[Federal Register Volume 69, Number 204 (Friday, October 22, 2004)]
[Notices]
[Pages 62086-62089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-23707]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket No. 03-05]


Express Wholesale Denial of Application

    On September 27, 2002, the Deputy Assistant Administrator, Office 
of Diversion Control, Drug Enforcement Administration (DEA), issued an 
Order to Show Cause to Express Wholesale (Respondent) 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 relevant part 
that granting the

[[Page 62087]]

application of Respondent 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 Gail A. Randall. Following prehearing 
procedures, a hearing was held in Oklahoma City, Oklahoma on October 
21-22, 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 May 18, 2004, Judge Randall issued her Recommended 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 June 24, 2004, Judge Randall 
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.
    By application dated August 23, 2001, Mr. Terry H. Kim, owner of 
Express Wholesale, located at 1913 Dyer Drive, Moore, Oklahoma, 
submitted an application for a DEA Certificate of Registration as a 
distributor of list I chemicals, seeking authority to distribute 
pseudoephedrine and phenylpropanolamine.
    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 commonly used to illegally manufacture 
methamphetamine, a Schedule II controlled substance. At the time that 
Respondent submitted its application for DEA registration, 
phenylpropanolamine, also a list I chemical, was a legitimately 
manufactured and distributed product used to provide relief of the 
symptoms resulting from irritation of the sinus, nasal and upper 
respiratory tract tissues, and is also used for weight control. 
Phenylpropanolamine is also a precursor chemical used in the illicit 
manufacture of methamphetamine and amphetamine. As noted 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 11,654 
(2004); Branex, Inc., 69 FR 8682 (2004); Yemen Wholesale Tobacco and 
Candy Supply, Inc., 67 FR 9997 (2002); Denver Wholesale, 67 FR 99,986 
(2002).
    On February 5, 2002, a DEA diversion investigator conducted a pre-
registration inspection at Respondent's proposed registered location. 
It was situated in the residential duplex where Mr. Kim lives. He 
indicated he would store the listed chemical products in one-half of 
the unit's two-car garage, which did not have an internal secure 
storage container.
    During the visit, the investigator provided Mr. Kim with a copy of 
DEA regulations and reference materials commonly referred to as the 
``Red Sheet'' and the ``Green Sheet.'' These documents direct an 
applicant's attention to matters involving the diversion of ephedrine, 
pseudoephedrine and phenylpropanolamine to the illicit production of 
amphetamine and methamphetamine. The investigator additionally 
explained the meaning of both notices to Mr. Kim and asked if he had 
any questions about the notices.
    When asked what products he intended to sell, Mr. Kim mentioned 
only Max Brand Pseudo 60 (``Max Brand'') and indicated that Max Brand 
would make up 30% of Respondent's overall business. He then asked the 
investigator if that was ``too much.'' After the on-site visit, Mr. Kim 
called the investigator several times inquiring as to the status of the 
application and stated he was losing business and customers because he 
could not provide them with the Max Brand product.
    Mr. Kim also provided a customer list during the inspection and the 
investigator recognized many of the intended customers through her work 
on an unrelated criminal investigation during which she had visited 50 
to 75 convenience stores in Oklahoma City, Oklahoma and Dallas, Texas. 
After being apprised the investigator was having problems confirming 
customers on his list, about a month later, Mr. Kim sent a supplemental 
list, which was shorter and had some different customers.
    The investigator again recognized some of the store names as being 
involved with on-going criminal investigations. Several of the 
prospective customers were also on lists provided by other distributors 
with pending applications or were customers of current registrants. A 
significant portion of Respondent's prospective customers were 
convenience stores and gas stations.
    During a brief follow-up visit on February 20, 2002, the 
investigator confirmed that Mr. Kim had now installed a wooden, 
padlocked storage container in the garage. The investigator concluded 
this would afford adequate physical security for storage of the list I 
chemical products.
    Respondent's business consists primarily of supplying general 
merchandise to convenience stores and gas stations. When he began the 
registration application process, Mr. Kim was not aware that 
pseudoephedrine was used to manufacture methamphetamine. While Mr. Kim 
indicated he was aware of, and willing to abide by all requirements 
levied upon a DEA registrant, his testimony at the hearing reflected 
uncertainty as to his actual understanding of those requirements.
    Mr. Kim did agree to exclude Max Brand from the product list if the 
application was granted. He also furnished 48 signed ``form letter'' 
type statements from owners or representatives of retail outlets in the 
Oklahoma City area, indicating they supported Respondent's DEA 
registration and would use its products only for legitimate purposes.
    Methamphetamine use is a growing problem in the State of Oklahoma 
and pseudophedrine and ephedrine are combined with other products to 
manufacture methamphetamine. Convenience stores have been the primary 
source for the pseudoephedrine and ephedrine used in the illicit 
manufacturing of methamphetamine in the Oklahoma City area and some of 
these convenience stores are supplied through different wholesale 
distributors.
    Max Brand Pseudo 60 is the precursor product predominantly 
encountered and seized at clandestine methamphetamine laboratories. 
Convenience stores are also the primary source for the purchase of the 
Max Brand products, which are the preferred brand for use by illicit 
methamphetamine producers and users. Large, nationally recognized 
chains such as Wal-Mart and Eckerd do not usually carry Max Brand 
products. While the record is unclear as to quantity and strength of 
products, in

[[Page 62088]]

Oklahoma City, Max Brand typically retailed for approximately $17.00 
per bottle while other name brand cold and sinus products such as 
Tylenol, typically retailed for approximately $5.00 per bottle. 
Although local law enforcement officials in Oklahoma consider Max Brand 
the product of predominant concern, other brands have been discovered 
at area clandestine laboratories, including Action Brand, Bolt, Equate 
and Roxanne.
    By declaration, the Government presented an expert witness in the 
area of statistical analysis of convenience stores and their sale of 
pseudoephedrine. Mr. Jonathan Robbin, a consultant in marketing 
information systems and databases, presented his evidence on behalf of 
the government as an expert in statistical analysis and quantitative 
marketing research. With respect to the expert analysis by Mr. Robbin, 
the Deputy Administrator adopts the following findings of fact, as set 
forth in Judge Randall's Opinion and Recommended Ruling.
    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 
purchases by ordinary customers.''
    Analyzing national sales data specific to over-the-counter, non-
prescription drugs containing pseudoephedrine, Mr. Robbin characterized 
convenience stores as a ``nontraditional market'' for the sale of such 
products. His research and analysis show ``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 concluded that 
``[c]onvenience stores, therefore, definitely constitute a `non-
traditional' market for the sale of over-the-counter, non-prescription 
drug pseudoephedrine products.''
    He explained that this information supports DEA's conclusion that 
pseudoephedrine products distributed to this nontraditional market 
greatly exceeded the normal demand for such products at such retail 
outlets. He agreed that such excessive sales could be purchases of 
listed chemical products that were diverted to illicit uses.
    With respect to Oklahoma wholesale pseudoephedrine sales of several 
distributors and over 300 of their retail customers, all of which were 
convenience stores, a July 2002 analysis by Mr. Robbin led to the 
conclusion ``that without evidence of the existence of immense numbers 
of legitimate customers, it was likely that the massive inventories of 
pseudoephedrine products purchased by these Oklahoma stores were being 
turned to illegal uses.''
    In connection with Respondent's prospective customer list, Mr. 
Robbin also analyzed data accumulated from prior DEA cases regarding 
wholesale sales of pseudoephedrine products to convenience store 
retailers in Oklahoma. He found that more than two-thirds of 
Respondent's proposed customers had previously acquired ``excessive 
amounts of listed chemical products from one or more sources.'' He 
further opined that a large number of the stores from Respondent's list 
were not ``in the normal or traditional range of expectation in regard 
to the stocking and presumed sale of pseudoephedrine (Hcl) tablets.''
    Four of the stores show an index of actual purchase rates of 
pseudoephedrine tablets in excess of 100% over the expected purchase 
rate. One store purchased a quantity valued at 208.9% over the expected 
legitimate purchase rate for such products. Given the small size of 
most convenience stores and the normal purchases of legitimate 
customers, Mr. Robbin concluded that ``[s]uch values are not possible 
in the normal commerce of these goods * * *''
    He also concluded that the data pertaining to Respondent's proposed 
customer list indicates Respondent ``will predominantly serve retailers 
who already acquire excessive amounts of product from multiple 
sources'' and that Mr. Robbin's analysis clearly showed Respondent 
would not be selling listed chemical products to the traditional market 
for such over-the-counter drug products.
    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 11,654; Energy Outlet, 64 FR 14,269 (1999); 
Henry J. Schwartz, Jr., M.D., 54 FR 16,422 (1989).
    The Deputy Administrator finds factors one, four and five relevant 
to Respondent's pending registration application.
    As to factor one, maintenance by the applicant of effective 
controls against diversion, the Deputy Administrator agrees with Judge 
Randall that the physical security of the proposed storage arrangement 
was adequate. However, DEA has previously held that registrants have a 
responsibility to maintain controls against diversion, beyond the 
confines of the mere physical security afforded the product. See, OTC 
Distribution Co., 68 FR 70,538 (2003).
    Judge Randall found the record devoid of any indication that Mr. 
Kim had contemplated any measures by which he could ensure that 
potential customers would not acquire excessive listed chemical 
products that would ultimately be diverted. Lacking any business 
practices or systems that would act as a detection system, she 
concluded ``Respondent would be unable to effectively monitor 
suspicious purchase orders to alert him to the need to inquire as to 
the possibility of a proposed illicit distribution of the listed 
chemical product, or to alert him to the need to report such illicit 
distribution to the DEA.''
    The evidence also failed to demonstrate that Mr. Kim grasped the 
need for monitoring the packaging of the listed chemical product he 
planned to distribute. The Deputy Administrator agrees with Judge 
Randall that ``DEA has legitimate concerns if a distributor elects to 
sell such bottles of listed chemical product, versus if a distributor 
elects to sell such product marketed in small quantity, blister 
packs.''

[[Page 62089]]

    Accordingly, particularly given Respondent's lack of a plan for a 
business monitoring system, factor one weights against registration
    As to factors two and three, there is no evidence that Mr. Kim has 
any criminal record or evidence that he violated any laws, which weighs 
in favor of granting the application.
    With regard to factor four, the applicant's past experience in the 
distribution of chemicals, the Deputy Administrator agrees with Judge 
Randall that the record demonstrates Mr. Kim lacks experience and 
knowledge in the distribution of listed chemical products. While he has 
offered assurances that he now knows the risks involved in handling 
listed chemical products, the absence of an adequate business plan to 
minimize the risk to the general public is significant.
    In prior DEA decisions, this lack of experience in handling list I 
chemical products has been a factor in denying pending applications for 
DEA registration. See e.g., Direct Wholesale, 69 FR 11,654 (2004); ANM 
Wholesale, 69 FR 11,652 (2004); Xtreme Enterprises, Inc., 67 FR 76,195 
(2002). The Deputy Administrator agrees with Judge Randall that this 
factor weights against granting Respondent's application for 
registration.
    With regard to factor five, other factors relevant to and 
consistent with the public safety, the Deputy Administrator finds this 
factor weighs heavily against granting the application. Unlawful 
methamphetamine use is a growing public health and safety concern 
throughout the United States and specifically in the State of Oklahoma. 
Pseudoephedrine and ephedrine are the precursor products used to 
manufacture methamphetamine and users predominantly have acquired the 
precursor products needed to manufacture the drug from convenience 
stores and gas stations.
    The Deputy Administrator specifically concurs with Judge Randall's 
finding that Max Brand is the product preferred by illicit 
methamphetamine manufacturers and users. Also, while Mr. Kim made a 
belated gesture in agreeing to eliminate Max Brand from his product 
list, it is only one of multiple precursor products used to manufacture 
the drug and the same public interest factors apply to other brands as 
well. As recognized by Judge Randall, ``merely declining to sell the 
Max Brand product is not enough to outweight the other public interest 
concerns that must be taken into consideration here.''
    While Mr. Kim has not been involved in the manufacturing of 
methamphetamine, the majority of his proposed customers operate 
convenience stores and gas stations. As noted by Judge Randall, the 
Deputy Administrator has previously found that many considerations 
weighed heavily against registering a distributor of list I chemicals 
because, ``[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.'' Extreme 
Enterprises, Inc., supra, 67 FR at 76,197. As in Xtreme Enterprises, 
Inc., Mr. Kim's lack of a criminal record, compliance with the law and 
a willingness to upgrade physical security are far outweighed by his 
lack of experience and his intent to sell ephedrine almost exclusively 
in the gray market. Id.
    The Deputy Administrator additionally takes notice that after the 
hearing on this matter concluded, Oklahoma enacted House Bill 2176, 
titled the ``Oklahoma Methamphetamine Reduction Act of 2004.'' Under 
this statute, which was signed on and made effective as of April 6, 
2004, among its provisions, the sale of pseudoephedrine tables is now 
restricted to licensed pharmacies. Accordingly, Respondent's proposed 
base of Oklahoma customers in no longer legally viable.
    Among the listed chemical products Respondent intends to distribute 
is phenylpropanolamine. As did Judge Randall, the Deputy Administrator 
also finds factor five relevant to the request to distribute 
phenylpropanolamine and 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 ANM 
Wholesale, 69 FR 11,652 (2004); William E. ``Bill'' Smith d/b/a/ B & B 
Wholesale, 69 FR 22,559 (2004); Shani Distributors, 68 FR 62,324 
(2003).
    Based on the foregoing, the Deputy Administrator concludes that 
granting the pending application of Respondent would be inconsistent 
with the public interest. As discussed by Judge Randall, DEA is 
justified in registering only those applicants who grasp the severity 
of the problem and understand and can implement controls to stop 
diversion of listed chemical products. Notwithstanding the loss of his 
customer base as a result of state legislative action, the record here 
falls woefully short of establishing that Mr. Kim has the requisite 
level of understanding, ability or willingness to establish and 
maintain business controls and procedures adequate to prevent diversion 
of listed chemical products.
    Accordingly, the Deputy Administrator of the Drug Enforcement 
Administration, pursuant to the authority vested in her by 21 U.S.C. 
823 and 28 CFR 0.100(b) and 0.104, hereby orders that the pending 
application for a DEA Certificate of Registration, previously submitted 
by Express Wholesale be, and it hereby is, denied. This order effective 
November 22, 2004.

    Dated: October 5, 2004
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. 04-23707 Filed 10-21-04; 8:45 am]
BILLING CODE 4410-09-M