfeit steroids was $500,000.
Id. The Ninth Circuit held that "at least federal agencies
were defrauded" by Cambra's acts, and that fraud on a
federal agency was enough to support the use of sec. 2F1.1.
Id. at 756. In Arlen, 947 F.2d 139, the defendant also ran
a business selling, buying and trading steroids through
the mail, taking great pains to keep this business hidden
from the FDA. Arlen argued that fraud against a regu-
latory agency was not sufficient to constitute an "intent
to defraud or mislead" under 21 U.S.C. sec. 333(a)(1) and that
it was not enough to invoke U.S.S.G. sec. 2F1.1. The Fifth
Circuit recognized that there was no evidence of fraud
against Arlen's customers, but held that fraud on a regu-
latory agency was sufficient to support charges of fraud
and deceit under both the Statute and the Guidelines. Id.
at 143, 146-47.

   The defendants here attempt to distinguish Cambra and
Arlen on their facts, arguing that there was more evi-
dence in both Cambra and Arlen of fraud on consumers
as well as regulatory agencies. However, we find these
attempted distinctions insignificant. Both cases involved
illegal marketing of drugs and fraud on the FDA, and
both courts specifically held that regulatory fraud alone is
sufficient basis for the application of sec. 2F1.1. See Cambra,
933 F.2d at 756; Arlen, 947 F.2d at 143-44, 146-47.

   The defendants also rely on United States v. Shields,
939 F.2d 780 (9th Cir. 1991) to support their argument
that regulatory fraud cannot be the basis for application
of sec. 2F1.1. However, that reliance is also misplaced. In
Shields, the defendants were sentenced under sec. 2N2.1 for
distribution of steroids in violation of 21 U.S.C. secs. 331,
333 and 353. The district court had, in fact, departed up-
ward from sec. 2N2.1, and the Ninth Circuit found this depar-
ture inappropriate and reversed and remanded for resen-
tencing. But, in resentencing Shields' co-defendant on re-
mand, the district court again gave a higher sentence, this
time under sec. 2F1.1. That sentence was subsequently up-
held in United States v. Von Mitchell, 984 F.2d 338 (9th
Cir. 1992), specifically because it was imposed under sec. 2F1.1
and not sec. 2N2.1.

   We find Cambra and Arlen persuasive. Here, as in those
cases, the district court found substantial evidence of fraud.
The FDA represents the public, and a deliberate attempt
to mislead the FDA should be considered as clearly a
fraud as are attempts to mislead customers or other in-
dividuals. Further, a straightforward application of the
Guidelines regarding fraud requires the use of sec. 2F1.1. We
thus join the Ninth and the Fifth Circuits in finding evi-
dence of fraud on a regulatory agency sufficient to invoke
sec. 2F1.1.

B.   Calculation of Loss

   Andersen and Van Damme also argue that the district
court's calculation under sec. 2F1.1 of the loss to customers
and competitors resulting from their fraud is erroneous.
The district court calculated the loss, and thus the defen-
dants' sentence, under sec. 2F1.1 by equating it with the
defendants' gain. The court concluded that if the defen-
dants could reap a net profit of $400,000 each over the
course of the four year scheme, "the manufacturer of a
regulated product could have garnered that money had
it not been for the defendants, or the veterinarians in
competition with the defendants could have garnered some
part of that profit." Sent. Tr., R.O.A. 82, p.5. Thus, the
district court decided, the defendants' net gain could be
used as a reasonable equivalent of loss. The district court's
factual determination of loss is a finding of fact reviewable
for clear error only, but the definition of "loss" is a legal
question subject to de novo review. United States v. Los-
calzo, 18 F.3d 374 (7th Cir. 1994).

   Generally the defendant's gain may provide a reasonable
approximation of a victim's loss, and may be used when
more precise means of measuring loss are unavailable. The
Application Notes to sec. 2F1.1 specifically allow the defen-
dants' gain to be used as a basis for calculating an ap-
proximate loss when evidence of the exact amount of loss
is not available. U.S.S.G. sec. 2F1.1, comment. (n.8) ("the of-
fender's gain from committing the fraud is an alternative
estimate [of the loss] that ordinarily will underestimate
the loss"). We therefore agree with the district court that
gain is usually an appropriate means of estimating loss.

   However, we find this case to present an unusual situa-
tion where the relationship between the defendants' gain
and any loss suffered by consumers or competitors is, at
best, extremely tenuous. While gain may normally prove
an adequate surrogate for loss, gain may be used only
as an alternative method of calculation when there is in
fact a loss, and only if use of the gain results in a "rea-
sonable estimate of the loss." U.S.S.G. sec. 2F1.1, comment.
(n.8). Here we have no clear evidence that customers or
consumers suffered any loss. 

   The drugs that the defendants were selling, while ad-
mittedly effective in treating certain animal diseases, were
not approved by the FDA. Therefore there is no reason
to believe that other competitors were selling the same
or similar drugs and thus suffered harm as a result of
the defendants' competition. The defendants also broke
down legal bulk drugs and sold them in smaller quantities,
but even then, we do not know that competitors were
selling like quantities of these drugs at competitive prices,
or that they were selling them at all. The government
has presented no evidence of any financial losses suffered
by competitors. In fact, there is evidence in the record
that the defendants' customers were afraid that they would
not be able to obtain veterinary services once the defen-
dants were incarcerated because there are apparently not
enough veterinarians in the affected area to meet the de-
mand for their services. R.O.A. 94 (Letters from Custom-
ers, Attachment to Pre-sentencing Report). Thus, there
is no adequate basis to assume that the defendants' profits
represented, or were equivalent to, the losses of competitors.

   The government has also provided no evidence that the
defendants' customers suffered a loss. Many of the drugs
were sold in hand-labeled containers, and the customers
appear to have been well aware that the drugs they were
purchasing were not approved by the FDA. Sent. Tr.,
R.O.A. 96, p. 111. Even if, as the government alleges,
the customers were given some false information, the gov-
ernment presents no evidence that that misinformation
led to any quantifiable loss. The customers themselves,
in fact, appear to have been very pleased with the defen-
dants' services. R.O.A. 94 (Letters from Customers, At-
tachment to Pre-sentencing Report).

   Demand is elastic and depends on price, availability,
convenience and many other factors. We have no way of
knowing whether there were any actual competitors in
the market the defendants were serving, whether con-
sumers would have bought from the defendants' competi-
tors or whether the services the defendants offered would
simply not have been available.

   As we have noted, we do not intend to suggest that
gain is not often an appropriate means of establishing loss.
As a matter of economic theory at least, assuming a fixed
amount of product to be distributed to a given set of cus-
tomers, one competitor's gain ought to equal the others'
loss. However, the case before us is unique in that there
is no persuasive evidence tying the defendants' profits to
any competitor's identifiable loss. There is some reason
to believe that the defendants were, in economic jargon,
serving a niche in the market not served by others. It
is very significant that in this case the district court "very
strongly" believed that the use of gain to calculate loss
resulted in a sentence that "is higher than is necessary
in this case." Sent. Tr., R.O.A. 82, p.6. Thus, while in
many situations it would be reasonable to use profits as
a proxy for loss, where, as here, there is no persuasive
evidence of monetary loss, the defendants' gain ought not
to be used to measure loss./2 See United States v. Had-
dock, 12 F.3d 950, 961 (10th Cir. 1993). This does not
mean that the defendants caused no harm or that they
should not be appropriately punished. The Application
Notes to sec. 2F1.1 recognize that some harms are not finan-
cial, and allow for upward departure when "a primary ob-
jective of the fraud was non-monetary; or the fraud caused
or risked reasonably foreseeable, substantial non-monetary
harm." U.S.S.G. sec. 2F1.1, comment. (n. 10).
   This court faced a similar situation in United States v.
Schneider, 930 F.2d 555 (1991). There, the defendants bid
for a government contract, and in the course of doing so
made false statements about past criminal records and
submitted fraudulent payment and performance bonds.
They were convicted of defrauding a federal agency, but
the court found no evidence of financial loss to the govern-
ment. Both defendants had performed numerous contracts
for the government in the past, and, in fact, the govern-
ment was likely to gain from the contract in question;
every indication was that the defendants would have done
the work well and at less expense than the other bidders.
Id. at 558. This court held that the amount bid for the
contracts was not a reasonable estimate of financial loss,
especially because there was no indication that the gov-
ernment would have suffered any financial loss from this
fraud. We held that the government had not earned the
"bonus punishment points [awarded by the Guidelines un-
der sec. 2F1.1] for different levels of proven loss beginning
with $2,000," id. at 559, but recognized that, nevertheless,
the government had non-financial interests that had been
harmed. This harm, we concluded, could be factored into
the sentencing because "the Guidelines permit an increase
in offense level for non-monetizable losses." Id. at 558.
See also United States v. Haddock, 12 F.3d 950, 961 (10th
Cir. 1993) ("If gain to the defendant does not correspond
to any actual, intended, or probable loss, the defendants'
gain is not a reasonable estimate of loss.").

   We believe the same conclusion is appropriate here. The
FDA is in the business of protecting the public. Whether
or not the defendants caused direct financial harm to com-
petitors or consumers, they caused harm to the public
through their violations of FDA rules. The FDA had not
approved some of the drugs the defendants were selling
because of possible adverse effects on humans once the
drug got into the food chain. Even those drugs that were
deemed safe for use in humans were banned from use for
animals by the FDA because their use in cattle could
eventually create resistance to the drug in humans and
lessen its effectiveness. 

   The defendants defrauded the FDA, thus causing harm
to the public, and this non-monetary harm should be rec-
ognized and used in calculating their sentence. However,
there is no evidence tying this harm directly to finan-
cial loss; and therefore a sentencing enhancement of nine
points under sec. 2F1.1(b)(1) based on the defendants' finan-
cial gain is insupportable. But, upward departure may cer-
tainly be warranted by the non-monetizable risk to human
and animal health caused by the defendants' failure to
follow FDA licensing regulations, failure to conduct re-
quired purity testing and intentional marketing of unap-
proved drugs. And, in calculating the extent of any depar-
ture, the net profits earned by the defendants, together
with all other relevant information, would not be inap-
propriate matters for consideration for whatever they
may suggest or be worth. For the above reasons, we
vacate and remand for resentencing in accordance with
this opinion. The district court should carefully consider
whether an upward departure is warranted and, if so,
what it should be.

AFFIRMED IN PART,
VACATED IN PART,
AND REMANDED.




FOOTNOTES



*
   The Honorable Stanley J. Roszkowski, of the United States
District Court for the Northern District of Illinois, sitting by
designation.


/1
   Cf. United States v. Bradshaw, 840 F.2d 871 (11th Cir.), cert.
denied, 488 U.S. 924 (1988) and United States v. Mitcheltree, 940
F.2d 1329 (10th Cir. 1991) (holding that fraud on a regulatory
agency is sufficient to constitute the necessary "intent to
defraud or mislead" under 21 U.S.C. sec. 333(a)(2)).


/2
   The government argues that a calculation of loss based on gain
here is supported by Cambra, in which the defendant was sen-
tenced under the sec. 2F1.1 loss table based on the stipulated
value of the counterfeit steroids he sold. However, we do not
find Cambra contradictory to our analysis here. There the
defendant was admittedly selling drugs made to look like those
made by reputable manufacturers. Thus the same product was
available from other manufacturers who were serving the same
market as the defendant. The fact that the same product could
have been purchased from the reputable manufacturers, and that
Cambra stipulated that the value of his counterfeiting was
$500,000, made this stipulated value a plausible means of
estimating loss. In the case before us however, there is no
evidence that many of the drugs were otherwise available, that
there were in fact competitors serving the same market or that
customers were defrauded. Thus, the defendants' gain in this case
is not an appropriate method for determining loss.