United States v. Hanafy

UNITED STATES COURT OF APPEALS
For the Fifth Circuit

No. 01-10068

UNITED STATES OF AMERICA,

Plaintiff-Appellant,

VERSUS

IBRAHIM ELSAYED HANAFY; MOHAMED M. MOKBEL;
SAMER SAMAD QUASSAS; ADEL HISHAM SAADAT,

Defendants-Appellees.

Appeal from the United States District Court
For the Northern District of Texas
August 15, 2002

Before JOLLY, DeMOSS, and PARKER, Circuit Judges.

DeMOSS, Circuit Judge:

Appellees Ibrahim Hanafy, Mohamed Mokbel, Samer Quassas and

Adel Saadat were found guilty by a jury of mislabeling and

trademark infringement in violation of 18 U.S.C. § 2320 and 21

U.S.C. §§ 331(a), 333(a)(2) and 321(m). The Appellees were also

found guilty of money laundering and conspiracy charges flowing

from the above offenses. The district court overturned the jury

verdict as a matter of law and the United States now appeals.
 BACKGROUND

The Appellees in this case all owned businesses which

purchased individual cans of infant formula and then repackaged the

cans into trays for resale to wholesalers. The cans at issue in

this case were all originally either bought, or obtained through

welfare programs, or stolen by various third parties who were not

associated with the Appellees. These cans of formula were then

resold by these various third parties to a number of different

convenience stores throughout Texas. The convenience stores in

turn sold the infant formula to various companies owned by the

Appellees. The Appellees then consolidated the cans of baby

formula, by manufacturer, into cardboard containers or shipping

trays. These trays were designed to extend upward only a few

inches so that the cans would remain visible, and these trays

resembled the trays used by the manufacturers themselves, including

use of the manufacturers’ trademarks on the trays. Though not all

of the cans in any given shipping tray would necessarily share the

same “sell by” date, it is unchallenged that all of the cans were

sold within their “sell by” date. Also, though the cans in a tray

may have come from different batches of the same manufacturer, all

of the cans that were resold were genuine and unadulterated.

The government charged the Appellees with conspiracy under 18

U.S.C. §371, interstate transportation of stolen goods under 18

U.S.C. § 2314, trafficking in goods with counterfeit marks under 18

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U.S.C. § 2320, selling misbranded goods with the intent to defraud

under 21 U.S.C. §§ 331(a) and 333(a)(2), money laundering under 18

U.S.C. § 1956, and engaging in monetary transactions with

criminally derived property under 18 U.S.C. § 1957. At trial, the

government attempted to show that some percentage of the baby

formula was stolen, that the Appellees knew it was stolen, and that

at least $5,000 worth of stolen baby formula had been transported

between states to satisfy 18 U.S.C. § 2314. The government also

contended that the Appellees counterfeited trademarks on the

shipping trays and mislabeled the trays. A jury trial was held,

and the Appellees were found guilty on all charges. Following this

verdict, the Appellees filed a Fed. R. Crim. P. 29(c) motion for

acquittal.

The district court ruled that, despite the jury verdict, the

evidence supporting the stolen goods charge was insufficient to

meet the $5,000 minimum value threshold required under § 2314. The

court also ruled that, as a matter of law, the packaging used by

the Appellees did not constitute a counterfeit mark under § 2320

and that the marks on the shipping trays did not constitute

“labeling” as a matter of law under 21 U.S.C. §§ 331(a) and

333(a)(2). The court then overturned the remainder of the verdict,

which was based on the above predicate offenses, except for the

conspiracy count. The court held that because the alleged

counterfeit mark and misbranding conduct was not unlawful, they

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could not support a conviction for conspiracy. However, even

though there was insufficient evidence to support the interstate

transportation of stolen goods charge, that charge could still form

the basis of a conspiracy count. As the district court did not

know which of these charges was the basis for the jury’s verdict on

the conspiracy count, the court granted the Appellees a new trial.

See Yates v. United States, 354 U.S. 298, 312 (1957) (“[T]he proper

rule to be applied is that which requires a verdict be set aside in

cases where the verdict is supportable on one ground, but not on

another, and it is impossible to tell which ground the jury

selected.”).

The government now appeals the district court’s ruling that

the packaging trays did not constitute a counterfeit mark and its

ruling that the shipping trays did not constitute labeling as a

matter of law. The government further argues that, once the

trademark issues are reversed, the money laundering and conspiracy

charges should be reinstated. The government does not appeal the

district court’s ruling that the evidence was insufficient to

support the stolen goods charge.

DISCUSSION

Did the Appellees illegally use counterfeit trademarks?

This court reviews de novo a district court’s order ruling on

a motion for acquittal. United States v. Restrepo, 994 F.2d 173,

182 (5th Cir. 1993). Issues of statutory interpretation are also

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reviewed de novo. United States v. Rasco, 123 F.3d 593, 597 (5th

Cir. 1997).

In order to prove a violation of 18 U.S.C. § 2320(a), the

government must establish that: (1) the defendant trafficked or

attempted to traffic in goods or services; (2) such trafficking, or

the attempt to traffic, was intentional; (3) the defendant used a

counterfeit mark on or in connection with such goods or services;

and (4) the defendant knew that the mark so used was counterfeit.

United States v. Sultan, 115 F.3d 321, 325 (5th Cir. 1997). The

term “traffic” means to transport, transfer, or otherwise dispose

of, to another, as consideration for anything of value, or make or

obtain control of with intent so to transport, transfer or dispose

of. 18 U.S.C. § 2320(d)(2). “A ‘counterfeit mark’ is defined as

a spurious mark used in connection with trafficking that is

identical or indistinguishable from a registered trademark and the

use of which is likely to confuse, cause mistake, or deceive.”

Sultan, 115 F.3d at 325 (citing 18 U.S.C. § 2320(d)(1)(A)(I), (ii)

and (iii)).

The district court found that the baby formula cans at issue

were not counterfeit because the goods themselves were genuine.

United States v. Hanafy, 124 F.Supp.2d 1016, 1023 (N.D. Tex. 2000).

The court noted that there are two exceptions to the use of a mark

on allegedly counterfeit goods. Id. One is an exception for “gray

goods.” “Gray goods” are goods that are authentic and that have

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been obtained from overseas and imported into the United States.

Id. The second exception is the “authorized use” or “overrun”

exception. Under this exception, a counterfeit mark “does not

include any mark or designation used in connection with goods or

services of which the manufacturer or producer was, at the time of

the manufacture or production in question authorized to use the

mark or designation for the type of goods or services so

manufactured or produced, by the holder of the right to use such

mark or designation.” 18 U.S.C. § 2320(e)(1). Based on these

exceptions, the district court noted:

A common denominator of these two exceptions is
that the goods to which the mark is attached were
manufactured by, or with the permission of, the
owner of the mark--that is, the goods themselves
are genuine. That Congress saw fit to exempt “gray
market” goods and overruns by a licensee (sold
beyond the license period) from criminal liability
lends support to an interpretation that § 2320 was
intended to prevent trafficking in goods that were
similar to but different than the goods normally
associated with the mark.

Hanafy, 124 F.Supp.2d at 1023-24. The district court also noted

that, despite the government’s contention that repackaged genuine

goods caused confusion, the cases relied upon by the government

were all civil cases under the Lanham Act and as such, should not

be used as authoritative in interpreting a criminal statute.1

1
The district court similarly distinguished attempted comparisons to the Lanham Act for
finding that the goods in this case were counterfeit.

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 The government argues that it was error for the district court

to construe § 2320 so narrowly. The government contends that

§ 2320, by its plain meaning should apply to the instant case. It

also argues that an expansive view of what is counterfeit should be

used and that the Lanham Act should be instructive on this point,

citing United States v. Petrosian, 126 F.3d 1232 (9th Cir. 1997).

The basic question before this court is whether a shipping

tray that is truthfully marked with the contents it contains, which

are genuine articles, is a “counterfeit good” for the purposes of

§ 2320(a) when the markings include the manufacturer’s trademarks

and contain no more information than that which is carried on the

cans themselves. The Supreme Court has stated, in a civil case,

that one who purchases a genuine product in bulk and divides it

into smaller portions for sale to consumers may do so as long as

the products are marked as having been repackaged. Prestonettes,

Inc. v. Coty, 264 U.S. 359, 368-69 (1924). The government asserts

that this and other civil cases, by analogy, establish that to

repackage the cans of baby formula into cardboard trays is

essentially the same as attaching a counterfeit mark to genuine

goods. See Monsanto Co. v. Haskel Trading, Inc., 13 F.Supp.2d 349,

356-58 (E.D.N.Y. 1998) (finding that defendants had violated the

Lanham Act when they repackaged small packages of NutraSweet into

boxes for resale). The government further cites Petrosian to

support the idea that the Lanham Act can be used to expand the

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scope of the terms used in § 2320. In Petrosian, however, the

defendants had purchased genuine Coca-Cola bottles, filled the

bottles with a different cola-like carbonated beverage that was not

Coca-Cola, and told purchasers the beverage was Coca-Cola.

Petrosian, 126 F.3d at 1233. The court held that attaching a

genuine mark to a counterfeit good makes the mark counterfeit under

§ 2320. Id. at 1234. That is not the case here, however, where an

associated mark is attached to the genuine products it is

associated with.

Also, though Petrosian indicated that the definitions in the

Lanham Act and § 2320 are identical, the Tenth Circuit has rejected

such an approach. As the district court pointed out, the Tenth

Circuit has found that Lanham Act precedent is of little value in

a § 2320 case because the Lanham Act deals with civil liability.

United States v. Giles, 213 F.3d 1247, 1250 (10th Cir. 2000). The

Giles court held that because § 2320 is a criminal statute, it must

be construed narrowly. Id.

We find the district court and Tenth Circuit’s reasoning more

persuasive. We therefore hold that attaching a mark to trays

containing the genuine unadulterated, unexpired products associated

with that mark does not give rise to criminal liability under

§ 2320.

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Did the Appellees introduce misbranded food articles into

interstate commerce?

Under 21 U.S.C. § 331(a), “[t]he introduction or delivery for

introduction into interstate commerce of any food, drug, device, or

cosmetic that is adulterated or misbranded” is prohibited. The

government alleges that the failure to indicate that the baby

formula was repackaged is the equivalent of misbranding under the

statute. The government further alleges that the Appellees conduct

was “with the intent to defraud or mislead” which increases the

potential criminal penalties. 21 U.S.C. § 333(a)(2). Under 21

U.S.C. § 321(n):

If an article is alleged to be misbranded because
the labeling or advertising is misleading, then in
determining whether the labeling or advertising is
misleading there shall be taken into account (among
other things) not only representations made or
suggested by statement, word, design, device, or
any combination thereof, but also the extent to
which the labeling or advertising fails to reveal
facts material in the light of such representations
or material with respect to consequences which may
result from the use of the article to which the
labeling or advertising relates under the
conditions of use prescribed in the labeling or
advertising thereof or under such conditions of use
as are customary or usual.

“The term ‘labeling’ means all labels and other written, printed,

or graphic matter (1) upon any article or any of its containers or

wrappers, or (2) accompanying such article.” 21 U.S.C. § 321(m).

From these provisions it is clear, as the district court noted,

that § 331 of the Federal Food, Drug, and Cosmetic Act covers not

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only affirmative representations but material omissions as well.

Hanafy, 124 F.Supp.2d at 1026.

The government contends that the Appellees omitted any

information from the shipping tray markings indicating that the

infant formula had been repackaged. The government also asserts

that at least one wholesaler testified that he would not have

bought the formula had he known it was repackaged.2 The district

court, however, found that an essential element of this claim

relied on whether the shipping trays constituted “labeling” under

§§ 331(a) and 333(a)(2). After analyzing several cases which held

a “common theme” that “labeling” is intended to provide substantial

information about the use or benefits of the article, the district

court concluded that shipping trays did not constitute “labeling.”

Id. at 1027.

In light of the district court’s analysis of Supreme Court and

Circuit Court precedents, we are persuaded that the district court

was correct in granting the Appellees’ motion for acquittal. In

Kordel v. United States, the Supreme Court was faced with the

question of whether the separate shipment of literature saved drugs

2
This witness was the manager of Stanford Trading, a company that acted as a wholesaler
as well as a diverter of goods similar to the type of business the Appellees themselves were
engaged in. His specific testimony was that he informed the Appellees that he did not have a
market for repackaged baby formula. The witness also testified that Stanford Trading did sell
repackaged goods, such as toothpaste. The witness was additionally capable of noticing
differences in the trays of the Appellees compared to a tray of baby formula directly from the
manufacturer, but it is unclear whether such differences were noticed at the time he purchased the
baby formula trays from the Appellees.

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from being misbranded within the meaning of the Federal Food, Drug,

and Cosmetic Act. 335 U.S. 345, 347 (1948). In holding that the

drugs were misbranded, the Court noted that because the literature

“supplement[ed] or explain[ed]” the drug, it accompanied it. Id.

at 350 (stating “[i]t is the textual relationship that is

significant”). Though this and many of the cases cited by the

district court dealt with “labeling” in the sense that a separate

label, booklet or pamphlet was involved, see Hanafy, 124 F.Supp.2d

at 1026-27, this Court can not find, and the government does not

point to, any case which breaks from the common thread that the

“labeling” be intended to provide substantial information about the

use or benefits of the article. We therefore hold that merely

identifying the contents of a shipping tray with no more

information than that which is already upon the articles themselves

does not “explain” or provide “substantial information” so as to

rise to the level of “labeling” as contemplated by Kordel and its

progeny.3

Should the remaining money laundering and conspiracy charges be

reinstated?

The government asserts that once the counterfeit trademark and

misbranding verdicts are reinstated, the laundering and conspiracy

charges must also be reinstated. As we affirm the district court’s

3
The district court noted that the shipping trays would be removed before the cans would
be placed on the shelves for consumers and that the shipping trays in this case contained virtually
no information that was not also displayed on the immediate containers themselves.

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decision on the previous issues, however, these remaining issues

are also affirmed.

CONCLUSION

Having carefully reviewed the record of this case and the

parties’ respective briefing and for the reasons set forth above,

we conclude that the district court’s decision to grant the

Appellees’ motion for acquittal should remain undisturbed. We also

conclude that the district court did not err in granting the

Appellees a new trial as to the conspiracy charge. We therefore

AFFIRM the district court’s decision.

AFFIRMED.

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