[Federal Register Volume 71, Number 101 (Thursday, May 25, 2006)]
[Notices]
[Pages 30168-30172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-4838]
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DEPARTMENT OF JUSTICE
Drug Enforcement Administration
[Docket No. 03-26]
H & R Corporation; Denial of Application
On April 7, 2003, the Deputy Assistant Administrator, Office of
Diversion Control, Drug Enforcement Administration (DEA) issued an
Order to Show Cause to H & R Corporation (Respondent H & R) proposing
to deny its application for a DEA Certificate of Registration as a
distributor of list I chemicals. The Order to Show Cause alleged in
substance that granting Respondent's application to distribute list I
chemicals to what DEA has identified as the ``gray market,'' would be
inconsistent with the public interest, as that term is used in 21
U.S.C. 823(h) and 824(a).
Respondent, through counsel, requested a hearing on the issues
raised by the Order to Show Cause and the matter was docketed before
Administrative Law Judge Mary Ellen Bittner. Following prehearing
procedures, a hearing was held in Atlanta, Georgia on October 28, 2003.
At the hearing, both parties called witnesses to testify and introduced
documentary evidence. Subsequently, both parties filed Proposed
Findings of Fact, Conclusions of Law, and Argument.
On December 3, 2004, Judge Bittner issued her Opinion and
Recommended Ruling, Findings of Fact, Conclusions of Law, and Decision
of the Administrative Law Judge (Opinion and Recommended Ruling),
recommending that Respondent's application for a Certificate of
Registration as a distributor of listed chemical products be denied.
Neither party filed exceptions to the Opinion and Recommended Ruling
and on January 11, 2005, judge Bittner transmitted the record of these
proceedings to the Deputy Administrator.
The Deputy Administrator has considered the record in its entirety
and pursuant to 21 CFR 1316.67, hereby issues her final order based
upon findings of fact and conclusions of law hereinafter set forth. The
Deputy Administrator adopts, in full, the Opinion and Recommended
Ruling of the Administrative Law Judge. Her adoption is in no manner
diminished by any recitation of facts, issues and conclusions herein,
or any failure to mention a matter of fact or law.
In April 2002, Respondent, a Tennessee corporation owned by members
of the Patel family, submitted an application for DEA Certificate of
Registration as a distributor of list I chemicals, seeking authority to
distribute pseudoephedrine, ephedrine and phenylpropanolamine. Mr. Ramu
Patel (Mr. Patel) owns 50 per cent of the business and the remainder is
owned by R. Patel's uncle, Hasmukh Patel (H. Patel) and his brothers,
Mahendra and Kantibhai Patel. Mr. Patel and H. Patel are Respondent's
only employees.
H & R also does business under the name ``Tri-State Wholesale,'' a
name used previously used by Elk International, Inc. (Elk
International) when that company was operating out of the Chattanooga-
area premises where H & R is now located. On May 1, 2001, Elk
International filed an application for DEA registration as a
distributor of list I chemicals. An Order to Show Cause was issued
proposing to deny Elk International's application and H & R
subsequently purchased the right to use the name ``Tri-State
Wholesale'' from the company, along with its customer list. The Elk
International matter was administratively closed as it was no longer in
business at the location and H & R ultimately then submitted its
application for registration, which is the subject of these
proceedings.
H & R is a wholesale supplier of tobacco products, hair products
and paper supplies to tobacco and convenience stores and what Mr. Patel
referred to as ``mom and pop'' stores. Mr. Panel testified that he and
his uncle previously owned retail tobacco stores/outlets in Dalton and
Chickamauga, Georgia and his store had sold Mini-Thins and ephedrine
products, along with tobacco products and other sundries.
List I chemicals are those that may be used in the manufacture of a
controlled substance in violation of the Controlled Substances Act. 21
U.S.C. 802(34); 21 CFR 1310.02(a). Pseudoephedrine and ephedrine are
list I chemicals which are legitimately manufactured and
[[Page 30169]]
distributed in single entity and combination forms as decongestants and
bronchodilators, respectively. Both are used as precursor chemicals in
the illicit manufacture of methamphetamine and amphetamine.
Phenylpropanolamine, also a list I chemical, is a legitimately
manufactured and distributed product used to provide relief of the
symptoms resulting from inflammation of the sinus, nasal and upper
respiratory tract tissues and for weight control. Phenylpropanolamine
is also used as a precursor in the illicit manufacture of
methamphetamine and amphetamine. See, Gazaly Trading, 69 FR 22561
(2004). In November 2000, the United States Food and Drug
Administration issued a public health advisory requesting drug
companies to discontinue marketing products containing
phenylpropanolamine, due to risk of hemorrhagic stroke. As a result,
many pharmaceutical companies have stopped using phenylpropanolamine as
an active ingredient.
As testified to by government witnesses and as addressed in
previous DEA final orders, methamphetamine is an extremely potent
central nervous system stimulant and its abuse is a persistent and
growing problem in the United States. See e.g., Direct Wholesale, 69 FR
11654 (2004); Branex, Inc., 69 FR 8682 (2004); Yemen Wholesale Tobacco
and Candy Supply, Inc., 67 FR 9997 (2002); Denver Wholesale, 67 FR
99986 (2002).
A Special Agent from DEA's Chattanooga, Tennessee, Resident Office
testified regarding the rapid proliferation of clandestine
methamphetamine laboratories in Tennessee and its adjoining states and
described prevalent methods of local production. He also described the
multiple health hazards and social costs stemming from the production
and abuse of methamphetamine in Southeastern Tennessee. In sum, he
deemed it ``more than a legal issue; it is a terrible social issue.''
As recognized in recent published final orders, Tennessee has led
the DEA Atlanta Region in the number of clandestine laboratories
seized. See Prachi Enterprises, Inc., 69 FR 69407 (2004); CWK
Enterprises, Inc., 69 FR 69400 (2004). Further, the Chattanooga/Eastern
Tennessee area, where H & R seeks to distribute chemicals, has a
``substantial'' methamphetamine abuse problem and it has been
recognized that local ``[d]istributors or retailers serving the illicit
methamphetamine trade observe no borders and trade across state
lines.'' Id., 69 FR at 69401.
The Special Agent estimated that 80 to 90 percent of ephedrine and
pseudoephedrine used by area methamphetamine manufacturers was obtained
from convenience stores. More often than not, the ephedrine and
pseudoephedrine products were ``off name'' brands, with Max Brand the
most prevalent encountered at illicit laboratories. He also sees
products at these sites with brand names such as Mini-Thins, Mini-Tabs,
Pseudo-60's and Z-60's and the preferred pseudoephedrine is of 60 mg.
strength.
The Special Agent testified that convenience stores are readily
able to purchase ephedrine and pseudoephedrine and may use several
distributors simultaneously for these products. Further, persons
seeking to buy ephedrine and pseudoephedrine from convenience stores
for illicit manufacturing typically go to many stores and buy small
quantities from each, or recruit four or five people, who each purchase
chemicals from a single store. Often store personnel allow the same
individual to complete multiple purchases in a short period of time and
some convenience stores even cater to manufacturers, selling other
products used in the manufacturing process such as coffee filters,
antifreeze, and Heet fuel which, for certain customers were even
packaged in manufacturing ``kits.''
Diversion Investigators testified that, in general, persons
purchasing pseudoephedrine and ephedrine for legitimate therapeutic
purposes bought their products, packaged in blister packs and in
smaller dosage units and strengths, at traditional drug stores, grocery
stores and large discount stores.
By written declaration, a DEA Diversion Investigator contrasted the
``traditional'' market for list I chemicals with what DEA has termed
the ``gray market'' for these products. The traditional market,
characterized by a short distribution chain from manufacturer to
distributor to retailer, typically includes large chain grocery stores,
chain pharmacies, large convenience stores and large discount stores.
The gray market is characterized by additional layers of distribution
and includes such non-traditional retailers as small convenience
stores, gas stations and other retail establishments where customers do
not usually purchase over-the-counter medications. These non-
traditional retailers typically sell higher-strength products in large
package sizes, such as 100 or 120 count bottles of 60 mg.
pseudoephedrine. The Diversion Investigator also identified the brand
names found at clandestine laboratory seizures in disproportionate
numbers. They included Max Brand, Mini Two Way, MiniThin and Action-
Pseudo.
A Group Supervisor from DEA's Nashville office testified that, in
his view, the demand for pseudoephedrine and ephedrine for legitimate
medical purposes did not justify the supply and much of these chemicals
were being diverted at the convenience store level.
By declaration, the Government introduced evidence regarding
ephedrine and pseudoephedrine sales and the convenience store market
from Mr. Jonathan Robbin, a consultant in marketing information systems
and databases, who is an expert in statistical analysis and
quantitative marketing research.
Using the 1997 United States Economic Census of Retail Trade, Mr.
Robbin tabulated data indicating that over 97% of all sales of non-
prescription drug products, including non-prescription cough, cold and
nasal congestion remedies, occur in drug stores and pharmacies,
supermarkets, large discount merchandisers, mail-order houses and
through electronic shopping. He characterized these five retail
industries as the traditional marketplace where such goods are
purchased by ordinary customers.
Analyzing national sales data specific to over-the-counter, non-
prescription drugs containing pseudoephedrine, Mr. Robbin's research
and analysis showed that a very small percentage of the sales of such
goods occur in convenience stores--only about 2.6% of the HABC [Health
and Beauty Care] category of merchandise or 0.05% of total in-store
(non-gasoline) sales. He determined that the normal expected retail
sales of pseudoephedrine tablets in a convenience store would range
between $10.00 and $30.00 per month, with an average monthly sales
figure of about $20.00 and the sales of more than $100.00 in a month
would be expected to occur in a random sampling about once in one
million to the tenth power, a number he characterized as nearly
equivalent to the number of atoms in the universe. He further stated
that the current convenience store gross margin in the health and
beauty care category is about 40 percent, so that such a store could be
expected to spend an average of $12.00 per month acquiring its
inventory of pseudoephedrine products from a distributor.
In October 2002, a pre-registration inspection was performed at H &
R's facility by a DEA Diversion Investigator. Mr. Patel advised the
Diversion Investigator that H & R had purchased its customer list from
Elk International and its customers were mainly convenience stores and
gasoline stations
[[Page 30170]]
located within 30 miles of Chattanooga. He identified several listed
products H & R intended to sell which are normally sold in the
traditional market. Of concern, he also advised the Diversion
Investigator that the company would carry whatever products its
customers wanted to buy. At the hearing, Mr. Patel then testified that
customers had brought him samples of products they wanted and
specifically asked for Max Brand Pseudo 60s. However, he had not yet
identified a supplier for that product.
Max Brand Pseudo 60s has been identified by DEA as ``the precursor
product predominantly encountered and seized at clandestine
methamphetamine laboratories'' and convenience stores are the ``primary
source'' for the purchase of ``Max Brand products, which are the
preferred brand for use by illicit methamphetamine producers * * *.''
Express Wholesale, 69 FR 62086, 62087 (2004); see also RAM, Inc. d/b/a/
American Wholesale Distribution Corp., 70 FR 11693 (2005).
The Diversion Investigator found Respondent's physical security
adequate and its monitoring, storage and recordkeeping systems an
improvement over Elk International's systems.
At the time of the hearing, Mr. Patel testified H & R then had
about 385 customers. He also provided a list of 459 businesses, not all
of whom were actual customers. At least 27 of these customers were
located in cities some distance from Chattanooga, including Knoxville
and Nashville, Tennessee; Atlanta, Summerville, Americus, Griffin,
Rome, Tucker and Lakeland, Georgia; Huntsville, Chickasaw, Decatur and
Mobile, Alabama; Myrtle Beach and Greenville, South Carolina;
Gainsville, Florida; Kansas City, Missouri; and Woodstock, Illinois.
While Mr. Patel testified H & R would not sell listed chemicals to
customers in Mobile, Woodstock and Gainesville, he did not specify
whether he would sell to the customers at other distant locations on
the list. He further testified H & R delivered to local customers but
others, including those from nashville and Atlanta, would have to come
to the Chattanooga facility to pick up orders.
A DEA Special Agent testified he recognized at least ten names on
Respondent's customer list as being under investigation by DEA, state
or local law enforcement agencies for involvement in distribution of
ephedrine or other chemicals associated with methamphetamine
manufacturing. A Supervisory Investigator testified that Respondent's
customer list also included distributors who were already registered to
sell list I chemicals.
Mr. Patel testified he would not sell over-threshold quantities of
list I chemicals to customers, but he could not say how much he would
sell. He estimated that in addition to other products, he expected an
average convenience store to order one or two dozen bottles of Mini
Thins per month, which would probably retail at $6.99 per bottle.
H. Patel did not testify, but submitted a post-hearing affidavit in
which he stated that if Respondent's application were granted, they
were willing to ``work with DEA to limit the amount of ephedrine and
single ingredient pseudoephedrine products we sell'' and would not sell
to customers being investigated by DEA. He also stated that H & R's
customers requested that it carry listed chemicals, as they wanted to
make their purchases from one distributor. H. Patel admitted having no
experience selling listed chemicals at the wholesale level and did not
know how much of these products H & R's customers might buy.
Mr. Patel testified that neither he nor his uncle had criminal
records and the Government offered no evidence to the contrary.
Pursuant to 21 U.S.C. 823(h), the Deputy Administrator may deny an
application for a Certificate of Registration if she determines that
granting the registration would be inconsistent with the public
interest, as determined under that section. Section 823(h) requires the
following factors be considered in determining the public interest:
(1) Maintenance of effective controls against diversion of listed
chemicals into other than legitimate channels;
(2) Compliance with applicable Federal, State, and local law;
(3) Any prior conviction record under Federal or State laws
relating to controlled substances or to chemicals controlled under
Federal or State law;
(4) Any past experience in the manufacture and distribution of
chemicals; and
(5) Such other factors as are relevant to and consistent with the
public health and safety.
As with the public interest analysis for practitioners and
pharmacies pursuant to subsection (f) of section 823, these factors are
to be considered in the disjunctive; the Deputy Administrator may rely
on any one or combination of factors, and may give each factor the
weight she deems appropriate in determining whether a registration
should be revoked or an application for registration denied. See, e.g.,
Direct Wholesale, 69 FR 11654 (2004); Energy Outlet, 64 FR 14269
(1999); Henry J. Schwartz, Jr., M.D., 54 FR 16422 (1989).
As to factor one, maintenance by the applicant of effective
controls against diversion, the Deputy Administrator agrees with Judge
Bittner that H & R's proposed physical security and recordkeeping
arrangements were adequate. Judge Bittner also found that Respondent
did not disput the Government's evidence that convenience stores are a
major source of diversion of list I chemicals.
Judge Bittner phrased the key issue in factor one as whether
Respondent would sell listed chemicals to retailers who were likely to
divert them. In concluding this factor weighed against registration,
Judge Bittner took particular note that Mr. Patel's estimates of
anticipated sales were several times larger than what Mr. Robbin's
research indicated a convenience store would legitimately sell.
Additionally, at least ten customers on Respondent's list were
under investigation for involvement in the distribution of chemicals
associated with illicit methamphetamine manufacturing. Red flags were
further raised by Mr. Patel's failure to specifically testify whether
he would refuse to sell listed chemicals to customers located
substantial distances from H & R's Chattanooga facility.
The Deputy Administrator is particularly concerned with Mr. Patel's
willingness to sell ``whatever'' products his customers wanted. Coupled
with the specific requests from its gray market customers that the
company carry Max Brand Pseudo 60's, the preferred precursor of illicit
manufacturers, the risk of diversion should the application be
approved, is apparent. See, RAM, Inc. d/b/a American Wholesale
Distribution Corp., supra, 70 FR 11693, 11694.
Judge Bittner acknowledged applicability of a previously published
DEA final order in which registration was denied an applicant who, much
like Respondent, was seeking registration to distribute list I
chemicals in the gray market. In that case, Xtreme Enterprises, Inc.,
67 FR 76195 (2002), there was no evidence the applicant's owner had
failed to comply with Federal, State or local law or that she had any
prior convictions relating to controlled substances or chemicals.
Further, she was willing to provide adequate security for the listed
chemicals.
However, the Deputy Administrator found the applicant's owner had
only a rudimentary knowledge of what would constitute a suspicious
order and no experience in the manufacture or distribution of listed
chemicals. Most
[[Page 30171]]
significant, for purposes of this and similar cases, the Deputy
Administrator also found that ``[v]irtually all of the Respondent's
customers, consisting of gas station and convenience stores, are
considered part of the grey market, in which large amounts of listed
chemicals are diverted to the illicit manufacture of amphetamine and
methamphetamine.'' Xtreme Enterprises, Inc., supra, 67 FR at 76197.
Citing Xtreme Enterprises, Judge Bittner concluded that factor one
(maintenance of controls against diversion), weighed against granting H
& R's application. The Deputy Administrator agrees, noting DEA has
applied this analysis in numerous final orders published after Xtreme
Enterprises was decided. See, e.g., Express Wholesale, supra, 69 FR
62086; Value Wholesale, 69 FR 58548 (2004); K & Z Enterprises, Inc., 69
FR 51475 (2004); William E. ``Bill'' Smith d/b/a B & B Wholesale, 69 FR
22559 (2004); Branex Incorporated, supra, 69 FR 8682: Shop It for
Profit, 69 1,311 (2003); Shani Distributors, 68 FR 62324 (2003).
Judge Bittner found Respondent had complied with applicable
Federal, State and local laws and its owners have not been convicted of
any crimes relating to controlled substances or listed chemicals. Thus,
she concluded that factors two and three weigh in favor of
registration. Based on the record that was before the Administrative
Law Judge, the Deputy Administrator agrees. However, as discussed in
depth under factor five, after the Opinion and Recommended Ruling was
issued, state legislation was enacted making it illegal to sell
tableted pseudoephedrine products in Tennessee, outside of licensed
pharmacies. Thus, to the extent that Respondent's Tennessee gray market
customer base is no longer authorized to sell those products under
state law, factor two is adversely impacted and weighs against
registration.
With regard to factor four, the applicant's past experience in
distributing listed chemicals, Judge Bittner found that while Mr. Patel
had previously sold listed chemical products in his retail tobacco
outlet, neither of H & R's owners/employees had experience selling
listed chemicals at the wholesale level. Judge Bittner therefore found
this factor weighed in favor of a finding that H & R's registration
would be inconsistent with the public interest. The Deputy
Administrator agrees with that conclusion.
With regard to factor five, other factors relevant to public health
and safety, Judge Bittner was ``not persuaded that Respondent will
limit its sales of listed chemicals to the quantities that convenience
stores are likely to sell to legitimate customers.'' She thus found
this factor also weighed against registration. The Deputy Administrator
concurs.
Unlawful methamphetamine production and use is a growing public
health and safety concern throughout the United States and
specificially in the localities where Respondent intends to do
business. Pseudoephedrine and ephedrine are the precursor products used
to manufacture methamphetamine and area laboratory operators
predominantly acquire their precursor chemicals from the customer base
Respondent seeks to serve. While the Patels indicated some intent to
avoid contributing to this scourge, the risk of diversion once listed
chemicals enter the gray market is real, substantial and compelling.
The Deputy Administrator concludes Judge Bittner correctly applied
DEA precedent. As in Xtreme Enterprise, supra, the Respondent's owners'
lack of criminal records, their previous compliance with the law and
any professed willingness to comply with regulations and guard against
diversion, are far outweighed by the intent to sell ephedrine and
pseudoephedrine, almost exclusively, in the gray market.
This reasoning has been consistently applied by the Deputy
Administrator in a series of recently published final orders denying
registration to potential gray market distributors. See, RAM, Inc. d/b/
a American Wholesale Distribution Corp., supra, 70 FR 11693; Al-Alousi,
Inc., 70 FR 3561 (2005); Volusia Wholesale, supra, 69 FR 69409; Prachi
Enterprises, Inc., supra, 69 FR 69407; CWK Enterprises, Inc., 69 FR
69400 (2004); J & S Distributors, 69 FR 62089 (2004); Express
Wholesale, supra, 69 FR 62086; Absolute Distributing, Inc., 69 FR 62078
(2004); Value Wholesale, supra, 69 FR 58548 (2004); John E. McRae d/b/a
J & H Wholesale, 69 FR 51480 (2004).
While not addressed in the Opinion and Recommended Ruling, the
Deputy Administrator notes that state legislatures throughout the
United States are actively considering legislation designed to impede
the ready availability of precursor chemicals. Many of these proposals
are similar to legislation enacted by the State of Oklahoma, titled the
``Oklahoma Methamphetamine Reduction Act of 2004.'' Under that measure,
as of April 6, 2004, pseudoephedrine tablets were designated as
Schedule V controlled substances and may be sold only from licensed
pharmacies within that state.
As a result, it is prohibited in Oklahoma to sell these products
from gray market establishments, such as independent convenience
stores, which have contributed so much to the scourge of
methamphetamine abuse. See, e.g., Express Wholesale, supra, 69 FR at
62809 [denying DEA registration to an Oklahoma gray market distributor,
in part, because of new state restrictions].
A review of data for 2004 reveals the Oklahoma law has resulted in
an apparent reduction in the number of seizures involving clandestine
methamphetamine laboratories in that state. These developments are
encouraging and represent an important step in the ongoing battle to
curb methamphetamine abuse in the United States. State legislation,
such as Oklahoma's, reflects a positive trend and growing recognition
that the diversion of precursor chemicals through the gray market
insidiously impacts public health and safety. See, e.g., Tysa
Management, d/b/a Osmani Lucky Wholesale, 70 FR 12732, 12734 (2005)
[denying registration to intended Oklahoma distributor, in part, on
basis of enactment of recent state legislation]; Express Wholesale,
supra, 69 FR at 62089.
Of particular consequence to H & R and similarly situated Tennessee
applicants and registrants, after Judge Bittner signed her Opinion and
Recommended Ruling, legislation was enacted by the State of Tennessee
that is patterned after the Oklahoma initiative. That legislation
(Senate Bill 2318/House Bill 2334), collectively known as the ``Meth-
Free Tennessee Act of 2005,'' was signed into law by Governor Phil
Bredeson on March 31, 2005, and makes it unlawful for establishments,
other than licensed pharmacies, to sell tableted pseudoephedrine
products in Tennessee after April 1, 2005. This includes both name
brand and off-name brand products.
Accordingly, Respondent's entire intended Tennessee customer base
is now prohibited by state law from selling the pseudoephedrine
products H & R seeks DEA registration to distribute. This adversely
implicates factors five and two and weighs heavily against
registration. See, Tysa Management, d/b/a Osmani Lucky Wholesale,
supra, 70 FR at 12734; Express Wholesale, supra, 69 FR at 62089.
Factor five is also relevant to H & R's proposal to distribute
chemicals to customers under criminal investigation. The conduct of a
potential customer has previously been deemed a relevant consideration
under factor five. See,
[[Page 30172]]
Gazaly Trading, supra, 69 FR 22561; Shani Distributors, supra, 68 FR
62326.
Finally, it is noted that Respondent seeks to distribute
phenylpropanolamine. Accordingly, the Deputy Administrator finds factor
five relevant to H & R's request to distribute phenylpropanolamine and
the apparent lack of safety associated with the use of that product.
DEA has previously determined that an applicant's request to distribute
phenylpropanolamine constitutes a ground under factor five for denial
of an application for registration. See, J & S Distributors, supra, 69
FR 62089; Gazaly Trading, supra, 69 FR 22561; William E. ``Bill'' Smith
d/b/a B & B Wholesale, supra, 69 FR 22559; Shani Distributors, supra,
68 FR 62324.
Based on the foregoing, the Deputy Administrator concludes that
granting Respondent's pending application would be inconsistent with
the public interest.
Accordingly, the Deputy Administrator of the Drug Enforcement
Administration, pursuant to the authority vested in her by 21 U.S.C.
823 and CFR 0.100(b) and 0.104, hereby orders that the pending
application for a DEA Certificate of Registration, previously submitted
by H & R Corporation, be, and it hereby is, denied. This order is
effective June 26, 2006.
Dated: May 5, 2006.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. 06-4838 Filed 5-24-06; 8:45am]
BILLING CODE 4410-09-M