[Federal Register Volume 64, Number 188 (Wednesday, September 29, 1999)]
[Notices]
[Pages 52531-52538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25357]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration
[Docket No. 94-77]


RX Returns, Inc.--Continuation of Stay of Revocation

    On August 15, 1994, the Deputy Assistant Administrator, Office of 
Diversion Control, Drug Enforcement Administration (DEA) issued an 
Order to Show Cause to RX Returns, Inc. (Respondent) of Palm, 
Pennsylvania, notifying it of an opportunity to show cause as to why 
DEA should not revoke its DEA Certificate of Registration, RR0166113, 
and deny any pending applications for renewal of its registration as a 
distributor (disposer), pursuant to 21 U.S.C. 823(e), for reason that 
Respondent's continued registration would be inconsistent with the 
public interest.
    Respondent timely filed a request for a hearing, and following 
prehearing procedures, a hearing was held on June 13, 14, 15, and 
August 19 and 20, 1995, before Administrative Law Judge Paul A. Tenney. 
On November 14, 1995, Judge Tenney issued his Findings of Fact, 
Conclusions of Law and Recommendations, recommending that Respondent's 
registration be continued and no action be taken against it.
    On July 5, 1996, the then-Deputy Administrator issued a final order 
finding that it was in the public interest to revoke Respondent's 
registration, but to stay the revocation for one year, giving 
Respondent the opportunity to demonstrate that its recent changes to 
procedures, ``may, in operation, finally create an accountability 
system adequate for the Respondent to demonstrate the requisite degree 
of precision in handling controlled substances necessary to continue in 
operation as a disposer.'' RX Returns, Inc., 61 FR 37081 (July 16, 
1996). The then-Deputy Administrator further stated that during this 
one-year period DEA would conduct inspections and audits of Respondent 
and specifically stated that:

    * * * [I]f the DEA's inspections or audits reveal either new or 
repeated violations, the Deputy Administrator will remove the stay 
and the DEA Certificate of Registration will be revoked immediately, 
and all pending applications for renewal will be summarily denied. 
If, however, at the end of the one-year period, the Respondent 
successfully demonstrates its compliance with the DEA's regulatory 
requirements, then the Deputy Administrator will withdraw this order 
and will permit the Respondent to retain its registration, and to 
renew it, if necessary, at that time.

Id. at 37,090.
    On May 1, 1997, the Government filed a Motion to the Deputy 
Administrator for Removal of Order to Stay Revocation, alleging that a 
DEA inspection of Respondent's facility conducted between September 10, 
and October 3, 1996, revealed various regulatory violations. By letter 
dated June 20, 1997, Respondent filed its response to the Government's 
motion.
    By letter dated July 3, 1997, the then-Acting Deputy Administrator 
advised Administrative Law Judge Mary Ellen Bittner that it appeared 
that there was a factual dispute as to whether there had been any 
violation of DEA regulations. Accordingly, the then-Acting Deputy 
Administrator remanded the matter to the Administrative Law Judge ``to 
conduct a hearing and make recommendations as to whether a violation 
has occurred since the effective date of the final order, and if so, 
whether such violation warrants the removal of the stay.''
    Following prehearing procedures, a hearing was held before 
Administrative Law Judge Mary Ellen Bittner on September 3 through 5, 
1997, in Arlington, Virginia. At the hearing, both parties called 
witnesses to testify and introduced documentary evidence. After the 
hearing, both parties submitted proposed findings of fact, conclusions 
of law and argument.
    On May 26, 1999, Judge Bittner issued her Supplemental Opinion and 
Recommended Ruling, Findings of Fact, Conclusions of Law and Decision 
recommending that the Deputy Administrator withdraw the earlier final 
order, permit Respondent to retain its registration, and grant any 
pending applications for renewal of its registration. On June 15, 1999, 
the Government filed exceptions to Judge Bittner's opinion and 
recommendation, and on July 8, 1999, Respondent filed its response to 
the Government's exceptions. On July 9, 1999, 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 his final order based 
upon findings of fact and conclusions of law as hereinafter set forth. 
The Deputy

[[Page 52532]]

Administrator adopts, with noted exceptions, the Findings of Fact, 
Conclusions of Law, and Recommended Ruling of the Administrative Law 
Judge, and his adopted is in no manner diminished by any recitation of 
facts, issues and conclusions herein, or of any failure to mention a 
matter of fact or law.
    The Deputy Administrator finds that the findings of fact and 
conclusions of law which led to the revocation of Respondent's DEA 
Certificate of Registration and the stay of the revocation are set 
forth in great detail in the final order of the then-Deputy 
Administrator found at 61 FR 37081 (July 16, 1996). They will not be 
repeated in this final order, but are incorporated herein and will be 
referred to as necessary in rendering a decision in this matter. The 
issue now is whether any violations of the law and regulations have 
occurred since the previous final order and, if so, whether such 
violations warrant the removal of the stay and revocation of 
Respondent's registration.
    As background, the Deputy Administrator finds that Respondents is a 
disposer of products, including controlled substances, for customers 
such as health care facilities, retailers and wholesalers. Respondent 
either destroys the products or distributes them back to the original 
manufacturer for credit. Jeffrey Dershem owns approximately 55 percent 
of the shares of the firm and is the president and chief executive 
officer of Respondent. His wife, Deborah Dershem, (who was known in the 
previous proceeding as Deborah Smith), owns the other 45 percent of the 
shares and is Respondent's executive vice president and general 
manager. Ms. Dershem is responsible for Respondent's daily operations.
    Pursuant to the Controlled Substances Act DEA register 
manufacturers, distributors, and dispensers of controlled substances. 
Respondent's business does not fit within any of these registrant 
categories, yet DEA nonetheless issued Respondent a registration as 
distributor in 1991. Subsequently, in March 1992, DEA and Respondent 
entered into a Memorandum of Understanding which indicated that due to 
environmental concerns it has become difficult to dispose of controlled 
substances. As a result, ``* * * DEA has initiated steps to amend the 
[Controlled Substances Act] or regulations, permitting a new category 
of registrant. This new type of registrant would have controlled 
substance disposal as its primary function. Because of the need for 
this type of activity, this Memorandum of Understanding (MOU) will 
serve as an interims step in addressing this particular disposal 
problem.'' Pursuant to the Memorandum of Understanding, Respondent 
basically agreed to comply with security, recordkeeping and destruction 
regulations, and DEA agreed to issue Respondent a registration once its 
physical security was approved and to work with Respondent to establish 
appropriate recordkeeping procedures.
    On August 23, 1995, DEA published proposed regulations applicable 
to disposers of controlled substances. See 60 FR 43732 (1995). However, 
as of the date of the hearing in this matter, these regulations have 
not been finalized. Therefore, there are still no regulations in effect 
relating specifically to disposers of controlled substances.
    The Deputy Administrator finds that Respondent's business is quite 
different from other registered distributors of controlled substances. 
Regular ``forward'' distributors order and receive full containers of 
controlled substance from their suppliers and, in turn, distribute full 
containers to customers who order them. According to Mr. Dershem, 
Respondent, on the other hand, receives ``packages that are open, 
broken, no longer in shelf packs, bags of pill, boxes of pills, pills 
that have been repackaged, pills that have been taken out of the 
original containers and put into hospital containers, things of that 
sort.''
    Ms. Dershem testified at the hearing before Judge Bittner that 
Respondent prepared a form for its customers to use to list all 
controlled substances in each box shipped to Respondent, and that a 
copy of the form was to be placed in the box. This form will 
hereinafter be referred to as receipt document. According to Ms. 
Dershem, as of September 1996, Respondent's standard operating 
procedure when a package containing controlled substances arrived at 
the facility was that the Respondent's employees opened the box, 
checked for the document listing the contents of the box, and removed 
any non-controlled substances or Schedule II controlled substances from 
the box. Respondent's personnel then counted every dosage unit of each 
controlled substance received in a box, corrected the inventory listed 
on the receipt document if necessary, and signed the receipt document 
as verified. The information is then entered into Respondent's computer 
and the receipt document filed. If no receipt document is received from 
a customer, Respondent's computer-generated report becomes the primary 
document of receipt. Then depending on whether the controlled 
substances are to be shipped to the manufacturer or be destroyed. 
Respondent would generate a shipping document or a DEA destruction 
form.
    Following the issuance of earlier final order in this matter, 
Respondent requested a meeting with DEA representatives. The meeting 
occurred on August 2, 1996, during which it was discussed, among other 
things, how Respondent should handle unsolicited shipments, shipments 
that are not accompanied by the appropriate documents, and shipments 
that were larger than anticipated. In a letter memorializing her 
understanding of the results of the meeting, Mr. Dershem stated that 
``DEA recognizes that [Respondent] is unique with regard to DEA 
licensing classification * * *. DEA will work with [Respondent] in 
understanding our specific business and necessary accommodations.''
    Ms. Dershem testified that Respondent was concerned that the 
receipt document sent by a customer who shipped a controlled substance 
to Respondent would be considered Respondent's record of receipt, 
because Respondent would be held accountable for any errors or 
omissions the customer made in preparing the form. Respondent wanted 
DEA to consider the document Respondent generated after it inventoried 
the product as its record of receipt. However, DEA representatives took 
the position that the proper receiving document is either an invoice or 
a packing slip that accompanies the controlled substances. But, it is 
undisputed that the DEA representatives assured Respondent that it 
would not be held accountable for errors made by customers, and that it 
would be acceptable for Respondent to attach its computer generated 
record to the receipt document from the customer.
    Regarding large shipments, Respondent emphasized at the meeting 
that it had a limited number of employees who had undergone background 
checks and therefore were certified to work in the controlled substance 
cage, and that it takes a long time to accurately process such a 
shipment. According to Ms. Dershem, the DEA supervisor present at the 
meeting indicated that she understood the problem and ``we were given a 
variance,'' but that Respondent was not told what DEA considered the 
most important steps in handling large shipments. According to DEA 
representatives who were present at the meeting and who testified at 
the hearing, they explained to Respondent that DEA understood that 
sometimes Respondent could not immediately reconcile what was actually 
in the

[[Page 52533]]

shipment with the documents accompanying it, but that Respondent should 
at lest open the boxes immediately and determine whether they contained 
the receipt document from the customer.
    On September 10, 1996, DEA began an inspection and accountability 
audit of Respondent. Prior to the inspection, DEA investigators had 
decided to audit six different controlled substance products. When the 
DEA investigators arrived at Respondent they found approximately 1,400 
to 1,500 boxes in the controlled substance cage. It was determined that 
the vast majority of these boxes were part of a shipment that contained 
products from Kmart, and that only approximately 40 boxes were not part 
of the Kmart shipment.
    It appears that all Kmart pharmacies were going to conduct a 
physical inventory on July 31, 1996. In preparation for that inventory, 
the pharmacies were directed to remove various products, including 
controlled substances, from their shelves that had expired or were 
about to expire. Kmart had entered into an agreement with Cardinal 
Health (Cardinal), a DEA-registered distributor, that Cardinal would 
pick up these products from Kmart stores, however Cardinal was unable 
to handle certain aspects of the Kmart returns. Cardinal was along-time 
customer of Respondent and made arrangements for Respondent to handle 
the Kmart returns of partially full containers. Ms. Dershem testified 
that neither Cardinal nor Kmart could predict how much material 
Respondent could expect.
    When the investigators arrived on September 10, 1996, most of the 
Kmart boxes were on pallets. The boxes had labels identifying them as 
from Kmart, but the pallets had pieces of paper on them indicating the 
name of a city and a date. The investigators were told that the city 
names indicated locations of Cardinal facilities, and the date 
reflected the date that Respondent received the shipment.
    According to Ms. Dershem, the Kmart facilities had been instructed 
to place a label on each box that identified whether it contained 
controlled substances. If the boxes indicated that they contained 
controlled substances, they were immediately taken to Respondent's 
controlled substance cage. The boxes were then processed in three 
stages. ``Stage 1'' consisted of breaking down the pallet, opening up 
each box, ascertaining which Kmart store was responsible for each box, 
and checking for a receipt document. If there was no receipt document, 
the Kmart store would be contacted to obtain the document. Also any 
Schedule II controlled substances or non-controlled substances were 
removed during this stage. The boxes were then resealed until ``stage 
2'' processing. ``Stage 2'' processing consisted of counting the actual 
dosage units in the boxes and verifying that what Respondent actually 
received was what the receipt document listed as the contents of the 
box. The receipt document was then signed. During ``stage 3'' the 
information was entered into Respondent's computer. As the number of 
Kmart boxes received at Respondent increased, Respondent was unable to 
complete all three stages of processing upon receipt. Therefore, when 
the DEA investigators arrived to conduct their inspection, the Kmart 
boxes were in various stages of processing. The receipt documents were 
maintained inside the boxes during processing.
    As a result, in order to conduct their accountability audit, the 
DEA investigators began opening each of the Kmart boxes to look at the 
receipt documents to ascertain whether the boxes contained any of the 
controlled substances being audited. In so doing, the investigators 
discovered that some receipt documents were missing and that others 
were inadequate, incomplete, incorrect, or illegible.
    By the end of the first day of the inspection, the investigators 
had inventoried the controlled substances to be audited in all of the 
non-Kmart boxes. At the end of the second day, the DEA investigators 
still had a large number of Kmart boxes to inventory. The investigators 
asked Ms. Dershem to have the receipt documents pulled from the boxes 
and that they would not return to Respondent the next day in order to 
give Respondent's personnel an opportunity to pull together the 
documents. Ms. Dershem had the documents available for the 
investigators the next day. Nonetheless the DEA investigators decided 
to stop inventorying the Kmart boxes believing that based upon the 
state of the documents, it would be impossible to audit the contents of 
the boxes.
    Consequently, DEA did not include the Kmart shipments in conducting 
its audit. As the initial inventory for the audit, DEA used 
Respondent's December 1995 biennial inventory, which consisted of a 42 
page computer printout plus six handwritten pages of information not 
yet entered into the computer. Upon review, it was discovered that 
there were approximately 47 entries in the inventory for substances 
that were the subject of the audit.
    DEA investigators noted several entries in the biennial inventory 
which caused them concern. First, the size of the containers was not 
listed on the handwritten portion of the inventory. Second, regarding 
Valium 10 mg./2 ml. ampules, the entry in the physical count column was 
a ``6,'' when in fact Respondent had 3 ampules. According to Ms. 
Dershem, the number of ampules (3) was multiplied by the package size 
(2 ml.). However, a DEA investigator testified that DEA considers an 
ampule a dosage unit so the entry should have been ``3'' instead of 
``6.'' Third, there were errors in three entries on the handwritten 
pages for propoxyphene napsylate. It is undisputed that these entries 
referred to propoxyphene napsylate with acetaminophen, a different 
product. Finally, another problem regarding these propoxyphene 
napsylate entries is that Respondent's inventory listed the number of 
containers, but did not indicate the size of the containers. Therefore, 
there was no way to know the total quantity of the drug on hand. For 
purposes of the audit computations, the DEA investigators listed that 
each container held 100 dosage units based upon the representation of 
the cage supervisor.
    DEA's audit revealed a shortage of 400 propoxyphene napsylate and 3 
ampules of Valium injectable, however these shortages resulted from 
Respondent's inaccurate entries on the December 1995 inventory. There 
were also relatively minor discrepancies regarding four other audited 
substances, and the remaining four audited substances balanced. The 
lead DEA investigator testified at the hearing in this matter that 
``[i]f I had gone in the firm and the only problem I had was these 
minor audit discrepancies, we would not be sitting here.'' A former DEA 
investigator who now works as a consultant conducted an on-site 
evaluation of Respondent's controlled substance handling in June 1997. 
The consultant conducted an audit of the same substances that DEA 
audited covering the same time period as DEA's audit. He testified that 
he found no discrepancies with respect to any of the audited 
substances. However, the consultant acknowledged that he did not know 
whether DEA was provided with the same records that he used. Also, the 
consultant conducted an additional accountability audit of the 
substances for September 1996 to June 1997, and there were no 
discrepancies.
    As part of its September 1996 inspection, DEA reviewed Respondent's 
recordkeeping procedures regarding the Kmart shipments, and had 
concerns regarding the maintenance of the receipt

[[Page 52534]]

documents. The lead DEA investigator testified that these documents 
were not readily retrievable. The receipt documents were still in the 
Kmart boxes and there no copies of these documents in any receiving 
file. Further, not all of the boxes even contained any receipt 
documents and some of the documents were either incomplete or 
inaccurate.
    It was also the investigator's opinion that these documents were 
not current. Ms. Dershem told the investigator that prior to the Kmart 
shipments receiving information was generally entered into the computer 
within 48 hours of receipt of a shipment. However, there were boxes 
that were part of the Kmart shipments that were received by Respondent 
in July 1996, but had not been completely processed by the September 
1996 inspection. The investigator testified that because of this delay, 
DEA was unable to determine whether any noted discrepancies between the 
subsequent actual inventories of the contents of the boxes and the 
receipt documents generated by the shipper were due to in-transit loss 
or on-site diversion.
    As a result of these problems, the investigator testified that DEA 
was unable to conduct an accountability audit that included the Kmart 
shipments. This concerned the investigator since the Kmart shipments 
amounted to the vast majority of the controlled substances for which 
Respondent was accountable.
    However Ms. Dershem disagreed, testifying that the receiving 
documents were readily retrievable because they could easily have been 
pulled out of the boxes, as demonstrated by Respondent being able to 
make copies of the documents available for the investigator overnight. 
Also, both Mr. and Ms. Dershem stated that Respondent had always 
maintained the receiving documents in boxes it received from customers 
and had never before been told that this practice was improper or 
violated any regulations, nor that it needed to put copies of the 
documents in a receiving file.
    Another concern of the DEA investigators regarding the Kmart 
shipments is that Respondent did not obtain any receipt documents from 
Cardinal. According to the DEA witnesses who testified, Cardinal was 
the true shipper of the controlled substances to Respondent, not Kmart. 
The lead investigator testified that DEA considers the supplier to be 
whoever shipped the controlled substances to the receiving registrant. 
She further testified that as far as DEA was concerned, Respondent's 
supplier for the Kmart shipments was Cardinal, and as a result, 
Cardinal should have opened the Kmart boxes upon receipt, inventoried 
the contents, and created an inventory document to accompany the boxes 
to Respondent. Another DEA investigator testified that transactions 
between Kmart and Cardinal and between Cardinal and Respondent were 
distributions, and therefore the recordkeeping requirements in 21 CFR 
part 1304 applied to these separate transactions.
    Ms. Dershem testified that Respondent believed that Cardinal was 
merely acting as the freight forwarder of the boxes from Kmart to 
Respondent and therefore no records were needed from Cardinal. An 
internal Cardinal memorandum instructed Cardinal managers that 
``[t]hese boxes are absolutely not to be opened or counted at our DC's, 
or else they will not longer meet the DEA's criteria for cross-dock 
shipments.'' Ms. Dershem testified that it was her understanding that 
Cardinal would have the responsibility of maintaining the audit trail 
showing how many boxes it sent to Respondent. According to Ms. Dershem, 
Cardinal told her that it would take care of shipping and she testified 
that she had no reason to question Cardinal because Cardinal is a large 
wholesaler with staff who specialize in regulatory compliance.
    However, DEA witnesses testified that the arrangement between 
Kmart, Cardinal and Respondent did not qualify as freight forwarding. 
An investigator and former chief of the Liaison Unit in the Liaison and 
Policy Section of DEA's Office of Diversion Control testified that both 
freight forwarding and cross-dock shipping refer to a DEA-registered 
distributor's use of a separate unregistered warehouse, operated and 
controlled by the distributor, as an interim warehouse to which 
controlled substances are conveyed by a long-haul trucker and at which 
the drugs are placed in smaller, local trucks for conveyance to another 
registrant who is the consignee for the order. But other DEA witnesses 
offered slightly different definitions of the terms.
    Yet, it is undisputed that at the time of the Kmart shipments, 
there were no regulations, nor did DEA have a formal written policy, 
regarding freight forwarding or cross-dock shipping. In fact, proposed 
regulations regarding freight forwarding were published in December 
1996, and they have yet to be finalized. Nonetheless, DEA has permitted 
freight forwarding facilities to operate in some instances despite the 
lack of regulations or formal policy.
    The consultant who conducted the on-site evaluation of Respondent 
in June 1997, not only conducted an audit of the same substances that 
DEA audited in September 1996, but also reviewed Respondent's 
recordkeeping system to determine whether it was able to prevent or 
detect diversion. In his opinion, Respondent's records were very 
orderly and met the requirements of the Controlled Substances Act and 
its regulations. He further testified that he did not detect any 
diversion occurring at Respondent.
    Another consultant testified that he visited Respondent in August 
1997 and found that Respondent's personnel were able to produce records 
promptly, that the records were very organized, easy to read, and in 
good order, and that he believed that Respondent's records exceeded 
DEA's requirements.
    Ms. Dershem testified that after the September 1996 inspection, 
Respondent changed its procedure for handling receipt documents: ``we 
actually take the document, we verify the products, correct it, make a 
photocopy of the document, put it in a pending file, mark the box with 
a number, mark the packing slip with a number.'' According to Ms. 
Dershem, the procedure in effect at the time of the hearing before 
Judge Bittner included writing the number of the box on the receipt 
document in a pending file so that DEA investigators could ascertain 
whether information from the document had been entered into the 
computer and could match the receipt document to the appropriate box.
    The Deputy Administrator must first determine whether any 
violations of the law and regulations have occurred since the effective 
date of the previous final order. The Government contends that 
Respondent violated 21 CFR 1304.11(a) \1\, 1304.15(c) and (d), and 
1304.16. These provisions essentially require that a registrant's 
inventory shall contain a complete and accurate record of all 
controlled substances on hand on the date the inventory is taken, and 
that such inventory shall include, among other things, the name of the 
substance, the number of dosage units in each commercial container, and 
the number of commercial containers.
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    \1\ References to the Code of Federal Regulations are to 
provisions in effect at the time of the September 1996 inspection.
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    The Deputy Administrator agrees with Judge Bittner that Respondent 
violated these provisions because its December 1995 biennial inventory 
failed to correctly identify propoxyphene napsylate with acetaminophen, 
failed to indicate the number of dosage units in

[[Page 52535]]

each commercial container of propoxyphene napsylate with acetaminophen, 
and failed to correctly indicate the total quantity of Valium ampules. 
Also there were no container sizes listed on the handwritten portion of 
the inventory.
    The Government also contends that Respondent violated 21 U.S.C. 827 
and 21 CFR 1304.04(f)(2), by failing to maintain its receipt records 
for the Kmart shipments either separately from all other records or in 
such form that the information required is readily retrievable from the 
ordinary business records of the registrant. The Deputy Administrator 
agrees with Judge Bittner's rejection of Respondent's contention that 
its maintenance of receipt records in boxes meets the requirement of 
maintaining the records separate from all other records. As Judge 
Bittner noted, ``adopting Respondent's interpretation would mean that a 
registrant could scatter controlled substance records around its 
establishment in no particular order, a result I do not believe the 
regulations intended to achieve.''
    The question then becomes whether Respondent's records of receipt 
regarding the Kmart shipments were readily retrievable. The record 
establishes that DEA investigators advised Respondent that the receipt 
documents from Respondent's customers were the primary records and that 
the 1993 Memorandum of Understanding entered into between DEA and 
Respondent required that Respondent obtain these documents from its 
customers. It is undisputed that to the extent that Respondent's 
customers provided these documents, Respondent was able to make them 
available to DEA investigators within a day of being asked to produce 
the documents. Therefore, it appears that the receipt documents from 
Respondent's customers were readily retrievable.
    However, the Deputy Administrator finds that 21 U.S.C. 827 and 21 
CFR 1304.21, require that a registrant maintain a record of its receipt 
of controlled substances. The Deputy Administrator agrees with Judge 
Bittner that the receipt documents in the Kmart boxes created by 
Respondent's customers are not what needed to be readily retrievable, 
but rather Respondent's record of what it received. Even if the receipt 
documents from the customers had been out of the boxes, DEA could not 
have conducted an accurate accountability audit because they did not 
reflect what controlled substances were actually received by 
Respondent. The Deputy Administrator agrees with Judge Bittner that, 
``[t]he only meaningful document is that which shows what the customer 
claimed to send versus what Respondent claims to have received, and 
that document does not exist until Respondent's personnel inventory the 
contents of the boxes.'' The Deputy Administrator recognizes that DEA 
registrants may use invoices from their suppliers as their records of 
receipt, however they are not obligated to do so. As is the case with 
Respondent, DEA registrants may wish to verify what they receive and 
then create their own record of receipt. All that is required by the 
statute and regulations is that a registrant maintain a record of the 
controlled substances that it receives.
    Jude Bittner concluded that Respondent's records of what it claims 
to have actually received were maintained and filed in chronological 
order and were therefore readily retrievable. As a result, Judge 
Bittner concluded that Respondent did not violate this provision.
    The Deputy Administrator agrees with Judge Bittner that as to those 
records where the contents of the Kmart boxes had been inventoried and 
verified against the customers' receipt documents, these documents were 
readily retrievable. However, as to the majority of the Kmart boxes, 
where the contents had yet to be verified against the customers' 
receipt documents at the time of the September 1996 inspection, 
Respondent had no record of what it actually received. Consequently, 
the Deputy Administrator finds that all of Respondent's records of 
receipt were not readily retrievable, because some did not exist at the 
time of the September 1996 inspection.
    Next, the Government contends that Respondent violated 21 U.S.C. 
827 and 21 CFR 1304.21(a), by failing to maintain on a current basis a 
complete and accurate record of its receipt of controlled substances. 
Again, Judge Bittner noted that the relevant document is what 
Respondent indicates it actually received. ``Current'' is not defined 
in DEA's regulations so Judge Bittner found that ``the real question is 
whether Respondent processed the material and generated the 
verification documents sufficiently quickly.''
    Judge Bittner noted that some of the Kmart boxes had been at 
Respondent's facility as of July 22, 1996, and had not been verified by 
the time of DEA's inspection in September. But, Judge Bittner found it 
relevant that Respondent could not predict the quantity of controlled 
substances it would receive or when the large shipment would be 
received and thus could not prepare for the shipments by hiring 
additional employees who would require pre-employment background 
checks. As a result, Judge Bittner concluded ``that the record is 
inadequate for a determination as to whether Respondent's records 
pertaining to the Kmart shipments were or were not `current.' I 
therefore conclude that the Government has not met its burden of proof 
showing that Respondent violated this regulatory requirement.''
    However, the Deputy Administrator disagrees with Judge Bittner. 
Respondent cannot have it both ways. Respondent does not want to be 
held responsible for what the customer says is in the boxes and wants 
the opportunity to verify the contents of the boxes and create its own 
record of receipt. But on the other hand, Respondent cannot get to 
verifying the contents of the boxes upon their receipt. The delay in 
verifying the contents of the boxes increases the potential for 
diversion, the very reason that records of receipt must be maintained 
on a current basis.
    The Deputy Administrator recognizes that with large shipments, 
Respondent may have a more difficult time maintaining its records of 
receipt on a current basis. But, that is Respondent's responsibility in 
light of existing regulations. In order to comply with the regulations, 
Respondent might have to require that its customers give it more 
advance notice of large shipments and an estimate as to the size of the 
shipments in order for Respondent to adequately prepare to handle these 
shipments and meet its regulatory responsibilities. Nonetheless, the 
Deputy Administrator finds that Respondent failed to maintain all of 
its records of receipt of the Kmart shipments on a current basis.
    Finally, the Government contends that Respondent violated 21 CFR 
1304.23(c), which requires that a distributor keep a record of what 
controlled substances it receives that includes, among other things, 
the name of the person from whom the containers were received. The 
Government asserts that Respondent received the Kmart shipments from 
Cardinal, and that consequently, Cardinal was required to inventory the 
product at its premises and Respondent was required to obtain 
documentation of that inventory from Cardinal. Respondent contends that 
Cardinal was acting as a freight forwarder for the shipments and 
therefore no records were required from Cardinal.
    Judge Bittner concluded that ``[i]t is undisputed that the Kmart 
boxes were handled at Cardinal facilities, that

[[Page 52536]]

Cardinal did not inventory the contents of the boxes, and that 
Respondent did not obtain inventories of the contents from Cardinal. 
Thus, according to a literal reading of section 1304.23(c), Respondent 
violated that section.
    The Deputy Administrator disagrees with Judge Bittner to the extent 
that Respondent's violation of the regulation is not Respondent's 
failure to obtain inventories from Cardinal. Instead, Respondent 
violated this provision by failing to list Cardinal as the shipper of 
the controlled substances on its records of receipt. In light of 
existing regulations, Cardinal should have opened the boxes and created 
a record of what it shipped to Respondent, but any violations by 
Cardinal are not at issue in these proceedings. Respondent then should 
have created a record of what it received listing Cardinal as the 
shipper of the controlled substances. Therefore, the Deputy 
Administrator finds that Respondent violated 21 CFR 1304.23(c) by 
failing to list Cardinal as the shipper of the controlled substances on 
its records of receipt.
    The Deputy Administrator concludes that Respondent did violate some 
provisions of the law and regulations relating to controlled substances 
since the effective date of the previous final order in this matter. 
The next question is whether such violations warrant revocation.
    As a preliminary matter, the Government argued in its exceptions to 
Judge Bittner's opinion that in light of the wording of the then-Deputy 
Administrator's final order dated July 5, 1996, any violation since the 
effective date of the final order should cause the stay to be lifted 
and Respondent's registration revoked. However, the Deputy 
Administrator agrees with the then--Acting Deputy Administrator's 
remand of this matter when he directed Judge Bittner to make a 
recommendation as to whether a violation warrants the removal of the 
stay. Revocation is a harsh sanction and should not be taken lightly. 
The nature of a violation and the circumstances surrounding such a 
violation should be considered in determining whether revocation is 
warranted.
    Pursuant to 21 U.S.C. 823(e) and 824(a)(4), the Deputy 
Administrator may revoke a DEA Certificate of Registration upon a 
finding that the continued registration would be inconsistent with the 
public interest. In determining the public interest, the Deputy 
Administrator must consider the following factors set forth in 21 
U.S.C. 823(e):
    (1) Maintenance of effective controls against diversion of 
particular controlled substances into other than legitimate medical, 
scientific, and industrial channels;
    (2) Compliance with applicable State and local law;
    (3) Prior conviction record of applicant under Federal or State 
laws relating to the manufacture, distribution, or dispensing of such 
substances;
    (4) Past experience in the distribution of controlled substances; 
and
    (5) Such other factors as may be relevant to and consistent with 
the public health and safety.
    It is well established that these factors are to be considered in 
the disjunctive; the Deputy Administrator may properly rely on any one 
or a combination of factors, and give each factor the weight he deems 
appropriate. See Centrum Medical Enterprises, Inc., 58 FR 51,383 
(1993).
    Regarding factor one, Judge Bittner concluded that Respondent has 
established a number of controls to prevent the diversion of controlled 
substances, however as of the September 1996 inspection, Respondent was 
unable to generate an accurate report of what was in the cage. But, 
Judge Bittner also found it significant that ``Respondent operates 
under a variety of exogenous constraints, including lack of information 
as to when controlled substances will arrive at its facility and in 
what quantity and the requirement that it perform background checks on 
potential employees who would have access to controlled substances.'' 
Therefore, Judge Bittner concluded that, ``[i]n these circumstances, 
and given the unusual nature of the Kmart shipments and Respondent's 
care in ensuring that controlled substances are secured, * * * 
Respondent maintains effective controls against diversion and * * * 
this factor weighs in favor of Respondent's continued registration.''
    The Deputy Administrator agrees with Judge Bittner to some extent. 
Respondent has instituted a number of procedures to help minimize the 
risk of diversion, however the violations discovered during the 
September 1996 inspection must be considered in determining whether 
Respondent has maintained effective controls against the diversion of 
controlled substances.
    First, the Deputy Administrator has concluded that Respondent had 
several inaccurate entries on its December 1995 biennial inventory 
causing discrepancies in an accountability audit. In order to conduct 
an accountability audit, DEA must rely on the accuracy of a 
registrant's records, including its inventories. While ideally there 
should be no discrepancies in an audit, given the volume of 
Respondent's business and the explanations provided for the inaccurate 
entries, the Deputy Administrator finds that the violations relating to 
Respondent's biennial inventory are relatively minor. Even the lead DEA 
investigator characterized the problems as ``minor audit 
discrepancies.'' The Deputy Administrator therefore concludes that the 
violations relating to Respondent's inventory do not warrant revocation 
of Respondent's registration.
    Next, the Deputy Administrator finds it significant that other than 
the Kmart shipments, Respondent's records of receipt appear to be in 
compliance with the regulations. But, the Deputy Administrator finds as 
discussed above, that Respondent's records relating to the Kmart 
shipments were not all readily retrievable or current. This is of 
serious concern to the Deputy Administrator since these requirements 
are in place to prevent the diversion of controlled substances. By not 
having readily retrievable records of receipt for several months after 
the controlled substances are received at Respondent's facility, the 
chances of diversion increase.
    The Deputy Administrator recognizes Respondent's dilemma that it 
might take Respondent a long time to process large shipments, but it 
must nonetheless comply with the existing regulations which require 
that records of receipt be maintained on a current basis and be readily 
retrievable.
    The disposer business is different from other DEA registered 
distributors, and regulations are needed to specifically address this 
type of DEA registrant. DEA's failure to finalize regulations that were 
proposed in August 1995 seems to support a conclusion that even DEA 
recognizes that this is a complex and evolving business, not like other 
distributors where receipt of controlled substances is easily 
verifiable.
    Therefore, the Deputy Administrator does not find it appropriate to 
lift the stay of revocation at this time. However, until regulations 
are promulgated, Respondent must establish procedures to deal with 
large shipments of controlled substances and still comply with the 
existing regulations. As previously discussed, Respondent may need to 
require that its customers provide Respondent with more advance notice 
of large shipments and an estimate as to the size of the shipments so 
that Respondent can better prepare to meet its regulatory 
responsibilities.
    Finally, the Government contends that Respondent's failure to 
obtain receipt documents from Cardinal

[[Page 52537]]

threatened the closed system of distribution and therefore increased 
the risk of diversion. Judge Bittner concluded that Respondent violated 
21 CFR 1304.23(c) by failing to obtain records from Cardinal showing 
what Cardinal sent to Respondent as part of the Kmart shipments. Judge 
Bittner further concluded however that, ``imposing such a requirement 
in this type of transaction quite simply makes no sense.'' Judge 
Bittner contended that to require Cardinal to open boxes, inventory 
contents and create a record would increase the chance of diversion.
    But, as noted above, the Deputy Administrator concludes that 
Respondent's violation of the regulations was not that it did not 
obtain documents from Cardinal, but rather that Respondent did not list 
Cardinal as the shipper of the controlled substances on its own records 
of receipt. While it may seem to increase the chances of diversion, the 
regulations currently in effect nonetheless require that Cardinal 
should have opened the Kmart boxes, counted the contents and created a 
record of what it was shipping to Respondent. But, the violations by 
Cardinal are not at issue in this proceeding. The Deputy Administrator 
finds however that Respondent should have created a record of receipt 
indicating that it obtained the controlled substances from Cardinal, 
not Kmart.
    However, the record supports a finding that both Respondent and 
Cardinal thought that Cardinal was merely acting as a freight forwarder 
of the controlled substances from Kmart to Respondent and as a result, 
no records relating to Cardinal's involvement were required. This 
interpretation is not supported by the existing regulations. Under the 
current regulations, the shipments from Kmart to Cardinal and from 
Cardinal to Respondent are considered separate distributions, each 
requiring records of the transactions.
    While Respondent's interpretation is not supported by the 
regulations, it is not unreasonable. DEA published proposed regulations 
regarding freight forwarding in December 1996 which have yet to be 
finalized. Despite this lack of regulations, DEA has nonetheless 
permitted some forms of freight forwarding to occur, thereby 
contributing to the industry's confusion as to what is or is not 
permitted as it relates to freight forwarding. Therefore, Respondent's 
failure to list Cardinal as the shipper of the controlled substances on 
its records of receipt does not warrant revocation at this time.
    As to factor two, there is not evidence in the record to indicate 
that Respondent does not comply with applicable state and local law. 
Likewise, there is no evidence relating to factor three that Respondent 
or any of its officers or agents have ever been convicted under any 
Federal or state laws relating to the manufacture, distribution, or 
dispensing of controlled substances.
    Regarding factor four, Respondent's past experience in the 
distribution of controlled substances appears to be good. Respondent 
appears to have a good system in place for tracking what controlled 
substances leave its facility and where they go.
    Pursuant to factor five, the Deputy Administrator agrees with Judge 
Bittner that ``[b]oth Dershems credibly expressed their willingness to 
comply with DEA requirements, and * * * that Respondent has implemented 
and will continue to implement measures to minimize the risk of 
diversion of controlled substances.''
    Judge Bittner concluded that even though some regulatory violations 
occurred, ``Respondent's management remains willing to implement 
additional measures as necessary to prevent diversion.'' Judge Bittner 
therefore recommended that the Deputy Administrator conclude that 
Respondent's continued registration would not be inconsistent with the 
public interest, and that the Deputy Administrator withdraw the final 
order published on July 16, 1996, revoking Respondent's registration, 
permit Respondent to retain its registration, and grant any pending 
applications for renewal of its registration.
    In its exceptions to Judge Bittner's opinion, the Government argued 
that due to the problems with Respondent's records in the past, the 
parties agreed that Respondent would obtain records from shippers, and 
that the DEA investigators made it clear to Respondent that the records 
from the customers would be considered Respondent's records of receipt. 
However as noted above, the records from Respondent's customers would 
not be useful in conducting an audit because they would not necessarily 
reflect what controlled substances Respondent actually received. But 
the Deputy Administrator agrees with the Government that DEA continues 
to be unable to perform audits without current records of receipt. 
Therefore as previously discussed, Respondent needs to develop 
procedures to deal with large shipments and the creation of its records 
of receipt in a prompt manner. The Government's remaining exceptions, 
and the Respondent's reply to those exceptions, have already been 
addressed in this final order, and require no further discussion here.
    The Deputy Administrator concludes that other than the minor 
problems with Respondent's December 1995 inventory, Respondent's 
regulatory violations center around the Kmart/Cardinal shipments. 
Respondent's non-Kmart recordkeeping practices seem to be in compliance 
with the regulations. Respondent's problems appear to be in dealing 
with large shipments of the type received by Respondent from Kmart with 
partial bottles and random pills in each box.
    Regulations exist to protect the public health and safety and they 
apply to Respondent as a registered distributor of controlled 
substances. Even though the current regulations were not promulgated 
with Respondent's type of business activity in mind, Respondent must 
comply with the existing regulations when handling these large 
shipments.
    However, the Deputy Administrator recognizes that Respondent 
continues to appear willing to do whatever it takes to comply with its 
regulatory responsibilities. The Deputy Administrator also acknowledges 
the need for regulations that address the unique aspects of the 
disposer industry and freight forwarding. Therefore, the Deputy 
Administrator concludes that it is not in the public interest to lift 
the stay and revoke Respondent's registration at this time.
    But unlike Judge Bittner, the Deputy Administrator concludes that 
further monitoring of Respondent is still necessary. Respondent's 
failure to create records of receipt for large shipments in a prompt 
manner threatens the closed system of distribution of controlled 
substances and increases the likelihood of diversion.
    Therefore, the Deputy Administrator concludes that is in the public 
interest to continue the stay of revocation for one year from the 
effective date of this final order. The Deputy Administrator orders 
that within one month of the effective date of this final order, 
Respondent shall present evidence to the DEA office in Philadelphia 
that it has developed procedures to deal with large shipments of 
controlled substances and to maintain its records of receipt on a 
current basis and in a readily retrievable manner. Thereafter, during 
the one year probationary period, DEA will conduct inspections and 
audits in compliance with 21 U.S.C. 880 to determine if Respondent's 
records of receipt are now maintained in a readily retrievable manner 
and on a current basis.

[[Page 52538]]

    If DEA's inspections or audits reveal that Respondent still does 
not maintain its records of receipt in a readily retrievable and 
current manner, the Deputy Administrator will remove the stay and 
revoke Respondent's DEA Certificate of Registration. However, if the 
inspections reveal that Respondent is now maintaining its records of 
receipt in compliance with DEA regulations, then the Deputy 
Administrator will withdraw this final order and the final order 
published on July 16, 1996, will permit Respondent to retain its 
registration, and will renew the registration.
    Also to avoid further confusion within the controlled substance 
industry and to address the concerns set forth in this final order, the 
Deputy Administrator directs that DEA's Office of Diversion Control 
finalize the regulations relating to disposers of controlled substances 
and relating to the freight forwarding of controlled substances.
    Accordingly, the Deputy Administrator of the Drug Enforcement 
Administration, pursuant to the authority vested in him by 21 U.S.C. 
823 and 824 and 28 CFR 0.100(b) and 0.104, hereby orders that the stay 
of revocation of DEA Certificate of Registration RR0166113, issued to 
RX Returns, Inc., that is set forth in the final order dated July 5, 
1996 and found at 61 FR 37,801 (July 16, 1996), be, and it hereby is, 
continued for one year from the effective date of this final order, 
subject to the above described conditions. This final order is 
effective October 29, 1999.

    Dated September 20, 1999.
Donnie R. Marshall,
Deputy Administrator.
[FR Doc. 99-25357 Filed 9-28-99; 8:45 am]
BILLING CODE 4410-09-M