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Holloway Distributing; Revocation of Registration
FR Doc E7-14822 [Federal Register: August 1, 2007 (Volume 72, Number
147)] [Notices] [Page 42118-42126] From the Federal Register Online via
GPO Access [wais.access.gpo.gov] [DOCID:fr01au07-101]
DEPARTMENT OF JUSTICE
Drug Enforcement Administration
[Docket No. 05-33]
Holloway Distributing; Revocation of Registration
On May 25, 2005, the Deputy Assistant Administrator, Office of
Diversion Control, Drug Enforcement Administration, issued an Order to
Show Cause to Holloway Distributing, Inc. (Respondent), of Puxico,
Missouri. The Show Cause Order proposed the revocation of Respondent's
DEA Certificate of Registration, 003219HIY, and the denial of
Respondent's pending application for renewal of its registration, on the
ground that its continued registration "is inconsistent with the public
interest.'' Show Cause Order at 1.
More specifically, the Show Cause Order alleged that Respondent
distributed list I chemical products containing pseudoephedrine, a
precursor chemical used in the illicit manufacture of methamphetamine, a
schedule II controlled substance, to convenience stores, gas stations,
liquor and video stores, and bait and tackle shops in various parts of
Missouri, the State which has repeatedly ranked first in the nation in
the number of clandestine methamphetamine lab seizures. Id. at 2. The
Show Cause Order alleged that these establishments constitute the
non-traditional market for consumers who purchase pseudoephedrine
products for legitimate uses. Id. at 7. The Show Cause Order further
alleged that Respondent's "sale of pseudoephedrine products is
inconsistent with the known legitimate market and known end-user demand
for products of this type.'' Id.
The Show Cause Order also alleged that in March 2004, DEA
investigators conducted verifications of several entities which
Respondent identified as its customers. Id. at 3-4. According to the
allegations, DEA investigators determined that several of Respondent's
customers were purchasing additional list I chemical products from other
distributors and also selling other products such as starting fluid and
lantern fuel which are used in the illicit manufacture of
methamphetamine. Id.
The Show Cause Order next alleged that in March 2004, as part of a
regulatory investigation of Respondent, DEA investigators conducted an
accountability audit of five list I chemical products. Id. at 5. The
Show Cause Order alleged that there were either overages or shortages
for each product, and that DEA investigators found that Respondent had "failed
to notify the agency of a significant loss of List I chemical products
as required by 21
U.S.C. 830(b)(1)(C) and 21
CFR 1310.05(a)(3).'' Id.
Finally, the Show Cause Order alleged that between November 7, 2003,
and April 1, 2004, Respondent sold pseudoephedrine products on numerous
occasions to one Keith Frankum, notwithstanding that Frankum had
presented a sales tax exempt certificate which indicated that his
business address was a local storage facility and was vague when asked
about the nature of his business. Id. at 5-6. According to the
allegations, notwithstanding that local law enforcement authorities had
told one of Respondent's employees that Frankum's brother was "a meth
cook,'' and that its employees "referred to [Frankum] as `the drug guy'
whenever he arrived at Holloway to make a purchase,'' Respondent made
additional sales of pseudoephedrine products to him. Id. at 6. The Show
Cause Order further alleged that in early April 2004, Frankum was
arrested and during a search incident to the arrest, was found to be in
possession of twenty boxes of pseudoephedrine products sold by
Respondent, an invoice from Respondent, and a handwritten note which
read: "Be careful when leaving here!'' Id. at 5. According to the
allegations, Frankum subsequently told DEA investigators that he sold
pseudoephedrine "to several repeat customers'' and that it "was a big
seller because it was used to make drugs.'' Id. at 6. The Show Cause
Order also alleged that Frankum admitted that he had a prior arrest for
possession of methamphetamine and that he had done "a lot of meth'' five
years earlier. Id. The Show Cause Order further alleged that Respondent
never reported to DEA its sales to Frankum. Id. at 5.
On June 24, 2005, Respondent, through its counsel, requested a
hearing. The matter was assigned to Administrative Law Judge (ALJ) Gail
A. Randall, who conducted a hearing in Arlington, Virginia, on February
7, 2006, and in Cape Girardeau, Missouri, on February 22-23, 2006.
During the hearing, both parties called witnesses to testify and
introduced documentary evidence. Following the hearing, both parties
submitted briefs containing proposed findings of fact, conclusions of
law and argument.
On December 19, 2006, the ALJ submitted her recommended decision
(hereinafter, ALJ). In her decision, the ALJ concluded that the
Government had "initially * * * met its burden of proof * * * by
demonstrating that the Respondent made `grossly excessive sales' of
listed chemical products between October 1, 2003, and March 23, 2004.''
ALJ at 40 (citing FOF 26). The ALJ also acknowledged DEA precedent
holding that a registrant's grossly excessive sales support a finding
that its products were diverted and that its continued registration
would be inconsistent with the public interest. Id. at 40-41.
The ALJ concluded, however, that Respondent's continued registration
would not be inconsistent with the public interest for two reasons. Id.
at 41. First, the ALJ noted that Respondent had "demonstrated its
willingness and its ability to develop and implement changes in its
business processes consistent with the [agency's] recommendations.'' Id.
Second, the ALJ relied on Missouri's recently enacted restrictions on
pseudoephedrine sales. According to the ALJ, the statute showed that "the
State will be monitoring the gelcap and liquid pseudoephedrine products,
if any, found in the methamphetamine labs,'' and that "[s]uch heightened
scrutiny leads to the conclusion that, if the products of the
Respondent, as well as other distributors of List I chemical products in
Missouri, are found in illicit methamphetamine laboratories, the State
will close the legislative loophole afforded these limited products.''
Id. The ALJ reasoned that "[u]ntil such time as the problem is
substantiated * * * the possibility of * * * Respondent's products being
diverted [should] not be relied upon to revoke'' its registration. Id.
The ALJ therefore recommended that I not revoke
[[Page 42119]]
Respondent's registration and not deny its pending application for
renewal.
On January 5, 2007, the Government filed exceptions to the ALJ's
decision. On February 1, 2007, the ALJ forwarded the record to me for
final agency action. Having reviewed the record as a whole, I hereby
issue this decision and final order. I adopt the ALJ's findings of fact
except as noted herein. I reject, however, the ALJ's conclusions of law
with respect to factors one, two, four and five. I further reject the
ALJ's ultimate conclusion that Respondent's continued registration "would
not be inconsistent with the public interest.'' Id. Accordingly, I also
reject the ALJ's recommendation that Respondent's registration should
not be revoked and its pending renewal application should not be denied.
I make the following findings.
Findings of Fact
Respondent is a Missouri Corporation which is located at 210 East
Owen Avenue, Puxico, Missouri. ALJ Ex. 2. Respondent is co-owned by Mr.
Terry Holloway and his wife, Debbie Holloway. Tr. 720. Mr. Holloway is
Respondent's president. Id. Respondent is a wholesale distributor of
approximately 10,000 products including groceries, restaurant foods,
candy, cigarettes, and tobacco. Id. at 724.
Respondent, which has been registered since 1998, currently holds DEA
Certificate of Registration, 003219HIY, which authorizes it to
distribute list I chemicals. Gov. Ex. 1 & 2. Based on Respondent's
submission of a timely renewal application in September 2004,
Respondent's registration has remained in effect pending the final order
in this matter. Gov. Ex. 2.
Methamphetamine and the Market for List I Chemicals
Pseudoephedrine is lawfully marketed under the Food, Drug and
Cosmetic Act as a decongestant. Gov. Ex. 4, at 4. Pseudoephedrine is,
however, also regulated as a list I chemical under the Controlled
Substances Act (CSA) because it is easily extracted from non-
prescription drug 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).
Methamphetamine "is a powerful and addictive central nervous system
stimulant.'' T. Young Associates, Inc., 71 FR 60567 (2006) (other
citations omitted). As noted in numerous DEA final orders, the illegal
manufacture and abuse of methamphetamine pose a grave threat to this
country. See id. Methamphetamine abuse has destroyed numerous lives and
families. Id. Moreover, because of the toxic nature of the chemicals
used in making the drug, illicit methamphetamine laboratories cause
serious environmental harms. Id.
The illicit manufacture and abuse of methamphetamine is an
extraordinarily serious problem in Missouri. According to the record,
during the years 2001 through 2004, Missouri repeatedly ranked first in
the number of law enforcement seizures of methamphetamine laboratories.
See Gov. Ex. 3, at 4. More specifically, in 2001, law enforcement
authorities seized 2,181 labs; in 2003, 2,885 labs; and in 2004, 2,782
labs. Id. Moreover, while legislation enacted by Missouri in June 2005
(which made pseudoephedrine and ephedrine in tablet-form a schedule V
controlled substance and limited its sale to pharmacies), appears to
have led to a substantial reduction in the number of meth. lab seizures,
law enforcement authorities still seized 745 labs in the latter half of
2005. See Gov. Ex. 28.
The Missouri statute, however, exempts pseudoephedrine in liquid and
liquid-filled gel caps. See Mo. Rev. Stat. 195.017.17; Tr. 309-11. Thus,
in Missouri, these products can be sold by non-pharmacies. According to
the record, "[w]hile the vast majority of clandestine laboratories
seized have utilized tableted pseudoephedrine and ephedrine products,
gel-caps and liquid dosage form products can easily serve as a source of
precursor material for the production of methamphetamine.'' Gov. Ex. 4,
at 8. Furthermore, DEA studies show that pseudoephedrine "can be easily
extracted'' from liquid and gel cap products by using reagents and
solvents which are "readily available at hardware and auto parts stores
in the U.S.'' Id.; see also Gov. Ex. 6 (discussing study by DEA chemist
who was able to extract pseudoephedrine from gel caps and obtain a 68
percent yield using equipment typically found in meth. labs). The record
further establishes that in those States (including Missouri) which have
exempted gel cap and liquid form listed chemical products, traffickers
are using exempted products to make meth. See Gov. Ex. 5, at 13-14; Gov.
Ex. 6, Gov. Ex. 7, Tr. 321-22.
The Government also established that there is both a traditional and
non-traditional market for pseudoephedrine. According to Jonathan Robbin,
who has testified as an expert in statistical analysis of demographic,
economic, geographic, survey and sales data in numerous DEA proceedings
and several criminal and civil trials, over 97 percent of all
non-prescription drug products are sold by drug stores, pharmacies,
supermarkets, large discount merchandisers, and electronic shopping and
mail order houses. Tr. 173. Mr. Robbin further testified that sales of
non-prescription drugs by convenience stores (including both those that
sell and do not sell gasoline), "account for only 2.2% of the overall
sales of all convenience stores that handle the line and only 0.7% of
the total sales of all convenience stores.'' Gov. Ex. 8, at 5. Based on
his study of U.S. Government Economic Census data, survey data obtained
by the National Association of Convenience Stores, and commercially
available point-of-transaction data, Mr. Robbin further stated that only
about 1.2 percent of all non-prescription drug products are sold at
convenience stores, Tr. 173, and cold remedies (including
pseudoephedrine products) "are [a] * * * much smaller'' portion of this.
Id. at 174; Gov. Ex. 8, at 5. Mr. Robbin thus explained that convenience
stores "definitely constitute a `nontraditional market' for the sale of
[OTC] non-prescription drug pseudoephedrine'' products. Gov. Ex. 8, at
5.
Mr. Robbin further testified that "the normal expected retail sale of
pseudoephedrine (Hcl) tablets in a convenience store may range between
$0 and $40 per month[,] with an average of $19.85 per month,'' and that
the expected sales range of Actifed tablets in a convenience store
ranges between $0 and $20 [per month], with an average of $ 8.68.'' Id.
at 8; Tr. 176. Mr. Robbin explained that "[a] monthly retail sale of $60
of pseudoephedrine (Hcl) * * * would be expected to occur less than one
in 1,000 times in random sampling,'' and [a] monthly retail sale of $100
a month of pseudoephedrine (Hcl) or of $50 of Actifed tablets would be
expected to occur about once in a million times in random sampling.''
Mr. Robbin also stated that gas stations without convenience stores,
liquor stores, sporting goods stores, bait shops, video stores, gift
stores, and head shops sell only "trace amounts'' of these products.
Gov. Ex. 8, at 8.
DEA investigators provided Mr. Robbin with a list of 1,371
transactions in which Respondent distributed either Select Brand [s]udafed
or [a]ctifed during the period from October 1, 2003, through March 23,
2004. Id. at 12. The products were sold to 94 stores which included
convenience stores, gas stations and liquor stores. Id. According to the
data, Respondent distributed 3,129 packages of Select Brand [s]udafed,
each containing 24 tablets, and 5,858 packages of Select Brand
[[Page 42120]]
[a]ctifed, each also containing 24 tablets. Gov. Ex. 8, at 12-13.
Based on information obtained from Thomson Micromedex's Red Book, Mr.
Robbin initially calculated an implied retail sales value of $4.58 for
Respondent's sudafed product and $4.34 for the actifed product. Id. at
12. Based on these values, Mr. Robbin then tabulated the imputed monthly
sales of these products by Respondent's customers and calculated the
probability that the sales were to meet legitimate consumer demand for
the products. See Gov. Ex. 9, at B1-B10. Mr. Robbin found that ten of
the seventy-five stores selling the sudafed had sold ten times the
expected amount, and another five stores sold five to ten times
expectation. Gov. Ex. 8, at 14. With respect to the actifed product, "49
of the 71 stores (69.01%)'' sold amounts which Mr. Robbin described as "extraordinarily
excessive when compared to normal expectations.'' Id. at 15.
Respondent did not, however, sell name brand Sudafed and Actifed, but
rather, a generic brand. The evidence established that the suggested
retail price (SRP) of these products was $1.83 for the generic sudafed
and $2.81 for the generic actifed although Respondent did not produce
any evidence establishing that its customers actually sold the product
at the SRP.\1\ See Gov. Ex. 16, at 7, Gov. Ex. 23, at 2.
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\1\ Indeed, there is evidence that some of
Respondent's customers sold it for even higher prices than that used
by Mr. Robbin. See Tr. 412.
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The Government therefore entered as a rebuttal exhibit a new
tabulation of the average monthly sales by Respondent's customers. See
Gov. Ex. 29. According to this table, three stores were selling the
sudafed products at ten times expectation; another eight stores were
selling the product at five to seven times expectation. Id. at B7.
The data for the stores selling actifed was even more pronounced.
This tabulation showed that one store was selling at over fifty times
expectation, seven stores were selling at twenty-five to fifty times
expectation, eleven stores were selling at ten to twenty-five times
expectation, and another eleven stores were selling at five to ten times
expectation. Id. at B10-B12.
In his testimony, Mr. Robbin acknowledged that reducing the estimated
retail price by half would "certainly put more stores into the
insignificant range.'' Tr. 279. Mr. Robbin, however, further testified
that it would "still leave a great many stores in the significant
range.'' Id. Mr. Robbin also stated that even if he reduced the
estimated retail "price in half,'' he would still conclude that
Respondent's sales were "excessive.'' Id. at 254.
Mr. Robbin further testified that he "rule[d] out [the] location [of
Respondent's customers] as being a factor in the degree of sales.'' Id.
at 183. According to Mr. Robbin, wherever [people] live in Missouri,''
there is a "a major pharmacy [or] chain pharmacy'' within "a half an
hour drive time.'' Id. at 181. While acknowledging that a convenience
store might be a five to ten minute drive, Mr. Robbin reiterated that "ninety-seven
percent'' of shoppers "buy their non- prescription drugs in pharmacies
and supermarkets.'' Id. According to Mr. Robbin's testimony, "non-prescription
drugs are bad sellers in convenience stores. They are given very little
shelf space, and * * * are classed among the impulse goods, meaning that
nobody goes to a convenience store, or few people do, to buy them
specifically.'' Id. at 182. Mr. Robbin thus "rule[d] out location as
being a factor in the degree of sales,'' because while location might
influence sales fifty percent either way (depending upon whether the
store was in a rural or urban area), the differences between the
expected sales range and Respondent's actual sales were "vastly greater
than fifty percent.'' Id. at 183-84.
The ALJ found credible the testimony of Mr. Terry Holloway
(Respondent's President and co-owner) that Doniphan, Missouri, a town in
Respondent's market, is forty miles from a store in the traditional
market. ALJ at 9-10. Mr. Holloway also testified that Doniphan was a
town of 3,000 people and had "a lot of attractions'' such as a river,
which apparently is popular with canoeists, and campgrounds. Tr. 727.
Mr. Robbin's conclusion that Respondent's customers had engaged in
excessive sales was based, however, on sales that occurred in the
October to March time frame, a period in which it does not seem likely
that tourists would be flocking to Doniphan to go camping or canoeing.
But in any event, Mr. Holloway's testimony does no more than call into
question Mr. Robbin's conclusion regarding a few stores.\2\ Neither it
nor the ALJ's observation that "in some instances * * * Respondent sold
list I chemical products in quantities much lower than expected,'' ALJ
at 12 (FOF 27), refutes Mr. Robbin's ultimate finding that Respondent "provides
services to retailers outside the traditional market for [OTC] drug
products and frequently has sold products containing pseudoephedrine (hcl)
in extraordinary excess of normal or traditional demand.'' Gov. Ex. 8,
at 17-18.
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\2\ Mr. Holloway also testified that Fisk, Missouri,
another town in Respondent's market, was located fifteen miles from a
store in a traditional market. Tr. 729. Beyond the fact that fifteen
miles on rural roads does not seem to be an excessively long drive,
Mr. Robbin's analysis lists only one store as being located in Fisk.
See Generally Gov. Ex. 29. Respondent's evidence thus does not provide
reason to question Mr. Robbin's conclusion that numerous other stores
had engaged in excessive sales of pseudoephedrine products.
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The DEA Investigation of Respondent
In September 2003, a Diversion Investigator (DI) in the St. Louis
Field Division was advised by a DEA Special Agent with the Cape
Girardeau field office that Southeastern Missouri Drug Task Force
officers were concerned that pseudoephedrine products being found in
clandestine meth. labs had come from Respondent's customers. Tr. 348,
354-55. In particular, the Special Agent told the DI that "some of
[Respondent's] customers were selling case quantities * * * out the back
door'' of their stores. Id. at 355. The DI advised his Group Supervisor
of the report and Respondent was scheduled for a regulatory
investigation. Id. at 348-49.
On March 23, 2004, the DI visited Respondent's registered location
and conducted an inspection. Gov. Ex. 13. As part of the inspection, the
DI conducted an accountability audit of five highly diverted list I
chemical products including three products which contain 30 mg. of
pseudoephedrine hydrochloride per tablet (Select Brand sudafed, Select
Brand Sinus Allergy, and Contac Sever Cold & Flu Max Strength) and
two products which contain 60 mg. of pseudoephedrine tablet (Select
Brand Antihistamine Nasal Decongestant (actifed) and BC Allergy Sinus
Headache). Gov. Ex. 21; Tr. 389. Accordingly, in the presence of one
Respondent's employees, the DI inventoried these products. Gov. Ex. 21.
The DI then proceeded to audit Respondent's handling of the products
during the period beginning on October 1, 2003, through the close of
business on March 23, 2004, and recorded the results on a chart.\3\ Gov.
Ex. 22. Initially, the DI concluded that one of the products, Select
Brand pseudoephedrine had an overage. Id. at 1. The DI also determined
that Respondent had shortages in each of the remaining products. Id.
Most significantly, Respondent was short 105 boxes of Select Brand
Antihistamine Nasal Decongestant. Id. Respondent was also short five
boxes of Select Brand Sinus Allergy, two boxes of Contac
[[Page 42121]]
Severe Cold and Flu, and one box of BC Allergy Sinus. Id.
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\3\ The DI established the beginning count based on
Respondent's computer records. Tr. 392.
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The first chart did not, however, include Respondent's manual
adjustments to inventory because Respondent had not properly documented
them. Tr. 394-95. Nonetheless, the DI gave Respondent the "benefit of
the doubt that [the] manual adjustments * * * were * * * correct'' and
prepared a second chart. Id. Respondent gave two explanations for the
adjustments: (1) That the sudafed and actifed products were stored next
to each other on the shelf and that an employee could have recorded one
product when he had actually pulled the other product for distribution,
and (2) that some products were bound together so that six boxes of a
product might have been recorded as one box. Id. at 396. According to
the second computation chart, Respondent still had shortages of each
product. The most significant shortage (Select Brand [a]ctifed) had been
reduced from 105 boxes to one. Gov. Ex. 22, at 2; Tr. 397-98. Another
product, Select Brand [p]seudoephedrine, had gone from an overage of
thirteen boxes to a shortage of thirteen boxes.\4\ Gov. Ex. 22, at 2.
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\4\ There were no adjustments to the inventories of
the Contac Severe Cold & Flu and BC Allergy Sinus products. See
Gov. Ex. 22, at 1-2. After adjustments, the shortage in the remaining
product, Select Brand Sinus Allergy was reduced by two boxes. Id.
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Following the initial on-site inspection, the DI visited seven of
Respondent's customers including several convenience stores, a liquor
store, a video store, and a gas station. Tr. 403-04; Gov. Ex. 25. The
first store the DI visited was Millie's, a Citgo gas station located in
Wappapello, Missouri. There, the DI found that the store was selling not
only listed chemicals products it obtained from Respondent, but also Pro
Active ephedrine products that were carried by another supplier. Tr.
405-06.
The DI next visited Green's Grocery in Doniphan, Missouri. Id. at
406. There, the DI also found that the store was selling Pro Active
ephedrine products. Id. The DI interviewed Green's owner, who told her
that twice a week, it purchased twelve boxes of twenty-four Select Brand
[s]udafed from Respondent, and that it also purchased 72 boxes of 40
count Pro Active Ephedrine Multi-Action. Id. The DI also found that
Green's was selling lantern fuel and starting fluid, two products which
are used in the illicit manufacture of methamphetamine. Id. at 409.
The DI next went to Bart's Package Store, which is also located in
Doniphan, Missouri. Id. at 410. There, the store owner told the DI that
he purchased twelve boxes of Select Brand Pseudoephedrine (24 count) and
twelve boxes of Select Brand Antihistamine (24 count) from Respondent
every three weeks and sold the products for $7 a box. Id. at 412.\5\ The
DI also found that Bart's sold starting fluid and lantern fuel. Id. at
416. According to the father of the owner, initially Bart's had
purchased three cans of starting fluid but was then ordering ten cases a
week to meet demand. Id. at 417-18.
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\5\ According to the DI, several other DEA
investigations had found that Bart's had purchased large quantities of
listed chemical products from other distributors in the period circa
2000. Tr. 414- 15. Most significantly, Bart's had purchased "over 6
million dosage units from Heartland Distributing for $563,234,''
during a three year period. Id. at 415. The DI testified, however,
that she did not know whether Bart's had purchased listed chemical
products from Respondent during this period. Id. at 416. While this
testimony is not directly probative of Respondent's conduct, it does
support what DEA has found in numerous cases--that non-traditional
retailers of listed chemical products are frequently conduits for
diversion.
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The DI then visited the Country Junction, a convenience store which
is also located in Doniphan. Id. at 419. There, the DI found that the
store was not only purchasing Select Brand sudafed from Respondent, it
was also buying Pro Active Multi-Action Ephedrine from another
distributor. Id. at 419-20.
Next, the DI visited JB's Grocery, in Neelyville. Id. at 422. Here
again, the DI found that the store was purchasing listed chemical
products from both Respondent and another supplier. Id. at 423. The
store was also selling starting fluid and lantern fuel.\6\ Id.
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\6\ The record indicates that JB's had purchased
large quantities of pseudoephedrine from another distributor several
years earlier. Tr. 424.
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On April 5, 2004, after discussing the results of the investigation
with her supervisor, the DI called Mr. Marvin Wheeler, who had served as
Respondent's contact person during the inspection. Id. at 521. The DI
told Mr. Wheeler that the office had decided that a "verbal warning''
would suffice to address Respondent's failure to report the significant
loss of list I chemical products, based on the products that were
missing during the audit. Id. at 521, 531-32. As for Respondent's lack
of documentation for its inventory adjustments, the DI "suggested that
they develop a standard procedure to * * * investigate [a] shortage or
surplus and document it thoroughly.'' Id. at 532.
Later that day, the DI received a telephone call from the same Cape
Girardeau based Special Agent informing her that one Keith Frankum had
been stopped by local law enforcement officers after leaving
Respondent's premises. Id. at 356, 435-36. During the stop, which had
occurred on April 1, 2004, the authorities found twenty boxes of
pseudoephedrine products, an invoice documenting that Respondent had
sold the products to Frankum, and a handwritten note which stated: "Be
Careful Leaving here!!'' Gov. Ex. 23. The investigation determined that
the note had been written by Jennifer Holloway, the daughter of
Respondent's owners who then worked in the customer service
department.\7\ Tr. 438.
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\7\ The ALJ also found that "the record contains no
evidence that Jennifer Holloway knew Mr. Frankum, and it is unclear
why she passed to note to him.'' ALJ at 21 (FOF 62). According to her
mother, when asked why she passed the note, she "didn't really know.''
Tr. 702. Ultimately, it is not necessary to determine Ms. Holloway's
motive to resolve the issues in this case.
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The DI subsequently determined that Frankum had purchased a total of
92 boxes of listed chemical products (58 boxes of Select Brand actifed
(24 count) and 34 boxes of Select Brand pseudoephedrine (24 count) on
five separate occasions beginning on November 7, 2003, and ending on
April 1, 2004. Id. at 453-54. According to the testimony of Jane
Brotherton, Frankum had called Respondent and specifically asked whether
it carried Sudafed and Actifed. Id. at 541. Notwithstanding that
Frankum's question made her suspicious, id., Frankum was subsequently
allowed to purchase these products upon his presentation of a Missouri
Retail Sales License which indicated that the location of his business
was a storage unit located in Dexter, Missouri. Id. at 543; see also
Resp. Ex. 10.
During Frankum's first visit to Respondent, Ms. Brotherton asked him
what type of business he had. Tr. 457. Frankum was vague. Id.; see also
id. at 548 (testimony of Ms. Brotherton regarding Frankum's third visit;
"there was never any reference to opening up a business''). Moreover,
Frankum paid cash for each purchase. Id. at 457 & 545; see also Resp.
Ex. 11, at 1-5.
Even after two other employees who live in Dexter confirmed to Ms.
Brotherton that the address given by Frankum was a storage unit,
Respondent made additional sales of listed chemical products to him. Tr.
544-47. Moreover, two weeks after Frankum's first purchase, a local
police official told Ms. Brotherton that "Frankum's brother was a meth
cook.'' Id. at 459, 505. While Ms. Brotherton related this information
to other employees, id. at 459, she
[[Page 42122]]
apparently never told Respondent's owners about this or any of the
sales. Id. at 559-60.
Some of Respondent's employees who worked in the customer service
department referred to Frankum as "the drug guy.'' Id. at 460; see also
at 564 (testimony of Jane Brotherton; "I'm sure the girls that worked up
front probably [referred to Frankum as `the drug guy'] in
conversation.''). While Frankum was suspicious enough to prompt Ms.
Brotherton to call the local police after his numerous visits, see Resp.
Ex. 9, Respondent sold listed chemical products to him up until his
arrest.
Respondent did not, however, report any of these sales to DEA. Tr.
491. Moreover, during the March 2004 inspection, the DI "specifically
asked [Respondent's liaison] about intelligence information.'' Tr. 491.
Even then, Respondent did not mention the sales to the DI. Id.
After his arrest, DEA personnel interviewed Frankum. Id. at 451-52.
Frankum admitted that he had previously been arrested for assault and
possession of methamphetamine and stated that "he did a lot of meth
about five years ago.'' Id. at 451. Respondent told investigators that
he sold the pseudoephedrine products to five main customers, whom he
learned of "through word of mouth''; that pseudoephedrine was a big
seller "because it was used to make drugs''; that "[h]e didn't think
anyone purchased the product for allergies or sinus problems''; and that
"[h]e knew that some of his customers likely used [the] pseudoephedrine
that he sold them to make methamphetamine.'' Id. at 452-53. Frankum
subsequently pled guilty to possession of a methamphetamine precursor
drug with intent to manufacture amphetamine, methamphetamine or any of
their analogs, a felony offense under Missouri law, and was sentenced to
three years of imprisonment. Resp. Ex. 13, at 1.
Upon investigating the circumstances of Respondent's sales to Frankum,
DEA investigators re-evaluated their initial position regarding its
continued registration and requested that it surrender its registration.
Tr. 483-86. Respondent's owner initially agreed to but then changed his
mind. Id. at 484-85. This proceeding was then initiated.
Respondent's Remedial Measures and Its Policies
The ALJ found that Respondent undertook several corrective actions to
prevent diversion following the DEA inspection. These measures included
instructing its employees on their obligation to report diversion
committed by another employee, Resp. Ex. 18, and the issuance of a
written policy which announced that the company was "limiting the
quantity of [Select Brand Sudafed] tablets to 10 each per order and * *
* Actifed to 10 each per order.'' Resp. Ex. 20. The policy further
stated that employees should "[a]lso take notice [of] the attached list
of items and regulate the quantity of items ordered from it also.'' Id.
Finally, the policy instructed Respondent's employees to "[p]lease
report any suspicious orders to a manager or Dalton McKnight,'' id., who
the company had appointed as its DEA compliance officer. Tr. 480-81.
According to the testimony of Respondent's President, the company
voluntarily reduced the quantity of products that could be purchased per
transaction because he did not "want to see [the young generation]
messed up in this stuff.'' Id. at 741.\8\
---------------------------------------------------------------------------
\8\ The ALJ also found that Respondent had "stopped
selling Mini-thins in 1999 or 2000,'' another frequently diverted
listed chemical product, because the Holloways "knew it was going to
things it shouldn't be going [to],'' ALJ at 23 (quoting Tr. 734), more
specifically, the illicit manufacture of methamphetamine. Tr. 734.
When asked by his counsel how he learned to this, Mr. Holloway
testified: "you go to the coffee shop, you can learn about everything.
It don't mean it always true, but basically, just through hearsay.''
Id.
---------------------------------------------------------------------------
The ALJ further found that Respondent had reduced the number of
listed chemical products it carried from thirty to eighteen and had
started a daily inventory of the products. ALJ at 23 (citing Tr. 871-
72). Respondent constructed a special cage in which its listed chemical
products would be stored under lock; it also limited access to the cage
to only three or four supervisory employees. Tr. 881-82. Respondent also
adopted the suggestion of the DI that a supervisor fill the listed
chemical product orders and created a separate "pick ticket,'' a
document which is used to fill orders and place them on the appropriate
truck. Id. at 882. Finally, Respondent also issued a memorandum
instructing its employees on the proper documenting of all transactions.
See Resp. Ex. 21.
As found above, the customer verifications indicated that
Respondent's customers were also purchasing listed chemical products
from other distributors. During his testimony, the Government asked Mr.
Holloway whether he aware that J.B.'s Store was purchasing listed
chemicals from another distributor. Tr. 774. Mr. Holloway answered that "none
of us would have know[n] that.'' Id. at 774-75. Mr. Holloway then added:
"[o]ur salesmen [are] trained to be aware of that. They, you know, you
don't get nosy in people's business.'' Id. at 775.
The Government then asked Mr. Holloway whether he had "ever asked any
of [his] customer accounts whether they were purchasing listed chemical
products from other suppliers?'' Id. Mr. Holloway answered: "[I]n the
wholesale world, that's kind of a no-no. If you want [to be] throw[n]
out the door * * * if you want your competitor to take [the business],
well get too nosy and that's what happens.'' Id. When pressed by the
Government as to whether his answer was "no,'' Mr. Holloway explained: "If
the salesman don't want that account, he can go ask personal questions
like that and he can lose them.'' Id. at 776. Mr. Holloway then added: "[t]he
answer is I taught them, [d]on't lose customers.'' Id.
Discussion
Section 304(a) of the Controlled Substances Act provides that a
registration to distribute a list I chemical "may be suspended or
revoked * * * upon a finding that the registrant * * * has committed
such acts as would render his registration under section 823 of this
title inconsistent with the public interest as determined under such
section.'' 21
U.S.C. 824(a)(4). 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. Sec. 823(h).
"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 a registration should be revoked or an application for a
modification of a registration should be denied. See, e.g., David M.
Starr, 71 FR 39367, 39368 (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).
Based on factors one, two, four and five, I conclude that the
Government has
[[Page 42123]]
proved that Respondent's continued registration would be "inconsistent
with the public interest.'' 21 U.S.C. 823(h). Moreover, having
considered the evidence regarding the corrective actions taken by
Respondent, I conclude that while some of these measures do adequately
address the Agency's concerns, in other respects, they are insufficient
to protect the public from the continued diversion of listed chemicals
into the illicit manufacture of methamphetamine. Finally, I find wholly
unpersuasive--and contrary to the public interest--the ALJ's suggestion
that until the diversion of gel caps and liquid pseudoephedrine products
is substantiated, I not rely on this "possibility'' to revoke
Respondent's registration. Accordingly, Respondent's registration will
be revoked and its pending application will be denied.
Factor One--Maintenance of Effective Controls Against Diversion
As the ALJ noted, DEA precedents establish that this factor
encompasses a variety of considerations. ALJ at 31. These include the
adequacy of security, the adequacy of record keeping and reporting, the
conduct of the registrant and its employees, and the occurrence of
diversion. See Rick's Picks, 72 FR 18275, 18278 (2007), John J.
Fotinopoulos, 72 FR 24602, 24605 (2007), D & S Sales, 71 FR 37607,
37610 (2006); Joy's Ideas, 70 FR 33195, 33197-98 (2005).
As the ALJ found, Respondent constructed a special cage for storing
listed chemical products and limited the number of persons with access
to it. ALJ at 31. Moreover, the Government did not dispute whether other
aspects of Respondent's physical arrangements were adequate. I thus
conclude that Respondent provides adequate physical security for its
products.
Respondent's recordkeeping is another matter. As the record
establishes, the accountability audits showed that there were
discrepancies with respect to each of the five audited products.
Furthermore, even after the audit took into account Respondent's manual
adjustments--which were not supported by appropriate documentation--
there were still shortages.\9\ While some of the shortages involved
small amounts as an absolute matter, they were significant on a
percentage basis.
---------------------------------------------------------------------------
\9\ As found above, one of the manual adjustments
was for 105 boxes of Select Brand antihistamine. I do not find
Respondent's justification for the discrepancy to be persuasive. For
example, if employees were mistakenly pulling this product from the
shelf rather than the adjoinign product (Select Brand sudafed), given
that both products were audited, one would think that there would be a
substantial and corresponding overage in the audit of the actifed. The
audit report indicates that there was ony a thirteen box overage on
the initial count of the actifed and that after applying Respondent's
adjustments, there was a shortage. See Gov. Ex. 22, at 1-2
---------------------------------------------------------------------------
Under DEA regulations, a registrant must have adequate "systems for
monitoring the receipt, distribution, and disposition of List I
chemicals in its operations.'' 21
CFR 1309.71(b)(8). Respondent's lack of documentation for its
inventory adjustments supports a finding that its recordkeeping and
accountability controls were inadequate. Respondent did, however,
implement several changes to its monitoring and record keeping
practices. Were there no other evidence of Respondent's inadequate
controls, Respondent's corrective actions might well support its being
allowed to maintain its registration. There is, however, such evidence.
Jonathan Robbin, the Government's expert witness testified that
Respondent's customers are non-traditional retailers of pseudoephedrine
products and that the normal expected sales range of these products at
Respondent's customers is "between $ 0 and $ 40 per month[,] with an
average of $ 19.85 for pseudoephedrine (HCL) and between $ 0 and $ 20
per month, with an average of $ 8.68'' for its actifed product. Mr.
Robbin further testified that "[a] monthly retail sale of $ 60 of
pseudoephedrine (HCL) would be expected to occur less than one in 1,000
times in random sampling,'' and "[a] monthly retail sale of $ 100 a
month of pseudoephedrine (HCL) or of $ 50 of Actifed tablets would be
expected to occur about one in a million times in random sampling.''
Gov. Ex. 8, at 8.
Moreover, the Government entered into evidence a rebuttal exhibit
prepared by Mr. Robbin which showed that even using Respondent's
suggested retail price for Select Brand Sudafed and Actifed,\10\
Respondent's customers were still selling these products in
extraordinary quantities. More specifically, three stores were selling
its sudafed product at ten times expectation; another eight stores were
selling the product at five to seven times expectation. As for its
actifed product, one store was selling it at over fifty times
expectation, seven stores were selling it at twenty-five to fifty times
expectation, eleven stores were selling it at ten to twenty-five times
expectation, and another eleven stores were selling it at five to ten
times expectation.
---------------------------------------------------------------------------
\10\ As explained above, Respondent did not produce
any evidence that its customers actually sold the products at the
suggested retail prices. Indeed, Mr. Holloway testified that under
Missouri law, Respondent could not tell its customers what price to
sell the products for. TR 783.
---------------------------------------------------------------------------
Respondent attempts to discredit Mr. Robbin's findings by arguing
that one of the towns in Respondent's market (Doniphan) is forty miles
from a store in the traditional market. This testimony only calls into
question Mr. Robbin's findings with respect to the stores in Doniphan.
It does not impeach his findings with respect to the other stores or his
ultimate finding that Respondent "frequently has sold products
containing pseudoephedrine * * * in extraordinary excess of normal or
traditional demand.'' Gov. Ex. 8, at 17-18. Because of the statistical
improbability that these sales were to meet legitimate demand, I
conclude that a preponderance of the evidence establishes that a
substantial portion of Respondent's products have been diverted. See T.
Young, 71 FR at 60572; see also 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'').
The ALJ acknowledged that the Government had proved that Respondent
had engaged in " `grossly excessive sales' of listed chemical
products,'' and that "[i]n the past, this pattern of sales has supported
a finding'' of diversion and that Respondent's continued registration "would
be adverse to the public interest.'' ALJ at 40-41. The ALJ noted,
however, that "Respondent ha[d] demonstrated its willingness and its
ability to * * * implement changes in its business processes.'' Id. In
this regard, the ALJ had earlier noted that Respondent had "voluntarily
lowered the maximum number of listed chemical products to be sold per
transaction.'' Id. at 32.
Respondent's action does not impress me. As the record indicates,
Respondent lowered the number of boxes per order from twelve to ten. Tr.
645-46, 653 (testimony of Marvin Wheeler). Moreover, Respondent did not
limit the number of times a customer could order in a month; indeed, the
record indicates that its customers were allowed to purchase the
products twice a week. Id. at 654 (testimony of Marvin Wheeler); see
also id. at 484 (testimony of DI). Even using Respondent's suggested
retail price for these products, Respondent's policy would allow a
customer to obtain a quantity of products which would sell for
approximately $225 per month (actifed) and $146 per month for its
sudafed product, amounts which are far in
[[Page 42124]]
excess of the normal expected retail sales by a non-traditional
retailer to meet legitimate demand. In short, Respondent's sales limit
is not a consequential reform of its business practices and would not
prevent diversion.\11\ I therefore hold that Respondent does not
maintain effective controls against diversion.
---------------------------------------------------------------------------
\11\ It is acknowledged that this discussion
involves products in tablet form that Respondent can no longer
distribute under Missouri law. However, once the Government proved
that Respondent's products have been diverted, the burden of proof
shifted to Respondent to show that its controls were adequate. See
Gregory D. Owens, 67 FR 50461, 50464 (2002); Thomas Johnston, 45 FR
72311 (1980). Furthermore, this hearing took place eight months after
Missouri changed its law. Respondent's memorandum instituting the
sales limit vaguely instructed its employees to "take notice to the
attached list of items and regulate the quantity of items ordered from
it also.'' Resp. Ex. 20, at 1. It is thus far from clear what limits
Respondent has imposed on its sales of gelcap and liquid products. It
was, however, Respondent's burden to show that its controls were
adequate and that the sales limits it imposed would prevent diversion
of its gel cap and liquid products. This it failed to do.
---------------------------------------------------------------------------
Respondent's controls against diversion are inadequate for an
additional reason, which the ALJ completely ignored. The record
establishes that several of Respondent's customers were receiving listed
chemical products from other sources. Yet notwithstanding the potential
for diversion of listed chemical products, see Tr. 734, Respondent's
President and co-owner testified that he had never inquired of his
customers as to whether they were purchasing listed chemical products
from other distributors. Id. at 775-76. Moreover, Mr. Holloway expressed
the view that it was inappropriate for his salesmen to ask the firm's
customers whether they were purchasing products from other distributors.
According to Mr. Holloway, "[i]f you want [to be] throw[n] out the door
* * * if you want your competitor to take [the business], well get too
nosy and that's what happens.'' Id. at 776. Mr. Holloway further
explained that "[i]f the salesman don't want that account, he can go ask
personal questions like that and he can lose them.'' Id. Mr. Holloway
then stated that he had "taught'' his sales force, "[d]on't lose
customers.'' Id.
Respondent's policy--which is fairly characterized as "see no evil,
hear no evil''--is fundamentally inconsistent with the obligations of a
DEA registrant. See, e.g., D & S Sales, 71 FR at 37610. As noted in
numerous DEA orders, selling amounts below the 1,000 gram threshold that
triggers reporting requirements, see 21
CFR 1310.04(f), does not create a safe harbor which allows a
registrant to distribute listed chemical products in disregard for the
ultimate disposition of those products. See Rick's Picks, L.L.C., 72 FR
18275, 18278 (2007); D & S Sales, 71 FR 37607, 37609, 37611-12
(2006); see also United States v. Kim, 449 F.3d 933, 939 (2006). Rather,
a registrant has an affirmative duty to protect against diversion by
knowing its customers and the nature of their list I chemical sales.
Under Federal law, a registrant cannot sell listed chemical products to
a customer when it has "reasonable cause to believe'' the products will
be diverted. 21
U.S.C. 841(c)(2). A registrant cannot avoid the requirements of
Federal law by instructing its sales force to ask no questions of its
customers and thereby be deliberately ignorant of diversion.
I therefore conclude that notwithstanding the corrective measures it
has implemented, Respondent still does not maintain effective controls
against diversion. Furthermore, this factor, by itself, establishes that
Respondent's continued registration is inconsistent with the public
interest and provides reason alone to revoke Respondent's registration.
Factor Two and Four--Respondent's Compliance with Applicable Laws
and its Past Experience in the Distribution of Listed Chemicals
Under this factor, the ALJ discussed Respondent's failure to report
to DEA its transactions with Mr. Frankum notwithstanding their
suspicious nature. See ALJ at 34. The ALJ did not, however, make any
finding as to whether Respondent had in fact violated federal law
because it reported the transactions to local authorities rather than
DEA. See id.
The Government offers no argument as to why Respondent's failure to
report these transactions to DEA violated federal law. See Gov. Proposed
Findings and Conclusions of Law at 44. In any event, the real issue is
not Respondent's failure to report the transactions but its repeated
sales to Mr. Frankum given the information it had obtained.
It is a violation of federal law for "[a]ny person [to] knowing or
intentionally * * * distribute[] a listed chemical * * * having
reasonable cause to believe, that the listed chemical will be used to
manufacture a controlled substance except as authorized by'' the CSA. 21
U.S.C. 841(c)(2). Moreover, "[t]here is no quantity threshold exempting
a merchant from criminal liability under Sec. 841(c)(2).'' Kim, 449 F.3d
at 941.
The record clearly establishes that Respondent's employees with
requisite authority had knowledge of facts which created "reasonable
cause to believe'' that the pseudoephedrine products it sold to Frankum
would be used to manufacture methamphetamine. United States v. Kaur, 382
F.3d 1155, 1158 (9th Cir. 2004) (defining standard as whether defendant
actually "knew, or knew facts that would have made a reasonable person
aware, that the pseudoephedrine would be used to make methamphetamine'').
As found above, when Frankum first contacted Respondent, he
specifically asked Ms. Brotherton whether the firm sold Actifed and
Sudafed. Moreover, when Frankum visited Respondent, the sales tax
certificate which he presented gave a storage unit as his business's
address and when interviewed, Frankum was vague about the nature of his
business. Furthermore, Frankum did not complete a credit application,
but rather paid cash for his purchases. See U.S. Dept. of Justice,
Report to the U.S. Attorney General by the Suspicious Order Task Force,
Appendix A (1999).
The record further establishes that within two weeks of Frankum's
first visit, Officer Clark informed Ms. Brotherton that Frankum's
brother was a "meth cook.'' Tr. 459, 505. Moreover, Respondent's
employees referred to Frankum as "the drug guy.'' Id. at 460. Finally,
Ms. Brotherton testified that even during Frankum's third visit, "there
was never any reference to opening up a business.'' Id. at 548.
I thus conclude that Respondent knowingly distributed listed chemical
products to Frankum having reasonable cause to believe that the products
would be used to manufacture methamphetamine. While the information Ms.
Brotherton initially obtained may not have risen to the level of "reasonable
cause,'' having been told by law enforcement authorities that Frankum's
brother was "a meth cook,'' and Frankum's continued vagueness about the
nature of his business, did establish reasonable cause.\12\ Furthermore,
Respondent does not contend that the acts of Ms. Brotherton or the other
employees involved in the transactions were unauthorized or were not
undertaken for the corporation's benefit. See, e.g., United States v.
Basic Construction Co., 711 F.2d 570, 573 (4th Cir. 1983); United States
v. Cincotta, 689 F.2d 238, 241-42 (1st Cir. 1982); see also United
States v. Bank of New England, 821 F.2d 844, 856 (1st Cir. 1987) ("[T]he
knowledge obtained by corporate employees acting within the
[[Page 42125]]
scope of their employment is imputed to the corporation.'').
Accordingly, the violations involving the Frankum sales are properly
charged to Respondent.
---------------------------------------------------------------------------
\12\ To establish a violation of this provision, the
Government is not required to prove that the products were actually
used to manufacture methamphetamine. See United States v. Johal, 428
F.3d 823, 828 (9th Cir. 2005); United States v. Prather, 205 F.3d
1265, 1269-70 (11th Cir. 2000).
---------------------------------------------------------------------------
I acknowledge that Ms. Brotherton reported the Frankum sales to local
authorities and that Frankum was eventually arrested and pled guilty to
the state law offense of possession of a methamphetamine precursor with
intent to manufacture. But Respondent should never have sold listed
chemicals to Frankum in the first place. I thus find that Respondent
violated federal law at least three times when it sold pseudoephedrine
products to Frankum. While I acknowledge that Respondent appears to have
implemented a training program that addresses the Frankum incidents, I
nonetheless conclude that Respondent's record of compliance with
applicable laws and its experience in distributing listed chemicals
support a finding that its continued registration is inconsistent with
the public interest.\13\
---------------------------------------------------------------------------
\13\ I acknowledge that Respondent has not been
convicted of a criminal offense. The actual conduct of Respondent,
however, outweighs the fact that it has not been charged and convicted
of a criminal offense.
---------------------------------------------------------------------------
Factor Five--Other Factors Relevant to and Consistent with the
Public Health and Safety
The illicit manufacture and abuse of methamphetamine have had
pernicious effects on families and communities throughout the nation.
This is especially so in Missouri which, notwithstanding the State's
enactment of a law restricting the sale of certain pseudoephedrine
products, still has an extraordinarily serious problem with illicit
methamphetamine production and its abuse. See Gov. Ex. 28. As the record
demonstrates, while the Missouri law has led to a substantial reduction
in the number of meth. lab seizures, law enforcement authorities still
seized 745 illegal labs in the latter half of 2005. The illicit
production of methamphetamine thus remains a grave threat to public
health and safety in Missouri. Cutting off the supply source of
methamphetamine traffickers is of critical importance in protecting the
citizens of Missouri and adjoining States from the devastation wreaked
by this drug.
While listed chemical products containing pseudoephedrine have
legitimate medical uses, both DEA orders and the record here establish
that convenience stores and gas-stations constitute the non-traditional
retail market for legitimate consumers of products containing these
chemicals. See, e.g., Tri-County Bait Distributors, 71 FR 52160, 52161-
62 (2006); D & S Sales, 71 FR at 37609; Branex, Inc., 69 FR 8682,
8690- 92 (2004). 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'' if
application to distribute to non-traditional retailers was granted).
Accordingly, "[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.'' Joey Enterprises, Inc., 70 FR 76866, 76867 (2005).
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'').\14\ Here, the record establishes that
several of the stores that Respondent supplied had previously been found
to be purchasing extraordinary quantities of listed chemicals. See Tr.
414-15, 424-25 (discussing purchases of Bart's and JB's).
---------------------------------------------------------------------------
\14\ 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 manufacture of methamphetamine'').
---------------------------------------------------------------------------
Moreover, as found above under factor one, the evidence supports a
finding that Respondent supplied numerous non-traditional retailers with
listed chemical products and that it sold extraordinary quantities of
these products to a substantial number of these establishments. The
evidence thus also establishes that a substantial portion of
Respondent's products have been diverted.\15\
---------------------------------------------------------------------------
\15\ While the ALJ concluded "that diversion is the
only conceivable explanation'' for Respondent's excessive sales, she
further reasoned that Respondent may have been less likely to detect
these sales because of its large customer base. ALJ at 38-39.
Respondent itself did not make this argument and thus it need not be
considered. In any event, DEA case law establishes that a registration
can be revoked even when a registrant was "an unknowing and
unintentional contributor to [the] methamphetamine problem.'' Joy's
Ideas, 70 FR at 33198. See also T. Young, 71 FR at 60572.
---------------------------------------------------------------------------
The ALJ also noted that Respondent's List I chemical sales are a "minute
percentage of [its] total business,'' and stand in "contrast to other
revocation cases, where * * * List I chemicals products have represented
a significant portion of business.'' ALJ at 39 (citations omitted). Be
that as it may, even where List I products are a "minute percentage'' of
a registrant's total business, a substantial amount of products can
still be diverted, especially where, as here, a registrant lacks
effective controls to prevent diversion. See discussion of factor one.
Finally, while the ALJ acknowledged that some methamphetamine
traffickers "have already begun to circumvent the new [Missouri] law''
by using liquid and gelcap forms of pseudoephedrine, ALJ at 39, the ALJ
concluded that the law "drastically reduce[s] the potential for
diversion and harm to public safety.'' Id. at 40. The ALJ further
explained that "the State will be monitoring the gelcap and liquid
pseudoephedrine products, if any, found in the methamphetamine labs.
Such heightened scrutiny leads to the conclusion that, if the products
of the Respondent, as well as other distributors of List I chemical
products in Missouri, are found in illicit methamphetamine laboratories,
the State will close the legislative loophole afforded these limited
products.'' Id. at 41. The ALJ then reasoned that "[u]ntil such time as
the problem is substantiated * * * I recommend that the possibility of
the Respondent's products being diverted not be relied upon to revoke *
* * Respondent's Certificate of Registration.'' Id.
In T. Young Associates, an Order published before the issuance of the
recommended decision in this matter, I rejected a similar argument. See
71 FR at 60573. There, I noted several studies (including those by the
Washington State Patrol and McNeil Consumer and Specialty
Pharmaceuticals) which show "that methamphetamine can be produced from
List I chemicals sold as liquid-filled gelcaps and liquids.'' Id.
(citing DEA, Microgram Bulletin 96-97, 102 (June 2005)). Here, the
record likewise establishes that pseudoephedrine "can be easily
extracted'' from gelcaps and liquid products using "readily available''
reagents and solvents. Gov. Ex. 4, at 8.
Contrary to the ALJ's understanding, the diversion of gelcap and
liquid forms of pseudoephedrine into the illicit manufacture of
methamphetamine has already been "substantiated.'' See Gov. Ex. 7, Tr.
87-88, 91 Moreover, as I noted
[[Page 42126]]
in T. Young, "experience has taught DEA that in the aftermath of
every major piece of legislation addressing the illicit manufacture of
methamphetamine, traffickers have quickly found ways to circumvent the
restrictions.'' 71 FR at 60573; see also Tr. 63-64. This Agency is not
required to wait until the diversion of gelcap and liquid forms of
pseudoephedrine reaches epidemic proportions before acting to protect
the public interest. Therefore, I reject the ALJ's finding that factor
five supports the continuation of Respondent's registration.\16\
---------------------------------------------------------------------------
\16\ In her analysis of factor five, the ALJ
concluded that the Government had not proved that "Respondent's
continued distribution of liquid and gelcap forms of List I chemical
products poses a threat to the public health and safety.'' ALJ at 40.
The ALJ erred, however, because she applied the wrong legal standard.
As I have previously explained, the Government is
not required to prove that Respondent's conduct poses a threat to
public health and safety to obtain an adverse finding under factor
five. See T. Young, 71 FR at 60572 n.13. Rather, the statutory text
directs the consideration of "such other factors as are relevant to
and consistent with the public health and safety.'' 21 U.S.C. Sec.
823(h)(5). This standard thus grants the Attorney General broader
discretion than that which applies in the case of other registrants
such as practitioners. See id. Sec. 823(f)(5) (directing consideration
of "[s]uch other conduct which may threaten the public health and
safety'').
Accordingly, while proof of a threat to public
health and safety clearly satisfies the standard of subsection
823(h)(5), it is not required. Distributing a product, which studies
show can be easily used to make methamphetamine, clearly satisfies
this standard even in the absence of evidence showing widespread
diversion of the products.
---------------------------------------------------------------------------
In conclusion, the record establishes that Respondent's products have
been diverted. While Respondent has taken corrective actions, these
measures are still not adequate to protect against the diversion of its
products. Furthermore, Respondent violated federal law by knowingly
distributing listed chemical products when it had reasonable cause to
believe that the products would be used to manufacture methamphetamine.
Finally, studies show that pseudoephedrine can be easily extracted from
gelcap and liquid forms of pseudoephedrine and anecdotal evidence
establishes that methamphetamine traffickers are already using these
products. Factor five does not require that DEA wait until the diversion
of these products becomes widespread before acting to protect the public
interest. Therefore, I conclude that Respondent's continued registration
is "inconsistent with the public interest.'' 21
U.S.C. 823(h).
Order
Accordingly, pursuant to the authority vested in me by 21 U.S.C.
823(h) & 824(a),
as well as 28 CFR 0.100(b) 7 0.104, I order that DEA Certificate of
Registration, 003219HIY, issued to Holloway Distributing, Inc., be, and
it hereby is, revoked. I further order that the pending application of
Holloway Distributing, Inc., for renewal of its registration, be, and it
hereby is, denied. This order is effective August 31, 2007.
Dated: July 20, 2007.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. E7-14822 Filed 7-31-07; 8:45 am]
BILLING CODE 4410-09-P
NOTICE: This is an
unofficial version. An official version of these publications may be obtained
directly from the Government Printing Office (GPO).
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