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United States v. Cone, No. 11-4888 and No. 11-4934

Decided: April 15, 2013

Consolidating appeals from a joint-criminal trial, the Fourth Circuit affirmed the District Court for the Eastern District of Virginia with respect to the district court’s evidentiary rulings and one defendant’s argument that a conviction on a particular count was not supported by sufficient evidence. Based on the facts of the case, with respect to both defendants, the court vacated the district court’s decision regarding conspiracy convictions that were prosecuted on a theory of “material alteration” and further vacated a conviction on a particular count, with respect to one defendant, based on insufficient evidence. Based on the vacation of several counts of conviction, the Fourth Circuit remanded for sentencing.

Co-defendants, Zhao and Cone, were married immigrants from China, living and working in the United States. They formed JDC Networking, Inc. (“JDC”), a licensed distributor of products made by and for Cisco. JDC conducted frequent business with a Hong Kong based company, allegedly operated by members of Zhao’s family, known as Han Tong. As a Cisco “registered partner,” JDC was prohibited from purchasing Cisco products for resale from outside the US. Yet, trial records reflect that, from 2004 through 2010, JDC frequently imported shipments from Han Tong containing both genuine Cisco products and fake imitations. During that time frame, as evidenced by emails introduced at trial, several JDC customers returned products because they believed that they were counterfeit Cisco products. Also during that time frame, Zhao filed income tax returns indicating that JDC was struggling and that she was only earning a small salary; however, to the contrary, JDC was thriving by purchasing Cisco products (or purported Cisco products) in China for resale at rates considerably below the expected market price. Beginning in 2006, U.S. Customs and Border Patrol (“CBP”) began intercepting shipments, however, that investigation went cold until 2010. In 2007, Zhao and Cone’s marriage began to deteriorate. Upset with their faltering marriage, Cone sent a series of emails to Zhao implicating both defendants in the counterfeiting conspiracy at issue. In 2010, CBP got a new lead in their investigation leading them to Zhao. CBP agents, along with Immigration and Customs Enforcement agents, executed a search warrant at Zhao’s residence and a storage unit maintained by her, which resulted in a wealth of evidence. During a post-arrest interview, Zhao eventually confessed to selling “fake” Cisco products. Subsequently, Cone was interviewed and arrested after confessing that JDC received and resold both real and counterfeit Cisco products from Han Tong. With respect to “authentic” Cisco products, Cone further admitted that he and Zhao altered the products, representing that they were higher end products than they actually were. Following their joint-trial, the jury returned a mixed verdict, convicting Cone of conspiracy, convicting Zhao of conspiracy along with several other charges. Cone was sentenced to 30 months imprisonment. Zhao was sentenced to 60 months imprisonment. Both Zhao and Cone appealed several of the district court’s rulings; the Fourth Circuit consolidated the appeals.

The Fourth Circuit held that “material alteration”—one of the three theories of conspiracy, which the prosecution relied on to support criminal liability under the federal counterfeiting statute—is not a crime as defined by the statute. In so holding, the court found that Zhao and Cones’ acts of obtaining a genuine Cisco product bearing a genuine mark and altering the product, but not the mark, was not a criminal act as defined under the statute. The court was not persuaded by the fact that, in the context of civil cases, courts have found liability based on a material alteration theory under the Lanham Act. Zhao’s conviction for money laundering was also vacated because the court found that the “material alteration” theory may have formed the basis for her money laundering convictions. Similarly, because the court found that the district court may have utilized some of the acts under the material alteration theory in arriving at the sentences, the Fourth Circuit vacated and remanded the sentences with respect to both Zhao and Cone. Zhao and Cone, also challenged the introduction of JDC customer emails complaining that JDC products were “fake.” The Fourth Circuit found that the evidence was properly introduced, as non-hearsay, to prove that the defendants were on notice that their products may be fraudulent, but that the district court committed error by not issuing a limiting instruction to the jury. However, in light of the context of a twelve-day jury trial in which the government adduced overwhelming evidence of guilt, the court held that his was harmless error.

The Fourth Circuit also addressed several of Zhao’s individual challenges. First, she challenged the sufficiency of the evidence, with respect to two counts, upon which she was convicted. The court quickly concluded the jury had ample evidence on which to convict her on with respect to one count. However, with respect to the other count, the court found that testimony from a client that packaging was not genuine, standing alone, was not sufficient to sustain a conviction under the statute for a counterfeit mark on the goods in the package. Next, the court addressed Zhao’s argument that the district court committed reversible error by admitting Cone’s out-of-court statements against her in violation of the Confrontation Clause. Applying Fourth Circuit precedent, the court held that the substitution of Zhao’s name with “another individual” was sufficient to protect her rights under the Confrontation Clause.  Addressing Cones’ individual challenge to his conviction for conspiracy to import misdeclared goods, the court found that, because the record reflects Cones’ active participation in the overall scheme, the government adduced sufficient evidence to support a conviction

Full Opinion

– W. Ryan Nichols