The Seventh Circuit had a busy week, with eight new opinions in criminal cases.  In this post, I’ll discuss three that deal primarily with substantive criminal law issues.  A subsequent post will cover the sentencing and procedure cases.

Two of the opinions in this post deal with the difficult and important question of whether it is money laundering when a brothel purchases advertising.  But, before getting to that question, I’ll discuss a case that offers an unusual dressing-down of a federal prosecutor.  (There’s actually a pun in that last sentence — read on to see what I mean.)

The legal question in United States v. Farinella (Nos. 08-1839 & 08-1860) was whether those “best when purchased by” labels you find on food packages really mean anything to consumers.  Do they indicate that spoilage is imminent, or are they essentially meaningless marketing devices, akin to claims that a product is “new and improved?” 

Farinella, the defendant, purchased 1.6 million bottles of “Henri’s Salad Dressing” for resale at so-called “dollar stores.”  He presumably bought them at a discount because the bottles were past, or at least fast-approaching, the “best when purchased by” date stamped on each bottle by the manufacturer.  The manufacturer’s label would obviously make resale more difficult, but Farinella solved this problem by covering the original labels with new labels listing a later purchase date.  Of course, no one would hold this up as a model of business ethics.  But was it a federal crime?

The government charged Farinella with the crime of introducing into interstate commerce a misbranded food with intent to defraud or mislead.  A jury convicted, but the Seventh Circuit (per Judge Posner) held that the evidence was insufficient: “[T]o prove a person guilty of having made a false representation, a jury must be given evidence about the meaning (unless obvious) of the representation claimed to be fraudulent, and that was not done here.”  The court further noted there was no evidence that “selling salad dressing after the ‘best when purchased by’ date endangers human health,” that any buyer had been sickened by the salad dressing, or even that any buyer had ever complained about the taste.

The court seemed particularly put out by the government’s conflation of a “best when purchased by” date with an expiration date; in arguments at trial and on appeal, the government repeatedly characterized the “best when purchased by” date as the date on which “the dressing would expire.”  In a strongly worded rebuke, the court sated,

That is itself false and misleading, and is part of a pattern of improper argumentation in this litigation that does no credit to the Justice Department. . . . The term “expiration date” . . . on a food product . . . has a generally understood meaning: it is the date after which you shouldn’t eat the product.  Salad dressing, however, or at least the type of salad dressing represented by Henri’s, is what is called “shelf stable”; it has no expiration date.

And this was only the court’s first shot at the prosecutor’s conduct.  The court characterized her case as “threadbare,” and labeled the testimony of her expert witness (an FDA employee) as “not just improper and inadmissible, but incoherent.”  This was, in short, a big-time trip to the woodshed for the prosecutor who tried the case.  The court called her out by name, catalogued a whole series of improper statements she made to the jury, and called for an “appropriate sanction”:

The government’s appellate lawyer told us that the prosecutor’s superior would give her a talking-to.  We are not impressed by the suggestion.

The court’s harsh criticism of the prosecutor is extraordinary, and may have serious consequences for her career.  (I am particularly sensitive to these issues now in my capacity as Chair of the Nominating Commission for the open United States Attorney position in the Eastern District of Wisconsin; our questionnaire asks applicants about judidicial comments on the quality of their work.)  Because the court was reversing anyway on the basis of insufficient evidence, there was no need for the court to catalogue the prosecutor’s improper arguments.  Nor was there any need to identify the prosecutor by name, or to get into the Department of Justice’s internal disciplinary procedures.

Did the court go too far?  Or, in light of the extraordinary power prosecutors’ wield and the profound consequences of wrongful convictions, might it actually be desirable to see more frequent direct criticism of dubious prosecutorial practices?

And how about taking more defense lawyers to the woodshed, too?  It seems hardly a week goes by without the Seventh Circuit rejecting an otherwise viable argument by a defendant because it was not properly preserved for the appeal.  (I’ll discuss an example in my next post.)  Yet, one does not normally see the defendant’s trial lawyer called out by name.  To be sure, some “forfeitures” are probably sound (or at least defensible) tactical decisions by the trial lawyer.  Other times, the forfeited issue was sufficiently subtle that one can easily understand why it was missed (query in such cases whether forfeiture is indeed just).  But other times it appears to be inexcusable carelessness.  Where the court encounters such incompetence, should the court expressly label it as such?   

The next two cases both deal with spas in Rockford, Illinois, that were run as fronts for prostitution.  (Yes, if you thought the “Paradise Health Spa” in Rockford sounded too good to be true, you were right.)  The various owners of the businesses collected money from the johns, put it into business accounts, and drew on the accounts to pay rent, utilities — customers at the “Royal Health Spa” were given a shower along with their “massage” — and advertising.  (With all of the “spas” in Rockford, the competition for customers must have been fierce!)  The owners were plainly guilty of many crimes, but how about money laundering?

The government argued in the affirmative, relying on a provision of the money-laundering statute (19 U.S.C. § 1956(a)(1)) that makes it a crime to use the “proceeds” of an unlawful activity to promote an unlawful activity.  In the government’s view, the statute is violated when a prostitution business plows its revenue back into the business through rent, utilities, and advertising payments.  However, this view flies in the face of Seventh Circuit precedent (specifically, United States v. Scialabba, 282 F.3d 475 (7th Cir. 2002)), which defines “proceeds” as net proceeds, not gross revenue.  Under the Seventh Circuit’s approach, there are no “proceeds” to be laundered until after the bills are paid.  Because the government’s money-laundering case was built around evidence of rent, utilities, and advertising payments, the defendants’ money-laundering convictions pretty clearly could not stand under Scialabba.

But the two Rockford cases, United States v. Hodge (Nos. 06-3485 & 06-3502) and United States v. Lee (Nos. 06-3029 et al.), presented a difficulty: in the time since Scialabba had been decided, the Supreme Court issued its own pronouncement on the meaning of “proceeds” in United States v. Santos — a pronouncement whose implications for Hodge and Lee were not entirely clear. 

I blogged about Santos here.  Briefly, the Court divided 4-1-4, with no majority opinion in the case.  One group of Justices would join with the Seventh Circuit in categorically defining “proceeds” as net proceeds (or profits), while another group would categorically define “proceeds” as gross revenue (or receipts).  Justice Stevens, the decisive fifth vote, endorsed an in-between position, in which “proceeds” might sometimes mean one thing, and sometimes the other.  The Seventh Circuit thus faced a difficult task in deciding to what extent Scialabba survived Santos.

And the court did not exactly supply a clear, complete answer to that question.  Judge Easterbrook, writing for the Hodge panel, characterized Justice Stevens’ (controlling) position this way:

Justice Stevens concluded not only that normal business expenses are not proceeds but also that the money-laundering statutes should be construed to avoid raising the maximum punishment for a substantive offense that necessarily entails the use of gross revenues to carry on the business . . . .

Justice Stevens was worried about the duplication of legal prohibitions — about a  situation in which it is impossible to commit the substantive offense without committing money laundering, unless the defendant eats or burns the currency he takes in.

In the view of the Hodge and Lee panels, Stevens’ position was consistent with Scialabba when it came to rent and utilities: these are normal business expenses for a brothel, and their payment should not give rise to money-laundering liability.  But advertising might be in different category: in Easterbrook’s words, “It is possible to carry on organized crime without advertising it.”  Thus, “Justice Stevens may well conclude that . . . advertising costs are not subtracted when defining ‘proceeds.'”  Ultimately, though, this tentative conclusion was as far as the court got in resolving the advertising issue.  In both Hodge and Lee, the jury instructions failed to make clear the important distinctions that had to be made with regard to the definition of “proceeds,” and it was possible that the defendants were convicted on the basis of paying their rent and utility bills (which would not be money laundering) instead of on the basis of their advertising expenditures (which might or might not count as money laundering).  Given the risk of conviction on an improper basis, the defendants’ convictions had to be reversed — leaving a definitive resolution of the advertising question for another day.