Electronic Hearsay: Fact Business Keeps and Receives Emails Doesn’t Make Them Business Records (Good Quote) — 803(6) Elements Must Be Satisfied — Business Records Exception Is Predicated on Accuracy & Reliability; Email Is Typically More Casual

United States v. Cone, 714 F.3d 197 (4th Cir. 2013):

Donald Cone and Chun-Yu Zhao were convicted of various charges under an indictment arising out of a scheme to import and resell counterfeit pieces of computer networking equipment, some of which bore the trademark of Cisco Systems, Inc. ("Cisco"). On appeal,  [**2] they challenge certain evidentiary rulings made at their joint trial and whether some of the criminal acts alleged can support a conviction for criminal counterfeiting under 18 U.S.C. § 2320. Additionally, Cone challenges whether sufficient evidence supports his conviction for conspiracy and Zhao challenges the sufficiency of the evidence on certain substantive counts upon which she was convicted. For the reasons set forth below, we reject Zhao and Cone's attack on the district court's evidentiary rulings and Cone's argument that his conviction was not supported by sufficient evidence. However, the government's theory of prosecution based on a "material alteration" theory of counterfeiting trademarks is not cognizable under the criminal counterfeiting statute based on the facts of this case. Further, the government's evidence on Count 10 was insufficient as a matter of law to sustain Zhao's conviction. We therefore vacate the judgment of the district court on certain counts of conviction, affirm the judgment of the district court in all other respects, and remand for resentencing.

I.

Background and Material Proceedings Below

A. The Factual Background

Zhao, then a recent immigrant from  [**3] the People's Republic of China ("China"), was recently divorced from Junling Yang, an indicted co-conspirator in this case who remains at large, when she married Cone.1 While living and working in the United States, Zhao and Cone formed JDC Networking, Inc. ("JDC"), a licensed distributor of products made by and for Cisco. JDC conducted frequent business with a company known as Han Tong Technology ("Han Tong"), a Hong Kong-based business alleged to be operated by members of Zhao's family. As a Cisco "registered partner," JDC was contractually prohibited from purchasing Cisco products for resale from outside of the United States, yet records introduced at trial reflect that, from 2004 through 2010, JDC imported over 200 shipments from Han Tong and companies associated with Han Tong in China containing both genuine Cisco products and fake imitations.

In 2005 and 2006, while Zhao and Cone were living together in Rockville, Maryland, U.S. Customs and Border Patrol ("CBP") agents began intercepting and seizing shipments of highly sophisticated  [**4] counterfeit computer networking products sent from Han Tong to "Lucy" and "Donald," at addresses in Rockville, Maryland. The investigation went cold, however, when the shipper of the counterfeit goods began declaring a very low value for the goods shipped and using variant spellings of the destination address, thus foiling CBP's tracking techniques.

From 2004 to 2010, JDC marketed computer equipment bearing a Cisco mark to consumers and resale outlets. Several of JDC's customers, however, were dissatisfied with some of the products they purchased from JDC. E-mails introduced at trial from JDC customers revealed that some clients believed they had been sold counterfeit or fake products.

 [*202]  Zhao filed income tax returns indicating that JDC was struggling and that she was only earning a small salary. In fact, JDC was thriving and producing significant income for her. JDC records reflect that it was purchasing Cisco products (or purported Cisco products) in China for resale at considerably below the expected market price for such products and then reselling the products with a high markup.

As JDC thrived, however, Zhao's marriage to Cone deteriorated. In late 2007, Cone moved out of the couple's  [**5] home, and Zhao moved into a condominium with her ex-husband Yang. Upset with Zhao over their faltering marriage, Cone sent Zhao a series of e-mails demanding his share of JDC proceeds. In one, he stated "I won't let my life get ruined. I will make sure everyone knows the truth about everything. IRS, DOJ, Customs, Immigration, et cetera. . . . I have proof of everything." (J.A. 1651.) In another e-mail, Cone indicated that "other companies were returning products to us because they were counterfeit." (J.A. 1653.) Zhao and Cone later divorced.

In 2010, CBP was notified that four pieces of "highly sophisticated, very expensive" counterfeit networking technology ("routers") bearing Cisco marks were seized upon entry from China into the United States, bound for a Parcel Plus retail storefront in Northern Virginia and with an estimated value of thousands of dollars per piece of equipment. CBP agents compared the attributes of this shipment with those in the 2005-06 investigation and concluded that the 2010 shipments were similar and likely related to the same counterfeiting scheme.

Coordinating its efforts with DHL (a shipping company) and Immigration and Customs Enforcement ("ICE"), CBP intercepted  [**6] the next package sent from China to the address in Virginia. When CBP and ICE agents opened the package, they discovered over 300 labels bearing a Cisco mark that agents suspected to be counterfeit. CBP and ICE forwarded the package to an ICE facility in Washington, where agents coordinated a controlled delivery of the package to the Parcel Plus retail storefront. Agents observed Zhao retrieving the package and followed her to her home. CBP and ICE agents then executed an anticipatory search warrant at the residence.

In the course of searching Zhao's home, federal agents discovered, in addition to the shipment of suspected counterfeit Cisco labels that led them to Zhao, unlabeled transceivers that matched the labels found in the shipment, labeled transceivers, business and financial records, torn labels and label backing, and instructions on how to convert Cisco equipment into different models.

As investigators were executing the search warrant at Zhao's home, a FedEx delivery driver attempted to deliver two packages to her. The delivery driver revealed to the agents executing the warrant that Zhao maintained a storage unit across the street. Although Zhao initially denied the existence  [**7] of the storage unit (and later provided law enforcement agents with a false unit number and a false entry code to the storage facility), agents were eventually able to gain access. Agents found quantities of boxes filled with equipment bearing a Cisco mark filling "at least half" the storage unit. (J.A. 614.)

After being arrested, Zhao was interviewed by ICE Agent Julie Hilario for approximately 45 minutes. Although Zhao initially denied any involvement with counterfeiting (and even denied receiving the package that was the subject of the controlled delivery), she eventually admitted that she sold "fake" Cisco products to  [*203]  make a greater profit than with a legitimate product.

As ICE and CBP pursued the investigation, agents interviewed Cone by telephone (he had left the United States and was living in China). Cone admitted that JDC received and resold both real and counterfeit Cisco products from Han Tong (which he described as a "fake" company). (Vol. V J.A. 1990.) With respect to "authentic" Cisco products, Cone informed agents that he and Zhao altered authentic Cisco products obtained from China and sold them to clients, representing that they were higher end products than they actually  [**8] were. Cone was later arrested when he returned from China in December 2010.

B. District Court Proceedings

Cone and Zhao were both indicted by a grand jury (along with Yang and Chun-Yan Zhao, defendant Zhao's sister) in 2010 in the United States District Court for the Eastern District of Virginia on one count of conspiracy in violation of 18 U.S.C. § 371, with three objects: (1) trafficking in counterfeit goods and labels; (2) importation and sale of improperly declared goods; and (3) wire fraud (Count 1); and three counts of wire fraud in violation of 18 U.S.C. § 1343 (Counts 16-17, 23).2

As relevant to that part of the Count 1 conspiracy charge alleging trafficking in counterfeit goods and labels, the government presented at trial three theories underlying the alleged objects of that conspiracy. First, that some of the products seized from Zhao's residence or sold to end-users were represented to be Cisco products but in fact were "pure" counterfeits (i.e., the products were never made by or for Cisco). Second, other products (acquired from legitimate Cisco resellers in the United States and abroad) were indeed made by or for Cisco, but were converted by Zhao and Cone into a different type of Cisco product and represented to buyers as the original of that item (the "material alteration"  [**10] theory). Third, other products acquired from China that were originally made by or for Cisco but were relabeled and mislabeled by Zhao and Cone with new serial numbers to deceive customers into believing that the products were eligible for Cisco warranty and services in the United States, when, in fact, such products were not so eligible.3

In support of Count 8 (counterfeiting) the government introduced testimony from its expert, Cisco engineer Michael Heidecker, who testified that the four routers seized by CBP in 2010 each contained a unique Cisco "MAC address," but that the MAC addresses found on the routers were  [*204]  actually assigned to other Cisco products. Thus, Heidecker was able  [**11] to establish that the four routers were not actually manufactured by Cisco. Furthermore, they were shipped in packaging that, although displaying a Cisco mark, was, according to Heidecker, counterfeit. Defense expert Richard Krebs, however, opined that the routers were manufactured by or for Cisco, because the MAC addresses for each were actually consistent with the MAC addresses assigned to Cisco and because counterfeiters could not have created the switches due to the prohibitive cost.

Craig Grant, a manager at Vology, a Cisco equipment reseller, testified regarding Cisco-marked transceivers that are the subject of Count 10 (counterfeiting). Grant testified that Vology purchased ten Cisco transceivers from JDC, but returned them to JDC because Vology was unable to verify the transceivers' authenticity. Specifically, Grant stated that the Vology inventory team noted that the transceivers were not packaged in standard Cisco packaging. The exact items JDC sold to Vology were not available at trial (having been returned to JDC and resold). Heidecker told the jury that Cisco does not sell unlabeled transceivers and packages them in a certain specific manner not followed in the case of  [**12] Vology.

During the government's case in chief, Zhao lodged timely objections to several items of evidence. First, Zhao moved to exclude statements made by Cone which she argued incriminated her and therefore required exclusion under Bruton v. United States, 391 U.S. 123, 88 S. Ct. 1620, 20 L. Ed. 2d 476 (1968) (holding that admission of a statement inculpating a co-defendant in a joint trial violates the co-defendant's rights under the Confrontation Clause). The district court denied the motion, although it did require the government to excise any mention of Zhao's name when Cone's statements were presented to the jury and replace her name with a gender-neutral noun. The court reasoned that "there are multiple individuals involved [in the conspiracy]" and therefore, Zhao's rights under the Confrontation Clause would not be prejudiced by use of a gender-neutral substitute. Accordingly, when Cone's statements were read into evidence, "another individual" was substituted for Zhao's name.

Zhao also filed a motion in limine to exclude e-mails from JDC customers characterizing certain Cisco products purchased from JDC as "fake" or "counterfeit." She argued that the e-mails constituted inadmissible hearsay. The district court  [**13] denied the motion on the grounds that the e-mails were to be admitted not for their truth, but rather, as evidence that Zhao and Cone were on notice that the products JDC sold were not authentic. After the e-mails were introduced at trial, Zhao requested a limiting instruction from the court that the e-mail statements were not to be considered by the jury for their truth. The court replied as follows but did not give the requested limiting instruction.

I believe I've said that multiple times to the jury. I'll say it again. The jury is going to decide what is counterfeit or not. They make up the definition. The e-mails say what they say, and the jury will have to decide if they're believable or not. That's their job.

(J.A. 1673-74.)

At the close of the evidence, Cone moved pursuant to Federal Rule of Criminal Procedure 29 for judgment of acquittal on the charges against him. The district court granted the motion with respect to the wire fraud counts (16-17, 23), granted it in part to the extent that Count 1 (conspiracy) related to wire fraud, but denied the motion for the remainder of Count 1  [*205]  charging a counterfeiting and importation of misdeclared goods conspiracy.

Zhao similarly filed  [**14] a Rule 29 motion as to all of the wire fraud counts, as well as a motion to dismiss Counts 1 through 6 (the conspiracy charge and the improperly declared goods charges). The district court granted the motion with respect to the wire fraud charges and denied it in all other respects.4

In denying the Rule 29 motions on the remaining counts, the district court briefly discussed Cone and Zhao's argument that the government's "material alteration" theory exceeded the scope of the federal criminal counterfeiting statute. The court reasoned:

the issue of whether the marks appear on the serial numbers and the various labels including barcodes are encompassed in the definition [of spurious mark] because labels are being applied to Cisco products to give the end[ ]user an impression that the goods that were of a higher grade than when they originated from the factory. . . .

The statute has to be interpreted in the light of the meaning, and the presentation of an item as new when it has been altered under a mark is likely to cause confusion and lead the consumer to believe the product was  [**15] made by the genuine owner of the trademark in the fashion in which it left the factory even though it was not.

(J.A. 2344.)

The jury returned a mixed verdict, convicting Cone of conspiracy (the only remaining charge against him), convicting Zhao of conspiracy, all four improperly declared goods charges, all four trafficking in counterfeit goods and labels charges, two counts of money laundering, one count of making a monetary transaction with criminally derived proceeds, and three charges not relevant to this appeal. Zhao was acquitted on one false statement to law enforcement charge and one money laundering charge.

The district court imposed a thirty-month sentence upon Cone and a sixty-month sentence upon Zhao. Both noted timely appeals and we have jurisdiction pursuant to 28 U.S.C. § 1291.

***

D. Introduction of Customer E-Mails

Cone and Zhao last argue that the district court erred in admitting certain e-mails  [*219]  from JDC customers complaining that JDC products were "counterfeit" and "fake." Although the district court determined that the e-mails were introduced for a non-hearsay purpose, i.e., to show that Zhao and Cone were on notice that they were selling counterfeit goods, the court declined to give a limiting jury instruction to that effect and instead stated that "the e-mails say what they say and the jury will have to decide if they're believable or not. That's their job." (J.A. 1673-74.) Cone and Zhao contend that the court's actions constitute reversible error.

HN23[ ] This Court reviews evidentiary rulings for an abuse of discretion and "will only overturn an evidentiary ruling that is 'arbitrary and irrational.'" United States v. Cloud, 680 F.3d 396, 401 (4th Cir. 2012) (quoting United States v. Cole, 631 F.3d 146, 153 (4th Cir. 2011)). Evidentiary rulings are subject to harmless error  [**56] review, such that any error is harmless where we may say "with fair assurance, after pondering all that happened without stripping the erroneous action from the whole, that the judgment was not substantially swayed by the error." United States v. Johnson, 617 F.3d 286, 292 (4th Cir. 2010).

At the outset, we believe that the district court properly admitted the e-mails for the non-hearsay purpose of showing that Cone and Zhao were on notice as to the counterfeit nature of the goods they sold. See 5-801 Weinstein's Federal Evidence § 801.11[5][a] (Out of court statement not hearsay when "offered not for [its] truth but to prove the extent of . . . a recipient's notice of certain conditions.").

We are troubled, however, by the court's response to counsel's request for a limiting instruction. Indeed, while the emails may have been properly admitted for a reason other than their truth, the district court stated just the opposite—that the jury will have to decide "if they're believable or not." In other words, the court erroneously instructed the jury to consider statements contained in the e-mails for the truth of the matter asserted.

The government contends, nonetheless, that the court's  [**57] statement was not error because the statements in the e-mails could have been admitted under a hearsay exception, namely the business records exception to the hearsay rule, found at Federal Rule of Evidence 803(6). We are not persuaded.

HN24[ ] Rule 803(6)(B) allows for the introduction of records that are "kept in the course of a regularly conducted activity of a business." For a record to be admitted as a business record, it must be "(1) made by a regularly conducted business activity, (2) kept in the 'regular course' of that business, (3) 'the regular practice of that business to make the memorandum,' (4) and made by a person with knowledge or from information transmitted by a person with knowledge." Clark v. Los Angeles., 650 F.2d 1033, 1036-37 (9th Cir. 1981) (quoting Fed. R. Evid. 803(6)).

E-mails, however, present unique problems of recent vintage in the context of the business records exception. As one district court recently explained:

Courts are in disagreement on whether emails can and should fall under the business records hearsay exception. The business records exception assumes that records containing information necessary in the regular running of a business will be accurate and  [**58] reliable. See Certain Underwriters at Lloyd's London v. Sinkovich, 232 F.3d 200, 204-05 (4th Cir. 2000). Email, however, is typically a more casual form of communication than other records usually kept in the course of business, such that it may not be appropriate to assume the same degree of accuracy and reliability. As  [*220]  email is more commonly used to communicate business matters both internally and externally, however, more formal paper records are becoming more unusual.

Its My Party, Inc. v. Live Nation, Inc., No. JFM-09-547, 2012 U.S. Dist. LEXIS 119625, 2012 WL 3655470 at *5 (D. Md. Aug. 23, 2012) (unpublished). The district court in that case excluded the e-mails on the basis that the "more specificity is required regarding the party's recordkeeping practices to show a particular email in fact constitutes a reliable business record." Id.

HN25[ ] While properly authenticated e-mails may be admitted into evidence under the business records exception, it would be insufficient to survive a hearsay challenge simply to say that since a business keeps and receives e-mails, then ergo all those e-mails are business records falling within the ambit of Rule 803(6)(B). "An e-mail created within a business entity does not, for that  [**59] reason alone, satisfy the business records exception of the hearsay rule." Morisseau v. DLA Piper, 532 F. Supp. 2d 595, 621 n.163 (S.D.N.Y. 2008). The district court's observation that the e-mails were kept as a "regular operation of the business" is simply insufficient on that basis alone to establish a foundation for admission under Rule 803(6)(B). Accordingly, because the e-mails could not, on this record, be admitted under an exception to the hearsay rule, the district court's failure to give the limiting jury instruction was error.

We conclude, however, that the any error in the court's jury instructions or failure to give an e-mail limiting instruction was harmless. In the context of a twelve-day jury trial in which the government adduced overwhelming evidence of Cone and Zhao's guilt, we cannot conclude that Cone or Zhao were prejudiced by this single error concerning a minute portion of the total evidence against them. As discussed above, the government further introduced physical evidence in the form of counterfeit labels seized from Zhao's home and storage unit. The government also introduced routers seized by CBP, that Heidecker (a Cisco engineer) identified as counterfeit  [**60] goods.

The government also introduced evidence from Cone and Zhao themselves. In addition to Zhao's confession at the time of her arrest (that she sold "fake" goods in order to make more money), the government introduced incriminating e-mails from Cone to Zhao wherein Cone threatened to reveal the counterfeiting scheme to law enforcement if he did not receive his share of proceeds from the criminal venture. In sum, the government's evidence against Cone and Zhao was more than ample, and we conclude that the district court's jury instruction with respect to certain e-mails from JDC customers was harmless beyond a reasonable doubt.

III.

Because we conclude that the government's material alteration theory of counterfeiting is not encompassed within the § 2320 statutory crime of counterfeiting marks, we vacate Zhao's conviction on Count 9. In light of this holding, we must vacate Zhao's convictions for Counts 27, 28, and 29. We further hold that the evidence was insufficient as a matter of law to sustain Zhao's conviction on Count 10 and also vacate that conviction. We also vacate the sentences of both Cone and Zhao and remand for resentencing in light of our holding today. We affirm the  [**61] judgment of the district court in all other respects.

AFFIRMED IN PART, VACATED IN PART, AND REMANDED

Concur by: WYNN (In Part)

Dissent by: WYNN (In Part)

Dissent

 

 

 [*221]  WYNN, Circuit Judge, concurring in part and dissenting in part:

I concur with the majority's conclusion that the government's "material alteration" theory is not supported by the plain language of the criminal trademark counterfeiting statute, 18 U.S.C. § 2320. As a result, I also agree that this Court must reverse Defendant Zhao's conviction on Count 9, which involved a networking switch that the government concedes was manufactured by or for Cisco, and her three money laundering convictions, which were tainted by the material alteration theory. I further concur that the government adduced insufficient evidence to convict Defendant on Count 10 because the government's evidence at most showed that Defendant Zhao repackaged a genuine Cisco product.

However, I cannot join the majority in affirming Defendant Zhao's conviction on Count 8, the remaining trademark counterfeiting conviction potentially tainted by the errant material alteration theory. The government and Defendant Zhao presented conflicting evidence regarding whether the products at issue in Count 8  [**62] were manufactured by or for Cisco. In affirming that conviction, the majority considered the evidence adduced at trial in the light most favorable to the government. But such deference is unwarranted because the government argued its legally incorrect alteration theory to the jury and the district court did not provide an adequate instruction to the jury regarding when a product that has its genesis in authorized production can serve as the basis for a trademark counterfeiting conviction. Because we do not know whether the jury properly credited the government's evidence or improperly credited the government's errant legal theory, this conviction also should be reversed.

In addition, I write separately to clarify that in resentencing Defendants Zhao and Cone on their conspiracy convictions the district court should not take into account evidence that Defendants altered one other type of Cisco product, which, like the switch at issue in Count 9, the government concedes was manufactured by or for Cisco. I further emphasize that this panel was not tasked with answering, and thus did not decide, whether the repackaging of an altered, but genuine product in a non-deceptive manner violates  [**63] Section 2320 as a matter of law.

***

 


Based on the jury's verdict, we recite the facts in the light most favorable to the government. United States v. Cloud, 680 F.3d 396, 399 n.1 (4th Cir. 2012).

In addition, Zhao was individually indicted on five counts of importation and sale of improperly declared goods in violation of 18 U.S.C. § 545 (Counts 2-6); four counts of trafficking in counterfeit goods and labels in violation of 18 U.S.C. § 2320 (Counts 7-10); three counts of making false statements to federal law enforcement officials in violation of 18 U.S.C. § 1001(a)(2) (Counts 11-13); two counts of false statements in naturalization in violation of 18 U.S.C. § 1425(a) (Counts 14-15); seven individual counts of wire fraud (Counts 18-2, 24-25); three counts of money laundering in violation of  [**9] 18 U.S.C. § 1956(a) (Count 26-28); and one count of monetary transaction with criminally derived proceeds in violation of 18 U.S.C. § 1957(a) (Count 29).

For purposes of this appeal, only Counts 1 and 9 are affected by the second object of the conspiracy, which we address as the material alteration theory. The first and third objects are not at issue on appeal as part of the material alteration theory challenge. The convictions related to the first object, importation of misdeclared goods (and underlying substantive counts) are unaffected by our analysis of the material alteration theory, and the third object, wire fraud, was dismissed by the district court.

The district court also dismissed Count 15, false statements in naturalization, on the government's motion.

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