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MK Distributing, Inc.; Denial of Application
FR Doc E7-3857 [Federal Register: March 6, 2007 (Volume 72, Number
43)] [Notices] [Page 9972-9974] From the Federal Register Online via GPO
Access [wais.access.gpo.gov] [DOCID:fr06mr07-76]
[[Page 9972]]
DEPARTMENT OF JUSTICE
Drug Enforcement Administration
MK Distributing, Inc.; Denial of Application
On May 25, 2005, the Deputy Assistant Administrator, Office of
Diversion Control, Drug Enforcement Administration, issued an Order to
Show Cause to MK Distributing (Respondent) of Arvada, Colorado. The Show
Cause Order proposed to deny Respondent's pending application for a DEA
Certificate of Registration as a distributor of list I chemicals, on the
ground that its registration would be inconsistent with the public
interest. See Show Cause Order at 1 (citing 21
U.S.C. 823(h)).
More specifically, the Show Cause Order alleged that on November 18,
2003, Respondent's owner, Frederick H. Gates, had applied for a
registration to distribute ephedrine and pseudoephedrine, which are
precursor chemicals used in the illicit manufacture of methamphetamine.
Id. at 1-2. The Show Cause Order alleged that Respondent's customer base
"is comprised primarily of gas stations, convenience stores, and
independent grocers,'' and that these establishments are "sources for
the diversion of listed chemical products.'' Id. at 2.
The Show Cause Order further alleged that on April 1, 2003, Mr. Gates
had purchased Respondent and that between that date and October 2003,
Respondent had distributed 18,351 bottles and 3,720 packets of
combination ephedrine (25 mg) products under the DEA registration of its
previous owner. Id. at 2-3. The Show Cause Order alleged that Mr. Gates'
use of the previous owner's registration violated DEA regulations that
prohibit the assignment or transfer of a registration without the
written consent of the Administrator. Id. at 3 (citing 21
CFR 1309.63).
The Show Cause Order also alleged that between May and October 2003,
Respondent sold 1,056 bottles and 672 packets of ephedrine to the Barn
Store, a small independent grocer, and that these sales were "far in
excess of legitimate demand for these products.'' Id. Relatedly, the
Show Cause Order alleged that during the same period, Respondent sold
849 bottles and 312 packets of ephedrine products to a combination gas
station/convenience store, and that these sales were also "far in excess
of legitimate demand for these products.'' Id. The Show Cause Order thus
concluded by alleging that all of Respondent's customers are part of the
non-traditional market for list I chemical products, that its sale of
these products "is inconsistent with the known legitimate market and * *
* end-user demand for [these] products,'' and that granting its
application "would likely lead to increased diversion of list I
chemicals.'' Id. at 4.
On June 6, 2005, the Show Cause Order, which also notified Respondent
of its right to request a hearing, was served by certified mail, return
receipt requested, as evidenced by the signed return receipt card. Since
that time, neither Respondent, nor anyone purporting to represent it,
has responded. Because (1) more than thirty days have passed since
service of the Show Cause Order, and (2) no request for a hearing has
been received, I conclude that Respondent has waived its right to a
hearing. See 21
CFR 1309.53(c). I therefore enter this final order without a hearing
based on relevant material contained in the investigative file and make
the following findings.
Findings
Methamphetamine and the List I Chemical Market
Both ephedrine (in combination with guaifenesin) and pseudoephedrine
currently have therapeutic uses and are generally available as
non-prescription products.\1\ See Tri-County Bait Distributors, 71 FR
52160, 521612 (2006). Both chemicals are, however, regulated under the
Controlled Substances Act because they are easily extracted from
non-prescription products and used in the illicit manufacture of
methamphetamine, a schedule II controlled substance. See 21
U.S.C. 802(34); 21
CFR 1308.12(d).
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\1\ Combination ephedrine-guaifenesin products are
currently approved for use as a bronchodilator for the treatment of
asthma. The FDA is, however, currently proposing to remove these
products from its over-the-counter (OTC) drug monograph and to declare
them not safe and effective for OTC use. See 70 FR 40232 (2005).
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Methamphetamine is a powerful and addictive central nervous system
stimulant. See Gregg Brothers Wholesale Co., 71 FR 59830 (2006). The
illegal manufacture and abuse of methamphetamine pose a grave threat to
this country. Methamphetamine abuse has destroyed numerous lives and
families and ravaged communities. Moreover, because of the toxic nature
of the chemicals used to make the drug, its manufacture causes serious
environment harms.\2\ Id.
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\2\ According to the investigative file, in 2002,
law enforcement agencies seized 452 illicit methamphetamine
laboratories in Colorado.
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In numerous cases, DEA has shown through expert testimony that only a
small percentage of pseudoephedrine sales occur at gas stations and
convenience stores and that these stores constitute a non-traditional
market for the legitimate commerce in these products. See, e.g., T.
Young Associates, Inc., 71 FR 60567, 60568 (2006); D & S Sales, 71
FR 37607, 37608-09 (2006); Branex, Inc., 69 FR 8682, 8690-92 (2004). DEA
has further established that the monthly expected sales of combination
ephedrine products by non-traditional retailers such as convenience
stores and gas stations to meet legitimate demand, i.e., the purchase of
the products for their medically approved use as a bronchodilator to
treat asthma, is between $0 and $25, with an average of $12.58. See,
e.g., T. Young Associates, Inc., 71 FR at 60567 n.2 & 60568 (2006);
Tri-County Bait Distributors, 71 FR 52160, 52161-62 (2006); D & S
Sales, 71 FR 37607, 37608-09 (2006). DEA has also shown that a monthly
retail sale of $60 to meet legitimate consumer demand for ephedrine
products "would occur about once in a million times in random
sampling.'' T. Young, 71 FR at 60568 (int. quotations and citations
omitted).
Findings Pertinent to Respondent
Respondent is a Colorado corporation which is located at 6150 W. 55th
Avenue, Arvada, Colorado. On November 18, 2003, Respondent's owner, Mr.
Frederick H. Gates, submitted an application for a registration to
distribute the list I chemicals ephedrine and pseudoephedrine.
Respondent is a wholesaler of pornographic magazines, DVDs, videos, toys
and novelty items in the Colorado Springs area. Respondent's customer
base is largely comprised of non-traditional retailers of list I
chemical products. See, e.g., T. Young Associates, Inc., 71 FR at 60568.
Respondent was previously owned by Mike and Jane Kleppen, who
incorporated the firm in November 2001; this entity held a DEA
registration to distribute list I chemicals which was last renewed on
December 9, 2002. According to the investigative file, on April 1, 2003,
the Kleppens sold the business to either Mr. Gates or another firm owned
by him. The Kleppens did not, however, surrender MK Distributing's DEA
registration.
Between April 1, 2003, and October 8, 2003, Respondent continued to
distribute large quantities of combination ephedrine products using the
registration issued to MK Distributing under its previous owners. On the
latter date, two DEA Diversion Investigators (DIs) went to MK
[[Page 9973]]
Distributing's warehouse and met with Jane Kleppen. The DIs
questioned Ms. Kleppen as whether the new owners had obtained a DEA
registration. Ms. Kleppen advised the DIs that on April 1, 2003, MK
Distributing had been purchased by a firm called "Pleasures,'' and that
the latter firm had not applied for a DEA registration because of its
inability to obtain a tax identification number.
The DIs informed Ms. Kleppen that the new company was not authorized
to use the registration. One of the DIs then asked Ms. Kleppen to
voluntarily surrender the DEA registration; Ms. Kleppen agreed and
signed a voluntary surrender form. Ms. Kleppen then surrendered the list
I products that were in Respondent's warehouse.
Ms. Kleppen told the DIs that the original certificate of
registration was at her residence and that there were additional list I
products on Respondent's four delivery vans. Accordingly, the following
day, the DIs returned to Respondent and obtained the original
certificate from Ms. Kleppen. Ms. Kleppen then turned over to the DIs
additional list I products, which were subsequently returned to the
supplier.
As stated above, on November 18, 2003, Mr. Gates (Respondent's new
owner) applied for a registration. On July 1, 2004, the same two DIs
returned to Respondent's warehouse to conduct a pre-registration
investigation. During this visit, Mr. Gates told the DIs that he
expected that list I products would be approximately ten percent of
Respondent's total sales. When asked what ephedrine was used for, Mr.
Gates told the DIs that it was used by truck drivers to stay alert, for
weight loss, and methamphetamine.
As part of the application process, Respondent was required to
complete a questionnaire. On this questionnaire, Mr. Gates stated that "[t]he
new owners of MK Distributing, LLC[,] have sold 18,351 bottles of
Ephedrine 25 mg, and 3,720 packets of ephedrine 25 mg before DEA
investigators * * * pulled'' the registration. Mr. Gates also provided a
list of the monthly purchases of list I products by Respondent's
customers from May through October 2003.
A representative sampling of this information shows that Respondent
was selling massive amounts of combination ephedrine products to its gas
station/convenience store customers.\3\ Between May and September,
Respondent sold 720 bottles (for a monthly average of 144) to the Kwik-
Way Dublin, 960 bottles (for a monthly average of 192) to the Corner
Store, and 654 bottles (for a monthly average of 130.8) to Lil T Foods.
During the same period, Respondent sold 1147 bottles (for a monthly
average of 229.4) to the Broken Wheel, 1200 bottles (for a monthly
average of 240) to PHA, and 692 bottles (for a monthly average of
138.40) to Centron. Finally, Respondent sold 828 bottles (for a monthly
average of 165.60) to R & S, 768 bottles (for a monthly average of
153.6) to the South Circle Station, and 993 bottles (for a monthly
average of 198.6) to the Conoco Union gas station.
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\3\ All of the data used in the sampling were for
sixty-count bottles. Respondent also sold ephedrine packets to several
of these entities.
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According to the investigative file, the DIs were told by an employee
at one store that the retail price of the sixty-count bottles was $7.99.
This figure is consistent with other information that DEA has obtained
during investigations in Colorado. See Wild West Wholesale, 72 FR 4042,
4043 (2007) (finding that retail price was $5.99 for 48-count
combination ephedrine product).
At an average retail price of $7.99 per bottle, the monthly average
sales of the above stores were: Kwik-Way Dublin, $1151; Corner Store,
$1534; LiL T Foods, $1045; Broken Wheel, $1833; PHA, $1918; Centron,
$1106; R & S, $1323; South Circle, $1227; and Conoco Union,
$1587.\4\ The average monthly sale for all of these stores was $1414. As
explained above, through expert testimony, DEA has established that the
monthly expected sales range of combination ephedrine products at a
non-traditional retailer to meet legitimate consumer demand is between
$0 and $25, with an average of $12.58; a monthly retail sale of $60 to
meet legitimate consumer demand at a non-traditional retailer would
occur about once in a million times in random sampling.
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\4\ These figures were either rounded up or down to
the nearest dollar.
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Because these sales so greatly exceed the monthly expected sales
range to meet legitimate demand, I further find that most of
Respondent's products were diverted into the illicit manufacture of
methamphetamine. Moreover, even if these stores sold Respondent's
products at a lower retail price (such as the price found in Wild West
Wholesale for a smaller quantity), I would still find that Respondent's
sales were so excessive that its products were diverted.
Discussion
Under 21
U.S.C. 823(h), an applicant to distribute list I chemicals is
entitled to be registered unless the registration would be "inconsistent
with the public interest.'' In making this determination, Congress
directed that I consider the following factors:
(1) Maintenance by the applicant of effective controls against
diversion of listed chemicals into other than legitimate channels;
(2) Compliance by the applicant with applicable Federal, State, and
local law;
(3) Any prior conviction record of the applicant under Federal or
State laws relating to controlled substances or to chemicals
controlled under Federal or State law;
(4) Any past experience of the applicant in the manufacture and
distribution of chemicals; and
(5) Such other factors as are relevant to and consistent with the
public health and safety.
Id. "These factors are considered in the disjunctive.'' Joy's Ideas,
70 FR 33195, 33197 (2005). I may rely on any one or a combination of
factors, and may give each factor the weight I deem appropriate in
determining whether an application for registration should be denied.
See, e.g., David M. Starr, 71 FR 39367 (2006); Energy Outlet, 64 FR
14269 (1999). Moreover, I am "not required to make findings as to all of
the factors.'' Hoxie v. DEA, 419 F.3d 477, 482 (6th Cir. 2005); Morall
v. DEA, 412 F.3d 165, 173-74 (D.C. Cir. 2005).
In this case, I conclude that an analysis of factors one, two, and
three is not necessary. I hold that factors four (Respondent's
experience) and five (Respondent's intent to distribute to the non-
traditional market) conclusively establish that granting Respondent's
application would be inconsistent with the public interest.
Factors Four and Five--The Registrant's Past Experience in the
Distribution of Chemicals and Other Factors Relevant To and Consistent
With Public Health and Safety
As found above, the illicit manufacture and abuse of methamphetamine
have had pernicious effects on families and communities throughout the
nation. Cutting off the supply source of methamphetamine traffickers is
of critical importance in protecting the public from the devastation
wreaked by this drug.
While combination ephedrine products have a legitimate medical use as
a bronchodilator to treat asthma, DEA orders have established that
convenience stores and gas-stations constitute the non-traditional
retail market for legitimate consumers of products containing ephedrine.
See, e.g., Tri-County Bait Distributors, 71 FR
[[Page 9974]]
at 52161; D & S Sales, 71 FR at 37609; Branex, Inc., 69 FR at
8690-92. DEA has further found that there is a substantial risk of
diversion of list I chemicals into the illicit manufacture of
methamphetamine when these products are sold by non-traditional
retailers. See, e.g., Joy's Ideas, 70 FR at 33199 (finding that the risk
of diversion was "real'' and "substantial''); Jay Enterprises, Inc., 70
FR 24620, 24621 (2005) (noting "heightened risk of diversion'' should
application be granted).
DEA orders thus recognize that the sale of combination ephedrine (and
pseudoephedrine) products by non-traditional retailers is an area of
particular concern in preventing diversion of these products into the
illicit manufacture of methamphetamine. See, e.g., Joey Enterprises,
Inc., 70 FR 76866, 76867 (2005). As Joey Enterprises explains, "[w]hile
there are no specific prohibitions under the Controlled Substances Act
regarding the sale of listed chemical products to [gas stations and
convenience stores], DEA has nevertheless found that [these entities]
constitute sources for the diversion of listed chemical products.'' Id.
See also TNT Distributors, 70 FR 12729, 12730 (2005) (special agent
testified that "80 to 90 percent of ephedrine and pseudoephedrine being
used [in Tennessee] to manufacture methamphetamine was being obtained
from convenience stores'').\5\ Here, nearly all of Respondent's
customers are convenience stores and gas stations, which are
non-traditional retailers of list I chemical products; DEA has
repeatedly found that these entities are conduits for the diversion of
list I products into the illicit manufacture of methamphetamine.
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\5\ See OTC Distribution Co., 68 FR 70538, 70541
(2003) (noting "over 20 different seizures of [gray market
distributor's] pseudoephedrine product at clandestine sites,'' and
that in eight- month period distributor's product "was seized at
clandestine laboratories in eight states, with over 2 million dosage
units seized in Oklahoma alone.''); MDI Pharmaceuticals, 68 FR 4233,
4236 (2003) (finding that "pseudoephedrine products distributed by
[gray market distributor] have been uncovered at numerous clandestine
methamphetamine settings throughout the United States and/or
discovered in the possession of individuals apparently involved in the
illicit manufacturer of methamphetamine'').
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Relatedly, DEA has repeatedly revoked the registrations of list I
chemical distributors who supplied the non-traditional market for
selling quantities of products that clearly exceeded legitimate demand
and were likely diverted into the illicit manufacture of methamphetamine.
See T. Young Associates, Inc., 71 FR at 60572-73; D & S Sales, 71 FR
at 37611-12; Joy's sIdeas, 70 FR at 33198-99; Branex, Inc., 69 FR at
8693-96. Most significantly, the investigative file establishes that
Respondent distributed combination ephedrine products in quantities that
far exceeded legitimate consumer demand for these products as an asthma
treatment.
The representative sampling of Respondent's customers showed that the
lowest average estimated monthly retail sale per store was $ 1045; four
of the stores had average monthly retail sales of more than $ 1500.
Moreover, the average estimated monthly sale for all stores in the
sample was $ 1414. These figures grossly exceed the monthly expected
sales range of $ 0 to $ 25 (with an average of $ 12.58) by convenience
stores to meet legitimate demand for these products. See T. Young, 71 FR
at 60568; D & S Sales, 71 FR at 37609.
Indeed, as found above, a monthly retail sale of $ 60 of ephedrine
products at a convenience store should "occur about once in a million
times in random sampling.'' T. Young, 71 FR at 60568. The $ 1414 average
monthly retail sale for all nine stores is more than twenty- three times
this amount. Moreover, this figure is an average for these stores over a
five-month period. It is thus considerably more improbable than a one in
a million probability that Respondent's products were being purchased to
meet legitimate demand.
I therefore conclude that the only plausible explanation for these
extraordinary sales is that Respondent's products were being diverted
into the illicit manufacture of methamphetamine. See T. Young, 71 FR at
60572; D & S Sales, 71 FR at 37611 (finding diversion occurred "[g]iven
the near impossibility that * * * sales were the result of legitimate
demand''); Joy's Ideas, 70 FR at 33198 (finding diversion occurred in
the absence of "a plausible explanation in the record for this deviation
from the expected norm''). Moreover, because the purpose of the CSA's
registration provisions is to protect the public interest, it is
irrelevant whether Respondent knew that its products were being
diverted. T. Young, 71 FR at 60572.
"The diversion of list I chemicals into the illicit manufacture of
methamphetamine poses the same threat to public health and safety
whether a registrant sell the products knowing they will be diverted,
sells them with a reckless disregard for the diversion, or sells them
being totally unaware that the products were being diverted.'' Id.
(citing D & S Sales, 71 FR at 37610-12, & Joy's Ideas, 70 FR at
33198). As I have previously noted (albeit in a revocation proceeding),
the public interest standard does not require that the Government prove
that a registrant acted with any particular mens rea in order to support
a finding that diversion has occurred. T. Young, 71 FR at 60572. The
same rule applies to an applicant who has previously engaged in the
distribution of list I products. Accordingly, where, as here,
substantial quantities of products have been diverted, adverse findings
are warranted under factors four and five even if Respondent's owner was
unaware that its products were being diverted. I therefore hold that
granting Respondent's application would be inconsistent with the public
interest.
Order
Accordingly, pursuant to the authority vested in me by 21
U.S.C. 823(h), as well as 28 CFR 0.100(b) & 0.104, I order that
the application of MK Distributing, Inc., for a DEA Certificate of
Registration as a distributor of list I chemicals, be, and it hereby is,
denied. This order is effective April 5, 2007.
Dated: February 23, 2007.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. E7-3857 Filed 3-5-07; 8:45 am]
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