United States: Six-Year Prison Sentence For Misrepresentation Upheld

Novel arguments from nonprescription drug hawker fall flat in the First Circuit

Bad Libs

Typically, when we cover cases about the Federal Trade Commission (FTC), we’re talking about cases in which people or companies are doing their best to avoid charges of one sort or another. This week, we’re writing our first item about a defendant who sought out charges under the Federal Trade Commission Act (FTC Act). What gives?

Allow us to introduce Mustafa Hassan Arif, a Lahore, Pakistan-based purveyor of nonprescription drugs. Not just any drugs, by his own admission – drugs that could cure a staggering array of medical conditions. To sell his product, he operated an elaborate network of more than 1,500 sales and affiliate websites, which were variously “located” at false addresses in Germany, Italy, New Zealand, Australia and other countries.

Problem was, most of the websites promoted the drugs through false and misleading statements, including “altered clinical studies, fabricated testimonials, and false indicia of origin;” many of the sites were based on the same fill-in-the-blank template with the names of Arif’s drug and a given medical condition swapped in.

Long Arm

All told, Arif pulled in about $12 million between 2007 and 2014. The money was processed through online payments that were then wired to his accounts in Pakistan and the United Kingdom.

All this we know from Arif himself and the court case that resulted from his scheme: He was sued by the United States in the District Court of New Hampshire in 2014, and in 2016, he pled guilty to one count of wire fraud. He was sentenced to six years’ imprisonment.

But Arif’s plea was conditional; he asked to be allowed to appeal the sentence on two arguments that the district court had rejected. The two arguments that were originally shot down were brought before the First Circuit in 2017.

They’re fascinating arguments. Were they effective?

First, Arif argued that he had been prosecuted under the wrong statute. He maintained that he should have been tried under the FTC Act for false advertising claims rather than by the Department of Justice for wire fraud. Why?

Arif argued that the FTC Act (enacted in 1938) held a “preemptive effect” over the wire fraud statute (which, while enacted in 1952, was based on the mail fraud statute first enacted in 1872). In a July 2018 opinion, the First Circuit rejected this argument, stating that such a “repeal by implication” of an older law by a new law is an exceptional case limited to situations where Congress’ desire to repeal is “clear and manifest” in the new law. Finding no “irreconcilable conflict” (one of the two methods of determining whether repeal by implication is an appropriate interpretation) between the FTC Act and the wire fraud statute and rejecting Arif’s argument that Congress intended the FTC to be the sole enforcer in false advertising cases, the court held that the prosecution could have moved ahead under either or both laws.

“This case provides a good example for why Congress has vested discretion in the prosecutorial agencies as to which statute to employ,” the court wrote. “The offense here was not a run-of-the-mill false advertising of a single product … The FTCA penalties for first or second offenders would hardly have been an adequate deterrent for such egregious conduct. Crime must be made not to pay.” Ouch.

In the second argument, Arif took exception to the district court’s dismissal of his argument that he did not commit wire fraud because he sincerely believed in the products he sold. The court rejected this argument as well. Belief was beside the point, because Arif “was not being charged ‛with selling drugs that did not work as intended ... or for harming his customers’” the court wrote. Arif was charged with making false representations through his schemes and for his knowledge of those false representations, namely claiming that the drugs were backed by clinical research, faking customer testimonials and claiming to operate from countries other than Pakistan.

After dismissing several other objections, the First Circuit affirmed the original ruling along with Arif’s six-year sentence.

The Takeaway

Aside from the obvious lessons that Arif’s case teaches about refraining from making false or misleading statements, the court’s decision in this case is illustrative of the ways in which the FTC Act can be interpreted. While the court does not equate the two laws (the FTC Act and the wire fraud statute) at issue in this case, its perspective is instructive with regard to how a “repeal by implication” argument is handled when the FTC Act is at issue. Similarly, the court reiterated (and advertisers should note) that one’s sincere belief in a product or service, as Arif argued here, is an insufficient defense against wire fraud allegations when the performance of the product or service is not at issue.

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