[Federal Register Volume 69, Number 224 (Monday, November 22, 2004)]
[Notices]
[Pages 67951-67962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-25695]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket Nos. 01-12; 01-13]


Indace, Inc., c/o Seegott, Inc.; Malladi, Inc.; Suspension of 
Shipments

    On January 25, 2001, the then-Administrator of the Drug Enforcement 
Administration (DEA) issued an Order to Suspend Shipment to Indace, 
Inc., c/o Seegot, Inc. (Indace) of Elgin, Illinois, notifying it that 
pursuant to 21 U.S.C. 971, DEA had ordered the suspension of a shipment 
of 3,000 kilograms of ephedrine hydrochloride, a listed chemical, from 
India into the United States. Indace indicated in its request for 
importation that the listed chemical was intended for further shipment 
to PDK Laboratories, Inc. (PDK) of Hauppage, New York. The Order to 
Suspend Shipment stated that DEA concluded that the listed chemical may 
be diverted to the clandestine manufacture of a controlled substance 
based upon the appearance of products manufactured from prior imports 
of ephedrine and pseudoephedrine destined for PDK at illicit criminal 
sites, including methamphetamine clandestine laboratories and dumpsites 
throughout the United States.
    On January 26, 2001, the then-Administrator of DEA issued an Order 
to Suspend Shipment to Malladi, Inc. (Malladi) of Edison, New Jersey, 
notifying it that pursuant to 21 U.S.C. 971, DEA had ordered the 
suspension of a shipment of 3,000 kilograms of ephedrine hydrochloride, 
a listed chemical, from India into the United States. Malladi also had 
indicated in its request for importation that the listed chemical was 
intended for further shipment of PDK and the Order to Suspend Shipment 
similarly stated that DEA had concluded the listed chemical may be 
diverted to the clandestine manufacture of a controlled substance, 
based upon the appearance of products manufactured from prior imports 
of ephedrine and pseudoephedrine destined for PDK at illicit criminal 
sites, including methamphetamine clandestine laboratories and dumpsites 
throughout the United States.

[[Page 67952]]

    On February 8, 2001, PDK requested a hearing in both matters, 
asserting standing as a Respondent pursuant to the ruling in PDK 
Laboratories, Inc. v. Reno, et al., 134 F.Supp.2d 24 (D.D.C. 2001). DEA 
complied with the District Court's ruling and both matters were 
docketed before Administrative Law Judge (ALJ) Gail A. Randall.
    On March 8, 2001, the ALJ issued an order consolidating both 
matters for hearing purposes. Neither Indace nor Malladi requested a 
hearing in these matters. Following prehearing procedures, a hearing 
was held in Arlington, Virginia, on March 26-30, April 5-6, April 11-13 
and April 16-17, 2001. At the hearing, PDK and the Government called 
witnesses to testify and introduced documentary evidence. After the 
hearing, both parties filed proposed findings of fact, conclusions of 
law, and argument.
    On April 5, 2002, the ALJ issued a consolidated Recommended 
Rulings, Findings of Fact, Conclusions of Law, and Decision of the 
Administrative Law Judge (hereinafter ``Recommendation'' or ``Opinion 
and Recommended Ruling'') recommending that both suspensions be lifted 
and the exporters allowed to complete the shipments. On April 25, 2002, 
the Government filed Exceptions to the ALJ's Recommendation. In 
response, on May 21, 2002, PDK filed its Response to the Exceptions 
Filed by the Government. Subsequently, on June 5, 2002, the ALJ 
transmitted the record of these proceedings to the Deputy Administrator 
for final action pursuant to 21 CFR 1313.57.
    On December 13, 2002, pursuant to 21 CFR 1313.57, then-Deputy 
Administrator John B. Brown III, issued his final order regarding the 
Indace and Malladi suspensions of shipments. The then-Deputy 
Administrator rejected the Opinion and Recommended Ruling of the 
Administrative Law Judge. That final order was subsequently published 
in the Federal Register on December 19, 2002. See Indace, Inc. c/o 
Segott, Inc.; Malladi, Inc. (Indace/Malladi), 67 FR 77805 (2002).
    In the ALJ's Opinion and Recommended Ruling, she interpreted the 
terms``listed chemical'' and ``the chemical,'' as set forth in 21 
U.S.C. 971(c)(1) (hereafter ``971''), to be limited to the actual 
material to be imported, in this case, bulk ephedrine. In the event the 
Deputy Administrator disagreed with that interpretation, the ALJ made 
alternative findings and recommendations that the Government had not 
satisfied the ``may be diverted'' portion of 971. The then-Deputy 
Administrator rejected the ALJ's interpretation of 971, finding:

    The application of 971 is not limited to the imported form of 
the listed chemical. The Deputy Administrator concludes that the 
provisions of 971 apply to regulated transactions involving listed 
chemicals regardless of imported or exported form. i.e., bulk of 
finished products. The Deputy Administrator further concludes the 
provisions of 971 apply to finished products subsequently 
manufactured from bulk imported list chemicals.

Id., 67 FR at 77806.
    The then-Deputy Administrator agreed with the ALJ that the evidence 
did not show, by a preponderance of the evidence, a violation by PDK of 
its obligation to report suspicious sales under 21 CFR 1310.05(a)(1) in 
connection with certain mail order sales of 25 mg. ephedrine products 
which occurred in 1995 and 1996. The then-Deputy Administrator further 
noted there had been testimony presented concerning ``traditional'' 
versus ``non-traditional'' markets for List I chemical products. 
However, in accord with his previous holding on this subject, he found 
the probative weight of the evidence introduced in this case to be 
minimal, without ``some form of further extrinsic evidence to support 
these arguments.'' Indace/Malladi, supra, 67 FR at 77808, quoting 
Mediplas Innovations, (Mediplas) 67 FR 41256, 41264 (2002).
    However, relying primarily on the issuance of a series of Warning 
Letters by DEA between 1999 and 2001, advising PDK that its ephedrine 
and pseudoephedrine products had been found at illicit methamphetamine 
manufacturing sites, the then-Deputy Administrator concluded sufficient 
evidence supported DEA's contention that the chemicals may be diverted. 
Secondarily, the then-Deputy Administrator relied on PDK's failure to 
report as exports, pursuant to 21 CFR 1313.21(a), four shipments of 
ephedrine sold to Sun Labs of Canada between 1994 and 1995, which had 
been delivered within the United States.
    In making his ruling the then-Deputy Administrator applied the 
``totality of the circumstances'' test used in Mediplas, stating:

    The Deputy Administrator notes the record is replete with PDK's 
contentions that it has worked hard to evaluate its activities and 
to cooperate with DEA in stemming diversion. However, the record 
shows that diversion of PDK products has continued to occur, and 
that, based upon the Warning Letters received, PDK should have known 
its remedial actions were insufficient to stem the diversion of its 
List I chemical products. Moreover, the record shows evidence that 
PDK violated export regulations on at least four occasions by 
failing to file the required notifications of its shipments to Sun 
Labs. The totality of the circumstances therefore supports the 
Government's assertion that the list chemicals sought to be imported 
and distributed to PDK may be diverted and furthermore that the 
Suspension Orders were proper and should be sustained, Mediplas, 67 
FR at 41,264. The fact that PDK products containing ephedrine and 
pseudoephedrine have been repeatedly found at the site of 
clandestine methamphetamine laboratories and dump sites is a 
significant indicator that these products may continue to be 
diverted to such illicit activities.
    * * * The Deputy Administrator finds that there was sufficient 
evidence at the time of the hearing to support DEA's contention that 
the chemicals may be diverted. Mediplas, 67 FR at 41260-41261 * * * 
Therefore, the Deputy Administrator concludes that the suspensions 
set forth in the January 25 and 26, 2001 Orders to Suspend Shipments 
of ephedrine hydrochloride issued to Indace and Malladi were 
justified.

Indace/Malladi, supra, 67 FR at 77809.
    PDK filed a timely petition for review of the final order pursuant 
to 21 U.S.C. 877 with the United States Court of Appeals for the 
District of Columbia Circuit and on March 26, 2004, the Court issued 
its opinion in PDK Laboratories Inc. v. U.S. Drug Enforcement 
Administration (PDK Labs), 362 F.3d 786 (D.C. Cir. 2004). Consistent 
with the District Court's decision in PDK Labs Inc. v. Reno, supra, 134 
F. Supp. at 31, the Court of Appeal concluded PDK had both prudential 
and Article III standing to challenge the suspension orders under the 
facts and circumstances of this cas. PDK Labs, supra, 363 F.3d at 791-
794; see also PDK Labs Inc. v. Ashcroft, ---- F.Supp.2d ----, 2004 WL 
1924930, 4 (D.D.C., decided August 27, 2004).
    The Court of Appeal also ruled that the final order of December 13, 
2002, should be set aside and remanded to DEA for a new final order. 
The entire Court concluded the then-Deputy Administrator had relied in 
significant part on PDK's failure to file export notifications 
regarding the New York deliveries of tablets containing ephedrine to 
Sun Labs of Canada. However, the final order failed to distinguish or 
explain its apparent departure from the position taken by the agency in 
Alfred Khalily, Inc. (Khalily), 64 FR 31289 (DEA June 10, 1999). PDK 
Labs, 363 F.3d at 798-799.

    In applying his `totality of the circumstances' approach to 
determining whether the listed chemical may be diverted, the Deputy 
Administrator ruled that PDK had violated an export notification 
regulation when it made four deliveries of tablets containing 
ephedrine between 1994 and 1995 to Sun Labs of Canada in New York. 
67 FR

[[Page 67953]]

at 77807-08. The Deputy Administrator did not explain how alleged 
export violations were relevant to determining whether PDK's 
finished products might be used in methamphetamine laboratories. In 
any event, the Deputy Administrator failed to distinguish, indeed 
did not mention, Alfred Khalily, Inc., 64 FR 31389 (DEA June 10, 
1999), which held that a company selling List I chemicals to a 
foreign buyer but delivering the chemicals to the buyer in the 
United States `was not responsible for filing any export 
documentation.' Id. at 31,293 n.2.

PDK Labs, 362 F.3d at 788.
    In addition to this ground for remand, a majority of the Court also 
concluded that remand was necessary for DEA to interpret 971(c)(1)'s 
provision authorizing DEA to ``order the suspension of any importation 
* * * of a listed chemical on the ground that the chemical may be 
diverted to the clandestine manufacture of a controlled substance.'' 
See PDK Labs, v. DEA, 362 F.3d at 794-98. One judge issued a concurring 
opinion which, while agreeing remand was appropriate for the failure to 
distinguish Khalily, disagreed with the majority as to the need for DEA 
to provide further interpretation of section 971(c)(1). Id. at 799-810 
(Roberts, J., conc.). However, the majority analyzed the crux of the 
case as follows:

    The main interpretive question in the case is whether, as the 
suspension orders assume, `the chemical may be diverted' includes 
the prospect that PDK's ephedrine-containing pills in retail stores 
will be sold to, or shoplifted by, people who will then use the 
pills to produce methamphetamine [fn]. The Deputy Administrator 
concluded that the statute plainly meant what the suspension orders 
assumed. He reached this conclusion without mentioning any policy 
considerations or other means within the agency's expertise. 
Apparently for this reason, DEA neither invoked Chevron v. NRDC, 
U.S. 837, 843-45 (1984), nor asks us to give special deference to 
the Deputy Administrator's judgment about the meaning of the 
provision.

PDK Labs, supra, 362 F.3d at 794.
    The majority viewed the then-Deputy Administrator's final order as 
premised on an erroneous belief that the statute was ``clear'' and 
971(c)(1)'s meaning ``plain.'' Id., at 794-95. It held as follows:

    We do not agree that the language of Sec.  971(c)(1) plainly 
covers the diversion of finished products, or drug products. That a 
statute is susceptible of one construction does not render its 
meaning plain if it is also susceptible of another plausible 
construction, as we believe this statute is. Section 971(c)(1) deals 
with importation (and exportation) of listed chemicals. It does not 
regulate what a drug manufacturer does with the chemical after 
receiving it; other sections of the [Controlled Substances Act, as 
amended] control that subject. When Sec.  971(c)(1) states that DEA 
may stop the importation if `the chemical may be diverted to the 
clandestine manufacture of a controlled substance,' one might ask: 
`Diverted from what?' In context, a reading as plausible as the 
Deputy Administrator's is that Congress meant only to cover 
diversions during importation. On this view, Sec.  971(c)(1) would 
authorize suspension orders only if the imported chemical might not 
reach its intended destination--the legitimate, domestic 
manufacturer.

PDK Labs, supra, 362 F.3d at 796-97 (italics in original).
    The majority further concluded,

    In short, we do not agree that the meaning of Sec.  971(c)(1) is 
as plain as it says it is. It may be that here, as in other cases, 
the strict dichotomy between clarity and ambiguity is artificial, 
that what we have here is a continuum, a probability of meaning. In 
precisely those kinds of cases, it is incumbent upon the agency not 
to rest simply on its parsing of the statutory language. It must 
bring its experience and expertise to bear in light of competing 
interests at stake. See Chevron v. NRDC, 467 U.S. at 865-66, 104 S. 
Ct. at 2792-93. But it has not done so here and at this stage it is 
not for the court `to choose between competing meanings.' 
[Citations].

PDK Labs, supra, 362 F.3d at 797-98.
    With this guidance in mind, the Deputy Administrator has considered 
the record in its entirety, along with the Court of Appeal's ruling 
and, pursuant to 21 CFR 1313.57, hereby issues her final order 
regarding the Indace and Malladi suspension of shipments, based upon 
findings of fact and conclusions of law as hereinafter set forth. The 
Deputy Administrator is issuing one final order regarding both 
suspension cases since the same findings of fact and conclusions of law 
apply to both suspensions. Except as hereinafter noted, the Deputy 
Administrator rejects, in its entirety, the Opinion and Recommended 
Ruling of the Administrative Law Judge. Based upon her review of the 
record in this matter, including all submissions of both parties, and 
exceptions as filed, the Deputy Administrator adopts such findings of 
fact and conclusions of law as hereinafter follow.
    The Deputy Administrator finds that both Indace and Malladi are 
registered with DEA as importers of listed chemicals. Both importers 
were advised in the Orders to Suspend Shipment of their right to 
request a hearing. Neither importer chose to do so. Furthermore, the 
record reflects that the ALJ gave Indace an opportunity to participate 
in prehearing matters, but Indace did not respond. Accordingly the 
Deputy Administrator concludes that both Indace and Malladi have waived 
their right to a hearing pursuant to 21 CFR 1313.54.
    It is now the law of the case that in reference to this proceeding, 
PDK is ``a regulated person to whom an order applies under 21 U.S.C. 
971(c)(2) with respect to the suspension of List I chemicals to be 
imported on PDK's behalf.'' PDK Laboratories Inc. v. Reno, et al., 
supra, 134 F.Supp. at 31; PDK Labs, supra, 362 F.3d at 792-95. 
Accordingly, the District Court and the Court of Appeal have created a 
rule for this case.\1\
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    \1\ However, as the Court of Appeal indicated, ``in holding that 
PDK has prudential standing, we have avoided placing a judicial 
interpretation on Sec.  971(c)(2), the hearing provision.'' PDK 
Labs, supra, 362 F.3d at 794. The Deputy Administrator therefore 
declines to adopt a rule as DEA policy that a party in PDK's 
position (i.e., a wholesale distributor/manufacturer or a downstream 
customer of such an entity), is entitled to a hearing under 21 
U.S.C. 971(c)(2) as a ``regulated person to whom an order applies 
under paragraph (1)'' of that subdivision.
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    On January 25 and 26, 2001, DEA issued the Orders to Suspend 
Shipment to Indace and Malladi which are the subject of these 
proceedings. The Orders asserted as a basis for suspension that the 
ephedrine to be imported may be diverted to the illicit production of a 
controlled substance. They recited that DEA investigations revealed 
that products produced from prior imports of ephedrine and 
pseudoephedrine destined for PDK had appeared at clandestine 
methamphetamine laboratories in the United States. The Orders also 
indicated that traffickers utilize ephedrine and pseudoephedrine in the 
illicit production of methamphetamine, that PDK manufactures and 
distributes over-the-counter drug products containing the listed 
chemicals pseudoephedrine and ephedrine, that these products are 
distributed in strength, quantity and packaging unlike the traditional 
market (referred to by DEA as ``gray market'' products), and that these 
products are generally distributed and sold through non-traditional 
retail outlets. The Orders to Suspend Shipment also indicated that DEA 
data regarding clandestine laboratory seizures noted that gray market 
products are predominantly encountered in clandestine methamphetamine 
laboratories.
    The issue before the Deputy Administrator is whether or not the 
record as a whole establishes by a preponderance of the evidence that 
DEA should suspend the two shipments of ephedrine hydrochloride 
destined to be shipped from India to the United States, pursuant to 21 
U.S.C. 971(c)(1) and 21 CFR 1313.41(a).

[[Page 67954]]

    There is no evidence that the shipments of bulk ephedrine 
hydrochloride would be diverted before reaching PDK, the intended 
recipient within the United States. Thus, if the ALJ's interpretation 
of the terms ``listed chemical'' and ``the chemical'' as set forth in 
971(c)(1) was correct, the suspensions could not be sustained. However, 
the Deputy Administrator rejects the ALJ's interpretation of these 
critical terms and concludes they encompass more than just the imported 
or exported form of the listed chemical, in this case bulk ephedrine 
hydrochloride. Instead, the Deputy Administrator finds the applicable 
provisions of 971 apply to regulated transactions involving listed 
chemicals, regardless of their imported or exported form, i.e., bulk or 
finished products. The Deputy Administrator further concludes the terms 
at issue also apply to finished products subsequently manufactured from 
bulk imported/exported list chemicals.
    The Deputy Administrator believes that the term ``listed 
chemical,'' as used in 971(c)(1) should be construed broadly in light 
of that term's use in other parts of the same statute, which was 
enacted by Congress in 1988. In the previous final order, the then-
Deputy Administrator cited the Ninth Court of Appeal's decision in 
United States v. Daas (Dass), 198 F.3d 1167 (9th Cir. 1999). See, 
Indace/Malladi, 67 FR at 77806. In that case, the defendant, who had 
been convicted under then-21 U.S.C. 841(d)(2) \2\ for distributing a 
listed chemical, argued the evidence was insufficient to support his 
conviction because that statute, which was enacted at the same time as 
971(c)(1), only criminalized the distribution of pure ephedrine or 
pseudoephedrine, not a chemical mixture containing these chemicals.
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    \2\ Now 21 U.S.C. 841(c)(2).
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    The Ninth Circuit rejected that argument, holding that ``Sec.  
841(d)(2) encompasses such mixtures as Mini Thins and Pseudo Thins.'' 
Dass, 198 F.3d at 1174. In particular, the Ninth Circuit noted that the 
ephedrine and pseudoephedrine in Mini Thins and Pseudo Thins ``retain a 
separate existence,'' (quoting Chapman v. United States, 500 U.S. 453, 
461 (1991) and, therefore, that ``[t]he ephedrine and pseudoephedrine 
in Mini Thins and Pseudo Thins are plainly `listed chemicals' within 
the meaning of Sec.  841(d)(2).'' Id., at 1175.\3\
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    \3\ The Mini-Thin ephedrine based product involved in Daas, had 
been obtained by the defendant from Body Dynamics Incorporated (BDI) 
and sold to the All-Rite Market of Marysville, California between 
early 1996 and early 1997. Daas, supra, 198 F.3d at 1171-72. During 
this period, PDK was manufacturing the Mini-Thin products and 
distributing it exclusively through BDI. In 1998, after DEA executed 
a Federal search warrant on BDI and sent a Warning Letter to PDK 
concerning BDI labeled products being found at illicit sites, PDK 
terminated its contract with BDI.
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    For clarification, while Daas referred to the ``plain'' meaning of 
the phrase in the criminal statute, the Deputy Administrator does not 
view Dass as mandating the adopted interpretation of 971(c)(1). 
However, as noted by the majority in PDK Labs, ``There is logic in the 
Ninth Circuit's reasoning, and in the Deputy Administrator's reliance 
on the decision. When Congress uses the same word in different parts of 
a statute, it usually means the same thing. See Sullivan v. Stroop, 496 
U.S. 478, 484 (1990); Energy Research Found v. Defense Nuclear Safety 
Bd., 917 F.2d 581, 583 (D.C. Cir. 1990).'' PDK Labs, 362 F.3d at 796.
    However, the majority went on to note that logic is only one 
component of statutory interpretation. The words of the statute should 
be ``read in context, the statute's place in `the overall scheme' 
should be considered, and the problem Congress sought to solve should 
be taken into account [Citations].'' PDK Labs, 362 F.3d at 797.
    The Deputy Administrator finds that based upon the evidence in the 
record, the listed chemicals ephedrine and pseudoephedrine are marketed 
in prescription and over-the-counter drug products which have 
legitimate therapeutic uses as a bronchodilator and nasal decongestant, 
respectively.
    The Deputy Administrator also finds that over the past decades, DEA 
has been engaged in enforcement and regulatory activity to control the 
large-scale diversion of chemicals, including ephedrine and 
pseudoephedrine, into the illicit manufacture of controlled substances. 
The controlled substance methamphetamine is easily produced in 
clandestine laboratories using either pseudoephedrine or ephedrine. The 
process of manufacturing methamphetamine is easily accomplished with 
minimal equipment and readily available chemical supplies.
    The Controlled Substances Act has always prohibited the illicit 
(i.e., without a DEA registration) manufacture of controlled 
substances. The earliest illicit methamphetamine laboratories used the 
freely available chemical phenyl-2-propanone, also known as 
phenylacetone or P2P, to produce methamphetamine, until that substance 
was itself scheduled as a controlled substance. In the 1980's 
methamphetamine laboratories increasingly began to switch to an 
ephedrine process. The Chemical Diversion and Trafficking Act of 1988 
(CDTA), Pub. L. 100-690, established the basic scheme of chemical 
regulation and imposed reporting and record keeping and import/export 
notification requirements on certain regulated transactions involving 
chemicals, including bulk ephedrine. However, at the time, listed 
chemicals contained in drug products were exempted from the reporting 
and record keeping provisions of the CDTA.
    In response to these controls, illicit methamphetamine laboratories 
began to switch to targeted ``single entity'' ephedrine as a raw 
material. The Domestic Chemical Diversion Control Act of 1993 (DCDCA), 
Pub. L. 103-200, was then crafted to close the ephedrine ``loophole'' 
by removing the exemption for ``single entity'' ephedrine products, and 
lowering its sales threshold. In addition, the DCDCA initiated a 
registration requirement for handlers of List I chemicals.
    Subsequently, illicit laboratories shifted to pseudoephedrine and 
combination ephedrine drug products as sources of raw material, 
prompting the passage of the Comprehensive Methamphetamine Control Act 
of 1996 (MCA), Pub. L. 104-237, to establish additional controls and 
quantity thresholds for reporting transactions regarding listed 
chemicals. The MCA also established a Suspicious Orders Task Force, in 
part to assist in alerting the chemical industry to the many devices 
used by individuals who seek to divert large quantities of listed 
chemicals and listed chemical products into the illicit manufacture of 
controlled substances.
    Thus, there has been a series of legislative enactments intended to 
address the problems of illicit drugs, including methamphetamine. As 
illicit manufacturers altered methods of production and choices of 
precursor chemicals, Congress enacted legislation intended in 
significant part to brunt the efforts of criminals engaged in operating 
clandestine methamphetamine laboratories and to thwart or impede their 
obtaining the precursor chemicals required to manufacture controlled 
substances.
    The Deputy Administrator finds nothing in the legislative history 
of these enactments compels the narrow interpretation of 971(c)(1) 
adopted by the ALJ in her Opinion and Recommended Ruling. Indeed, that 
history suggests Congress was very much concerned with the diversion of 
finished drug products containing ephedrine. See H.R. Rep. No. 103-

[[Page 67955]]

379(I), at 6 (1993), reprinted in 1993 U.S.C.C.A.N. 2983 [``This 
provision removes the exemption * * * for drugs containing ephedrine * 
* * because these products are being diverted in significant quantities 
for the illicit manufacture of methamphetamine''). As discussed in the 
initial final order, when the then-Acting Deputy Administrator made a 
report to the House of Representatives Committee considering the DCDCA, 
it indicated the legislation was intended, part, to close a 
``loophole'' for those who divert ephedrine drug products. Id., at 5, 8 
(1993).
    As noted by the concurring opinion in PDK Labs, the DEA Acting 
Administrator's report to the House explained that ``the so-called 
`legal drug exemption' which currently exempts drug products approved 
for marketing under the Food, Drug and Cosmetic Act from the regulatory 
provisions of our chemical control law had become a `loophole' 
exploited by clandestine laboratory operators. H.R. Rep. No. 103-379, 
at 8. It is that loophole that the DCDCA and CMCA revoked for drugs 
containing ephedrine, see 21 U.S.C. 802(39)(A)(iv)(I)(aa).'' PDK Labs, 
362 F.3d at 803 (Roberts, J., conc.) (internal quotation marks 
omitted).
    However, the majority in PDK Labs observed that the 1993 House 
Report came out five years after the 1988 enactment of 971(c)(1), that 
the DCDCA did not specifically amend section 971 and the ``loophole'' 
being closed concerned record keeping and reporting requirements. PDK 
Labs, 362 F.3d at 794-95.
    Nevertheless, the Deputy Administrator views the totality of these 
progressive enactments as part of an overall continuum of Congress' 
intent to provide DEA the regulatory means to monitor the domestic 
production, manufacture and distribution of List I chemicals and 
prevent their illicit use in manufacturing methamphetamine, including 
the ability to prevent the importation of bulk chemicals that will be 
manufactured into chemical products after arriving into the United 
States and then diverted throughout the country to thousands of 
clandestine laboratories.
    The Deputy Administrator does not view the relevant enactments of 
Congress as expressing any clear intent that the term ``listed 
chemical,'' as used in 971(c)(1 ), was limited to the particular 
chemical being imported or that DEA, as the agency entrusted with 
administering that provision, could not consider and take action to 
prevent the import of bulk listed chemicals which were to be 
manufactured into finished products and then, in the downstream course 
of commerce, diverted to the illicit production of methamphetamine.
    If Congress wanted to make an express distinction between a bulk 
listed chemical and a finished product in section 971(c), it could have 
done so. For example, 21 U.S.C. 958(i) is the statute permitting 
registered manufacturers to challenge an application for a DEA 
registration that seeks to import bulk controlled substances. That 
provision explicitly states that it is limited to bulk manufacturers. 
Congress could have done likewise, but it did not make such a 
distinction between bulk and finished form list chemicals when it 
crafted section 971.
    The record reflects that once PDK receives its bulk ephedrine, it 
combines the ephedrine with the decongestant guaifenesin and binders to 
form a listed chemical product. Throughout this process, the chemical 
composition of the ephedrine is unaltered. Illicit methamphetamine 
manufacturers then purchase or steal the tablets and break the finished 
product down to its component parts. This, in effect, yields the same 
pure ephedrine that was imported for PDK. In this manner, the listed 
chemical itself--ephedrine--is diverted to methamphetamine 
manufacturing. As the concurring opinion described the process in PDK 
Labs,

    At the time of its `diversion,' the ephedrine extracted from PDK 
Mini-Two Way Action is just as much a listed chemical as when it was 
transported across the high seas in bulk form. Thus, at least 
insofar as a listed chemical is readily extractable from its 
finished drug product, the text of section 971(c) treats 
transactions (including a `diversion') in that drug as transactions 
in the listed chemical it contains.
    This interpretation comports with common sense. If a 
methamphetamine manufacturer steals, for the purpose of making 
methamphetamine, a bottle containing pure ephedrine, or pure 
ephedrine dissolved in water, or a bottle containing 50 ephedrine 
and 50 guaifenesin pills, we would not hear an argument that he did 
not divert a listed chemical because he also diverted a bottle, some 
water, or some guaifensin. The presence of packaging materials or 
other extraneous items does not vitiate the existence of the listed 
chemical. Here, a bottle of PDK Mini Two-Way Action contains pills 
each consisting of 25 mg of ephedrine and 200 mg of guaifensin and 
binders. For purposes of Section 971(c), the decongestant and the 
binders are extraneous materials, no more relevant to the analysis 
than the bottles and boxes in which the pills are packaged.

PDK Labs, 362 F.3d at 800-801 (Roberts, J., conc.).
    The Deputy Administrator agrees with this analogy and finds that it 
comports with that of the Ninth Circuit in interpreting ``listed 
chemical'' for purposes of 21 U.S.C. 841(d)(2) (now (c)(2)), discussed 
earlier. See United States v. Daas, supra, 198 F.3d at 1174-75.
    While Congress may not have been as concerned about the diversion 
of ephedrine-containing products when it enacted section 971 as it was 
in the years that followed, as noted in the concurring opinion, `` `the 
fact that a statute can be applied in situations not expressly 
anticipated by Congress does not demonstrate ambiguity. It demonstrates 
breadth.' PGA Tour, Inc. v. Martin, 532 U.S. 661, 689 (2001) (internal 
quotation marks and citations omitted); accord Consumer Elecs. Ass'n, 
347 F.3d [291] at 298.'' PDK Labs, 362 at 802-03.
    Were the ALJ's strict interpretation of section 971(c)(1) given 
effect, as a policy matter it would also create an arbitrary dual 
standard. For example, if a listed chemical is imported in bulk form 
and if it is a chemical that is not or will not be converted to a drug 
product, then under 971(c)(1), that chemical may be suspended based 
upon its diversion during any time in its distribution flow, i.e., from 
the initial importation downstream to the last retail handler. Under 
the ALJ's interpretation, however, the suspension statute would be of 
limited use for those bulk products, such as ephedrine, that could be 
finished into an over-the-counter drug product somewhere along the 
distribution chain. In other words, as a matter of law, based solely 
upon the ALJ's statutory interpretation, once the imported bulk 
ephedrine is converted into a drug product at some point in the 
distribution chain, it is no longer subject to being suspended pursuant 
to section 971(c).
    Such an artificial distinction between over-the-counter drug 
products and other chemicals that will not be converted into any 
finished drug product is not tenable and is certainly inconsistent with 
the criminal penalty provisions of the law involving imports. For 
example, if DEA had facts to show that an importer had reasonable cause 
to believe that a listed chemical was to be imported, tableted, and 
distributed to a clandestine laboratory, then the importer would be 
subject to a lengthy term of imprisonment under 21 U.S.C. 960(d)(3). 
However, even if DEA knew those same facts, under the ALJ's standard, 
the import shipment could not be suspended.
    For consideration only of the policy issues involved in 
interpreting 971(c)(1), as opposed to the sufficiency of the evidence 
to show that in this particular case the List I chemical ``may be

[[Page 67956]]

diverted,'' (inasmuch as no additional extrinsic evidence was 
introduced at the hearing regarding the gray market; see Mediplas, 
supra, 67 FR at 41264; Indace/Malladi, supra, 67 FR 77808), a series of 
cases decided after this matter was litigated and/or originally acted 
upon by the then-Deputy Administrator, illustrate the problems DEA, 
state regulators and law enforcement agencies throughout the country 
currently face as a result of the proliferation of clandestine 
laboratories--using precursor chemicals, obtained by theft or purchase 
of listed chemical products which have often been made from bulk 
chemicals imported into the United States and then distributed to 
convenience stores and gas stations as a part of the grey market.
    See, e.g., OTC Distribution Co., 68 FR 70538, 70539 (2003) 
(``Pseudoephedrine bulk powder is usually imported from China or India, 
tableted by DEA-registered manufacturers, distributed to various 
distributors, wholesalers and then to retail outlets. Of DEA's 
approximately 3,500 chemical registrants in 2000, over 3,100 were 
distributors. While illegal diversion can occur at any point in the 
distribution chain, it usually occurs after the manufacturer has sold 
its product to a distributor.''; see also Branex Incorporated, 69 FR 
8682, 8690-93 (2004); Xtreme Enterprises, Inc., 67 FR 76195, 76196-97 
(2002); Sinbad Distributing, 67 FR 10232, 10233-34 (2002). For 
additional background as to the diversion of List I over-the-counter 
chemical products after distribution to retail establishments as it 
bears on DEA's interpretation of 971(c)(1), see also DEA's Proposed 
Rules on Security Requirements for Handlers of Pseudoephedrine, 
Ephedrine, and Phenylpropanolamine, 69 FR 45616, 45617 (2004).
    In sum, DEA and other Federal, State and local law enforcement 
agencies are faced with a growing problem of listed chemicals being 
imported into the United States in bulk form, which are then converted 
into List I chemical products, distributed to the grey market and 
diverted to illicit production of methamphetamine. Section 971(c)(1) is 
considered by DEA to be a significant component of the regulatory 
arsenal given it by Congress to combat this immense and growing public 
problem.
    If the language of a law is ambiguous and there exists two 
competing reasonable interpretations and the agency interpretation, 
which best suits its goals, is consistent with the intent of Congress, 
that interpretation should be granted great deference. Such a construct 
would be especially true here, because section 971 (similar to many 
other statutes under the Controlled Substances Act) is remedial and 
since it was passed to protect the public interest, it should be 
construed broadly to effectuate its purpose. See Jefferson County 
Pharmaceutical Association v. Abbott Laboratories et al., 460 U.S. 150, 
159 (1983) (holding that the Robinson-Patman Act had to be construed 
liberally and broadly to effectuate its purpose, which was to prevent 
anti-trust price discrimination); Federal Trade Commission v. Mandel 
Brothers, Inc., 359 U.S. 385, 389 (1959) (holding that the Federal 
Trade Commission's interpretation of a retail labeling act would be 
upheld because the legislation was remedial, i.e., it was enacted to 
protect consumers).
    The Deputy Administrator therefore concludes that the 
interpretation adopted in this final order is consistent with the words 
of the statute, its place in the overall drug enforcement legislative 
scheme and the problems Congress was attempting to address.
    In adopting her limited interpretation of ``listed chemical'' under 
971(c)(1), the ALJ cited three prior DEA cases in support of her 
position: Suspension of Shipment Cases,\4\ 65 FR 51333 (2002); Yi Heng 
Enterprises Dev. Co., 64 FR 2234 (1999); and Neil Laboratories, Inc., 
64 FR 30063 (1999). The Deputy Administrator finds these cases readily 
distinguishable, as they did not involve or discuss the question of 
chemical identity, which is at issue here. Instead, each of these cases 
dealt with other listed chemicals which were distributed in their 
original state and, unlike the PDK-bound imports, were not destined to 
be subjected to the introduction of fillers and coatings in order to 
transform them into over-the-counter drug products after importation 
and then placed into commerce.
---------------------------------------------------------------------------

    \4\ January 17, 1998, Shipment of 10,000 Kilograms of Potassium 
Permanganate, December 16, 1997 Shipment of 20,000 Kilograms of 
Potassium Permanganate and November 17, 1997, Shipment of 20,000 
Kilograms of Potassium Permanganate; Suspension of Shipments 
(collectively referred to as Suspension of Shipment Cases).
---------------------------------------------------------------------------

    While remanding, the Court of Appeal implicitly suggested that the 
then-Deputy Administrator's interpretation of 971(c)(1)'s ``listed 
chemical'' was permissible. However, in the majority's view it was 
arrived at under the erroneous impression that the statute ``plainly 
meant what the suspending orders assumed.'' PDK Labs, 362 F.3d at 794.
    Disavowed of that view by the majority's guidance, based on the 
foregoing, the Deputy Administrator re-adopts the interpretation given 
by her predecessor to 971(c)(1)'s terms ``listed chemical'' and ``the 
chemical'' and holds they apply to regulated transactions involving 
listed chemicals regardless of imported or exported form, i.e., bulk or 
finished products and that the provisions of 971 apply to finished 
products subsequently manufactured from bulk imported or exported 
listed chemicals.
    The Deputy Administrator does not view this interpretation as 
managed by the ``plain language'' of the 971(c)(1). Instead, based on 
its experience and expertise, DEA concludes this is a reasonable 
interpretation which is consistent with the intent and language of the 
statute. It is also compatible with an in furtherance of the will of 
Congress in enacting the overall series of drug control laws serving to 
deter the illicit manufacturing, distribution and use of controlled 
substances and in furtherance of DEA's mission. Accordingly, should 
this final order be the subject of judicial scrutiny, it is requested 
that it be afforded appropriate deference. See, Chevron v. NRDC, supra, 
467 U.S. at 865-66; PDK Labs, supra, 362 F.3d at 794.
    The ALJ also disagreed with the Government's interpretation of 
971(c), finding it would create a form of ``strick liability'' for the 
importers in this case. As discussed previously, although the 
suspension was directed against the importers, the party in interest in 
this proceeding is the manufacturer-customer of the importers. It is 
the conduct of that party, PDK, and its customers, and the fact that 
the product which it manufactured and distributed ended up in 
clandestine drug laboratories, that forms the basis of the Government's 
contention that the ephedrine ``may be diverted.''
    The then-Deputy Administrator concluded in Mediplas, supra, 67 FR 
41,256, published subsequent to the ALJ's recommendation in the instant 
case, that whether a regulated person foresaw or knew of diversion was 
not a determining factor as to whether the listed chemical ``may be 
diverted.'' While knowledge of a regulated person, or its party in 
interest customer, may be relevant in a totality of the circumstances 
analysis, the ultimate issue is whether the listed chemical being 
imported into the United States ``may be diverted'' and then, whether 
or not the Deputy Administrator should exercise her discretion to 
sustain the suspension of shipment.
    The focus of the factual inquiry is the ultimate destination of the 
listed chemical, not the culpability of the regulated person. Indeed 
section 971(1), by its terms, makes no mention of a

[[Page 67957]]

showing of intent, recklessness, negligence, knowledge, or any type of 
mens rea. Rather the plain language of the provision focuses solely 
upon whether the chemical ``may be diverted.'' Any contention that the 
``may be diverted'' standard should be interpreted to contain a 
culpability element, cannot be squared with the plain language of that 
provision. See American Tobacco C. v. Patterson, 456 U.S. 63, 68 (1982) 
(``As in all cases involving statutory construction, our starting point 
must be the language employed by Congress and we assume that the 
legislative purpose is expressed by the ordinary meaning of the words 
used.'' (internal quotations omitted); United States v. Green Drugs, 
905 F.2d 694,697-98 (3rd Cir. 1990) (holding that strict liability may 
be imposed for civil violations of the recordkeeping provisions of the 
CSA because ``[o]ur starting point is, of course, the text of the 
statute itself, which plainly shows an absence of the scienter 
requirement for civil violations of the recordkeeping 
provisions.'').\5\
---------------------------------------------------------------------------

    \5\ In 1998, Congress amended the recordkeeping requirements of 
the CSA to include a negligence provision. See 21 U.S.C. 842(a)(5), 
(a)(10). Notably, however, Congress did not similarly amend section 
971(c) to include such a provision.
---------------------------------------------------------------------------

    While Mediplas was published after the ALJ issued her Opinion and 
Recommendation, the argument that an importer and, by logical 
extension, PDK as its party in interest, must have some degree of 
responsibility for the diversion, had previously been rejected by DEA 
ion a transshipment case. In Yi Heng Enterprises Dev. Co., supra, 64 FR 
2,234, a transshipper of potassium permanganate through a U.S. port 
argued it had committed no violations in the past when it sold listed 
chemical to customers in Colombia. Even though the record demonstrated 
the transshipper's customers had committed numerous violations with 
listed chemicals purchased from the transshipper, that company 
contended that it had no control, and thus, should not be responsible 
for the transgressions of its downstream customers. Yi Heng 
unequivocally rejected this argument holding, ``[t]he prior conduct of 
[the transshipper's] customers * * * is clearly relevant in determining 
whether the shipments may be diverted.'' Id., at 2,235.
    To the extent the ALJ here concluded the Government's 
interpretation of ``may be diverted'' represents a ``radical shift in 
policy'' that must be accomplished through rulemaking, as opposed to 
adjudication, the Deputy Administer disagrees. The statute's language 
on this point and its meaning are sufficiently clear. DEA need not 
issue an array of regulations to anticipate every situation where a 
List I chemical may be diverted and the importer/exporter is entitled 
to an ``agency hearing on the record in accordance with subchapter 5 of 
Title 5.'' 21 U.S.C. 971(c)(2). The statute clearly envisions 
permitting the agency to proceed by adjudication.
    Further, the instant suspension orders entail no new standards. 
They simply require a determination of specific facts. Similarly, the 
Government's position cannot be characterized as a ``radical 
departure.'' To the contrary, it is consistent with prior rulings, 
particularly Yi Heng and Mediplas.\6\
---------------------------------------------------------------------------

    \6\ To the extent a future reviewer should disagree with the 
Deputy Administrator's reading of 971(c)(1)'s ``may be diverted'' 
language and determine it is ambiguous, the agency position should 
be given due deference under Chevron, See, INS v. Anibal Aguirre, 
526 U.S. 415, 425 (1999).
---------------------------------------------------------------------------

    Applying the interpretations of 971(c)(1) discussed above and the 
totality of the circumstances test applied in Mediplas and the initial 
action on this matter, the Deputy Administrator now determines whether 
evidence exists to support the suspensions, based upon a finding that 
the List I chemicals may be diverted.
    The Deputy Administrator finds DEA initiated a program intended to 
inform listed chemical registrants of situations when their listed 
chemicals products were discovered at illicit clandestine laboratory 
sites. According to DEA, a Warning Letter program was developed to 
assist registrants in identifying products that had been diverted and 
so they could decide appropriate remedial action.
    On March 19, 1998, DEA issued a Warning Letter to PDK indicating 
that, from April 2, 1997, through December 20, 1997, PDK List I 
chemical products were found in 51 sites in Oklahoma, Missouri, 
Arkansas, Alabama, Kansas, California, Texas, Tennessee, Ohio, Florida, 
Iowa, Michigan, South Dakota, Arizona, Utah and Colorado, all in 
connection with the clandestine manufacture of controlled substances.
    For investigative reasons, DEA did not resume sending any Warning 
Letters to PDK until February 15, 2000, when it issued a Warning Letter 
indicating that during 1998-99, PDK's ``Max Brand Pseudo 60's,'' ``Mini 
Tabs,'' ``Max Alert Pseudo,'' ``Mini Pseudo,'' ``Mini Two Way'', ``Mini 
Two Way Action'' and ``Mini Thins'' products were found in 
approximately 49 sites in eleven states, all in connection with the 
clandestine manufacture of controlled substances.
    On February 15, 2000, DEA issued a Warning Letter to PDK indicating 
that 500 bottles of PDK's ``Max Brand Mini-Tabs'' product were found on 
June 25, 1999, in connection with the clandestine manufacture of 
controlled substances.
    On February 17, 2000, DEA issued a Warning Letter to PDK indicating 
that 48 bottles of PDK ``Mini Pseudo'' product were found on October 
26, 1999, in Dooly County, Georgia; that 1564 bottles of PDK ``Mini 
Pseudo'' product were found on March 24, 1999, in San Bernardino 
County, in California; that 8 bottles of PDK ``Mini Two Way Action'' 
product were found on March 23, 1999, in Detroit, Michigan; that 12,931 
bottles of PDK ``Max Brand Pseudo 60's'' product were found on February 
18, 1999, in Chatsworth, California; and that 40 bottles of PDK ``Mini 
Pseudo'' product were found on February 12, 1999, in Seattle, 
Washington, all in connection with the clandestine manufacture of 
controlled substances.
    On February 28, 2000, DEA issued a Warning Letter to PDK indicating 
that 96 bottles of PDK ``Max Brand Pseudo 60's'' product and 144 
bottles of PDK ``Two Way Max Brand'' product were found on January 
27,2000, in McCrory, Arkansas; and that 13 bottles of PDK ``Max Brand 
Pseudo 60's'' product were found on February 14, 2000, in Dallas, 
Texas, both in connection with the clandestine manufacture of 
controlled substances.
    On June 26, 2000, DEA issued a Warning Letter to PDK indicating 
that 1 bottle of PDK ``Max Brand Pseudo 60's'' product was found on 
December 22, 1999, in San Dimas, California; and that 143 bottles of 
PDK ``Max Brand Pseudo 60's'' product were found on January 6, 2000, in 
Las Vegas, Nevada, both in connection with the clandestine manufacture 
of controlled substances.
    On June 6, 2000, DEA issued a Warning Letter to PDK indicating that 
1 bottle of PDK ``Two Way Max Brand'' product and 2 bottles of PDK 
``Max Brand Pseudo 60's'' product were found on January 6, 2000, in 
Sparta, Tennessee; that 4 bottles of PDK ``Max Brand Pseudo 60's'' 
product were found on May 11, 2000, in Lawrence, Kansas; and that 5 
bottles of PDK ``Two Way Brand'' product were found on May 19, 2000, in 
Hamilton, Alabama, all in connection with the clandestine manufacture 
of controlled substances.
    On June 8, 2000, DEA issued a Warning Letter to PDK indicating that 
9 bottles of PDK ``Max Brand Pseudo 60's'' product were found on May 
11, 2000, in Lawrence, Kansas; that 6 bottles of PDK ``Max Brand Pseudo 
60's'' product were found on May 12, 2000, in Signal Mountain, 
Tennessee; that 144 bottles of PDK ``Max Brand

[[Page 67958]]

Pseudo 60's'' product were found on May 31, 2000, in Auburn, 
Washington; and that 2 bottles of PDK ``Max Brand Pseudo 60's'' product 
were found on June 5, 2000, in Ozawkie, Kansas, all in connection with 
the clandestine manufacture of controlled substances.
    On July 5, 2000, DEA issued a Warning Letter to PDK indicating that 
1,871 bottles of PDK ``Max Brand Pseudo 60's'' product were found on 
April 12, 2000, in Temecula, California, in connection with the 
clandestine manufacture of controlled substances.
    On July 7, 2000, DEA issued a Warning Letter to PDK indicating that 
6 bottles of PDK ``Max Brand Pseudo 60's'' product were found on 
December 17, 1999, in Freeport, Florida; and that 1 empty case 
indicating a volume of 144 bottles of PDK ``Two Way Max Brand,'' and 78 
bottles of PDK ``Max Brand Pseudo 60's'' product were found on April 
14, 2000, in Sherman, Texas, all in connection with the clandestine 
manufacture of controlled substances.
    On July 7, 2000, DEA issued a Warning Letter to PDK indicating that 
672 bottles of PDK ``Max Brand Pseudo 60's'' product were found on 
February 29, 2000, in Hillsboro, Oregon; that 12 bottles of PDK ``Max 
Brand Pseudo 60's'' product were found on March 23, 2000, in Gales 
Creek, Oregon; and that 3 bottles of PDK ``Max Brand Pseudo 60's'' 
product were found on April 6, 2000, in Washington County, Oregon, all 
in connection with the clandestine manufacture of controlled 
substances.
    On July 13, 2000, DEA issued a Warning Letter to PDK indicating 
that 157 bottles of PDK ``Max Brand Pseudo 60's'' product were found on 
July 7, 2000, in Plano, Texas, in connection with the clandestine 
manufacture of controlled substances.
    On September 23, 2000, DEA issued a Warning Letter to PDK 
documenting that 24 bottles of PDK ``Max Brand Pseudo 60's'' product 
were found on June 21, 2000, in Las Vegas, Nevada; that 36 bottles of 
PDK ``Max Brand Pseudo 60's'' product were found on August 3, 2000, in 
Portland Oregon; that 217 bottles and 2,880 packets of PDK ``Max Brand 
Pseudo 60's'' product and 7 packets of PDK ``Pseudo 60's'' product were 
found on September 8, 2000, in Las Vegas, Nevada, all in connection 
with the clandestine manufacture of controlled substances.
    On September 23, 2000, DEA issued a Warning Letter to PDK 
indicating that 72 bottles of PDK ``Max Brand Pseudo 60's'' product 
were found on April 25, 2000, in Copeville, Texas; that 2 bottles of 
PDK ``Two Way Max Brand'' product were found on May 2, 2000, in 
Charlotte, North Carolina; that 142 bottles of PDK ``Max Brand Pseudo 
60's'' product were found on July 7, 2000, in Reno, Nevada; and that 
341 bottles of PDK ``Max Brand Pseudo 60's'' product and 7 packets of 
PDK ``Pseudo 60's'' product were found on September 1, 2000, in 
Portland, Oregon, all in connection with the clandestine manufacture of 
controlled substances.
    On September 25, 2000, DEA issued a Warning Letter to PDK 
indicating that approximately 400 bottles of PDK ``Mini-Pseudo'' 
product were found on September 7, 2000, in Fallbrook, California, in 
connection with the clandestine manufacture of controlled substances.
    On October 24, 2000, DEA issued a Warning Letter to PDK indicating 
that 15 bottles of PDK ``Max Brand Pseudo 60's'' product were found on 
August 22, 2000, in Cedar Rapids, Iowa; and that 1,152 bottles of PDK 
``Max Brand Pseudo 60's'' product were found on March 14, 2000, in 
Turlock, California, both in connection with the clandestine 
manufacture of controlled substances.
    On October 27, 2000, DEA issued a Warning Letter to PDK indicating 
that 287 bottles of PDK ``Max Brand Pseudo 60's'' product were found on 
October 20, 2000, in Lake Havasu City, Arizona, in connection with the 
clandestine manufacture of controlled substances.
    On November 9, 2000, DEA issued a Warning Letter to PDK indicating 
that 504 bottles and 35 boxes of PDK ``Max Brand Pseudo 60's'' product 
were found on October 12, 2000, in Portland, Oregon, in connection with 
the clandestine manufacture of controlled substances.
    On November 13, 2000, DEA issued a Warning Letter to PDK indicating 
that 15 bottles of ``Mini Tabs Two Way,'' 5 packets of PDG ``Two Way 
Max Brand'' product and 480 packets of PDK ``Max Brand Pseudo 60's'' 
product were found on July 31, 2000, in Little Rock, Arkansas; and that 
approximately 1,700 bottles of PDK ``Max Brand Pseudo 60's'' product 
were found on July 26, 2000, in Lawrence, Kansas, all in connection 
with the clandestine manufacture of controlled substances.
    On November 15, 2000, DEA issued a Warning Letter to PDK indicating 
that 528 packets of PDK ``Max Brand Pseudo 60's'' product were found on 
September 27, 2000, in South Jordan, Utah, in connection with the 
clandestine manufacture of controlled substances.
    On December 18, 2000, DEA issued a Warning Letter to PDK indicating 
that 354 bottles of PDK ``Ephedrine Two Way'' product were found on 
August 12, 2000, in Yakima, Washington, in connection with the 
clandestine manufacture of controlled substances.
    On December 28, 2000, DEA issued a Warning Letter to PDK indicating 
that 12 bottles of PDK ``Max Brand Pseudo 60's'' product were found on 
February 24, 2000, in Stevenson, Alabama; that 1 bottle of PDK ``Max 
Brand Psuedo 60's'' and 1 bottle of PDK ``Two Way Ephedrine Max Brand'' 
product were found on September 6, 2000, in Russellville, Alabama; and 
that 144 bottles of PDK ``Max Brand Pseudo 60's'' product were found on 
December 12, 2000, in Dallas, Texas, all in connection with the 
clandestine manufacture of controlled substances.
    On January 23, 2001, DEA issued a Warning Letter to PDK indicating 
that 25 bottles of PDK ``Two Way Max Brand'' product were found on June 
20, 2000, in Sicklerville, New Jersey; and that 369 bottles of PDK 
``Two Way Max Brand'' product were found on December 6, 2000, in Carson 
City, Nevada, both in connection with the clandestine manufacture of 
controlled substances.
    It is recognized that the above Warning Letters reflect that 
pseudoephedrine listed products were found at these clandestine 
laboratories and dump sites, along with PDK's ephedrine chemical 
products. However, DEA is aware that there is a close relationship 
between these two listed chemicals in the methamphetamine manufacturing 
process and PDK used the same or similar distribution chain to 
distribute both forms of listed chemical products. Based on agency 
experience, DEA knows that the same or similar methods of diversion are 
employed by clandestine methamphetamine manufacturers to obtain both 
pseudoephedrine and ephedrine listed chemical products and that a 
history of diversion of one product is probative as to the potential 
for diversion of the other. Thus, the Deputy Administrator concludes 
that the diversion of PDK's pseudoephedrine chemical products reflected 
in the Warning Letters is highly relevant to the potential for future 
diversion of its ephedrine chemical products.
    The Government did not introduce evidence as to the quantity of 
other manufacturer's listed chemical products that have been found to 
be diverted, only the quantities and types of PDK's products which had 
been the subject of Warning Letters for the period at issue. It is also 
recognized that section 971(c)(1) requires an exercise of agency 
discretion, given that all ephedrine chemical products require the 
importation of the listed chemical into the United States at some point 
in their manufacturing and/or distribution chain. Thus, literally every 
shipment is

[[Page 67959]]

subject to a theoretical possibility that it ``may'' be diverted.
    DEA recognizes that it and other law enforcement agencies are aware 
of and able to take action against only a small number of the total 
clandestine methamphetamine laboratories and dump sites in this 
country. Accordingly, the specific universe of PDK product diverted, 
vis a vis, all other manufacturers' products, is a number which cannot 
be established with specificity. However, the Deputy Administrator 
notes that at a March 1998 meeting between DEA and PDK, DEA personnel 
concluded that PDK's listed chemical products were being reported as 
the most prevalently found products at illicit settings in this 
country, i.e., ``PDK products were number one in terms of being seized 
at methamphetamine labs.'' Tr. 1613.
    Given the quantities and diverse locations of PDK listed chemical 
products discovered at illicit sites reflected in the Warning Letters, 
DEA is able to draw a reasonable inference regarding the likelihood 
that the instant shipments may be diverted and to exercise its 
discretion as to the need to prohibit their import.
    In Mediplas, without having to undergo any attempt at a comparative 
statistical analysis, the Deputy Administrator found ``the nine Warning 
Letters issued to Mediplas provided substantial evidence documenting 
the diversion of thousands of bottles of its previously imported List I 
chemical Products * * *.'' Mediplas, supra, 67 FR at 41262. In 
comparison, PDK's 22 Warning Letters detail diversion of thousands of 
bottles of its previously imported List I chemicals to approximately 
140 illicit methamphetamine laboratory-related sites located in at 
least 18 states.
    The fact that a company's product has been discovered in 
clandestine laboratories and dump sites has been a regular basis for 
DEA taking adverse action against manufacturers and distributors of 
List I chemical products, again without attempting statistical 
comparative analysis. See OTC Distribution, supra, 68 FR at 70544 (14 
Warning Letters in 21 months a factor in revoking registration of List 
I chemical product distributor); Sinbad Distributing, supra, 67 FR at 
10233 (registration as a distributor of listed chemical products denied 
in part because two potential suppliers of applicant had received 15 
Warning Letters between them); CHM Suppliers, 67 FR 9985, (2002) 
(same).
    In Neil Laboratories, Inc. v. Ashcroft, 217 F. Supp.2d 80 (D.D.C. 
2002), DEA had issued an immediate suspension of a List I 
manufacturer's registration under 21 U.S.C. 824(d). The registrant 
challenged that action and the district court upheld the DEA order 
based, in part, on the fact that ``Neil Labs received approximately 30 
warning letters from the DEA between February 4, 1999, and March 11, 
2002, that identified various instances in which Neil Labs' product had 
been diverted to illicit uses.'' Id., at 87.
    The Deputy Administrator finds the record shows through testimony 
and documentary evidence that over a period of several years, PDK and 
DEA corresponded and met with the intention of resolving problems 
pertaining to the diversion of PDK's ephedrine and pseudoephedrine 
products. Evidence presented by PDK indicated it had taken steps to 
implement controls in its plant and distribution chain and during this 
period, DEA permitted certain listed chemical shipments, destined for 
PDK, to be imported. Nevertheless, as documented by the Warning 
Letters, PDK's products continued to appear at illicit settings in 
substantial amounts, despite remedial efforts undertaken or promised by 
the company. As the Court of Appeal observed in ALRA Laboratories, Inc. 
v. DEA, 54 F.3d 450 (7th Cir. 1995), ``An agency rationally may 
conclude that past performance is the best predictor of future 
performance.'' Id., at 452.
    As a collateral matter, it is noted that the individual responsible 
for implementing PDK's operating procedures for responding to DEA 
Warning Letters was Mr. Michael Lulkin. Beginning in 1990, Mr. Lulkin, 
an attorney, had served as PDK's outside counsel. In 1995, he was hired 
as in-home counsel and became PDK's Vice President of Legal Affairs and 
subsequently it's Director of Administrative Affairs. In 1998, Mr. 
Lulkin, along with PDK's then-President, Mr. Michael Krasnoff, was 
convicted in Federal court of four felony counts relating to securities 
fraud, money laundering and mail fraud. The mail fraud offenses 
involved PDK. Mr. Lulkin was subsequently disbarred from the practice 
of law in 1999.
    PDK's Board of Directors and its current President, Mr. Reginald 
Spinello, who had worked for Mr. Krasnoff as PDK's Executive Vice 
President for Operations since 1991, allowed Mr. Krasnoff and Mr. 
Lulkin to remain associated with PDK. After resigning as President in 
1998, Mr. Krasnoff continued to serve as a consultant to the company. 
Mr. Lulkin continues as an employee of PDK, where his duties include 
overseeing the company's regulatory compliance.
    Neither of these personnel decisions, but particularly the 
retention of Mr. Lulkin as a key overseer of regulatory matters, 
despite his convictions for fraud and a felony against the company, 
generates confidence on the part of the Deputy Administrator that PDK 
is sufficiently committed to complying with the myriad of regulatory 
requirements designed to prevent diversion of listed chemicals.
    In sum, the Deputy Administrator finds, based on the foregoing, 
that the bulk ephedrine which is the subject of the Suspension of 
Shipment Orders is a ``listed chemical'' that ``may be diverted'' and 
that the orders should be sustained.
    As discussed earlier, the full court in PDK Labs agrees remand was 
necessary because the then-Deputy Administrator had also concluded PDK 
violated export notification requirements in connection with the sale 
and delivery of ephedrine products to Sun Labs of Canada. Because the 
evidence showed the product was actually delivered to the customer 
within the United States, the Court concluded the then-Deputy 
Administrator had failed to explain the agency's apparent divergence 
from its decision in Alfred Khalily, Inc., supra 65 FR 31,289 (1999). 
See PDK labs, supra, 362 F.3d at 798-99.
    In Khalily, the then-Deputy Administrator agreed with the ALJ that 
the respondent company was not responsible for filing export 
documentation regarding its sale of a listed chemical, hydriotic acid, 
to a Mexican based company, R.J. Meyer. The key findings were that 
``R.J. Meyers's purchase orders revealed that the shipments were either 
consigned to Jose Gutierrez, and sometimes Gus Pimental c/o Sky Harbor 
Delivery in Tucson, Arizona, or to Jose Gutierrez c/o Gus Pimental ata 
warehouse in Phoenix, Arizona'' and ``According to Respondent's 
invoices, Respondent sold the hydriotic acid to R.J. Meyer, but it was 
shipped to Jose Gutierrez at Sky Harbor Delivery. These shipments were 
`FOB Destination,' which according to Mr. Khalily means that the 
shipper's responsibility ends when the product is delivered to the 
specified location.'' Khalily, supra, 64 FR at 31, 290.
    The chemicals had been shipped to the Arizona warehouse and 
subsequently picked up by Mr. Gutierrez who, it turned out, was not a 
representative of R.J. Meyer. The chemicals were then loaded into a 
rental truck and disappeared. R.J. Meyer's personnel testified that the 
shipments never entered Mexico and DEA was

[[Page 67960]]

unable to determine their disposition after they left the Arizona 
warehouse.
    The then-DEA Deputy Administrator concluded, ``While Respondent was 
selling above threshold quantities of hydriotic acid to a Mexican 
company, these sales were ``FOB Destination'' transactions and 
therefore Respondent's responsibility ended when the chemicals were 
delivered to the warehouse in Arizona. Respondent did not send or take 
the listed chemicals out of the United States, nor was it the 
`principal party in interest' with the power and control for sending 
the chemicals out of the United States. Therefore, it was not 
responsible for filing any export documentation.'' Khalily, 64 FR at 
31293 (emphasis added).
    In the instant case, the then-Deputy Administrator concluded that 
``[g]iven the circumstances of these sales, and especially given that 
PDK actually believed the product was destined for export, that PDK 
should have complied with DEA export regulations in effect at the 
time.'' 67 FR at 77808. He also concluded the ``record shows that PDK 
violated DEA export regulations on at least four occasions by failing 
to file the required notifications of its shipments to Sun Labs.'' 67 
FR at 77809.
    Notwithstanding Khalily, under the unique facts of this case the 
Deputy Administrator agrees that PDK should have filed export 
notifications with DEA.
    The evidence shows that between 1994 and 1995, PDK sold Sun Labs of 
Canada at least four shipments of ephedrine and ephedrine 
hydrochloride, a listed chemical. During these proceedings, the parties 
disputed whether these shipments were ``exports,'' which required 
filing of a DEA Form 486 report within 15 days of the ``export,'' 
pursuant to 21 CFR 1313.21. That regulation provides, in relevant part, 
``no person shall export or cause to be exported from the United States 
any [listed chemical] * * * until such time as the Administrator has 
been notified. Notification must be made not later than 15 days before 
the transaciton is to take place.'' 21 CFR 1313.21(a).
    Neither PDK nor Sun Labs, nor their then-principals, were 
strangers. At the time, the President and owner of Sun Labs was Mr. 
Perry Krape, a former principal and a founder of PDK who, up until 
November of 2000, retained 8% ownership in PDK.
    The ALJ noted in her findings that Mr. Krasnoff, discussed earlier 
as the subject of felony convictions involving the company, was PDK's 
President during this period. Mr. Krasnoff testified that these orders 
were delivered to Sun Labs at PDK's facility in Hauppauge, New York. He 
further testified it was PDK's belief that, after picking up the 
product, Mr. Krape's immediate intention was to transport it to his 
storage facilities in New York. Although there was no testimony that 
the ephedrine product was actually shipped to Canada, the Deputy 
Administrator finds it reasonable to infer that it was destined for 
Canada and to only remain in the United States temporarily.
    The invoices indicated the customer was Sun Labs, located in 
Mississauga, Ontario, Canada. A DEA diversion investigator testified 
that ``the address on the invoices and the shipping labels, the 
shipping documents, indicated it was going to Ontario, Canada.'' 
Additionally, the investigator testified that each of the bills of 
lading for these transactions stated the ephedtine was being billed to 
and shipped to Sun Labs in Ontario, Canada.
    While there were no shipping charges on the invoices and the ``Name 
of Carrier'' on the bills of lading listed either ``Pick-up'' or 
``Perry Krape,'' the invoices, which were introduced into evidence, 
stated a ``Ship to'' address of ``Sun Labs, Inc., 300-2400 Dun Dun St 
West, Mississauga ON L5K2R8.'' The ``Bill to'' address on the invoices 
was the same foreign location. The bills of lading further identified 
the ``To Consignee'' as Sun Labs Inc. at its Mississauga, Ontario 
address.
    Mr. Krasnoff also assumed Sun Lab's owner was going to distribute 
this product in Canada, as Mr. Krasnoff testified PDK had a ``no-
compete'' agreement with Sun Labs in which Sun Labs agreed it would not 
sell ephedrine in PDK's territory, which included the entire United 
States. Further, Mr. Krasnoff testified in reference to these 
transactions, that he ``believe[d] that [Sun Labs] intention was to 
take the product to Canada at some point in time and that [Sun Labs] 
was putting together a distribution system in order to distribute that 
produce in Canada.'' Finally, Mr. Krasnoff states that Mr. Krape had 
said he ``was going to be the ephedrine king of Canada.'' \7\
---------------------------------------------------------------------------

    \7\ Although he is no longer with PDK, Mr. Krasnoff was also 
quoted as saying in May of 1996, ``it's none of my business if 
someone gets high off of this stuff,'' demonstrating an improper 
attitude for an officer of a DEA registrant and a cavalier approach 
toward complying with DEA regulations, including those pertaining to 
exports.
---------------------------------------------------------------------------

    For purposes of these export regulations, 21 CFR 1312.02, defines 
the term ``chemical export'' to cover more than just the physical 
sending or taking of the listed chemical out of the United States. 
Instead it provides ``The term `chemical export' means transferring 
ownership or control, or the sending of listed chemicals out of the 
United States (whether or not such sending or taking out constitutes an 
exportation within the meaning of the Customs and related laws of the 
Unites States).'' 21 CFR 1313.02(a) (1995), now 21 CFR 1300.02(b)(5) 
(italics in original, emphasis added).
    In Khalily, the shipment was consigned ``F.O.B'' to a buyer at an 
Arizona warehouse and the ALJ and then-Deputy Administrator were 
obviously focused on the implications of the ``F.O.B'' transfer i.e., 
``Respondent's responsibility ended when the chemicals were delivered 
to the warehouse in Arizona.'' Khalily, supra, 64 FR at 31,293. 
Further, there was no evidence that the listed chemicals were ever sent 
to Mexico. The facts here are distinguishable.
    The invoices and bills of lading identify the listed chemical 
products as being purchased by and ``shipped to'' Sun Labs, a Canadian 
company at its foreign address in Ontario. While the bills of lading 
also indicated the product was going to be ``picked up'' at PDK's 
Hauppauge premises, even if the product was not being immediately 
transported across the border, ``ownership'' and ``control'' was 
knowingly transferred by PDK to a company located outside of the United 
States, thus falling within the definition of ``chemical export''--
which ``no person'' (including PDK) ``shall export or cause to be 
exported from the United States * * * until such time as the 
Administrator has been notified.'' 21 CFR 1313.21(a).
    While Mr. Krape apparently picked the listed chemicals up at PDK's 
New York location, the Deputy Administrator concludes PDK knew the 
listed chemicals were going to be physically taken outside the United 
States, albeit at an uncertain date, which the company never sought to 
ascertain and/or report. Where ownership and control was transferred to 
a foreign company, under the unique facts of this case, the Deputy 
Administrator concludes that export regulations required PDK to notify 
DEA of the transactions.
    Compliance with regulatory requirements is relevant to the risk of 
diversion the listed chemicals will face as they progress through the 
chain of commerce from importation and/or exportation, manufacture and 
ultimate distribution through wholesalers and retailers. With regard to 
exports, DEA is aware that precursor chemicals can be brought into the 
United States from their countries of origin and then exported to other 
countries, where they are diverted to the manufacture of

[[Page 67961]]

methamphetamine and other controlled substances and then subject to 
being smuggled back into the United States. See e.g., Neil 
Laboratories, supra, 64 FR at 30,064 (exportation of pseudoephedrine 
from New Jersey to Mexico suspended because of risk of diversion). 
Further, the government's evidence showed that Sun Labs had a toll free 
800 number and took orders from customers in the United States for List 
I chemical products, thereby returning them to this country. 
Additional, the Government offered testimony that DEA ``was beginning 
to see Canadian product showing up in large numbers in [clandestine] 
labs.'' Tr. at 753.
    An exporter/transshipper's failure to comply with the notification 
requirements of 21 CFR 1313.31 has previously been cited as a ground 
for suspending shipments. See e.g., Yi Heng Enterprises Dev. Co., 
supra, 64 FR at 2,235 (respondent transshipper concedes point and DEA 
holds ``it is undisputed that no advance notification of * * * 
shipments * * * was provided to DEA as required by the regulations and 
that this provides a basis for the suspension of these shipments.''); 
Suspension of Shipments, supra, 65 FR at 51,338 (``Finally, [the 
transhipper] failed to file advance notification of these 
shipments.'').
    The Deputy Administrator recognizes that PDK's regulatory omissions 
are mitigated by the facts of their age and that the company's failure 
to file notifications did not involve the specific shipments at issue 
in the suspension orders. Nevertheless, PDK's non-compliance with 
regulatory requirements in these instances is considered relevant.\8\
---------------------------------------------------------------------------

    \8\ For clarification should this final order be appealed, the 
Deputy Administrator finds that the evidence of diversion reflected 
in the series of Warning Letters provides a sufficient basis for 
sustaining the suspension orders, independent of the export 
notification infractions.
---------------------------------------------------------------------------

    The Orders to Suspend Shipments also alleged that in 1995, PDK made 
direct mail orders sales of its ephedrine chemical products to 
individuals who were later arrested and convicted of manufacturing and 
possessing methamphetamine with intent to distribute and admitted 
obtaining their precurser chemicals from PDK. Based on her view of the 
evidence, the ALJ declined to find that these sales were suspicious 
transactions which should have been reported by PDK pursuant to 21 CFR 
1310.05(a)(1).
    The evidence showed that David Chapin ordered and received over 
12,000 tablets of ephedrine, 25 mg, during February 1995 and Jason 
Young received over 8,800 tablets of the same product between June and 
October of 1995. Based on his consultations with a pharmacist, a DEA 
diversion investigator deemed these sales to be excessive, given the 
individual therapeutic dosage units recommended in the Physician's Desk 
Reference and the United States Pharmacy Index for a one month period 
of time. Based on a recommended dosage of six tablets per day, the 
investigator testified that ``[e]very individual (purchase) on the mail 
order from 1995 was excessive.'' David Chapin was subsequently arrested 
for having an operational methamphetamine lab and stated that the PDK 
was the source of his ephedrine. He was subsequently convicted and 
sentence to 96 months in Federal prison.
    However, based primarily upon Mr. Krasnoff's testimony, the ALJ 
concluded that PDK believed Chapin and Young were repackaging the 
single-entity ephedrine tablets purchased from PDK for resale, thus the 
quantities would not have appeared to be suspicious and need not have 
been reported to DEA. While the Deputy Administrator agrees there was 
no evidence introduced that PDK specifically knew of the buyers' 
illicit manufacturing, the evidence indicates a disturbing willingness 
on the part of PDK to turn a blind eye toward diversion of its product.
    The ALJ specifically fond that Mr. Kranoff told DEA investigators 
in a May 1996 investigation concerning these sale, that he could care 
less who ordered what and how much. He also stated that ``it's none of 
my business if someone gets high off this stuff.'' Significantly, the 
ALJ found Mr. Krasnoff's sworn testimony at the hearing, in which he 
denied making these statements, to be incredible. The Deputy 
Administrator agrees that this witness was not credible and that his 
credibility is also diminished by his convictions of felony offenses 
involving moral turpitude.
    When pressed on cross-examination as to his belief that ``smallest 
of distributors were repackaging or reselling,'' Mr. Krasnoff testified 
that:

    We got the sense that there was a network of distributors who 
distributed his product that we manufactured either in a Tupperware-
type setting of [sic] door to door sales, and/or some of them 
distributing the product through the mail, ad hoc mail order 
companies.

Tr. 1993 (emphasis added).
    The Deputy Administrator finds this testimony, suggesting that mail 
order recipients were emptying tablets out of a 1,000 count bottle and 
reselling them in a Tupperware setting or door to door to be 
incredible, particularly when considered in light of its self-serving 
nature, Mr. Kraasnoff's other untruths while testifying, and his fraud 
based felony convictions. Accordingly, the Deputy Administrator finds 
that the subject sales should have been reported as suspicious. 
Further, this evidence establishes that in 1995, PDK, sold ephedrine 
products directly to individuals who diverted them to illicit purposes.
    However, it also noted these transactions occurred a number of 
years ago, Mr. Krasnoff's relationship with PDK has finally been 
severed, PDK ceased its mail order sales and the company has reported a 
series of suspicious sales to DEA on other occasions. Nevertheless, the 
Deputy Administrator finds that PDK's past attitude and its engaging in 
these transactions, along with its failure to report them as 
suspicious, are relevant as to whether the current suspensions should 
be sustained.\9\
---------------------------------------------------------------------------

    \9\ However, again for clarification of future reviewers, 
notwithstanding the above findings, the Deputy Administrator finds 
that the evidence of diversion reflected in the series of Warning 
Letters provid3es a sufficient independent basis for concluding that 
the List I chemicals may be diverted and the suspension orders 
sustained.
---------------------------------------------------------------------------

    At the hearing, DEA witnesses testified regarding traditional 
retail outlets and non-traditional retail outlets and the types of 
listed chemical products distributed to these outlets. The traditional 
market is characterized by a short distribution pattern to large chain 
grocery stores, large chain convenience stores, large chain drug 
stores, large discount retailers and large chain convenience stores. 
These products are packaged in blister packs and are 30 mg in strength. 
The non-traditional outlets are characterized by a very lengthy 
distribution chain of listed chemical products packaged in higher 
strength and in bottles of 60 or more dosage units. The higher strength 
products are those products usually found at the illicit 
methamphetamine production sites.
    The Suspicious Orders Task Force also identified as suspicious, 
customers who resell large volumes of listed chemical products to the 
``independent convenience store'' market. While PDK does not currently 
distribute List I chemical products directly to the public or to retail 
sales outlets, including convenience stores, witnesses indicated that 
through its distribution scheme, PDK is the largest supplier of generic 
List I chemical products to the convenience store market.
    Since the hearing on this matter, a series of DEA final orders have 
addressed the distribution of listed

[[Page 67962]]

chemical products through the gray market and in particular, through 
independent convenience stores. In Mediplas, my predecessor discounted 
the probative weight of the Government's ``anecdotal'' evidence 
``without some form of further extrinsic evidence to support these 
arguments.'' Mediplas, supra, 67 FR at 41,264. In sustaining the 
shipments in the initial final order here, my predecessor noted the 
evidence in PDK's hearing was ``essentially identical'' to the evidence 
in Mediplas. Accordingly, he applied the same rule and declined to find 
that the Government's evidence of PDK's gray market distribution chain 
supported the suspension orders. See, e.g., Indace/Malladi, supra, 67 
FR at 77808.
    In Branex, Incorporated, supra, 69 FR at 8696 while then-Acting 
Deputy Administrator, I approve use of the above Mediplas evidentiary 
standard:

    In deference to my predecessor's ruling in [Mediplas], a finding 
regarding convenience stores [as] conduits for the diversion of 
listed chemicals does not necessarily translate to a finding 
regarding the existence of the so-called `traditional' versus `non-
traditional' markets for products containing ephedrine and 
pseudoephedrine. Rather, in Mediplas, the then-Deputy Administrator 
found there was little probative value to such evidence, and the 
probative weight of evidence regarding traditional and non-
traditional markets is `minimal without some form of further 
extrinsic evidence to support these arguments [Citation].' The 
Acting Deputy Administrator notes further, my predecessor's 
conclusion that a registrant's sale of large quantities of list I 
chemicals do not, in and of themselves, demonstrate that the 
chemicals may be diverted.

Branex, supra, 69 FR at 8693.
    However, at the Branex hearing the Government did introduce 
substantial extrinsic evidence satisfying the Mediplas standard. In 
that regard, I held:

    The Acting Deputy Administrator concurs with Judge Bittner's 
conclusion that the government met the Mediplas evidentiary 
requirement by showing that Respondent sold pseudoephedrine to 
customers that did not have a reasonable expectation of being able 
to resell the product to a legitimate customer base. Specifically, 
the Government presented a relevant comparison analysis involving 
the marketing and sale of bottled pseudoephedrine products to a 
relatively small market by OTC Distribution (a supplier of listed 
chemicals to Respondent) versus that of nationally recognized 
pharmaceutical manufacturers and distributors of those products 
(i.e., Pfizer and the L. Perrigo Company). The Acting Deputy 
Administrator also finds telling, the testimony of Pfizer and 
Perrigo representatives that neither were aware of OTC Distribution 
as a possible competitor. More persuasive however, was the testimony 
and documentary evidence prepared by the Government expert in 
statistical analysis, Jonathan Robbin. * * *
    [T]he Acting Deputy Administrator . . . finds compelling Mr. 
Robbin's conclusion of the unlikelihood that convenience stores 
would sell more than $27.00 worth of pseudoephedrine per month to 
consumers purchasing decongestant products, as purportedly sold by 
Respondent's customers. The Acting Deputy Administrator further 
credits Mr. Robbin's finding regarding the inconceivability of 
customers purchasing a year's supply of list I chemical products 
from convenience stores and related establishments on a monthly 
basis.
    The Acting Deputy Administrator also finds persuasive the 
conclusion of Mr. Robbin that the pseudoephedrine products supplied 
by Respondents to its customers did not follow the normal channel of 
distribution of goods of this kind. This finding is given further 
credence when one considers the quantities of pseudoephedrine the 
respondent sold to its convenience store customers and the 
exorbitant price some of these customers were willing to pay the 
Respondent for those products. The Acting Deputy Administrator finds 
that the compelling nature of Mr. Robbin's market study casts doubt 
on the legitimacy of the Respondent's customers, and brings some 
context to the diversion of the respondent's listed chemical 
product.

Branex, supra, 69 FR at 8,693; see e.g., Xtreme Enterprises, Inc, 
supra, 67 FR at 76,197 (denying registration as a listed chemical 
distributor after testimony by Mr. Robbin on graymarket and holding 
that applicant's positive factors were ``far outweighed'' by lack of 
experience and ``the fact that she intends to sell ephedrine almost 
exclusively in the gray market.''). See also Value Wholesale, 69 FR 
58,548 (2004) (citing Xtreme Enterprises, Inc. and denying registration 
inpart on intent to distribute to grey market); K & Z Enterprises, 
Inc., 69 FR 51475 (2004) (same); William E. ``Bill'' Smith d/b/a B&B 
Wholesale, 69 FR 22559 (2004) (same); John E. McCrae d/b/a J & H 
Wholesale, 69 FR 51480 (2004) (same); SPA Dynamic Wholesalers, 68 FR 
61466 (2003) (citing Robbin study and denying registration as 
distributor to grey market).
    While DEA has concluded in the above series of cases that grey 
market establishments, such as convenience stores and gas stations, 
constitute sources for the diversion of listed chemical products and 
can form the basis for adverse action against registrants and potential 
registrants, the Government's evidence which formed the basis for those 
holdings was not presented at PDK's hearing. Thus, PDK has not had an 
opportunity to refute or contest that evidence and it is outside the 
record.
    Accordingly, the Deputy Administrator will continue to apply the 
Mediplas evidentiary standard to the instant record and declines to 
find that the vidence concerning the gray market introduced in this 
specific case supports a factual finding that the listed chemicals 
which are the subject of the two suspension orders ``may be 
diverted.''\10\
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    \10\ However, as noted earlier, for the limited purpose of 
interpreting the term ``listed chemical'' as it appears in section 
971(c)(1) and the policy implications of the alternatives, the 
findings and conclusions contained in the above cited cases are 
considered relevant to DEA's application of the agency's current 
knowledge and expertise.
---------------------------------------------------------------------------

    In arriving at this decision, the Deputy Administrator has 
considered PDK's stature and business activities in the business 
community, its efforts at compliance, as well as the evidence available 
to DEA up to the time of the hearing. The Deputy Administrator finds 
that there was sufficient evidence at the time of the hearing to 
support DEA's contention that the chemicals may be diverted. ``As the 
Deputy Administrator has previously noted, [e]vidence of a violation of 
law is not necessary to demonstrate that suspensions were lawful.'' 
Mediplas, supra, 67 FR at 41,262 citing Suspension of Shipments, supra, 
65 FR at 51337. Therefore, the Deputy Administrator concludes that the 
suspensions set forth in the January 25 and 26, 2001, Order to Suspend 
Shipments of ephedrine hydrochloride issued to Indace and Malladi were 
justified.
    Accordingly, the Deputy Administrator of the Drug Enforcement 
Administration, pursuant to the authority vested in her by 21 U.S.C. 
971 and 28 CFR 0.100(b) and 0.104, hereby orders that the suspensions 
of the above described shipments, be, and hereby are, sustained, and 
that these proceedings are hereby concluded.
    This final order is effective immediately.

    Dated: November 9, 2004.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. 04-25695 Filed 11-19-04; 8:45 am]
BILLING CODE 4410-09-M