[Federal Register Volume 72, Number 166 (Tuesday, August 28, 2007)]
[Notices]
[Pages 49316-49319]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-16936]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket No. 07-36]


Spirit Pharmaceuticals, L.L.C., c/o Novelty, Inc; Denial of 
Request for Hearing

    On June 22, 2007, I, the Deputy Administrator of the Drug 
Enforcement Administration, issued an Order to Suspend Shipment to 
Spirit Pharmaceuticals, L.L.C., of Fairless Hills, Pennsylvania. See 21 
U.S.C. 971(c). The Order suspended Spirit's proposed importation of 
2,000 kilograms of Ephedrine Hydrochloride to be purchased from 
Emmellen Biotech Pharmaceuticals, LTD., of Mumbai, India. Order at 1.
    The factual basis of the Order was that Spirit, a registered 
importer, had identified AAA Pharmaceuticals, Inc. (AAA), as the 
customer, on the Import Declaration (DEA Form 486) that it filed. Id. 
at 2. DEA personnel subsequently contacted AAA and determined that the 
ephedrine was to be used to manufacture tablets that would be sold to 
Novelty, Inc. Id. at 2.
    The Order related that ephedrine is a list I chemical, which while 
having a legitimate use as a bronchodilator, is also a precursor 
chemical which is used in the illicit manufacture of methamphetamine, a 
schedule II controlled substance. Id. The Order also related that DEA 
has found that non-traditional (or gray-market) retailers, which 
include such entities as gas stations, convenience stores, mini-marts, 
and liquor stores, ``purchase and sell ephedrine * * * OTC products in 
quantities that exceed what would be necessary to meet legitimate 
demand'' at these establishments, and that the products ``are often 
sold to persons for use in the illicit manufacture of 
methamphetamine.'' Id. Finally, the Order related that ``AAA 
manufactures and Novelty distributes'' ephedrine products which are 
``not widely-advertised and are distributed to `non-traditional' retail 
outlets * * * such as convenience stores and gas stations.'' Id. at 3. 
Based on DEA's experience with similar ephedrine products which were 
distributed to non-traditional retailers, I found that ``the proposed 
importation of ephedrine may be diverted to the clandestine manufacture 
of controlled substances.'' Id.
    The Order notified Spirit that it could request a hearing by filing 
a written request within thirty days of its receipt of the Order, and 
that if it failed to do so, it would be deemed to have waived its right 
to a hearing. Id. Spirit did not, however, request a hearing. Nor did 
AAA.
    Instead, on July 5, 2007, Novelty filed a request for a hearing 
asserting that it is ``a regulated person to whom an order applies'' 
under 21 U.S.C. 971(c)(2). ALJ Memorandum at 1; see also Ltr. of 
Novelty's Counsel (June 28, 2007), at 1. Novelty also contended that it 
``is directly harmed, both in its property and liberty interests,'' and 
that it ``has an independent due process right to a hearing under the 
Fifth Amendment * * * regardless of whether Spirit also requests a 
hearing on the order of suspension.'' Ltr. of Novelty's Counsel at 1. 
Id.
    Upon receipt of Novelty's letter, the matter was assigned to 
Administrative Law Judge (ALJ) Gail Randall, who initiated pre-hearing 
procedures. Shortly thereafter, the Government filed a motion to deny 
Novelty a hearing on various grounds including that it is a downstream 
distributor and thus not entitled to a hearing under the statute. See 
Mot. to Deny Novelty, Inc. an Adjudicatory Hearing Under 21 U.S.C. 
971(c)(2) (hereinafter, Mot. to Deny).
    Upon review of the Government's motion, the ALJ concluded ``that 
the usual manner of handling an administrative hearing is not 
appropriate here.'' ALJ Memorandum at 2. Noting that ``[t]he entity 
asking for a hearing, Novelty, is not the entity addressed in the Order 
to Suspend Shipment, Spirit Pharmaceuticals,'' and that the Government 
had objected to granting Novelty a hearing on the validity of the 
suspension order, the ALJ concluded that ``the designation of this 
matter for a hearing is not clear.'' Id. The ALJ thus transmitted the 
issue to me for resolution. Id. at 2-3.
    For the reasons set forth below, I conclude that Novelty is not ``a 
regulated person to whom an order applies under [21 U.S.C. 
971(c)(1)].'' 21 U.S.C. 971(c)(2). Accordingly, I deny Novelty's 
request for a hearing to challenge the suspension order. I further 
order that the proceedings currently pending before the ALJ be 
terminated.

Discussion

    Under 21 U.S.C. 971(a), ``[e]ach regulated person who imports * * * 
a listed chemical shall notify the Attorney General of the importation 
* * * not later than 15 days before the transaction is to take place.'' 
(emphasis added).\1\ In

[[Page 49317]]

addition, in subsection (c)(1), Congress granted the Attorney General 
the authority 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.'' Id. Sec.  
971(c)(1). Subsection (c)(1) further provides that ``[f]rom and after 
the time when the Attorney General provides written notice of the order 
* * * to the regulated person, the regulated person may not carry out 
the transaction.'' Id.
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    \1\ In subsection (b), Congress directed that the Attorney 
General issue regulations ``for circumstances in which the 
requirement of subsection (a) * * * does not apply to a transaction 
between a regulated person and a regular customer or to an 
importation by a regular importer.'' 21 U.S.C. 971(b)(1).
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    In the event that the Agency orders the suspension of an 
importation, Congress provided that ``[u]pon written request to the 
Attorney General, a regulated person to whom an order applies under 
paragraph(1) is entitled to an agency hearing on the record in 
accordance with'' subchapter II of the Administrative Procedure Act. 
Id. Sec.  971(c)(2) (emphasis added). It is this provision which is at 
issue in this proceeding.
    Relying on PDK Labs. v. Reno, 134 F. Supp.2d 24 (D.D.C. 2001), 
Novelty contends that as a wholesale distributor, it ``is a `regulated 
person' within the meaning of 21 U.S.C. 802(38) and, as such, is 
entitled to a hearing under'' subsection (c)(2). Novelty's Resp. to 
Mot. to Deny at 7. Novelty also maintains that it ``is a party within 
the `zone of interests' designedly protected by'' the hearing provision 
and thus entitled to a hearing on this alternative ground. Id. 
Relatedly, Novelty contends that to deny it a hearing would violate the 
rule of law because PDK Labs. v. Reno ``remain[s] the law governing 
this agency's construction of the hearing provision,'' id. at 5, and 
that ``DEA possesses no lawful power to act against the holding of the 
District Court in'' that case. Id. at 6.
    In PDK Labs. v. Reno, the district court addressed the question of 
whether a manufacturer (PDK) was entitled to a hearing to challenge 
this Agency's refusal to issue a Letter of No Objection (LONO) to 
Indace, Inc., an importer which had notified the Agency of its intent 
to import bulk ephedrine on behalf of PDK. 134 F.Supp.2d at 28. When 
the Agency refused to grant the LONO, PDK filed suit raising various 
claims including that the Agency had violated the Administrative 
Procedure Act and had ``failed to perform its statutory duties.'' \2\ 
Id. at 27.
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    \2\ At the time PDK filed suit, Indace had indicated that it 
planned to pursue the matter by having DEA issue a suspension order. 
134 F.Supp.2d at 28. The day after PDK filed suit, Indace notified 
the Agency that it considered the matter as being ``solely between'' 
DEA and PDK and that it no longer intended to pursue the matter. Id. 
DEA then notified Indace that it considered the request for 
importation to have been withdrawn. Id.
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    In the course of discussing whether PDK had standing to bring its 
APA claims, the district court addressed the Government's arguments 
that PDK was ``not an intended beneficiary of Sec.  971's procedures,'' 
and that ``the interests underlying [its] claims [were] not within the 
`zone of interests' protected by'' the statute. Id. at 29-30. In 
rejecting these arguments, the court began by noting that under 21 
U.S.C. 802(38), ```regulated persons' included manufactures [sic], 
distributors, importers, and exporters of listed chemicals,'' and that 
``as both a manufacturer and distributor PDK is a regulated person 
within the meaning of Sec.  802.'' Id. at 30. Observing that 
``[s]ection 971 uses both the terms `importers' and `regulated 
persons,' '' the court reasoned that ``Congress easily could have 
limited the right to a hearing in Sec.  971(c)(2) exclusively to 
`importers to whom an order applies,' but chose not to do so--instead 
extending this right to `regulated persons.' '' Id. The court then 
concluded that ``[t]he specific use of the term `regulated persons' in 
Sec.  971(c)(2) at least suggests that Congress intended to permit a 
regulated entity to whom an order applies--including a manufacturer 
like PDK--to obtain judicial review.'' Id. (emphasis added)
    The court buttressed its reasoning asserting that this Agency 
``itself previously adopted a similar reading in Yi Heng Enterprises 
Dev. Co., 64 FR 2234, 2235 (1999).'' Id. While noting that ``Yi Heng 
arose in a different context * * * because it involved the interests of 
two importers rather than an importer and a manufacture [sic],'' the 
court noted that the ``decision recognized that `the statute provides 
the opportunity for a hearing to ``a regulated person to whom an order 
(suspending shipment) applies,'' not necessarily the person to whom the 
order was issued.' '' Id.
    After discussing the zone of interests test for review under the 
APA--a separate inquiry from that of who is entitled to an agency 
hearing under the statute--the court further concluded that ``the 
phrase `regulated person to whom any [sic] order applies' is evidence 
that a manufacturer affected by a suspension order is protected under 
Sec.  971's review provision.'' Id. at 31. The court also noted that 
because PDK was specifically listed on the DEA Form 486 as ``the 
intended recipient of'' the proposed importation and that the 
suspension order ``hinge[d] largely on the identity of the eventual 
purchaser,'' PDK was ``entitled to a hearing.'' Id.
    Most of the district court's analysis of the hearing provision 
occurred in the course of its discussion of whether PDK had standing 
under the APA. The court nonetheless clearly incorporated this 
reasoning in granting PDK's motions for injunctive and declaratory 
relief. See id. at 36 (``PDK is a `regulated person to whom an order 
applies' within the meaning of Sec.  971. As such, it is entitled to an 
expedited hearing of formal suspension orders that apply to it.''). See 
also id. at 38. DEA did not appeal the court's decision, which ordered 
the Agency to either issue a LONO or a suspension order. Id. Instead, 
the Agency complied with the court's order by issuing orders suspending 
the importations. See Indace, Inc., c/o Seegott, Inc., 67 FR 77805 
(2002). Thereafter, PDK requested a hearing and ``DEA complied with the 
court's ruling'' by granting PDK a hearing. Id.
    The Government disagrees with Novelty as to the precedential weight 
of PDK Labs. v. Reno. First, the Government argues that Yi Heng, upon 
which the district court relied, does not support granting Novelty a 
hearing because there, both entities were deemed to be importers and 
thus the case did not address ``the question of whether someone other 
than an importer could obtain a hearing.'' Motion to Deny at 9. The 
Government further argues that ``Novelty is a step further removed from 
the importation than the plaintiff in PDK Labs.,'' and that to grant a 
hearing ``to any downstream regulated person affected by a suspension 
order is a considerable expansion of the flawed reasoning in PDK Labs. 
v. Reno.'' Mot. to Deny at 10. Relatedly, the Government contends that 
``under Novelty's reasoning, any one of [its] thousands of customers,'' 
which are also ``regulated persons'' under the statute, ``could receive 
[a hearing] regardless of whether Spirit, AAA, or even Novelty was 
interested in pursuing the importation.'' Id. at 11.
    Having considered the parties' arguments, I agree with the 
Government that PDK Labs v. Reno is not controlling authority in this 
matter. The statutory scheme, reasonably read, grants a hearing only to 
those who are properly deemed to be importers. While in some 
circumstances, a manufacturer may also be deemed to be an importer 
because it is the real party in interest in an import transaction, 
Novelty is neither an importer nor a manufacturer. Rather, it is the 
purchaser and distributor of a new and different product combining the 
ephedrine with guaifenesin, which has been manufactured in the United 
States.

[[Page 49318]]

    To be sure, a distributor such as Novelty falls within the 
definition of a ``regulated person.'' 21 U.S.C. 802(38). In subsection 
(c)(2), however, Congress did not extend the hearing right to all 
``regulated persons.'' Rather, it limited the right to only ``a 
regulated person to whom an order applies under paragraph(1).'' Id. 
Sec.  971(c)(2) (emphasis added). And as paragraph (1) (subsection 
(c)(1)) makes plain, the ``regulated person to whom an order applies'' 
is the regulated person that is seeking to ``carry out the 
transaction'' of the importation and which is the same regulated person 
that has previously notified the Agency of the proposed transaction. 
Id. Sec.  971(c)(1) (emphasis added). See also id. Sec.  971(a) (``Each 
regulated person who imports * * * a listed chemical shall notify the 
Attorney General of the importation * * * not later than 15 days before 
the transaction is to take place.'') (emphasis added). As section 971's 
text and structure demonstrate, an entity's entitlement to a hearing is 
not based solely on its status as a ``regulated person,'' but rather, 
as a ``regulated person'' seeking to carry out an import transaction.
    As explained above, the transaction which is the subject of the 
suspension order is the importation of bulk ephedrine by Spirit 
Pharmaceuticals from Emmellen Biotech Pharmaceuticals of Mumbai, India. 
Novelty is not a party to this transaction.
    My predecessor's decision in Yi Heng (which the district court 
relied on in PDK) provides no comfort to Novelty. In Yi Heng, my 
predecessor apparently adopted the ALJ's interpretation that ``the 
statute does not specify that only one party in a transaction is 
entitled to a hearing. * * * [T]he statute provides the opportunity for 
a hearing to `a regulated person to whom an order (suspending shipment) 
applies,' not necessarily the person to whom the order was issued.'' 64 
FR at 2235 (int. quotations omitted).
    In the decision, my predecessor relied on the Agency's regulation 
which defines a ``chemical importer'' as ``a regulated person who, as 
``the principal party in interest in the import transaction'', has the 
power and responsibility for determining and controlling the bringing 
in or introduction of the listed chemical into the United States.'' Id. 
(quoting 21 CFR 1300.02(b)(8)). Because title to the chemical had 
passed to Yi Heng's customer ``before the chemical entered the United 
States,'' the customer was also ``a regulated person to whom the 
suspension order applies.'' Id.
    Unlike Yi Heng's customer, Novelty is not ``the principal party in 
interest in the import transaction.'' 21 CFR 1300.02(b)(8). Indeed, as 
explained above, it is not even a party to the import transaction. 
Novelty thus stands on a different footing than a manufacturer (such as 
PDK did) which lacks an import registration and which must therefore 
import by entering into an agency relationship with a registered 
importer.\3\ Novelty does not have ``the power and responsibility for 
determining and controlling the bringing in or introduction of the 
listed chemical into the United States.'' Id. As the Government points 
out, even were Novelty to prevail at a hearing, it cannot ``compel 
Spirit to import the ephedrine.'' Mot. to Deny at 8. Nor does Novelty 
identify any consequence that would attach to it were Spirit to violate 
the suspension order. See 21 U.S.C. 960(d).
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    \3\ As our regulation makes clear, a manufacturer is an importer 
only when the registered importer acts as the manufacturer's agent 
in importing the chemical and the manufacturer is the principal 
party in interest in the transaction. When an importer proposes to 
import a listed chemical for its own account, its future customers 
are not importers.
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    Furthermore, here, in contrast to the PDK case, not even the 
manufacturer (AAA) filed a request for a hearing. Moreover, under 
Novelty's construction of the statute, any one of a manufacturer's 
wholesale-distributor customers (and some manufacturers have numerous 
wholesaler customers) would be entitled to a hearing even if the 
manufacturer had decided that it no longer desired to pursue the 
importation and manufacture the product. I will not adopt a 
construction of the statute that would lead to such an absurd 
result.\4\ Cf. Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 575 
(1982).
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    \4\ Novelty also argues that importers ``have little interest or 
incentive to do battle in a hearing with DEA,'' and that ``the 
importer has no way of discerning the intricacies of its client's 
business.'' Novelty's Resp. at 8 n.3. Novelty ignores, however, that 
in an agency relationship, the ``principal has the right to control 
the conduct of the agent with respect to matters entrusted to him.'' 
1 American Law Institute, Restatement (Second) of Agency Sec.  14, 
at 60 (1958). Presumably, the principal's right to control its agent 
should be sufficient to induce the agent to request a hearing, at 
which the manufacturer would intervene and litigate the basis for 
the order.
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    The text and structure of section 971 thus provide ample evidence 
that Congress intended to grant a hearing only to those regulated 
persons who are principal parties to a proposed import transaction. 
Because Novelty is not such a party but rather the purchaser of a new 
and different product, which has been manufactured in the United 
States, it is not ``a regulated person to whom an order applies.'' 21 
U.S.C. 971(c)(2). It is therefore not entitled to a hearing.\5\
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    \5\ For the same reasons, I also reject Novelty's contention 
that it is entitled to a hearing because it is within the zone of 
interests protected by section 971.
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    Novelty further argues that to deny it a hearing would deprive it 
of liberty and property interests in violation of the Due Process 
Clause. Novelty's Resp. at 16-17. Relatedly, Novelty argues that under 
the avoidance doctrine, DEA must construe the statute to provide it 
with a hearing.
    Novelty has not established that the suspension order has deprived 
it of either a liberty or property interest. Novelty maintains that it 
``has a liberty interest in avoiding damage to its reputation * * * 
that will result from the stigmatizing suspension DEA creates by its 
effective import ban.'' Novelty Resp. at 17. This contention is easily 
dismissed because in Paul v. Davis, 424 U.S. 693, 712 (1976), the 
Supreme Court held that one's ``interest in reputation'' is ``neither 
`liberty' nor `property' '' under the Due Process Clause.
    Novelty further asserts that ``the stigmatizing effects'' of the 
suspension order will ``preclude[ it] from obtaining 10-15% of its 
revenue.'' Novelty Resp. at 17. The Suspension Order does not, however, 
prevent Novelty from obtaining product from any one of the numerous 
other manufacturers of these products and thus does not preclude 
Novelty ``from pursuing its core business.'' PDK Labs. v. Reno, 134 
F.Supp.2d at 33. As for Novelty's claimed property interest, the PDK 
court held that ``[n]othing in the overall scheme of the [Chemical 
Diversion and Trafficking Act] justifies the finding that [a 
manufacturer] has an entitlement to import List I chemicals.'' Id. at 
33. The same is equally true with respect to a distributor. I therefore 
conclude that construing the statute to deny Novelty a hearing--as 
Congress intended--does not raise any constitutional question.\6\
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    \6\ Novelty also argues that ``DEA's refusal to grant [it] a 
hearing violates the DEA Administrator's oath of office to uphold 
the Constitution and the laws of the United States,'' Novelty Resp. 
at 19, and kindly reminds me that ``[v]iolation of the oath is an 
offense punishable by judicial action.'' Id. at 20. Novelty can be 
assured that both I and the Administrator fully appreciate our 
obligation to faithfully discharge the duties of our offices.
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Order

    Pursuant to the authority vested in me by 28 CFR 0.100(b) & 0.104, 
I hereby order that the request of Novelty, Inc., for a hearing to 
challenge the Order to Suspend Shipment issued to Spirit 
Pharmaceuticals, Inc., be, and it hereby is, denied. I further order 
that the proceedings in this matter be, and they

[[Page 49319]]

hereby are, terminated. This Order is effectively immediately.

    Dated: August 17, 2007.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. E7-16936 Filed 8-27-07; 8:45 am]
BILLING CODE 4410-09-P