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H & R Corporation; Denial of
Application
FR Doc 06-4838 [Federal Register: May 25, 2006 (Volume 71, Number
101)] [Notices] [Page 30168-30172] From the Federal Register Online via
GPO Access [wais.access.gpo.gov] [DOCID:fr25my06-91]
DEPARTMENT OF JUSTICE
Drug Enforcement Administration
[Docket No. 03-26]
H & R Corporation; Denial of Application
On April 7, 2003, the Deputy Assistant Administrator, Office of
Diversion Control, Drug Enforcement Administration (DEA) issued an Order
to Show Cause to H & R Corporation (Respondent H & R) proposing
to deny its application for a DEA Certificate of Registration as a
distributor of list I chemicals. The Order to Show Cause alleged in
substance that granting Respondent's application to distribute list I
chemicals to what DEA has identified as the "gray market,'' would be
inconsistent with the public interest, as that term is used in 21
U.S.C. 823(h) and 824(a).
Respondent, through counsel, requested a hearing on the issues raised
by the Order to Show Cause and the matter was docketed before
Administrative Law Judge Mary Ellen Bittner. Following prehearing
procedures, a hearing was held in Atlanta, Georgia on October 28, 2003.
At the hearing, both parties called witnesses to testify and introduced
documentary evidence. Subsequently, both parties filed Proposed Findings
of Fact, Conclusions of Law, and Argument.
On December 3, 2004, Judge Bittner issued her Opinion and Recommended
Ruling, Findings of Fact, Conclusions of Law, and Decision of the
Administrative Law Judge (Opinion and Recommended Ruling), recommending
that Respondent's application for a Certificate of Registration as a
distributor of listed chemical products be denied. Neither party filed
exceptions to the Opinion and Recommended Ruling and on January 11,
2005, judge Bittner transmitted the record of these proceedings to the
Deputy Administrator.
The Deputy Administrator has considered the record in its entirety
and pursuant to 21
CFR 1316.67, hereby issues her final order based upon findings of
fact and conclusions of law hereinafter set forth. The Deputy
Administrator adopts, in full, the Opinion and Recommended Ruling of the
Administrative Law Judge. Her adoption is in no manner diminished by any
recitation of facts, issues and conclusions herein, or any failure to
mention a matter of fact or law.
In April 2002, Respondent, a Tennessee corporation owned by members
of the Patel family, submitted an application for DEA Certificate of
Registration as a distributor of list I chemicals, seeking authority to
distribute pseudoephedrine, ephedrine and phenylpropanolamine. Mr. Ramu
Patel (Mr. Patel) owns 50 per cent of the business and the remainder is
owned by R. Patel's uncle, Hasmukh Patel (H. Patel) and his brothers,
Mahendra and Kantibhai Patel. Mr. Patel and H. Patel are Respondent's
only employees.
H & R also does business under the name "Tri-State Wholesale,'' a
name used previously used by Elk International, Inc. (Elk International)
when that company was operating out of the Chattanooga- area premises
where H & R is now located. On May 1, 2001, Elk International filed
an application for DEA registration as a distributor of list I
chemicals. An Order to Show Cause was issued proposing to deny Elk
International's application and H & R subsequently purchased the
right to use the name "Tri-State Wholesale'' from the company, along
with its customer list. The Elk International matter was
administratively closed as it was no longer in business at the location
and H & R ultimately then submitted its application for
registration, which is the subject of these proceedings.
H & R is a wholesale supplier of tobacco products, hair products
and paper supplies to tobacco and convenience stores and what Mr. Patel
referred to as "mom and pop'' stores. Mr. Panel testified that he and
his uncle previously owned retail tobacco stores/outlets in Dalton and
Chickamauga, Georgia and his store had sold Mini-Thins and ephedrine
products, along with tobacco products and other sundries.
List I chemicals are those that may be used in the manufacture of a
controlled substance in violation of the Controlled Substances Act. 21
U.S.C. 802(34); 21
CFR 1310.02(a). Pseudoephedrine and ephedrine are list I chemicals
which are legitimately manufactured and
[[Page 30169]]
distributed in single entity and combination forms as decongestants
and bronchodilators, respectively. Both are used as precursor chemicals
in the illicit manufacture of methamphetamine and amphetamine.
Phenylpropanolamine, also a list I chemical, is a legitimately
manufactured and distributed product used to provide relief of the
symptoms resulting from inflammation of the sinus, nasal and upper
respiratory tract tissues and for weight control. Phenylpropanolamine is
also used as a precursor in the illicit manufacture of methamphetamine
and amphetamine. See, Gazaly Trading, 69 FR 22561 (2004). In November
2000, the United States Food and Drug Administration issued a public
health advisory requesting drug companies to discontinue marketing
products containing phenylpropanolamine, due to risk of hemorrhagic
stroke. As a result, many pharmaceutical companies have stopped using
phenylpropanolamine as an active ingredient.
As testified to by government witnesses and as addressed in previous
DEA final orders, methamphetamine is an extremely potent central nervous
system stimulant and its abuse is a persistent and growing problem in
the United States. See e.g., Direct Wholesale, 69 FR 11654 (2004);
Branex, Inc., 69 FR 8682 (2004); Yemen Wholesale Tobacco and Candy
Supply, Inc., 67 FR 9997 (2002); Denver Wholesale, 67 FR 99986 (2002).
A Special Agent from DEA's Chattanooga, Tennessee, Resident Office
testified regarding the rapid proliferation of clandestine
methamphetamine laboratories in Tennessee and its adjoining states and
described prevalent methods of local production. He also described the
multiple health hazards and social costs stemming from the production
and abuse of methamphetamine in Southeastern Tennessee. In sum, he
deemed it "more than a legal issue; it is a terrible social issue.''
As recognized in recent published final orders, Tennessee has led the
DEA Atlanta Region in the number of clandestine laboratories seized. See
Prachi Enterprises, Inc., 69 FR 69407 (2004); CWK Enterprises, Inc., 69
FR 69400 (2004). Further, the Chattanooga/Eastern Tennessee area, where
H & R seeks to distribute chemicals, has a "substantial''
methamphetamine abuse problem and it has been recognized that local "[d]istributors
or retailers serving the illicit methamphetamine trade observe no
borders and trade across state lines.'' Id., 69 FR at 69401.
The Special Agent estimated that 80 to 90 percent of ephedrine and
pseudoephedrine used by area methamphetamine manufacturers was obtained
from convenience stores. More often than not, the ephedrine and
pseudoephedrine products were "off name'' brands, with Max Brand the
most prevalent encountered at illicit laboratories. He also sees
products at these sites with brand names such as Mini-Thins, Mini-Tabs,
Pseudo-60's and Z-60's and the preferred pseudoephedrine is of 60 mg.
strength.
The Special Agent testified that convenience stores are readily able
to purchase ephedrine and pseudoephedrine and may use several
distributors simultaneously for these products. Further, persons seeking
to buy ephedrine and pseudoephedrine from convenience stores for illicit
manufacturing typically go to many stores and buy small quantities from
each, or recruit four or five people, who each purchase chemicals from a
single store. Often store personnel allow the same individual to
complete multiple purchases in a short period of time and some
convenience stores even cater to manufacturers, selling other products
used in the manufacturing process such as coffee filters, antifreeze,
and Heet fuel which, for certain customers were even packaged in
manufacturing "kits.''
Diversion Investigators testified that, in general, persons
purchasing pseudoephedrine and ephedrine for legitimate therapeutic
purposes bought their products, packaged in blister packs and in smaller
dosage units and strengths, at traditional drug stores, grocery stores
and large discount stores.
By written declaration, a DEA Diversion Investigator contrasted the "traditional''
market for list I chemicals with what DEA has termed the "gray market''
for these products. The traditional market, characterized by a short
distribution chain from manufacturer to distributor to retailer,
typically includes large chain grocery stores, chain pharmacies, large
convenience stores and large discount stores. The gray market is
characterized by additional layers of distribution and includes such
non-traditional retailers as small convenience stores, gas stations and
other retail establishments where customers do not usually purchase
over-the-counter medications. These non- traditional retailers typically
sell higher-strength products in large package sizes, such as 100 or 120
count bottles of 60 mg. pseudoephedrine. The Diversion Investigator also
identified the brand names found at clandestine laboratory seizures in
disproportionate numbers. They included Max Brand, Mini Two Way,
MiniThin and Action- Pseudo.
A Group Supervisor from DEA's Nashville office testified that, in his
view, the demand for pseudoephedrine and ephedrine for legitimate
medical purposes did not justify the supply and much of these chemicals
were being diverted at the convenience store level.
By declaration, the Government introduced evidence regarding
ephedrine and pseudoephedrine sales and the convenience store market
from Mr. Jonathan Robbin, a consultant in marketing information systems
and databases, who is an expert in statistical analysis and quantitative
marketing research.
Using the 1997 United States Economic Census of Retail Trade, Mr.
Robbin tabulated data indicating that over 97% of all sales of non-
prescription drug products, including non-prescription cough, cold and
nasal congestion remedies, occur in drug stores and pharmacies,
supermarkets, large discount merchandisers, mail-order houses and
through electronic shopping. He characterized these five retail
industries as the traditional marketplace where such goods are purchased
by ordinary customers.
Analyzing national sales data specific to over-the-counter, non-
prescription drugs containing pseudoephedrine, Mr. Robbin's research and
analysis showed that a very small percentage of the sales of such goods
occur in convenience stores--only about 2.6% of the HABC [Health and
Beauty Care] category of merchandise or 0.05% of total in-store
(non-gasoline) sales. He determined that the normal expected retail
sales of pseudoephedrine tablets in a convenience store would range
between $10.00 and $30.00 per month, with an average monthly sales
figure of about $20.00 and the sales of more than $100.00 in a month
would be expected to occur in a random sampling about once in one
million to the tenth power, a number he characterized as nearly
equivalent to the number of atoms in the universe. He further stated
that the current convenience store gross margin in the health and beauty
care category is about 40 percent, so that such a store could be
expected to spend an average of $12.00 per month acquiring its inventory
of pseudoephedrine products from a distributor.
In October 2002, a pre-registration inspection was performed at H
& R's facility by a DEA Diversion Investigator. Mr. Patel advised
the Diversion Investigator that H & R had purchased its customer
list from Elk International and its customers were mainly convenience
stores and gasoline stations
[[Page 30170]]
located within 30 miles of Chattanooga. He identified several listed
products H & R intended to sell which are normally sold in the
traditional market. Of concern, he also advised the Diversion
Investigator that the company would carry whatever products its
customers wanted to buy. At the hearing, Mr. Patel then testified that
customers had brought him samples of products they wanted and
specifically asked for Max Brand Pseudo 60s. However, he had not yet
identified a supplier for that product.
Max Brand Pseudo 60s has been identified by DEA as "the precursor
product predominantly encountered and seized at clandestine
methamphetamine laboratories'' and convenience stores are the "primary
source'' for the purchase of "Max Brand products, which are the
preferred brand for use by illicit methamphetamine producers * * *.''
Express Wholesale, 69 FR 62086, 62087 (2004); see also RAM, Inc. d/b/a/
American Wholesale Distribution Corp., 70 FR 11693 (2005).
The Diversion Investigator found Respondent's physical security
adequate and its monitoring, storage and recordkeeping systems an
improvement over Elk International's systems.
At the time of the hearing, Mr. Patel testified H & R then had
about 385 customers. He also provided a list of 459 businesses, not all
of whom were actual customers. At least 27 of these customers were
located in cities some distance from Chattanooga, including Knoxville
and Nashville, Tennessee; Atlanta, Summerville, Americus, Griffin, Rome,
Tucker and Lakeland, Georgia; Huntsville, Chickasaw, Decatur and Mobile,
Alabama; Myrtle Beach and Greenville, South Carolina; Gainsville,
Florida; Kansas City, Missouri; and Woodstock, Illinois.
While Mr. Patel testified H & R would not sell listed chemicals
to customers in Mobile, Woodstock and Gainesville, he did not specify
whether he would sell to the customers at other distant locations on the
list. He further testified H & R delivered to local customers but
others, including those from nashville and Atlanta, would have to come
to the Chattanooga facility to pick up orders.
A DEA Special Agent testified he recognized at least ten names on
Respondent's customer list as being under investigation by DEA, state or
local law enforcement agencies for involvement in distribution of
ephedrine or other chemicals associated with methamphetamine
manufacturing. A Supervisory Investigator testified that Respondent's
customer list also included distributors who were already registered to
sell list I chemicals.
Mr. Patel testified he would not sell over-threshold quantities of
list I chemicals to customers, but he could not say how much he would
sell. He estimated that in addition to other products, he expected an
average convenience store to order one or two dozen bottles of Mini
Thins per month, which would probably retail at $6.99 per bottle.
H. Patel did not testify, but submitted a post-hearing affidavit in
which he stated that if Respondent's application were granted, they were
willing to "work with DEA to limit the amount of ephedrine and single
ingredient pseudoephedrine products we sell'' and would not sell to
customers being investigated by DEA. He also stated that H & R's
customers requested that it carry listed chemicals, as they wanted to
make their purchases from one distributor. H. Patel admitted having no
experience selling listed chemicals at the wholesale level and did not
know how much of these products H & R's customers might buy.
Mr. Patel testified that neither he nor his uncle had criminal
records and the Government offered no evidence to the contrary.
Pursuant to 21
U.S.C. 823(h), the Deputy Administrator may deny an application for
a Certificate of Registration if she determines that granting the
registration would be inconsistent with the public interest, as
determined under that section. Section 823(h) requires the following
factors be considered in determining the public interest:
(1) Maintenance of effective controls against diversion of listed
chemicals into other than legitimate channels;
(2) Compliance with applicable Federal, State, and local law;
(3) Any prior conviction record under Federal or State laws relating
to controlled substances or to chemicals controlled under Federal or
State law;
(4) Any past experience in the manufacture and distribution of
chemicals; and
(5) Such other factors as are relevant to and consistent with the
public health and safety.
As with the public interest analysis for practitioners and pharmacies
pursuant to subsection (f) of section 823, these factors are to be
considered in the disjunctive; the Deputy Administrator may rely on any
one or combination of factors, and may give each factor the weight she
deems appropriate in determining whether a registration should be
revoked or an application for registration denied. See, e.g., Direct
Wholesale, 69 FR 11654 (2004); Energy Outlet, 64 FR 14269 (1999); Henry
J. Schwartz, Jr., M.D., 54 FR 16422 (1989).
As to factor one, maintenance by the applicant of effective controls
against diversion, the Deputy Administrator agrees with Judge Bittner
that H & R's proposed physical security and recordkeeping
arrangements were adequate. Judge Bittner also found that Respondent did
not disput the Government's evidence that convenience stores are a major
source of diversion of list I chemicals.
Judge Bittner phrased the key issue in factor one as whether
Respondent would sell listed chemicals to retailers who were likely to
divert them. In concluding this factor weighed against registration,
Judge Bittner took particular note that Mr. Patel's estimates of
anticipated sales were several times larger than what Mr. Robbin's
research indicated a convenience store would legitimately sell.
Additionally, at least ten customers on Respondent's list were under
investigation for involvement in the distribution of chemicals
associated with illicit methamphetamine manufacturing. Red flags were
further raised by Mr. Patel's failure to specifically testify whether he
would refuse to sell listed chemicals to customers located substantial
distances from H & R's Chattanooga facility.
The Deputy Administrator is particularly concerned with Mr. Patel's
willingness to sell "whatever'' products his customers wanted. Coupled
with the specific requests from its gray market customers that the
company carry Max Brand Pseudo 60's, the preferred precursor of illicit
manufacturers, the risk of diversion should the application be approved,
is apparent. See, RAM, Inc. d/b/a American Wholesale Distribution Corp.,
supra, 70 FR 11693, 11694.
Judge Bittner acknowledged applicability of a previously published
DEA final order in which registration was denied an applicant who, much
like Respondent, was seeking registration to distribute list I chemicals
in the gray market. In that case, Xtreme Enterprises, Inc., 67 FR 76195
(2002), there was no evidence the applicant's owner had failed to comply
with Federal, State or local law or that she had any prior convictions
relating to controlled substances or chemicals. Further, she was willing
to provide adequate security for the listed chemicals.
However, the Deputy Administrator found the applicant's owner had
only a rudimentary knowledge of what would constitute a suspicious order
and no experience in the manufacture or distribution of listed
chemicals. Most
[[Page 30171]]
significant, for purposes of this and similar cases, the Deputy
Administrator also found that "[v]irtually all of the Respondent's
customers, consisting of gas station and convenience stores, are
considered part of the grey market, in which large amounts of listed
chemicals are diverted to the illicit manufacture of amphetamine and
methamphetamine.'' Xtreme Enterprises, Inc., supra, 67 FR at 76197.
Citing Xtreme Enterprises, Judge Bittner concluded that factor one
(maintenance of controls against diversion), weighed against granting H
& R's application. The Deputy Administrator agrees, noting DEA has
applied this analysis in numerous final orders published after Xtreme
Enterprises was decided. See, e.g., Express Wholesale, supra, 69 FR
62086; Value Wholesale, 69 FR 58548 (2004); K & Z Enterprises, Inc.,
69 FR 51475 (2004); William E. "Bill'' Smith d/b/a B & B Wholesale,
69 FR 22559 (2004); Branex Incorporated, supra, 69 FR 8682: Shop It for
Profit, 69 1,311 (2003); Shani Distributors, 68 FR 62324 (2003).
Judge Bittner found Respondent had complied with applicable Federal,
State and local laws and its owners have not been convicted of any
crimes relating to controlled substances or listed chemicals. Thus, she
concluded that factors two and three weigh in favor of registration.
Based on the record that was before the Administrative Law Judge, the
Deputy Administrator agrees. However, as discussed in depth under factor
five, after the Opinion and Recommended Ruling was issued, state
legislation was enacted making it illegal to sell tableted
pseudoephedrine products in Tennessee, outside of licensed pharmacies.
Thus, to the extent that Respondent's Tennessee gray market customer
base is no longer authorized to sell those products under state law,
factor two is adversely impacted and weighs against registration.
With regard to factor four, the applicant's past experience in
distributing listed chemicals, Judge Bittner found that while Mr. Patel
had previously sold listed chemical products in his retail tobacco
outlet, neither of H & R's owners/employees had experience selling
listed chemicals at the wholesale level. Judge Bittner therefore found
this factor weighed in favor of a finding that H & R's registration
would be inconsistent with the public interest. The Deputy Administrator
agrees with that conclusion.
With regard to factor five, other factors relevant to public health
and safety, Judge Bittner was "not persuaded that Respondent will limit
its sales of listed chemicals to the quantities that convenience stores
are likely to sell to legitimate customers.'' She thus found this factor
also weighed against registration. The Deputy Administrator concurs.
Unlawful methamphetamine production and use is a growing public
health and safety concern throughout the United States and specificially
in the localities where Respondent intends to do business.
Pseudoephedrine and ephedrine are the precursor products used to
manufacture methamphetamine and area laboratory operators predominantly
acquire their precursor chemicals from the customer base Respondent
seeks to serve. While the Patels indicated some intent to avoid
contributing to this scourge, the risk of diversion once listed
chemicals enter the gray market is real, substantial and compelling.
The Deputy Administrator concludes Judge Bittner correctly applied
DEA precedent. As in Xtreme Enterprise, supra, the Respondent's owners'
lack of criminal records, their previous compliance with the law and any
professed willingness to comply with regulations and guard against
diversion, are far outweighed by the intent to sell ephedrine and
pseudoephedrine, almost exclusively, in the gray market.
This reasoning has been consistently applied by the Deputy
Administrator in a series of recently published final orders denying
registration to potential gray market distributors. See, RAM, Inc. d/b/
a American Wholesale Distribution Corp., supra, 70 FR 11693; Al-Alousi,
Inc., 70 FR 3561 (2005); Volusia Wholesale, supra, 69 FR 69409; Prachi
Enterprises, Inc., supra, 69 FR 69407; CWK Enterprises, Inc., 69 FR
69400 (2004); J & S Distributors, 69 FR 62089 (2004); Express
Wholesale, supra, 69 FR 62086; Absolute Distributing, Inc., 69 FR 62078
(2004); Value Wholesale, supra, 69 FR 58548 (2004); John E. McRae d/b/a
J & H Wholesale, 69 FR 51480 (2004).
While not addressed in the Opinion and Recommended Ruling, the Deputy
Administrator notes that state legislatures throughout the United States
are actively considering legislation designed to impede the ready
availability of precursor chemicals. Many of these proposals are similar
to legislation enacted by the State of Oklahoma, titled the "Oklahoma
Methamphetamine Reduction Act of 2004.'' Under that measure, as of April
6, 2004, pseudoephedrine tablets were designated as Schedule V
controlled substances and may be sold only from licensed pharmacies
within that state.
As a result, it is prohibited in Oklahoma to sell these products from
gray market establishments, such as independent convenience stores,
which have contributed so much to the scourge of methamphetamine abuse.
See, e.g., Express Wholesale, supra, 69 FR at 62809 [denying DEA
registration to an Oklahoma gray market distributor, in part, because of
new state restrictions].
A review of data for 2004 reveals the Oklahoma law has resulted in an
apparent reduction in the number of seizures involving clandestine
methamphetamine laboratories in that state. These developments are
encouraging and represent an important step in the ongoing battle to
curb methamphetamine abuse in the United States. State legislation, such
as Oklahoma's, reflects a positive trend and growing recognition that
the diversion of precursor chemicals through the gray market insidiously
impacts public health and safety. See, e.g., Tysa Management, d/b/a
Osmani Lucky Wholesale, 70 FR 12732, 12734 (2005) [denying registration
to intended Oklahoma distributor, in part, on basis of enactment of
recent state legislation]; Express Wholesale, supra, 69 FR at 62089.
Of particular consequence to H & R and similarly situated
Tennessee applicants and registrants, after Judge Bittner signed her
Opinion and Recommended Ruling, legislation was enacted by the State of
Tennessee that is patterned after the Oklahoma initiative. That
legislation (Senate Bill 2318/House Bill 2334), collectively known as
the "Meth- Free Tennessee Act of 2005,'' was signed into law by Governor
Phil Bredeson on March 31, 2005, and makes it unlawful for
establishments, other than licensed pharmacies, to sell tableted
pseudoephedrine products in Tennessee after April 1, 2005. This includes
both name brand and off-name brand products.
Accordingly, Respondent's entire intended Tennessee customer base is
now prohibited by state law from selling the pseudoephedrine products H
& R seeks DEA registration to distribute. This adversely implicates
factors five and two and weighs heavily against registration. See, Tysa
Management, d/b/a Osmani Lucky Wholesale, supra, 70 FR at 12734; Express
Wholesale, supra, 69 FR at 62089.
Factor five is also relevant to H & R's proposal to distribute
chemicals to customers under criminal investigation. The conduct of a
potential customer has previously been deemed a relevant consideration
under factor five. See,
[[Page 30172]]
Gazaly Trading, supra, 69 FR 22561; Shani Distributors, supra, 68 FR
62326.
Finally, it is noted that Respondent seeks to distribute
phenylpropanolamine. Accordingly, the Deputy Administrator finds factor
five relevant to H & R's request to distribute phenylpropanolamine
and the apparent lack of safety associated with the use of that product.
DEA has previously determined that an applicant's request to distribute
phenylpropanolamine constitutes a ground under factor five for denial of
an application for registration. See, J & S Distributors, supra, 69
FR 62089; Gazaly Trading, supra, 69 FR 22561; William E. "Bill'' Smith
d/b/a B & B Wholesale, supra, 69 FR 22559; Shani Distributors,
supra, 68 FR 62324.
Based on the foregoing, the Deputy Administrator concludes that
granting Respondent's pending application would be inconsistent with the
public interest.
Accordingly, the Deputy Administrator of the Drug Enforcement
Administration, pursuant to the authority vested in her by 21
U.S.C. 823 and CFR 0.100(b) and 0.104, hereby orders that the
pending application for a DEA Certificate of Registration, previously
submitted by H & R Corporation, be, and it hereby is, denied. This
order is effective June 26, 2006.
Dated: May 5, 2006.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. 06-4838 Filed 5-24-06; 8:45am]
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