[Federal Register Volume 73, Number 176 (Wednesday, September 10, 2008)]
[Notices]
[Pages 52689-52704]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-21035]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket No. 08-33]


Novelty Distributors, Inc.; Revocation of Registration

    On January 17, 2008, I, the Deputy Administrator of the Drug 
Enforcement Administration, issued an Order to Show Cause and Immediate 
Suspension of Registration to Novelty Distributors, Inc. (Respondent), 
of Greenfield, Indiana. The Order immediately suspended and proposed 
the revocation of Respondent's DEA Certificate of Registration, 
003563NSY, as a distributor of the list I chemicals ephedrine and 
pseudoephedrine, on the grounds that its ``continued registration is 
inconsistent with the public interest,'' and ``constitute[d] an 
imminent danger to public health and safety.'' Show Cause Order at 1 
(ALJ EX. 1) (citing 21 U.S.C. 823(h), 824(a)(4), and 824(d)).
    More specifically, the Show Cause Order alleged that Respondent was 
storing listed chemical products at, and distributing them from, over 
100 unregistered locations throughout the United States, in violation 
of Federal law and regulations. Id. (citing 21 U.S.C. 822(e), 21 CFR 
1309.21 and 1309.23(a)).
    Next, the Show Cause Order alleged that Respondent was distributing 
quantities of listed chemical products ``to small retail outlets such 
as convenience stores'' in amounts ``far exceed[ing] what those retail 
outlets could be expected to sell for legitimate, therapeutic 
purposes.'' Id. at 2. The Order thus alleged that the ``listed chemical 
products distributed by [Respondent] in large quantities have been, and 
are likely to continue being, diverted to the clandestine manufacture 
of methamphetamine.'' Id. (citing cases). Relatedly, the Show Cause 
Order alleged that some ``[s]mall retail outlets that receive large 
quantities of * * * listed chemical products from [Respondent] sell 
such products to individuals in amounts that cannot be attributed to 
legitimate individual needs,'' that ``some of the retail outlets allow 
customers to make multiple purchases of scheduled listed chemical 
products within a single week, and in some cases, within a single 
day,'' and that ``[s]ome customers of these retail outlets purchased 
more than 9 grams of ephedrine or pseudoephedrine base within 30 days 
in violation of 21 U.S.C. 844(a).'' Id.\1\
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    \1\ The Show Cause Order also alleged that ``[i]n November 2002, 
22 bottles of ephedrine products distributed by Novelty were found 
at an illicit methamphetamine laboratory in Connecticut.'' Show 
Cause Order at 2.
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    The Show Cause Order further alleged that between January 1, 2007, 
and July 9, 2007, Respondent distributed listed chemical products ``on 
at least 284 occasions to 35 retail outlets,'' which had not self-
certified as required under Federal law. Id. (citing 21 U.S.C. 
830(e)(1)(A)(vii)). Id. Moreover, on three occasions subsequent to 
February 1, 2007, Respondent allegedly distributed 24-count bottles of 
listed chemical products to retailers in violation of Federal law, 
which effective April 9, 2006, required that non-liquid form products 
be sold only in blister packs. Id. at 2-3 (citing 21 U.S.C. 830(d)(2)). 
Relatedly, the Show Cause Order alleged that Respondent had distributed 
tablet-form products to retailers in Kentucky and North Carolina in 
violation of the laws of these States which ``prohibit the sale of non-
liquid ephedrine and pseudoephedrine except in a gel-cap product.'' Id. 
at 3.
    Finally, the Show Cause Order alleged that in July 2007, DEA had 
audited twenty listed chemical products which Respondent distributed. 
Id. at 2. The Show Cause Order alleged that Respondent ``could not 
account for more than 60,000 dosage units of two ephedrine products'' 
and that it also had ``overages for 16 different * * * listed chemical 
products.'' Id. The Order thus alleged that Respondent ``failed to 
maintain accurate records of its distributions and receipts of * * * 
listed chemical products in violation of 21 U.S.C. 830(a) and 21 CFR 
1310.04.'' Id.

[[Page 52690]]

    Based on the above allegations, I made the preliminary finding that 
the listed chemical products Respondent was distributing had been, and 
were ``likely to continue to be, diverted into the illicit manufacture 
of methamphetamine.'' Id. at 3. I also found that Respondent's 
``failure to maintain effective controls against diversion, including 
its distribution of large amounts of * * * listed chemical products 
that far exceed legitimate demand, contribute to the illicit 
manufacture of methamphetamine.'' Id. I thus came to the ``preliminary 
conclusion that [Respondent's] continued registration during the 
pendency of these proceedings would constitute an imminent danger to 
the public health and safety,'' and immediately suspended its 
registration. Id.
    On February 26, 2008, Respondent requested a hearing on the 
allegations. ALJ Ex. 2. The matter was assigned to Administrative Law 
Judge (ALJ) Gail Randall, who proceeded to conduct pre-hearing 
procedures. A hearing was held on March 24 through March 28, and March 
31 through April 2, 2008, at which both parties put on extensive 
testimony and introduced numerous documents into evidence.
    Moreover, on March 24, 2008, Respondent filed an interlocutory 
appeal in which it challenged the ALJ's denial of its motion to remove 
one of the Government's lawyers from participating in the hearing, on 
the ground that he was a necessary and indispensable witness to the 
events surrounding the execution of an administrative search warrant 
which was the subject of its motion to suppress. See ALJ Exs. 12 and 
13. On March 25, 2008, I denied Respondent's appeal on multiple 
grounds.\2\ ALJ Ex. 13.
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    \2\ The grounds included that Respondent had not established 
that the Government's lawyer was a necessary and indispensable 
witness, and that Respondent had not cited a single case to support 
its contention that the conduct of the Government lawyer--even if 
true--was a violation of its constitutional rights. Denial of 
Interlocutory Appeal, at 2-3 (ALJ Ex. 13.) I also noted that the 
Agency had previously held that the exclusionary rule does not apply 
to proceedings under 21 U.S.C. 824, and that the Supreme Court had 
``repeatedly declined to extend the exclusionary rule to proceedings 
other than criminal trials.'' Id. (quoting Pennsylvania Bd. of 
Probation v. Scott, 524 U.S.C. 357, 363 (1998)).
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    Following the hearing, both parties submitted briefs containing 
their proposed findings, conclusions of law, and argument. On May 21, 
2008, the ALJ issued her recommended decision (hereinafter, ALJ).\3\
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    \3\ The decision was 165 pages in length.
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    In her decision, the ALJ found that the Government's evidence 
regarding the monthly expected sales of combination ephedrine products 
at convenience stores ($14.39) to meet legitimate demand was ``flawed 
and not credible.'' ALJ at 97. Relatedly, while acknowledging that 
``Respondent sells an approximate monthly average of $640.00 in SLC 
products to its convenience store customers,'' the ALJ observed that 
``there is no legitimate sales figure in the record'' by which the 
excessiveness of its sales (and the likelihood that the products were 
being diverted) could be judged. Id.
    Regarding the allegation that Respondent failed to maintain 
accurate records of its receipts and distributions, the ALJ concluded 
that the evidence pertaining to the audit did not establish 
``preponderating evidence either way to assist in analyzing the 
accuracy of * * * Respondent's handling'' of listed chemical products. 
Id. at 88. The ALJ concluded, however, that ``Respondent's 
recordkeeping is not adequate to conduct an effective audit of its SLC 
products.'' Id.
    The ALJ also rejected the allegation that Respondent had made 
numerous distributions to uncertified retailers based on testimony and 
documentary evidence that one of Respondent's officials had confirmed 
that these ``customers were, in fact, self-certified.'' Id. at 91. The 
ALJ further found unproven the allegation that Respondent had thrice 
distributed listed chemical products in bottles in violation of Federal 
law, noting that Respondent had provided ``documentary proof that the * 
* * product * * * had not been illegally distributed.'' Id. at 86. The 
ALJ also found unproven the Government's allegation that Respondent had 
distributed tablet-form products to retailers in Kentucky and North 
Carolina, noting that ``Respondent produced credible testimonial 
evidence to support a finding that these illegal sales in fact did not 
happen.'' Id.
    With respect to the allegation that Respondent was violating 
Federal law because it was distributing from over 100 drop-off points 
which were not registered, the ALJ noted that Respondent had challenged 
the Agency's interpretation in Federal District Court. Id. at 90-91. 
The ALJ found, however, that Respondent had been advised by a DEA Group 
Supervisor (GS) that its practice of shipping SLCs to numerous storage 
units which were not registered was illegal, that it had continued do 
so without even seeking clarification from the Agency, and that this 
conduct was ``not consistent with the requirements for a participant in 
a regulated industry.'' Id. at 91. However, because Respondent's 
declaratory judgment action was still ``pending in federal court,'' the 
ALJ ``conclude[d] that [the district court was] the proper venue for 
this issue'' and declined to address the statutory question.\4\ Id. at 
91 n.38.
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    \4\ On August 7, 2008, the District Court granted the 
Government's motion for summary judgment and denied Respondent's 
cross-motion for summary judgment. See Entry on Cross Motions for 
Summary Judgment, Novelty, Inc., v. Tandy, No. 1:04-cv-1502-DFH-TAB 
(S.D. Ind., Aug. 7, 2008). Notably, the District Court held that the 
instructions in the Group Supervisor's letter were interpretive and 
not legislative rules, and were thus not subject to notice and 
comment rulemaking under 5 U.S.C. 553. Id. at 2. Pursuant to 5 
U.S.C. 556(e), I take official notice of the District Court's 
decision. I also take official notice of the August 13, 2008 letter 
submitted by Respondent's President. In his letter, Respondent's 
President stated that he has ordered a change to Respondent's 
distribution practices and ``reiterates its previously stated 
commitment to cooperate with [this Agency] and adhere to all 
conditions specified by [me] for [its] continued registration.'' 
Letter of Todd Green (Aug. 13, 2008).
    In his letter, Respondent's CEO does not state that Respondent's 
will waive its right to appeal the District Court's decision. 
Moreover, I conclude that in light of the extensive resources that 
have been devoted to litigating the issue of the lawfulness of 
Respondent's use of unregistered locations to store and distribute 
SLCs, as well as the importance of the issue to the regulated 
industry, the issue should be decided.
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    Finally, the ALJ also found that following the suspension order, 
Respondent had attempted to enter into an agreement with one of its 
suppliers (BDI), under which its salespersons would still take orders 
for SLCs which would be shipped by BDI. ALJ at 92. Here again, the ALJ 
noted that there was no evidence that Respondent had asked the Agency 
if the arrangement was lawful. Id.
    The ALJ nonetheless concluded that Respondent had ``demonstrated a 
willingness to comply with the laws and regulations governing the 
distribution of SLC products,'' specifically noting that it had 
developed a training program for its customers, had provided them with 
the logbooks required by the CMEA, and lockable display cases for its 
products, and had upgraded its computer system. Id. at 98-99. The ALJ 
also noted that following the implementation of the CMEA, Respondent 
had ``acted to remove * * * non-complying SLC products from its 
customers' shelves and [to] properly dispose of'' them. Id. at 99.
    With respect to the audits, the ALJ observed that while they 
``appeare[d] to reveal significant overages and shortages,'' Respondent 
had ``credibly and adequately minimized those figures to a more 
acceptable margin of inventory error after analyzing its records and 
making its own audit

[[Page 52691]]

findings.'' Id. Finally, while the ALJ noted that Respondent's 
continued distributions to the drop-off points ``cause[s] concern,'' 
she further reasoned that except for the Group Supervisor's letter, it 
``had no notice from the [Agency] of any violations until the * * * 
Suspension Order was served'' on it, and that it ``ha[d] not been given 
an opportunity to remedy the flaws identified by the Agency [in] this 
action.'' Id. at 100. Based on what she characterized as its ``history 
of,'' and ``financial commitment to,'' compliance, the ALJ reasoned 
that revocation would not be an appropriate sanction. Id. at 100-01. 
Instead, the ALJ recommended that I impose compliance requirements on 
Respondent to ensure that it operated in the public interest. Id. at 
101.
    Thereafter, the Government filed exceptions to the ALJ's decision. 
Respondent likewise filed a 140 page brief which supported the ALJ's 
decision while also excepting to certain findings and conclusions.
    Having considered the entire record in this matter and all of the 
issues raised in the parties' exceptions, I hereby issue this Decision 
and Final Order. More specifically, I reject the allegations that 
Respondent distributed SLC products in violation of the CMEA and the 
laws of Kentucky and North Carolina as unsupported by substantial 
evidence. With respect to the allegations that Respondent engaged in 
284 distributions to uncertified retailers, I conclude that the 
evidence establishes only a single instance of distributing to an 
uncertified retailer and several instances of inaccurate recordkeeping 
in that Respondent's records of the addresses for several stores did 
not match the actual addresses of the stores, and that the Government 
has not proved by substantial evidence that the stores were uncertified 
on the date of the distributions.
    With respect to the audit, I conclude that because the ALJ found 
credible the testimony of one of Respondent's executives that the 
Agency's investigators had excluded certain transactions and inventory 
adjustments which it had provided to them, and the Government offered 
no rebuttal evidence, the allegation that Respondent had shortages and 
overages of various products is not proved. I find, however, that the 
evidence shows that Respondent's recordkeeping did not comply with 
federal law because it failed to maintain proper records of regulated 
transactions as required by Federal law and DEA regulations. See 21 
U.S.C. 830(a); 21 CFR 1310.03, id. 1310.04, id. 1310.06. Because of 
this, as well as evidence showing that Respondent's list of shipments 
included three shipments of a product with a date of July 16, 2007, 
even though it was then only July 9, 2007, I find that Respondent does 
not have adequate systems for monitoring the receipt and distribution 
of SLCs. 21 CFR 1309.71(b).
    With respect to the allegation that Respondent's sales of SLC were 
excessive and consistent with diversion, I agree with the ALJ that the 
Government's figure as to the expected monthly sales range is not 
supported by substantial evidence. I nonetheless conclude that 
Respondent does not maintain effective controls against diversion 
because its own evidence shows that it distributed SLCs to numerous 
stores in quantities that dwarfed what its average customer purchases, 
and that it did so even when it had previously developed concerns that 
a store was purchasing excessive quantities, and that it does not even 
enforce its own sales limit policies.
    Next, in contrast to the ALJ, I conclude that this proceeding is 
the appropriate forum to address the meaning of 21 U.S.C. 822(e) and 
the allegation that Respondent has repeatedly violated Federal law by 
distributing from unregistered locations. Consistent with the statutory 
text and purpose, I conclude that Respondent's practice of using 
unregistered self-storage units to store and distribute SLC products 
violated the Controlled Substances Act and DEA's regulation.
    Finally, for reasons set forth below, I reject the ALJ's 
recommended sanction that Respondent's registration be continued with 
conditions. As explained below, because Respondent repeatedly violated 
Federal law notwithstanding that it was advised that its use of the 
unregistered self-storage facilities was unlawful, does not even 
enforce its own policies with respect to limiting sales, and attempted 
to circumvent the suspension order, I conclude that revocation is 
necessary to protect the public interest. I make the following findings 
of fact.

Findings

    Respondent is a corporation which is solely owned by its President, 
Mr. Todd Green. Respondent is a wholesale distributor of various sundry 
items to between 10,000 and 12,000 convenience stores throughout the 
United States.
    Since 1998, Respondent has held DEA Certificate of Registration, 
003563NSY, which authorizes it to distribute pseudoephedrine 
and ephedrine from its registered location of 351 W. Muskegon Drive, 
Greenfield, Indiana. GX 1. Respondent's registration expires on October 
31, 2008. Id.
    Both ephedrine and pseudoephedrine have FDA approved therapeutic 
uses. GX 19, at 3. Ephedrine is lawfully marketed under the Food, Drug, 
and Cosmetic Act for OTC use as a bronchodilator to treat asthma,\5\ 
and pseudoephedrine is lawfully marketed for OTC use as a decongestant. 
Id. at 3-4. Both substances are, however, regulated as schedule listed 
chemicals under the Controlled Substances Act because they are 
precursor chemicals which are frequently diverted into the illicit 
manufacture of methamphetamine, a schedule II controlled substance, a 
potent and highly addictive central nervous system stimulant. See 21 
U.S.C. 802(34); id. 812(c); 21 CFR 1308.12(d). Moreover, in the course 
of investigating methamphetamine trafficking, DEA has frequently found 
that the listed chemicals which are used by smaller illicit labs have 
been sold by convenience stores, gas stations, and other small 
retailers. GX 51, at 56, 59, 62, 66; GX 54, at 29-30.\6\ See also TNT

[[Page 52692]]

Distributors, 70 FR 12729, 12730 (2005) (noting testimony of Special 
Agent that ``80 to 90 percent of ephedrine and pseudoephedrine being 
used [in Tennessee] to manufacture methamphetamine was being obtained 
from convenience stores'').
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    \5\ The FDA has, however, issued a notice of proposed rulemaking 
which would remove combination ephedrine-guaifenesin products from 
the OTC monograph on the grounds that they are not ``safe and 
effective for continued OTC availability.'' 70 FR 40232 (2005).
    The parties also extensively litigated the medical 
appropriateness of using combination ephedrine products to treat 
asthma. See ALJ 43-48. I find it unnecessary to make any findings on 
this issue as until the FDA issues a final rule, combination 
ephedrine-guaifenesin products can be lawfully marketed for this 
purpose.
    \6\ Based on the testimony of a witness whose experience was 
limited to the Shenandoah, Virginia valley, the ALJ found that the 
street price of a gram of methamphetamine is ``between $20.00 and 
$50.00 per gram.'' ALJ at 48-49. Based on this, as well as evidence 
regarding the yield and conversion rate, the ALJ found that ``it 
would cost a methamphetamine cook between $50.00 and $144.00 to 
produce 1 gram of methamphetamine.'' ALJ at 50. The ALJ thus 
concluded that ``using the Respondent's product to manufacture 
methamphetamine makes little monetary sense.'' Id. at 96.
    I reject the ALJ's finding regarding the street price of 
methamphetamine and her conclusion that using Respondent's product 
``makes little monetary sense.'' Id. As for her findings regarding 
the street price of methamphetamine, I note that it is based on 
anecdotal evidence and limited to a small region of the State of 
Virginia. Respondent does not, however, limit its distribution of 
SLCs to this region of the country. I further note that it runs 
counter to the data which this Agency obtains on a periodic basis, 
and which show that in most of the country, methamphetamine prices 
are substantially higher than they are in the Shenandoah Valley. See 
U.S. Dep't of Justice, National Illicit Drug Prices--December 2007, 
32-37 (Mar. 2008). In accordance with 5 U.S.C. 556(e), and 21 CFR 
1316.59(e), I take official notice of the methamphetamine street 
price data contained in this publication. Moreover, the ALJ's 
conclusion assumes that methamphetamine addicts engage in 
economically rational behavior. There is, however, no evidence in 
the record to support this assumption. I therefore reject the ALJ's 
conclusion.
    I also find that this witness's testimony that convenience 
stores are not the source of precursors in the Shenandoah Valley 
(ALJ at 49), to be anecdotal and contrary to the Agency's experience 
throughout the country. I thus give it no weight.
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    Prior to the suspension of its registration, Respondent sold 
combination ephedrine and pseudoephedrine products under the brand 
names of Double Action, Mini, and Ephedrine Plus in package sizes of 
two, six, twelve and twenty-four count. Tr. 561, 692-93. Respondent 
sold these products to approximately 3,500 to 4,000 convenience stores 
in approximately thirty different States. Id. at 80-82, 558-60. 
Respondent does not carry any other OTC drug products. Id. at 552.
    Respondent employs approximately 150 sales persons, who typically 
visit each store every other week.\7\ Tr. 2046, 1290. Using its own 
tractor-trailers, Respondent ships products including SLCs from its 
Greenfield warehouse to each sales person's ``drop-off point,'' which 
is a unit in a commercial self-storage facility. Id. at 73-75. 
According to the testimony of Respondent's owner and CEO, Respondent 
was using approximately 150 to 180 drop-off points at the time the 
immediate suspension was served on it. Id. at 76. Both the driver who 
delivers the product to the drop-off point and the route sales person 
have keys to the storage unit. Id. While the sales persons are notified 
of each arriving shipment, SLCs can sit in the storage units for 
several days before the sales person retrieves them for delivery to the 
stores.\8\ Id. at 534, 668. Moreover, according to one of Respondent's 
executives, the SLCs can remain on the salesperson's truck for up to 
nine days depending upon the demand for the product. Id. at 1282, 1421.
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    \7\ Approximately 90% of the stores are on this schedule; the 
remaining stores are visited either weekly or monthly. Tr. 1290.
    \8\ It is undisputed that the SLCs are not shipped back to 
Respondent's registered location prior to their being distributed.
    At the hearing, an executive of Respondent insisted that ``we 
are not storing product in * * * unregistered locations,'' and 
added: ``Now your coming back into the definition of what is 
storage. We're not storing the product in that location,'' referring 
to the drop-off points. Tr. 666-67. See also id. at 668 (``We're not 
storing or keeping or whatever words you want to try and use, 
product in these warehouses, against the law. We're not doing 
it.''). The executive acknowledged, however, that products may stay 
in the storage units for ``a few days.'' Id. at 667. I therefore 
find that Respondent is storing products in the self-storage units.
    Respondent further asserted that its distribution system 
provided more security than shipping the products via such common 
carriers as UPS or Fed Ex. See Tr. 644-45. Yet an executive of 
Respondent acknowledged that it uses temporary drivers on a contract 
basis. Id. at 693, 697. Relatedly, Respondent's CEO offered 
testimony as to perceived security inadequacies at UPS, asserting 
that ``[p]roduct delivered by UPS could easily be stolen anywhere in 
the system.'' Id. at 157.
    On cross-examination, however, Respondent's CEO admitted that he 
had not taken a tour of a UPS facility. Id. at 161. When asked when 
he had last ``checked into the training that UPS personnel have with 
regard to handling [SLCs]?,'' he answered: ``I assume they don't 
have any training, since they're not DEA regulated facilities.'' Id. 
at 162. The ALJ did not address the credibility of the CEO's 
testimony. As ultimate factfinder, I reject it as lacking 
foundation.
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    None of the drop-off points is registered with the Agency. Tr. 
1284. Moreover, the units do not have separate cages for storing SLCs, 
id. at 132, and the facilities have varying degrees of external 
security with some having cameras and requiring access codes while 
others have no additional security. Compare id. at 131, with id. at 538 
(former salesperson testifying that anyone could come off the road and 
access the door and padlock to his route storage unit).\9\ Moreover, 
DEA Investigators could not determine the addresses of thirty-four of 
the drop-off points. Tr. 1196-98.\10\
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    \9\ There is no dispute that the security at Respondent's 
Greenfield warehouse is adequate. It is also undisputed that 
following the enactment of the CMEA, Respondent prepared a training 
video for its customers and supplied them with logbooks and cases 
for storing SLC products. Tr. 1390 & 1422; RXs 34, 47, & 48.
    \10\ On its list of shipments, Respondent used code numbers to 
indicate where products were being shipped to. Tr. 1196. Moreover, 
Respondent initially refused to turn over information identifying 
the addresses of the drop-off points for the sales routes, claiming 
that it was outside the scope of the warrant. Id. at 1197.
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    In a letter dated May 5, 2004, the Diversion Group Supervisor of 
the Indianapolis, Indiana DEA District Office, advised Respondent that 
``any storage at, and distribution from, a location other than the 
registered location (including the use of delivery vehicles for 
overnight storage) is a violation of federal law.'' \11\ GX 100. Upon 
review of the letter, Respondent sought a declaratory judgment in 
Federal District Court challenging the interpretation set forth in the 
letter. Tr. 652-53. At no time, however, did Respondent change its 
practice of distributing to the drop-off points. Id. at 664-65. Nor did 
Respondent seek a review of the letter by officials at the Agency's 
headquarters. ALJ at 18.
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    \11\ The letter also reviewed three scenarios ``in case 
[Respondent was] storing List I chemical products * * * and 
distributing them from satellite locations, such as commercial 
storage units, personal residences and or delivery vehicles.'' GX 
100, at 1. The first two scenarios involved sales representatives 
who picked up listed chemicals from a registered location either to 
fill a pre-placed order or a ``general order,'' and could not return 
the products ``to the registered location at the end of the day.'' 
Id.
    The third scenario was ``a company [that] ships orders 
containing List I chemicals to sales representatives at remote 
locations.'' Id. at 2. The letter further explained that ``DEA 
considers this to be freight forwarding and at this time * * * has 
no provisions that would permit freight forwarding for List I 
chemical products.'' Id.
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    The record further establishes that at the time the listed chemical 
products are shipped from its Greenfield, Indiana warehouse (which is 
its only registered location) to the drop-off points, the products have 
not been sold to a particular store. Tr. 2079. Indeed, the amount of 
SLCs to be sold to a customer is not known until the route sales person 
visits the store and determines how much product the store needs. Id. 
at 1282. The sales person counts the product on hand, discusses the 
order with the store manager, and restocks the store. Id. at 631; 1422.
    Moreover, at the time an SLC order is placed, only the 
salesperson--and no one at Respondent's headquarters--knows how much 
the store has purchased. Id. at 633. The salesperson is required to 
enter the order information into a handheld computer which generates an 
invoice; this information is later transmitted back to Respondent's 
headquarters. Id. at 634. The salesperson is also required to return a 
paper copy of the invoice, as well as a shipping document which 
accompanies the delivery of the SLCs from the warehouse, to 
headquarters. Id. at 688. Under its system, while Respondent's 
headquarters can determine which salesperson has received product with 
a particular lot number, it cannot identify the specific store that 
obtained a particular lot number of a product. Id. at 1517.
    Respondent's CEO testified that a store could purchase up to a case 
of an SLC product in each ``service cycle.'' \12\ Id. at 101. 
Accordingly, most stores could purchase two cases per month of each 
product. Moreover, Respondent sold more than ten different SLC 
products. Id. at 623.
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    \12\ With respect to the 24-tablet products, the record 
establishes that there were 144 packages in a case. Tr. 621. The 
record does not, however, establish how many packages there were in 
a case of the smaller size packages. Id. at 624.
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    According to one of its executives, the company monitors the sales 
of each SLC product at each store throughout the week to determine 
whether a store ``is increasing [its] inventory more than [Respondent] 
expects [it] to,'' and if it is, the company contacts the salesperson 
to

[[Page 52693]]

inquire further. Id. at 2061-62. This executive also asserted that in 
this event, it would send in one of the salesperson's supervisors to 
visit with the sales person and determine the true inventory at a 
store. Id. Moreover, another executive claimed that he ``receive[s] a 
computer-generated report indicating any time that more than one case 
has been sold to a single retail location of a single'' product and 
issues a warning letter to its salespersons. Id. at 1431. Respondent's 
CEO and Owner further testified that if a customer obtained more than a 
case of a product, he ``would cut them off, [and] stop the sale of 
product to them.'' \13\ Tr. 159. See also RX 10, at 1 (asserting that 
stores purchasing ``unusual quantities'' would be ``monitored over the 
following 4 week period,'' and that ``[i]f further unusual activity is 
noted,'' Respondent ``will discontinue sales of all or part of the List 
I products sold to the store'').
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    \13\ While the ALJ credited the CEO's testimony, the e-mails 
discussed in note 14 below, show otherwise. See, e.g., RX 56, at 3. 
Moreover, Respondent did not identify a single store which it had 
refused to sell SLCs to.
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    According to one of Respondent's executives, between January 17, 
2007 and January 17, 2008, that there had been ``approximately 35 to 
45'' violations of the one case limit, and most of the violations had 
occurred before July 2007, when the Agency executed the administrative 
warrant. Id. at 1433. The ALJ, however, credited the testimony of a DEA 
DI who reviewed Respondent's sales records for the period between 
January and July 2007, and found that its salespersons exceeded the one 
case limit 85 times. Tr. 1496-1506; GX 68.
    The same executive stated that Respondent had only started issuing 
written warnings to its salespersons after August 2007 because of a 
computer ``glitch'' which had resulted in the reports not being issued 
as scheduled. Id. at 1435. Moreover, while Respondent introduced into 
evidence a few e-mails indicating that the company had cut off 
supplying 100-count bottles to several stores, Respondent did not 
identify a single store to which it had refused to sell ephedrine.\14\ 
Indeed, according to its own evidence, one of the stores (BPM55), which 
it had previously stopped selling 100-count products to because of its 
excessive purchases, was allowed to purchase products with a retail 
value of more than $7300 a month, in the three months prior to the 
issuance of the suspension order. Compare RX 56, at 1, with RX 27a, at 
1.
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    \14\ The record contains several e-mails indicating that 
Respondent directed its employees to not sell 100 count ephedrine to 
several stores. See RX 56. While the e-mails expressed concerns 
about the excessiveness of these stores' sales of ephedrine 
products, notably, Respondent did not cut off all sales of the 
products to any of the stores. See id. Moreover, while it restricted 
its sales ``to a maximum of [one case] every 2 weeks'' and 
prohibited the sale of 100 count ephedrine to store number BPM55, 
this store was its leading SLC customer in the three months prior to 
the issuance of the suspension order, during which it purchased 
products with an average of retail value of $7317.77 per month. 
Compare RX 56, at 1, with RX 27A, at 1.
---------------------------------------------------------------------------

    According to one of its executives, Respondent's SLC customers 
purchased SLCs with an average retail sales value of $640 per month, 
with the majority of the products containing ephedrine. Id. at 563-64. 
Moreover, according to one of Respondent's exhibits, in the three 
months prior to the issuance of the suspension order, it distributed 
listed chemicals products with an average monthly retail sales value 
greater than $2000 to approximately 120 of its customers. RX 27A. 
Respondent also distributed listed chemical products with an average 
monthly retail sales value in excess of $3000 to thirty-four customers, 
and product with average monthly retail sale value greater than $4000 
to nine customers. Id. Finally, Respondent distributed to its two 
largest customers, products with an average monthly retail sales value 
of $5056 and $7314 respectively. Id.
    At the hearing, the Government put forward expert testimony to the 
effect that the expected sales range of ephedrine products at 
convenience stores to meet legitimate demand was $14.39 per month. GX 
25, at 8. In his declaration, the Government's expert stated that U.S. 
Economic Census data show that only about 31.5% of all convenience 
stores (45,077 stores) carry non-prescription drug products. GX 99, at 
7. According to his declaration, the Government's expert then applied 
``these statistics'' to the National Association of Convenience Stores 
2007 Survey revenue data which show that convenience stores sold a 
total of $292,000,000 of cough and cold remedies during 2006, to 
calculate the annual and monthly average sale of cough and cold 
products at a convenience store. Id. According to the Government's 
expert, stores carrying the HBC line had average annual sales of all 
cough and cold products of $4,080.18, and average monthly sales of 
$340.01. Id.; see also id. at Table 2.
    The Government's expert did not explain, however, why he used the 
total number of stores carrying the HBC line \15\ (71,565 stores) 
rather than the smaller number of stores that he had determined carried 
non-prescription drug products ( 45,077 stores). See id. at Table 2. 
Moreover, the Government did not rebut the testimony of Respondent's 
expert that because of legislation in twelve States, convenience stores 
can no longer sell ephedrine products and that the stores in these 
States comprise 23% of the nation's convenience stores. RX 59, at 10. 
This suggests that at most, 34,709 convenience stores nationwide carry 
ephedrine products. Id.\16\
---------------------------------------------------------------------------

    \15\ The HBC line includes analgesics, stomach remedies, 
vitamins, other OTC drugs, grooming aids, feminine hygiene, family 
planning, baby care, skin care, cosmetics, and some other 
unspecified products.
    \16\ Respondent's expert also pointed out that some convenience 
stores that carry non-prescription drug products may not sell any 
ephedrine. RX 59, at 10.
---------------------------------------------------------------------------

    Next, the Government's expert determined the percentage of cough 
and cold remedies comprised of ephedrine products. GX 99, at 8. 
According to the Government's expert, ``[t]his factor was derived from 
a tabulation of MRI data showing asthma remedy usage by retail channel 
(in this case, convenience stores).'' Id. Based on this data, which was 
included at Table 1, the Government's expert concluded that ephedrine 
products constitute 8.36% of cough and cold remedies sold at 
convenience stores. Id. Multiplying this figure times the average 
monthly total sales of cough and cold products, the Government's expert 
concluded that the average monthly sale of all ephedrine products at 
convenience stores selling the products was $28.43.\17\ Id.
---------------------------------------------------------------------------

    \17\ As part of its case, the Government entered into evidence a 
declaration prepared by its expert in another matter. See GX 25. In 
this document, the expert stated that he had also looked at data 
which included ``cumulated observed transactions,'' such as scanner 
data obtained by Information Resources, Inc. Id. at 7. The 
Government's expert also testified that in preparing GX 25, he had 
reviewed scanner data to determine ``the proportion of the 
nonprescription drug category that included preparations for the 
treatment of asthma containing ephedrine.'' Tr. 313 & 500. However, 
in his rebuttal declaration, the Government's expert made no mention 
of having used scanner data. See GX 99.
---------------------------------------------------------------------------

    Respondent's expert stated, however, that the MRI Survey (which is 
a survey of 50,000 consumers) does not provide sufficient information 
to support the Government's expert's figure that ephedrine products 
constitute 8.36% of cough and cold remedies sold at convenience stores. 
RX 59, at 11. Respondent's expert noted that the MRI Survey (which was 
included as an attachment to RX 59) ``reports absolutely no information 
about any ephedrine products,'' and ``reports absolutely no information 
on whether consumers bought either an asthma remedy or a cough and cold 
remedy from convenience stores.'' Id. (emphasis deleted).

[[Page 52694]]

    Respondent's expert further opined that the MRI Survey asks three 
questions which ``are inadequate to form an estimate'' of the 
percentage of cough and cold remedies constituting ephedrine. RX 59, at 
11. The first question is: ``How many times in'' various time periods 
has the person used one of numerous products? See Survey of the 
American Consumer 2-106. While the survey includes a list of non-
prescription cold, sinus, and allergy remedies, none of the products 
listed contain ephedrine. Survey at 12. Nor does it appear that an 
ephedrine product is listed anywhere in the survey.
    As for the remaining two questions, the survey asks whether a 
person has had asthma in the last twelve months, and whether they have 
used a prescription drug, a non-prescription drug, an herbal remedy, or 
have not treated the condition at all. Id. at 15. The survey does not 
ask any further questions regarding the use of non-prescription drugs 
to treat asthma.
    Finally, with respect to the use of convenience stores, the survey 
asks only whether the consumer has purchased a non-prescription/OTC 
drug at a convenience store in the last 30 days. Id. at 43. Again, the 
survey does not inquire further as to what type of drug the consumer 
may have purchased at a convenience store. The Government's expert did 
not explain how the data obtained in the answers to these questions 
supported his conclusion that ephedrine products constitute 8.36% of 
the cough and cold remedies purchased at convenience stores.\18\
---------------------------------------------------------------------------

    \18\ Respondent's expert noted that she was informed by its 
executives that ephedrine products constituted 60% of its customers' 
SLC sales. RX 59, at 12. Even if this is an accurate figure with 
respect to its customers, Respondent does not allow them to purchase 
SLCs from other suppliers, Tr. 626-27, and it does not sell any 
nationally-branded OTC pseudoephedrine remedies such as Sudafed or 
Claritin D. The figure is thus based on a biased sample.
---------------------------------------------------------------------------

    The Government's expert further stated that he used ``[a]nother MRI 
tabulation showing the route of the drug (powder, tablet, liquid, mist, 
skin patch, etc., etc.), [which] enabled the estimate to be further 
adjusted to reflect tablets only * * * resulting in the final estimate 
of $14.78.'' Id. The Government's expert thus concluded that 52% of 
ephedrine users use tablets rather than inhalers, id. at Table 2; 
multiplying this figure times the average monthly sales of $28.43, the 
expert concluded that the average monthly sale of tablet-form ephedrine 
products at convenience stores was $14.78. Id. at 8.\19\
---------------------------------------------------------------------------

    \19\ Because the average retail price for a box of the two 
leading brands of ephedrine was $7.19, the Government's expert then 
further reduced the average monthly sales figure from $14.78 to 
$14.39 ``to reflect the purchase of exactly two boxes of 24 count 
ephedrine tablets.'' Id. at 9.
---------------------------------------------------------------------------

    The MRI survey asks, however, only about the mode of administration 
with respect to cold, sinus and allergy remedies and not asthma 
remedies. Survey, at 12. Here again, it is unclear why this data 
provides a reliable basis for estimating the percentage of asthma 
sufferers who use tablets versus inhalers.
    I thus agree with the ALJ that the Government has not proved by 
substantial evidence that the monthly expected retail sales value of 
ephedrine products at convenience stores to meet legitimate demand is 
$14.39.\20\ On the other hand, it is undisputed that no ephedrine 
product ranks in the top 200 of over-the-counter and health-and-beauty 
care products which are sold in drug stores, supermarkets, and mass 
merchandisers. See GX 99, at 4. It is also undisputed that 
approximately 97% of the sales of non-prescription drugs occurs at 
pharmacies, supermarkets, warehouse clubs, department stores, 
electronic shopping/mail order houses, and other general merchandise 
stores. GX 25A, at C2. Moreover, convenience stores (both those with 
and without gasoline) account for approximately 1.14% of the total 
commerce in non-prescription drugs. Id. The Government, however, 
produced no evidence as to the annual sales of combination ephedrine 
products such as Primatene Tablets and Bronkaid, which are sold at 
pharmacies, supermarkets, and other large volume retailers of non-
prescription drugs.
---------------------------------------------------------------------------

    \20\ The Government offered evidence regarding visits or 
telephone contacts made by various Diversion Investigators (DIs) to 
eighteen pharmacies which were apparently located near some of 
Respondent's customers. See ALJ Dec. at 23-33. At least half the 
pharmacies did not carry any ephedrine products. See id. As for the 
remaining pharmacies, the Government produced evidence as to their 
sales levels of ephedrine products with respect to only four of the 
pharmacies. This evidence showed that the pharmacies were selling 
minimal quantities of tablet-form ephedrine products, with the most 
that any store sold being 71 boxes in a four-and-a-half month 
period. See, e.g., GXs 26, 27, 28 & 29.
    The Government did not establish that it used a statistically 
valid sampling technique in choosing the pharmacies the DIs 
interviewed. The evidence thus amounts to nothing more than a 
collection of anecdotes. To the extent the evidence is offered to 
show that there is little demand at pharmacies for these products, 
it is of limited probative value.
---------------------------------------------------------------------------

Evidence of Diversion

    In September 2002, DMD Pharmaceuticals, a supplier to Respondent, 
shipped it an entire lot of sixty-count bottles of a combination 
ephedrine (25 mg.) product.\21\ Tr. 1079. Two months later, twenty-two 
bottles of this lot were found at an illicit methamphetamine laboratory 
in Thompson, Connecticut. Id. at 1077. DEA subsequently issued a 
warning letter to DMD. Id. at 1077-78.
---------------------------------------------------------------------------

    \21\ According to the testimony of a DI, DEA issued DMD a 
warning letter. Tr. 1078. Upon receipt of the letter, DMD's 
compliance manager told the DI that he would look into to whom the 
product was shipped. Id. Subsequently, the DI received a phone call 
from DMD's compliance manager and owner informing her that ``that 
entire lot had been sold to'' Respondent in September 2002. Id. at 
1079. The ALJ credited this testimony, see ALJ at 13, as do I.
---------------------------------------------------------------------------

    Several months later, while completing a previously-commenced 
inspection of Respondent, a DI discussed the matter with two of its 
executives. Id. at 1082-83. While the executives provided the DI with 
the names of two salespersons whose territory included or was near the 
part of Connecticut where the lab was found, they could not identify 
which specific stores had obtained the ephedrine. Id. at 1084.
    As part of the investigation that gave rise to this proceeding, DIs 
based in four States visited a number of Respondent's customers. At a 
Roadrunner Market in Bristol, Tennessee, a DI testified that during the 
``time period of July 23rd through August 23rd'' of 2007, three 
customers had purchased quantities that far exceeded nine grams.\22\ 
Tr. 730-733. While 439 gel caps in 25 mg. strength is the dosage form 
equivalent to the nine gram limit, M.W. had bought 56 boxes totaling 
1,344 gel caps or approximately 27 grams. GX 46. During the same 
period, C.M. purchased 23 boxes totaling 552 gel caps (approximately 
11.3 grams), and E.B. purchased 52 boxes totaling 1,248 gel caps or 
approximately 25.6 grams. Id. The DI also found other evidence of 
repetitive purchasing patterns at the stores, but the logbooks were 
missing information such as the number of dosage units and/or strength 
of the product. See GX 80.
---------------------------------------------------------------------------

    \22\ It is noted that the time period which was reviewed 
exceeded thirty days. Even assuming that these persons did not 
violate Federal law in purchasing these products, given the dosing 
instruction for these products (one tablet every four hours and no 
more than six tablets every twenty-four hours), their purchases are 
not consistent with the use of the products to treat asthma. See, 
e.g., RX 9, at 1. Moreover, the ``Drug Facts'' warning label for 
Respondent's Double Action Ephedrine (25/200 mg.) product further 
advises to ``Stop use and ask a doctor if * * * cough persists for 
more than 1 week.'' Id.
---------------------------------------------------------------------------

    A different DI visited the Smoker Friendly No. 4 Store in Little 
Falls, New York, and obtained the logbooks. Tr. 785-86, 791-92. The 
logbooks showed that between July 27, 2007, and August

[[Page 52695]]

27, 2007, four persons had purchased more than nine grams. K.S. bought 
984 tablets of ephedrine 25 mg. (more than 20 grams), and A.P. bought 
768 tablets of ephedrine 25 mg. (approximately 15.7 grams). GX 45. 
Moreover, Richard and Robert R., who had the same last name and used 
the same address, respectively purchased 600 and 696 tablets of 
ephedrine 25 mg. Id. These purchases amounted to 12.3 and 14.25 grams. 
Id.
    Another DI visited the Mason of New York convenience store of 
Jamestown, New York, and obtained the logbook. Tr. 1484. The logbook 
entries were frequently missing information as to the strength of the 
ephedrine tablets that had been purchased. Nonetheless, the logbook 
showed that there were five individuals who, even if they had purchased 
only 12.5 mg. ephedrine, had nonetheless purchased more than nine grams 
during the period between July 21 and August 21, 2007. More 
specifically, M.M. purchased 1,368 tablets (14 grams),\23\ A.J. 
purchased 1,014 tablets (10.4 grams), J.B. purchased 1,548 tablets 
(15.9 grams), J.H. purchased 1,068 tablets (10.9 grams), and R.B. 
purchased 1,002 tablets (10.3 grams).\24\ GX 49.
---------------------------------------------------------------------------

    \23\ A person named Chris M. (with the same last name and 
address as M.M.) purchased an additional 360 tablets. GX 49.
    \24\ All of these calculations assume that these persons bought 
12.5 mg. tablets; if they bought 25 mg., then the amount of 
ephedrine was double. Moreover, the DI found that four other persons 
had purchased quantities which would exceed nine grams if the 
strength of the tablets was 25 mg.
---------------------------------------------------------------------------

    A Pennsylvania-based DI likewise found evidence of purchases that, 
while technically not in violation of the CMEA, raised a strong 
suspicion that the ephedrine was being diverted. For example, at the 
CoGo of Somerset, Pennsylvania, a DI found that S.M. had bought 384 
dosage units between August 16 and 23, 2007. GX 75. At 12.5 mg. 
strength, this amounted to 3.9 grams. This individual had also bought 
three twenty-four count boxes on three consecutive days.\25\ Id. 
Moreover, another DI visited a CoGos in Midland, Pennsylvania, and 
found evidence that a person had bought 620 dosage units of 12.5 mg. 
between May 1 and May 31, 2007, and an additional 636 dosage units 
between June 1 and June 15, 2007. Tr. 1486; GX 41.
---------------------------------------------------------------------------

    \25\ At two stores, the DI did not find any evidence of 
purchases in excess of the limit and was told by the managers that 
the products were primarily purchased by hospital workers and truck 
drivers who used them to stay awake on their jobs. Tr. 872-73; 886-
87.
---------------------------------------------------------------------------

The Allegation That Respondent Distributed Listed Chemicals to 
Uncertified Retailers

    Effective September 30, 2006, the CMEA prohibited a retailer from 
selling schedule listed chemical products unless the retailer had self-
certified to the Attorney General that all ``individuals who are 
responsible for delivering such products into the custody of purchasers 
or who deal directly with purchasers by obtaining payment for the 
products * * * have * * * undergone training provided by the seller to 
ensure that the individuals understand the requirements that apply'' to 
the sale of the products. 21 U.S.C. 830(e)(1)(VII). As stated above, 
the Government alleged that between January 1, 2007, and July 9, 2007, 
Respondent made 284 distributions of listed chemical products to 
thirty-five retailers who were not self-certified.
    As support for the allegation, a DEA DI testified that using a 
document supplied by Respondent which listed the customers by code 
number, store name and address, she conducted a spot check to see if 
the stores were listed in the Agency's database of stores that had 
become certified. Tr. 1213-19. The DI further testified that the 
results of her inquiry were reported in a thirteen page document, which 
listed the distributions by Respondent's store code number, the date, 
Respondent's product code, and quantity. Id. at 1218, see also GX 40 
(listing stores and transactions).
    At the hearing, Respondent produced numerous documents that refuted 
the allegation. For example, the Government listed twenty-five Speedway 
stores that were located in Indiana and Kentucky which had obtained 
SLCs from Respondent between April 10 and July 9, 2007. GX 40, at 3, 6 
& 7. Respondent, however, introduced into evidence, a letter dated 
April 3, 2007 from an executive of Speedway Super America to DEA's 
registration unit submitting a CD-Rom with the certification data for 
the company's stores in Indiana and Kentucky. RX 57. Respondent also 
submitted copies of each store's certification. See RX 57A. While each 
of the certifications was dated July 5, 2007, the Government did not 
rebut Respondent's evidence that the Agency considers a chain retailer 
who submits information on a CD-Rom to be self-certified on the date 
the information is received by the Agency. Tr. 1335-36.
    At most, the evidence suggests that Respondent made a single 
distribution to a single store before it obtained its certification. 
Compare GX 40, at 14, with RX 57, at 18. According to these exhibits, 
Respondent distributed a listed chemical product on January 18, 2007, 
to an independent convenience store located in Centreville, Virginia, 
prior to the store obtaining certification on March 8, 2007.\26\
---------------------------------------------------------------------------

    \26\ The store's certification shows that it was completed 
online at DEA's self-certification Web page. RX 57, at 18.
---------------------------------------------------------------------------

    The evidence did show, however, several instances in which 
Respondent's records contained erroneous information. For example, 
Respondent's records listed the address of store XTM7480 as 1451 Dorsey 
Road, Hanover, Maryland. GX 39, at 100. The store's DEA Certificate 
states, however, that its address is 7500 Ridge Road, Hanover, MD. RX 
57, at 14. Respondent's records likewise listed the address of store 
XTM7520 as 7300 Washington Blvd., Dorsey, MD. GX 39, at 100. According 
to its DEA certificate, the store's address was 7300 Washington Blvd, 
Elkridge, MD. RX 57, at 15. Also, Respondent's record listed the 
address of store MTO102 as 995 Old Airport Road, Bristol, TN. GX 39, at 
33. The store's DEA certificate, however, gives its address as 1001 
Airport Road, Bristol, Va. RX 57, at 16.\27\
---------------------------------------------------------------------------

    \27\ Likewise, Respondent's records list the address for store 
BGP1 as 1699 N. Dixie Hwy, Monroe Michigan. GX 39. The store's DEA 
certificate gives its address as 1488 N. Dixie Hwy., Monroe, 
Michigan. RX 57, at 21.
---------------------------------------------------------------------------

The Allegations That Respondent Distributed Products in Forms That 
Could Not Be Lawfully Sold Under the CMEA and State Laws

    Effective April 9, 2006, the CMEA prohibited a retailer from 
selling a listed chemical ``product in nonliquid form (including gel 
caps) at retail unless the product is packaged in blister packs * * * 
containing not more than 2 dosage units, or where the use of blister 
packs is technically infeasible, the product is packaged in unit dose 
packets or pouches.'' 21 U.S.C. 830(d)(2). The Government alleged that 
subsequent to February 1, 2007, Respondent distributed 24-count bottles 
of listed chemical product to retailers on three occasions.
    In support of this allegation, the Government introduced a document 
which lists three distributions of Respondent's product  
17902, Mini 2 Way 25 mg. gel caps in 24 count bottles, to three stores 
(PTR3295, PTR3438, and PTR3973).\28\ See GX 66 & 37. A DI testified 
that the three transactions were found in Respondent's sales records. 
Tr.

[[Page 52696]]

1442-45. According to Respondent's customer list, each of the stores 
was owned by The Pantry chain. See GX 39.
---------------------------------------------------------------------------

    \28\ According to Respondent's sales records, two of the 
distributions (to stores PTR3295 and PTR3438) occurred on February 
7, 2007; the other distribution (to store PTR3973) occurred on April 
23, 2007. GX 66, Tr. 1442-43.
---------------------------------------------------------------------------

    Respondent's record of shipments showed, however, that the product 
had not been shipped after January 2006. RX 40, at 152. Moreover, 
Respondent presented e-mail correspondence between it and an employee 
of The Pantry. More specifically, Respondent requested that The Pantry 
check its scanner data to determine whether it had sold the bottled 
product at the three stores after February 1, 2007. RX 46, at 2-3. In 
an e-mail, a Pantry employee reported that she had checked the item 
number for the three stores ``from Feb. 2007-Feb. 2008 and [that] there 
was no movement at any of the three locations for this item.'' RX 46, 
at 1.\29\ Based on the totality of the evidence, I find that the 
Government has not proved this allegation.
---------------------------------------------------------------------------

    \29\ Respondent's CEO attributed the data as resulting from its 
salesperson[s] having entered the wrong product code in their 
computer. Tr. 68. Another of Respondent's testified that that it had 
reprogrammed its computer system to prevent a salesperson from 
selling an item that was prohibited. Id. at 1404. Yet even after the 
reprogramming, there were several instances in which salespersons 
entered the codes for discontinued products. Id. at 1405. The same 
executive acknowledged that he did not know if the salespersons 
still had obsolete products in their storage units. Id.
---------------------------------------------------------------------------

    The Government also alleged that Respondent distributed tablet-form 
products to retailers in Kentucky and North Carolina, after these 
States prohibited the sale of non-liquid products other than in gel-cap 
form at establishments that are not pharmacies. In support of the 
allegation, the Government introduced a document which listed four 
distributions of Respondent's product  017550, Ephedrine Plus 
Blister 24 Count. See GX 37 & 65. Three of the distributions were made 
to three stores owned by Circle K Midwest which were located in 
Kentucky (CKM 3212, CKM 3247, and CKM 3248); the other store was owned 
by The Pantry and located in North Carolina (PTR3972). See GX 39, at 
10, 11 & 65. According to Respondent's records, the distributions 
occurred on March 27 and 28, and July 9, 2007.
    An executive of Respondent testified that its records pertaining to 
the four distributions were erroneous. Tr. 1347-50. Moreover, 
Respondent's records did not show any shipments of this product after 
December 26, 2005. RX 40, at 159. Finally, in an e-mail, an employee of 
The Pantry reported that ``there was no movement'' of the product at 
store number 3972. RX 46, at 1.\30\ Because the ALJ found credible 
Respondent's explanation and did not produce sufficient evidence to 
reject this finding, I find that Government has proved only that 
Respondent's records were erroneous and that it did not violate North 
Carolina or Kentucky law.
---------------------------------------------------------------------------

    \30\ Respondent also submitted an e-mail from an employee of 
Circle K., which states that she checked the stores' sales going 
back to April 30, 2007, and that the stores had not sold the 
product. RX 46, at 5. The e-mail is thus not probative of whether 
Respondent distributed the products in violation of Kentucky law.
---------------------------------------------------------------------------

The DEA Audits

    On July 9, 2007, as part of an administrative inspection of its 
registered location, DEA Investigators took a physical count of 
Respondent's listed chemical products then on hand. Tr. 1163. The DIs 
also obtained an initial inventory dated December 25, 2005, from 
Respondent's records. Id.; see GX 4. Both the beginning and ending 
inventories were certified as correct by Ryan Polk, Respondent's Chief 
Financial Officer. GX 4. Pursuant to an agreement with the DIs, 
products which were stored in the returns portion of Respondent's 
storage cage which included out-of-date products, broken blister packs, 
and single loose pills were not counted. Tr. 1494-95. The products had 
not, however, been logged back into Respondent's records. Id.
    DEA Investigators audited twenty different products by adding 
Respondent's receipts (including returns, Tr. 1182) to the beginning 
inventory (GX 34) \31\ and comparing this figure with the sum of the 
closing inventory and Respondent's shipments to its salespersons (GX 
35) and returns to its suppliers. See GX 4, at 3. Of further note, 
Respondent's list of shipments indicated that it had made three 
separate shipments of product  17121 (totaling more than 2300 
units \32\) to three of its salespersons on July 16, 2007, 
notwithstanding that this date was a week into the future. GX 35, at 
29.
---------------------------------------------------------------------------

    \31\ According to the DI, the investigators ``asked to see 
receipts for the products audited for a time period. And we were, 
instead, given this three-page summary.'' Tr. 1170. Relatedly, the 
DI testified that while Respondent gave them a 157 page list of its 
shipments, the document used product codes and the Investigators had 
to ask several times for a document which identified the products. 
Id. at 1180-81.
    \32\ This product was a six-count blister pack. See GX 32, at 1.
---------------------------------------------------------------------------

    According to the DIs' calculations, only one of the products in 
which there was activity balanced,\33\ two of the products had sizable 
shortages, and the remaining had overages. Id. More specifically, the 
DI identified Respondent's product code 17902 (Mini 2-Way 25 
mg. 24 count gel cap bottles) as being short nearly 28,000 bottles. Tr. 
1186. Moreover, the DI concluded that Respondent was short 32,913 units 
of product code  17903 (Mini 2 Way 12.5 mg. gel cap 6 ct. 
blister packs). See GX 4, at 3.
---------------------------------------------------------------------------

    \33\ While two other products balanced, the computation chart 
indicates that there was no beginning or closing inventory of, and 
no activity in, these products. GX 3, at 6.
---------------------------------------------------------------------------

    The DI further testified that ``because we got different numbers 
when comparing [Respondent's] receipts versus their warehouse 
documentation,'' Tr. 1186, she conducted an additional audit of four 
products by obtaining information from Respondent's suppliers in order 
to verify its receipts. Id. at 1187. According to the DI, for these 
four products, there were substantial differences between the 
quantities that were reported by the suppliers and the information 
provided by Respondent. Id. With respect to product  17121 
(Double Action 6 ct. ephedrine 25 mg. tablets), Respondent had 
represented that its receipts were 656,688, but according to the DI, 
the suppliers had claimed to have sold it only 429,024 units resulting 
in an overage of more than 275,000 units. Tr. 1188; GX 4, at 3. The DI 
also found overages in the other three products which were subject to 
the additional audit. GX 4, at 3. The DI further testified that she 
prepared an additional document which compared the receipt information 
provided on Respondent's printouts, the hard copy invoices of 
Respondent's receipts, and the quantities which the manufacturers of 
Respondent's products reported to the DI. Tr. 1189-90; GX 69.
    According to this document, while Respondent's printout of its 
receipts for product 17103 (525,240 units of Double Action 12 
ct. Blister 25 mg.) matched the quantity of the manufacturer's report, 
Respondent had no hard copy invoices. GX 69. With respect to product 
 17131 (Double Action Pseudo tablets 12 mg.), Respondent's 
printout indicated it had received 404,184 units and the manufacturer 
reported that it had sold 403,248 units to Respondent. Id. Respondent 
did not, however, have any hard copy invoices for the product. Id. With 
respect to product  17121 (Double Action 6 ct. ephedrine 25 
mg.), Respondent's receipts (656,688 units) matched the number reported 
by the manufacturer. Id. Respondent, however, had hard copy invoices 
for only 429,024 units. Id.
    With respect to product  17125, Respondent's printout 
indicated it had received 1,011,901 units, which matched the total 
quantity reported by the two suppliers of this product. Id. Respondent, 
however, had invoices only

[[Page 52697]]

for 851,671 units. Id. Apparently, Respondent was also missing invoices 
for other products.\34\ Id.
---------------------------------------------------------------------------

    \34\ The DI also testified that there were thirty-four sales 
routes for which Respondent did not provide address information 
indicating where its products were being shipped to. Tr. 1197-98, GX 
67.
---------------------------------------------------------------------------

    Respondent's CFO testified that upon being provided with a copy of 
the Government's audit, he proceeded to conduct his own audit. With 
respect to product  17902, which the Government had concluded 
was short, the CFO testified that the DIs had ``excluded a transaction 
for 28,800 units where we sent that product back to the original 
manufacturer'' because in his words, it ``was an obsolete item.'' Tr. 
2036; RX 36, at 4. The ALJ further found credible the CFO's testimony 
that he had provided this information to the DIs as part of their 
document request. Id.; see also ALJ at 42.\35\ Respondent also 
introduced into evidence numerous documents listing inventory 
adjustments and data pertaining to items that had been removed to the 
``obsolete inventory area'' which its CFO asserted had been excluded by 
the DIs in doing the audit. Tr. 2037; RX 36. As for Respondent's other 
product ( 17903), which the Government concluded it was short 
nearly 33,000 units, Respondent introduced into evidence two documents 
listing various inventory adjustments which it contended had not been 
considered by the Government and which would have greatly reduced the 
discrepancy. GX 36, at 2. On cross-examination, the CFO maintained that 
he had provided these documents no later than July 18, 2007. Tr. 2085. 
Notably, the Government did not rebut either the CFO's testimony that 
the documents had been provided or that it had failed to consider them 
in performing the audit.
---------------------------------------------------------------------------

    \35\ The ALJ noted that this document shows a return of 57,600. 
ALJ at 43. That figure appears, however, to be the amount of the 
credit Respondent was entitled to. RX 36, at 4.
---------------------------------------------------------------------------

    Respondent's CFO also testified that the additional audit 
(performed on the four products) was flawed, asserting that with 
respect to two of the items (s 17121 and 17125), the 
Government had ``exclude[d] a very large receipt that's on the sales 
record from those suppliers.'' Tr. 2038-39. With respect to product 
 17121, the CFO testified that the Government had excluded 
``227,664 units [that] were listed on the report as sold to'' it. Id. 
at 2039. As for product  17125, which came from two suppliers, 
the CFO stated that the Government had excluded transactions totaling 
160,000 units. Id.
    While the purpose of the second audit was to obtain information 
from Respondent's suppliers and verify it with Respondent's reported 
receipts, in fact, the audit appeared to have been based on 
Respondent's actual invoices and not the reported figures (which appear 
to have been used in the first round of audits). Compare GX 69, with GX 
4, at 3.\36\ In his testimony, however, Respondent's CFO did not 
address the Government's contention that Respondent was missing various 
invoices of its receipts and Respondent does not cite to any specific 
evidence of record rebutting the allegation. See Tr. 2042 (CFO 
testified that ``I think in a couple of instances--I did not include 
the pages in this [exhibit RX 36], for example, Item 17121 when the 
Government excluded the 227,000 units.''). Accordingly, I find that 
Respondent was missing numerous invoices documenting its purchases from 
its suppliers.
---------------------------------------------------------------------------

    \36\ For example, both Respondent and the manufacturer agreed 
that Respondent had obtained 656,688 packets of product  
17121, but Respondent's invoices only added up to 429,024 units. GX 
69. In the first audit, the Government used the 656,688 figure, and 
in the second audit, which was supposedly based on the information 
it obtained from the manufacturer, it used the 429,024 figure. See 
GX 4, at 3. It did the same thing with respect to product  
17125, using the 1,011,901 figure (which Respondent and the two 
manufacturers agreed with) in the first audit. Id. Again, in the 
second audit, it used the 851,671 figure, the figure that was based 
on the actual invoices produced by Respondent. Id.; see also GX 4, 
at 3.
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Respondent's Post-Suspension Conduct

    Following the issuance of the suspension order, Respondent engaged 
in discussions with BDI, Inc., one of its suppliers, under which 
Respondent proposed to have its sales persons take orders for SLCs, 
which would then be sent back to its headquarters and forwarded on to 
BDI, which would fill the orders by shipping them to its customer by 
UPS. GX 48; Tr. 2401-02. According to a February 8, 2008 letter which 
was signed by its CEO, under the scheme, Respondent's sales persons 
would ``still do all reordering and stocking of the merchandise as we 
have in the past,'' and when a shipment arrived at a customer, ``the 
manager [would] have the choice of stocking the OTC cabinet or holding 
it for our sales person.'' GX 48. The letter further stated: ``This 
basically keeps the business the same. The only difference is a UPS 
box. All invoices are from Novelty, Inc.'' Id.
    Respondent's Vice President of Product justified the scheme, 
reasoning that under his ``definition of sales, we're not involved in 
the distribution of the product. But our sales people are in that store 
functioning as an agent.'' Tr. 2402.
    Because BDI refused to participate, the scheme ``was never 
implemented.'' Id. at 2403. However, at the hearing, Respondent's VP 
testified that the scheme was ``[s]omething that we're still continuing 
to explore.'' Id.

Discussion

    Section 304(a) of the Controlled Substances Act provides that a 
registration to distribute a list I chemical ``may be suspended or 
revoked * * * upon a finding that the registrant * * * has committed 
such acts as would render [its] registration under section 823 of this 
title inconsistent with the public interest as determined under such 
section.'' 21 U.S.C. 824(a)(4). Moreover, under section 303(h), ``[t]he 
Attorney General shall register an applicant to distribute a list I 
chemical unless the Attorney General determines that registration of 
the applicant is inconsistent with the public interest.'' 21 U.S.C. 
823(h). In making the public interest determination, Congress directed 
that the following factors be considered:

    (1) Maintenance by the applicant of effective controls against 
diversion of listed chemicals into other than legitimate channels;
    (2) Compliance by the applicant with applicable Federal, State, 
and local law;
    (3) Any prior conviction record of the applicant under Federal 
or State laws relating to controlled substances or to chemicals 
controlled under Federal or State law;
    (4) Any past experience of the applicant in the manufacture and 
distribution of chemicals; and
    (5) Such other factors as are relevant to and consistent with 
the public health and safety.

Id. 823(h).
    ``These factors are considered in the disjunctive.'' Joy's Ideas, 
70 FR 33195, 33197 (2005). I may rely on any one or a combination of 
factors, and may give each factor the weight I deem appropriate in 
determining whether a registration should be revoked or an application 
for a registration should be denied. See, e.g., David M. Starr, 71 FR 
39367, 39368 (2006); Energy Outlet, 64 FR 14269 (1999). Moreover, I am 
``not required to make findings as to all of the factors.'' Hoxie v. 
DEA, 419 F.3d 477, 482 (6th Cir. 2005); Morall v. DEA, 412 F.3d 165, 
173-74 (DC Cir. 2005).
    In this matter, I have considered all of the statutory factors.\37\ 
While I have found that several of the Government's allegations have 
not been proved, I nonetheless conclude that Respondent does not 
maintain effective controls against diversion and that its

[[Page 52698]]

distribution practices and recordkeeping did not comply with Federal 
law. Moreover, while I have carefully considered the ALJ's findings 
regarding Respondent's willingness to comply with Federal law and her 
recommendation that I continue its registration with conditions, I 
conclude that on balance, the ALJ did not give sufficient weight to 
several factors including Respondent's failure to enforce its own 
policies, its sustained conduct in continuing to distribute out of 
unregistered storage facilities even after being advised that its 
practice was illegal, and its attempt to circumvent the suspension 
order. Accordingly, Respondent's registration will be revoked.
---------------------------------------------------------------------------

    \37\ I note that there is no evidence that Respondent has been 
convicted of an offense related to controlled substances or listed 
chemicals.
---------------------------------------------------------------------------

Factor One--Maintenance of Effective Controls Against Diversion

    Under agency decisions, this factor encompasses a variety of 
considerations. Holloway Distributing, Inc., 72 FR 42118, 42123 (2007). 
These include the adequacy of the registrant's/applicant's security 
arrangements, the adequacy of its recordkeeping and reporting, its 
distribution practices, and the occurrence of diversion. See id.; see 
also Rick's Picks, L.L.C., 72 FR 18275, 18278 (2007); John J. 
Fotinopoulos, 72 FR 24602, 24605 (2007); D & S Sales, 71 FR 37607, 
37610 (2006); Joy's Ideas, 70 FR 33195, 33197-98 (2005).
    In evaluating a registrant's security controls and procedures, DEA 
regulations direct that the Agency consider the following eight 
factors:

    (1) The type, form, and quantity of List I chemicals handled;
    (2) The location of the premises and the relationship such 
location bears on the security needs;
    (3) The type of building construction comprising the facility 
and the general characteristics of the building or buildings;
    (4) The availability of electronic detection and alarm systems;
    (5) The extent of unsupervised public access to the facility;
    (6) The adequacy of supervision over employees having access to 
List I chemicals;
    (7) The procedures for handling business guests, visitors, 
maintenance personnel, and nonemployee service personnel in areas 
where List I chemicals are processed or stored;
    (8) The adequacy of the registrant's or applicant's systems for 
monitoring the receipt, distribution, and disposition of List I 
chemicals in its operations.
21 CFR 1309.71.\38\

    \38\ Under DEA regulations, ``[a]ny registrant or applicant 
desiring to determine whether a proposed system of security controls 
and procedures is adequate may submit materials and plans regarding 
the proposed security controls and procedures either to the Special 
Agent in Charge in the region in which the security controls and 
procedures will be used, or to the Chemical Operations Section 
Office of Diversion Control'' at DEA Headquarters. 21 CFR 
1309.71(c).
---------------------------------------------------------------------------

    It is undisputed that Respondent maintains adequate physical 
security of the list I chemicals which it stores at its registered 
location. The record further establishes, however, that Respondent then 
ships the SLCs to between 150 to 180 self-storage units throughout the 
country, where the products may be kept for up to several days at a 
time before the route sales persons retrieve them. Tr. 534 & 667-68.
    As found above, Respondent disputes that this practice constitutes 
storage. See Tr. 666 (Executive testifying that: ``That's a nonsense 
question. Now you're coming back into the definition of what is 
storage. We're not storing the product in that location.''); id. at 672 
(``We are not storing or keeping or whatever words you want to try and 
use, product in these warehouses, against the law.''). Likewise, in its 
brief, Respondent engages in the tortured argument that it does not 
store products in the self-storage units because ``[t]he definition of 
`store' focuses on future, not present use,'' and it uses the units 
only for what it terms is an ``immediate'' and not a ``future use.'' 
Resp. Br. 99.
    This argument begs the question of why Respondent needs to rent 
storage units if not to store products in them. Moreover, the record is 
clear that the products are typically not immediately transferred from 
the delivery truck to the route salesperson and that products may 
remain in the storage unit for up to several days before the route 
sales person retrieves them. Respondent is therefore using the self-
storage areas for storage.
    Moreover, putting aside momentarily the issue of whether these 
storage units must be registered, it is unlikely that they could meet 
the security requirements of this Agency. Indeed, DEA has previously 
rejected applications of entities that sought to store SLCs in public 
storage facilities on the ground that they present an unacceptable risk 
of diversion. See Stephen J. Heldman, 72 FR 4032, 4034 (2007); see also 
Sujak Distributors, 71 FR 50102, 50104 (2006).
    In these decisions, I have noted a variety of security concerns 
which are raised by these facilities including the inadequacy of their 
construction, the lack of alarm systems, the lack of 24 hour on-site 
monitoring, the ability of unauthorized persons to gain access to the 
facility and the storage units, and the fact that the tenant does not 
control what other tenants the landlord rents to. See, e.g., Sujak, 71 
FR at 50104. Here, for example, a former salesperson for Respondent 
testified that his storage unit was in a facility which lacked a secure 
perimeter and that anyone could come off the road and gain access to 
the door of his unit. Tr. 538. It also is undisputed that the storage 
units did not have separate cages within them for securing the 
products. Id. at 133. Finally, to this day, the Agency does not know 
where thirty-four of the storage units are located. Tr. 1196-98. 
Respondent's use of these storage facilities thus does not provide 
adequate controls against diversion and provides reason alone to 
support the finding that its continued registration ``is inconsistent 
with the public interest.'' 21 U.S.C. 823(h).
    The record identified a further serious deficiency in the security 
of Respondent's distribution practices. As found above, SLCs may remain 
on a salesperson's truck for up to nine days before being delivered to 
a store. This practice presents a serious security concern because of 
the risk that a thief can steal the vehicle's cargo. Indeed, by 
stealing the entire vehicle with its cargo--an act which takes but 
seconds to perform--a thief does not have to spend time offloading the 
SLCs. See McBride Marketing, 71 FR 35710, 35711 (2006). Moreover, the 
risk posed by Respondent's distribution practice is exacerbated by the 
extensive time period during which the products remain on its trucks.
    Nor are these security concerns the only manner in which Respondent 
fails to maintain effective controls against diversion. The record also 
supports the conclusion that Respondent has serious recordkeeping 
deficiencies.
    According to the manufacturer's sales journal, AAA Pharmaceuticals 
made three shipments of product  17121 to Respondent: (1) 
227,664 dosage units on August 11, 2006; (2) 228,264 dosage units on 
September 1, 2006; and (3) 200,760 dosage units on November 14, 2006. 
See GX 32 at 7, 8 & 11. Each of these shipments was also a ``regulated 
transaction'' as each exceeded the 1,000 gram threshold. 21 CFR 
1310.04(f)(1)(ii). Respondent was thus required to keep a record of the 
transaction ``for 2 years after the date of the transaction.'' Id. 
1310.04(a). Yet Respondent was missing an invoice for the August 11, 
2006 shipment of 227,666 units, GX 69, and the computer-generated 
records which it provided to the Agency pursuant to the warrant did not 
comply with Federal law and Agency regulations because they were 
missing required information such as the form of packaging and the 
method of transfer. Compare GX 34,

[[Page 52699]]

with 21 U.S.C. 830(a)(2) and 21 CFR 1310.06(a).
    With respect to product number 17103, Respondent acquired more than 
525,000 units in seven different shipments between March 29, 2006, and 
April 19, 2006. See GX 3 at 2-5.\39\ Here again, Respondent engaged in 
multiple regulated transactions and was required to keep records of 
them. See 21 U.S.C. 802(39); 21 U.S.C. 1310.04(f) (threshold for 
regulations transaction is based on ``the cumulative amount for 
multiple transactions within a calendar month''). Yet it had no 
invoices for any of the shipments, GX 69, and the computer-generated 
records it provided to the Agency likewise did not comply with the 
regulations.\40\ Respondent was also missing invoices documenting its 
purchases of other products. See id. Respondent's failure to maintain 
adequate records for the regulated transactions it engaged in 
constitutes not only a violation of Federal law, it also demonstrates 
that its systems for monitoring the receipt of SLCs are inadequate.
---------------------------------------------------------------------------

    \39\ On March 29, 2006, AAA shipped Respondent 15,984 and 
114,480 units of product number 17103; a dosage unit of this product 
contained 25 mg. of ephedrine hcl. GX 32 at 2-3. This was followed 
by a shipment on April 14, 2006 of 113,856 units; a shipment on 
April 17, 2006 of 113, 472 units; and three shipments on April 18, 
2006 which totaled 167,328 units. See id.
    \40\ Here again, there were multiple transactions that fell 
within the definition of a regulated transaction.
---------------------------------------------------------------------------

    Respondent's systems for monitoring the distribution of its 
products are also deficient. First, Respondent's recordkeeping is 
deficient in various ways. According to the shipping records which 
Respondent provided to the DIs on July 9, 2007, it shipped more than 
2300 packages of product  17121 to three different 
salespersons on July 16, 2007, even though the date listed was a week 
into the future.
    The Government also identified several instances in which 
Respondent's records indicated that it had distributed products that 
could not be lawfully sold under either the CMEA or the laws of 
Kentucky and North Carolina. While I have credited Respondent's 
evidence that the distributions did not occur, the evidence nonetheless 
points to further inadequacies in Respondent's recordkeeping and 
systems for monitoring the distribution of SLCs.\41\ Moreover, 
Respondent's records contained a variety of errors related to the 
addresses of its customers including the wrong street address, and in 
one case, the wrong state.
---------------------------------------------------------------------------

    \41\ I acknowledge the testimony of Respondent's executives that 
the errors were caused by its salespersons' erroneous entry of 
products codes into their computers, and that the software has since 
been reprogrammed.
---------------------------------------------------------------------------

    Second, Respondent's procedures for monitoring the distribution of 
its products are deficient. The record establishes that the placement 
of an order and the delivery of the products occur simultaneously, and 
at the time, only the salesperson knows how much the store has 
purchased. Tr. 633. While Respondent asserted that it monitors its 
sales of SLC and conducts an inquiry if a store has acquired more 
inventory than is expected, and that another report is prepared which 
lists instances in which more than one case has been sold per product 
during a transaction, these procedures are wholly deficient to protect 
against the diversion of SLCs. Moreover, as the evidence with respect 
to the 2002 incident in which Respondent's products were found at a 
meth. lab shows, under its distribution model, it can not identify 
which stores receive a particular product. Tr. 1517.
    Fundamental to its obligation to maintain effective controls 
against diversion, a distributor must review every order and identify 
suspicious transactions. Further, it must do so prior to shipping the 
products. Indeed, a distributor has an affirmative duty to forgo a 
transaction if, upon investigation, it is unable to determine that the 
proposed transaction is for legitimate purposes. See DEA, Chemical 
Handler's Manual 21 (2002).\42\ Respondent's procedure of post-
transaction review is incompatible with its obligation to identify and 
forgo suspicious transactions.
---------------------------------------------------------------------------

    \42\ Under the Agency's policy, this manual was provided to all 
list I chemical distributors at various inspections. It is also 
available through the Agency's Web site.
---------------------------------------------------------------------------

    Respondent further maintains that its imposition of its one case, 
per product, per service cycle limit, and its practice of issuing 
warning letters to salespersons who sell over the limit, demonstrates 
that it maintains effective controls against diversion. However, the 
credited testimony establishes that between January and July 2007, 
Respondent's sales force violated its case limit policy some 85 times. 
ALJ at 12. Moreover, one of Respondent's senior executives testified 
that it had only started issuing written warnings in August 2007, 
which, of course, was after the administrative inspection. Furthermore, 
Respondent's policy is a meaningless measure because it sells ten 
different products and most stores are serviced every two weeks.
    The inadequacy of Respondent's control measures is further 
demonstrated by its own exhibit showing its sales of SLCs in the three 
months prior to the issuance of the suspension order. As found above, 
Respondent's CEO testified that its average customer sold SLCs with a 
retail value of $640 per month. Tr. 563-64. Yet Respondent's evidence 
shows that during this period, it had sold SLCs with an average monthly 
retail value of more than $2000 (more than three times its average 
monthly sale) to approximately 120 of its customers, and SLCs with an 
average monthly retail value of more than $3000 (4.68 times its average 
monthly sales) to thirty-four of its customers. RX 27A. Moreover, 
Respondent sold SLCs with an average monthly retail sales value greater 
than $4000 to nine customers. Id. One of these customers was purchasing 
SLCs with an average monthly retail sales value of $5056--approximately 
eight times its average customer's purchase. Id. Finally, its largest 
customer (Store  BPM55) was purchasing SLCs with an average 
monthly retail sale value of $7314--more than eleven times its average 
customer's purchase--in the three months prior to the issuance of the 
suspension order.
    Moreover, the record establishes that Respondent had previously 
determined that store BPM55 was purchasing excessive quantities. RX 56. 
Yet notwithstanding this store's history, Respondent allowed it to 
purchase quantities that dwarfed that of its average customer. 
Furthermore, upon reviewing this store's logbook for the period July 21 
through August 21, 2007, at least five individuals had purchased in 
excess of nine grams within this period. These customers purchased 
quantities which far exceeded the recommended dosing for the product's 
use as an asthma treatment \43\ and are consistent with diversion.\44\
---------------------------------------------------------------------------

    \43\ These five customers had purchased between 1,002 and 1,548 
tablets. In contrast, Respondent's recommended dosing for its 12.5 
mg product was ``2 tablets every 4 hours as needed, not to exceed 12 
tablets in 24 hours,'' and to ``stop use'' and see a doctor if 
``cough lasts more than 7 days.'' RX 9, at 3.
    I acknowledge that Respondent cannot review the logbooks. A 
registrant cannot, however, ignore other evidence which is 
indicative of diversion.
    \44\ At the hearing, Respondent's Expert testified that BPM55 is 
an outlier and that it would not be appropriate to draw ``a 
conclusion about [Respondent's] customers based on relying on the . 
. . highest seller.'' Tr. 1722. Contrary to the understanding of 
Respondent's Expert, in evaluating the effectiveness of an entity's 
diversion controls, there are no free passes. Excessive sales to a 
single store are sufficient by themselves to support the conclusion 
that the registrant does not maintain effective controls against 
diversion. Moreover, as explained above, BPM55 had a history of 
excessive sales and had previously come to the attention of 
Respondent. Yet Respondent continued to sell to it, and sold massive 
quantities to it in the three months which preceded the suspension.
    For similar reasons, I find unpersuasive the testimony of 
Respondent's Expert that it would be error to draw conclusions from 
the six stores identified in Government Ex. 38 and 44. See Tr. 1697-
1705. Indeed, with the exceptions of BPM 55 and NOC 56, it is not 
even clear that these stores were the largest purchasers.

---------------------------------------------------------------------------

[[Page 52700]]

    Contrary to Respondent's understanding, while proof that a 
distributor is selling quantities in excess of the national monthly 
average for sales of SLCs by convenience stores would be highly 
probative of the distributor's lack of effective controls against 
diversion, it is not the sole measure for evaluating the effectiveness 
of those controls. More specifically, a registrant cannot ignore 
evidence that some of its customers are purchasing quantities that 
greatly exceed what its typical customer buys from it. Significantly, 
Respondent introduced this evidence into the record. Although in some 
instances there may be a plausible explanation for the disparity that 
does not involve diversion, Respondent offered no explanation that was 
specific to any store for why it was selling in such quantities.\45\
---------------------------------------------------------------------------

    \45\ As noted above, there was a substantial dispute between the 
parties over the various assumptions necessary to determine what an 
average convenience store would sell in legitimate commerce. Yet 
even indulging numerous assumptions favorable to Respondent such as: 
(1) That only 31,000 stores sell the products, (2) that ephedrine 
products constitute sixty percent of the SLC market at convenience 
stores, and (3) that the NACS survey has an error rate of fifty-five 
percent because some stores erroneously report their sales of 
ephedrine as general merchandise rather than as cold and cough 
products, ALJ Ex. 15; and concluding that the average monthly sales 
figure is $941 a month, more than 100 stores were selling at levels 
which were statistically significant according to Respondent's 
expert. See Tr. 1700 (noting that being outside of two standard 
deviations is statistically significant); id. at 1704 (use of two 
standard deviations is ``a very appropriate number'').
    I acknowledge that because two standard deviations represents 
ninety-five percent of a population, by definition 2.5 % of the 
stores will fall outside of this point on both sides of the curve. 
In concluding that Respondent does not maintain effective controls 
against diversion, I do not rely solely on the Z scores calculated 
by Respondent's expert. See RX 27A. I also consider the disparity 
between the size of the purchases of Respondent's largest customers 
and its average customer.
---------------------------------------------------------------------------

    Moreover, while Respondent's CEO testified that he would cut off a 
customer who purchased more than a case of a product, Respondent 
offered no evidence that it has ever refused to sell to a customer 
because the customer was purchasing excessive amounts of products. 
Indeed, Respondent's continued sales to BPM55, at a rate that was more 
than eleven times what its average customer was buying, amply 
demonstrates that its purported written policy of monitoring those 
stores which purchased ``unusual quantities,'' and ``[i]f further 
unusual activity is noted * * *discontinu[ing] sales,'' RX 10, at 1; is 
a sham.
    I therefore conclude that Respondent does not maintain effective 
controls against diversion. Given the variety of ways in which 
Respondent's controls are deficient, this factor strongly supports the 
conclusion that Respondent's continued registration ``is inconsistent 
with the public interest.'' 21 U.S.C. 823(h).

Factor Two--Respondent's Compliance With Applicable Laws

    The Government further argues that Respondent failed to comply with 
Federal law and DEA regulations by distributing SLCs from the self-
storage units because none of the units were registered. See Gov. 
Exceptions 1-6. The ALJ, while noting that the facts surrounding 
Respondent's use of the self-storage units were not in dispute, 
declined to address the statutory issue, reasoning that because there 
was then litigation pending in the U.S. District Court, the Court, and 
not this proceeding, is the proper forum for resolving the dispute. ALJ 
at 91 n.38.\46\ I conclude, however, that there is no reason for the 
Agency to not address this issue which involves a fundamental question 
as to the scope of the CSA's registration requirements.\47\
---------------------------------------------------------------------------

    \46\ The ALJ did note, however, that Respondent ignored the 
letter of a DEA Group Supervisor which had informed it that its 
conduct was illegal. ALJ at 91.
    \47\ Ordinarily, courts defer to agencies when presented with a 
legal issue that lies within the agency's primary jurisdiction. II 
Richard J. Pierce, Jr., Administrative Law Treatise 917 (4th ed. 
2002). The scope of the CSA's registration requirements is such an 
issue.
---------------------------------------------------------------------------

    Under Federal law, ``[e]very person who * * * distributes any * * * 
list I chemical * * * shall obtain annually a registration issued by 
the Attorney General.'' 21 U.S.C. 822(a)(1). ``Persons registered by 
the Attorney General * * * to distribute * * * list I chemicals are 
authorized to possess [and] distribute * * * such * * * chemicals * * * 
to the extent authorized by their registration and in conformity with 
the other provisions of'' the CSA. Id. Sec.  822(b). The Act further 
provides that ``[a] separate registration shall be required at each 
principal place of business * * * where the applicant * * * distributes 
list I chemicals.'' Id. Sec.  822(e); see also 21 CFR 1309.23(a) (``A 
separate registration is required for each principal place of business 
at one general physical location where List I chemicals are 
distributed, imported, or exported by a person.'').
    With respect to SLC distributors, DEA has created by regulation two 
limited exceptions to the requirement that each principal place of 
business be registered. The first is for ``[a] warehouse where List I 
chemicals are stored by or on behalf of a registered person, unless 
such chemicals are distributed directly from such warehouse to 
locations other than the registered location from which the chemicals 
were originally delivered[.]'' 21 CFR 1309.23(b)(1).\48\ This 
regulation is directly applicable to Respondent's use of the storage 
units.
---------------------------------------------------------------------------

    \48\ The regulation also exempts from registration ``[a]n office 
used by agents of a registrant where sales of List I chemicals are 
solicited, made, or supervised but which neither contains such 
chemicals (other than chemicals for display purposes) nor serves as 
a distribution point for filling such sales orders.'' 21 CFR 
1309.23(b)(2). This provision is not applicable to Respondent's use 
of the self-storage units.
---------------------------------------------------------------------------

    Notably, at the time this regulation was promulgated, several 
commenters ``objected to the requirement * * * that a separate 
registration be obtained for each location at which List I chemical 
activities are carried out[,]'' and ``suggested that DEA allow 
companies to obtain a single registration * * * for multiple 
locations.'' Implementation of the Domestic Chemical Diversion Control 
Act of 1993, 60 FR 32447, 32448 (1995). As DEA then explained, ``[t]he 
law is specific on this point. The [Domestic Chemical Diversion Control 
Act] requires that a separate registration be obtained at each location 
at which List I chemicals are distributed.'' Id. (emphasis added).
    Relatedly, several commenters asked ``how the requirement for 
separate registrations for separate locations would apply to 
[independently owned] warehouses?'' Id. DEA explained that ``[t]he 
person who distributes List I chemicals from independently owned 
warehouses must register at each location and ensure that the other 
chemical control requirements, including security, record keeping, 
reporting, etc., for their products are met.'' Id. (emphasis added).
    The record here clearly establishes that the SLCs which Respondent 
stores in the self-storage units are not shipped back to Respondent's 
registered location before being distributed. Rather, the SLCs are 
distributed directly from the self-storage units to Respondent's 
customers. As DEA's regulation makes plain, Respondent's self-storage 
units are therefore subject to the registration requirement. See 21 CFR 
1309.23(b)(1).
    As explained above, Respondent's contention that it was not storing 
products at the self-storage units is

[[Page 52701]]

absurd. The units are warehouses as that term is understood in common 
usage. See Webster's Third New International Dictionary 2576 (1976) 
(defining warehouse as ``a structure or room for the storage of 
merchandise or commodities'').
    Respondent nonetheless argues that the drop-off points are not 
required to be registered because they are not its ``principal place of 
business.'' Resp. Br. at 97-98. Respondent acknowledges that the term 
``principal place of business [is] not defined in the definition 
section [ ] of the CSA.'' Resp. Br. at 97. Respondent thus contends 
that the term should be given its ``ordinary meaning.'' Id. Relying on 
several cases interpreting the term ``principal place of business'' for 
the purpose of determining a corporation's citizenship for the 
diversity jurisdiction of the federal courts, see 28 U.S.C. 1332(c)(1), 
Respondent contends that ``[t]he principal place of business for a 
corporation is usually its headquarters, where day-to-day business is 
conducted.'' Id. (citing Heritage Educ. Trust v. Katz, 287 F.Supp.2d 34 
(D.D.C. 2003) and Masterson-Cook v. Criss Bros. Iron Works, Inc., 722 
F. Supp. 810, 812 (D.D.C. 1989)).
    According to Respondent, the Federal courts apply a `` `nerve 
center of operation' test to establish the principal place of business 
of corporations doing business in multiple states[,]'' and that `` 
[w]hen no one state is clearly the center of corporate activity or 
accounts for a majority of the company income, the headquarters 
logically assumes greater importance in determination of the principal 
place of business.'' Id. at 97-98 (quoting Masterson-Cook, 722 F. Supp. 
812) (other citations omitted). In Respondent's view, its Greenfield, 
Indiana headquarters ``is clearly the center of corporate activity,'' 
because ``[a]ll transactions with vendors and customers are handled 
through the Greenfield offices.'' Id. at 98. Relatedly, Respondent 
argues that ``[t]he drop off units are not the `center of corporate 
activity' nor do they `account for a majority of the company income.' 
'' Id. Respondent's arguments are not persuasive.
    It is fundamental that statutory terms take their meaning from the 
context in which they are used and the statutory purpose. See Mid-Con 
Freight Systems, Inc., v. Michigan Pub. Serv. Comm'n, 545 U.S. 440, 447 
(2005); Tyler v. Cain, 533 U.S. 656, 662 (2001); see also 
Pharmaceutical Res. & Mfr's of America v. Thompson, 251 F.3d 219, 224 
(D.C. Cir. 2001). Respondent's reliance on cases interpreting the 
diversity statute ignores the context in which the term ``each 
principal place of business'' is used in the CSA, as well as the CSA's 
fundamentally different purpose.
    Under Respondent's interpretation, an entity would be required to 
obtain a registration only for a single location--its headquarters. The 
text of section 822 demonstrates, however, that Congress did not limit 
a registrant's obligation to obtain a registration to a single place of 
business such as its corporate headquarters. Rather, Congress imposed 
on a registrant the obligation to obtain a separate registration at 
``each principal place of business * * * where the applicant * * * 
distributes * * * List I chemicals.'' 21 U.S.C. 822(e) (emphasis 
added).
    Consistent with the underlying purposes of the CSA, the statutory 
text manifests Congress's understanding that an entity can have 
multiple principal places of business. A location where List I 
chemicals are stored and distributed from, is a principal place of 
business because it plays a ``consequential'' part in the registrant's 
activity of distributing. See Webster's Third New Int'l Dictionary 1802 
(1976) (defining ``principal'' in part as ``consequential''). In 
determining whether a facility is a principal place of business within 
the meaning of the CSA, the Act looks to the nature of the activity 
that occurs at the particular location and not at the dollar volume of 
business that is transacted out of the facility. See 21 CFR 
1309.23(b)(2) (exempting from registration ``[a]n office used by agents 
of a registrant where sales of List I chemicals are solicited, made, or 
supervised but which neither contains such chemicals * * * nor serves 
as a distribution point for filling sales orders'').
    Respondent's interpretation would clearly frustrate the 
Congressional purpose. In enacting the CSA's registration provisions, 
Congress' purpose was to protect against diversion by requiring that 
those persons who propose to engage in the legitimate distribution of 
controlled substances and listed chemicals apply for a registration, 
notify this Agency of the proposed location of their activity, and 
submit the facility for inspection by the Agency to ensure that it has 
adequate security controls and procedures. See, e.g., 21 U.S.C. 822(f) 
(authorizing the Attorney General ``to inspect the establishment of a 
registrant or applicant for registration''). Indeed, inspection by the 
Agency of a proposed facility is fundamental to the CSA's mandate to 
protect the public interest. Id. 823(h); see also 21 CFR 1309.41.
    As the record here establishes, Respondent has never applied for 
registration for any of its storage units and has never submitted any 
of its storage units for inspection. Indeed, according to the record, 
Respondent has yet to provide information regarding the location of 
some 34 of its storage units. As this case demonstrates, adopting 
Respondent's interpretation would frustrate Congress's purpose and 
render the Act a nullity.
    Respondent's interpretation would also create a perverse incentive. 
While it is unclear whether under its view an entity which has only a 
few warehouses would have to obtain a registration for each of them, 
see Resp. Br. at 97-98,\49\ what is clear is that an interpretation 
which determines whether a facility must be registered by looking to 
the amount of business activity that occurs out of a facility rather 
than the nature of the activity that occurs therein, would encourage an 
entity to keep adding warehouses or storage facilities so that it could 
eventually claim that its warehouses were no longer principal places of 
business and were thus not subject to the registration requirement. 
Adopting Respondent's interpretation would thus lead to absurd results 
and seriously undermine the security of the Nation's controlled 
substances and listed chemical supplies. I therefore reject it.
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    \49\ Respondent's argument that ``the principal place of 
business for a corporation is usually its headquarters,'' Resp. Br. 
98, suggests that its view is that only one registration is required 
for an entity no matter the geographic scope of its distribution 
activities.
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    As stated above, the ALJ did not address this statutory question. 
She did, however, conclude that Respondent's conduct in continuing to 
store SLCs at, and distributing them from, the self-storage units, even 
after receiving the Group Supervisor's letter, was ``not consistent 
with the requirements for a participant in a regulated industry,'' and 
supported the revocation of its registration. ALJ at 91. Respondent 
excepts to the ALJ's conclusion, contending that it was placed in the 
``dilemma'' that if it complied with the letter, it would have to use 
common carriers and that this ``would increase the risk of diversion.'' 
Resp. Exceptions at 99. Respondent further argues that because it 
``questioned the legal validity of the letter, and feared adherence to 
it would cause [it] to contribute to the risk of diversion to the 
illicit methamphetamine trade, it filed suit'' in federal court. Id. at 
100.
    Respondent's argument is patently self-serving and unsupported by 
the record. As found above, Respondent's evidence as to the perceived 
security inadequacies of, and increased risk of

[[Page 52702]]

diversion when shipping via common carriers, lacked foundation. It 
presented no evidence of any diversion of SLCs when being shipped by 
common carriers.\50\ The argument further ignores the significant risk 
of diversion posed by its own distribution model, both through its use 
of the storage units which do not provide an acceptable level of 
security, and its further practice under which SLCs may be stored on a 
salesperson's truck for up to nine days at a time.
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    \50\ Respondent also argues that ``the Raber letter would allow 
reliance on a system of distribution (FedEx and UPS unregistered 
locations) that present risks of diversion that exceed those of 
[its] system.'' Resp. Exceptions at 101. Congress however, has 
specifically exempted common carriers from registration, see 21 
U.S.C. 822(c)(2), and has concluded that their use for shipping 
controlled substances and listed chemicals poses an acceptable risk 
of diversion. I further note that Respondent acknowledged in 
testimony that it has used common carriers in the past.
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    Finally, Respondent contends that because it was not sure what the 
legal effect of the letter was, it felt obliged to challenge the letter 
by filing suit. Contrary to Respondent's view, its right to seek 
declaratory relief in federal court is not at issue. Cf. id. at 100. 
(arguing that ALJ's decision ``[c]ondemns the exercise of'' its right 
to seek relief in a federal court). Rather, what is at issue is 
Respondent's decision to continue to distribute SLCs--for some forty-
four months--in a manner that violates Federal law, and its doing so 
even after being told that it was violating Federal law.
    Furthermore, even if there was a legitimate question as to the 
legal effect of the letter, the Agency's regulation made clear that a 
warehouse was not exempt from registration if the SLCs being stored 
therein ``are distributed directly from such warehouse to locations 
other than the registered location from which the chemicals were 
originally delivered.'' 21 CFR 1309.23(a)(1). I thus conclude that the 
Agency's regulation and the letter provided Respondent with ample 
notice that its conduct was illegal.\51\ Notwithstanding Respondent's 
assertion that it is now willing to comply with Federal law, its 
deliberate disregard of the warning it received and lengthy failure to 
comply, strongly support the revocation of its registration.\52\
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    \51\ Nor did Respondent seek review of the Group Supervisor's 
letter within the Agency.
    \52\ As noted under factor one, Respondent also failed to comply 
with Federal law because it did not maintain proper records of 
regulated transactions.
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Factor Four--Past Experience in the Distribution of Chemicals

    In discussing this factor, the ALJ noted that Respondent has been 
registered since 1998 and thus had extensive experience in distributing 
SLCs. ALJ at 92-93. She further explained that prior to the service of 
the Suspension Order, ``Respondent had not been informed by the 
[agency] of any incidents of diversion of its SLC product,'' and that 
with the exception of the 2004 letter regarding its distribution 
practices, it was ``never informed * * * of any statutory or regulatory 
violations.'' Id. at 93. Finally, the ALJ noted that the Agency had 
renewed ``Respondent's registration annually between 1998 and 2007.'' 
Id. Based on what she characterized as Respondent's ``nine year history 
of compliance,'' the ALJ concluded that the evidence on this factor 
``support[ed] a remedy less severe than revocation.'' Id.
    The ALJ's conclusion is mistaken for several reasons. First, the 
ALJ's conclusion that Respondent had not been informed by the Agency of 
any incident of diversion is contrary to the evidence, which 
establishes that twenty-two sixty-count bottles of products it 
distributed were found at an illicit laboratory in Connecticut and that 
a DI discussed the matter with its executives. Tr. 1082-84. Whether the 
subject was first broached by the DI or Respondent is beside the point, 
as is whether the information was put in a formal warning letter. The 
fact remains that products which it distributed were diverted. 
Moreover, while Respondent provided the investigator with information 
as to which of its salespersons had received the products, it could not 
identify the stores to which the products were distributed. Tr. 1517.
    Second, the ALJ gave insufficient weight to Respondent's 
continuation of its illegal practice of distributing out of 
unregistered storage units for more than three and a half years after 
having been advised of the practice's illegality. Most significantly, 
at no point did Respondent voluntarily cease the practice.
    Moreover, as explained above under factor two, the registration 
requirement is one of the essential features of the CSA. Respondent's 
violations are not technical violations of the Act. Respondent's 
conduct thus precludes a finding that Respondent's experience 
establishes a ``history of compliance.'' ALJ at 93. Respondent's 
experience thus also supports the conclusion that its registration 
would be ``inconsistent with the public interest.'' 21 U.S.C. 
823(h).\53\
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    \53\ The ALJ's further reliance on the Agency's renewal of 
Respondent's registration was in error. Under Federal Regulations, 
in the event the Agency proposes the denial of a renewal 
application, it must issue an Order to Show Cause. 21 CFR 
1309.42(a). There are a variety of reasons why the Agency may not be 
prepared to go forward with a Show Cause Proceeding at a particular 
time including, inter alia, a lack of resources, the complexity of 
the matters under investigation, and the need to pursue other 
enforcement priorities. Moreover, field personnel may approve the 
renewal of a registration based on an erroneous understanding of the 
law and regulations. The decision to renew a registration is thus 
not probative of a registrant's record of compliance with Federal 
law and Agency regulations.
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Factor Five--Other Factors Relevant to and Consistent With Public 
Health and Safety

    As found above, following the service of the Immediate Suspension, 
Respondent contacted one of its suppliers and attempted to enter into a 
scheme under which its sales force would continue to take orders for 
SLCs, which would be sent to its headquarters and then on to the 
supplier, which would ship the products. Under the scheme, Respondent's 
salespersons would ``still do all reordering and stocking of the 
merchandise as [they] have in the past.'' GX 48.
    At the hearing, one of Respondent's vice presidents attempted to 
justify the scheme, explaining that under his ``definition of sales, 
we're not involved in the distribution of the product. But our sales 
people are in that store functioning as an agent.'' Tr. 2402. While the 
supplier refused to enter into the scheme, the VP testified that it was 
``[s]omething that were still continuing to explore.'' Id. at 2403.
    In its Exceptions, Respondent contends that ``[u]nder 21 CFR 
1309.23, sales agents are not required to be registered and are 
lawful.'' Resp. Exceptions at 102. Respondent further argues that 
because it ``only discerned select customer's interest in it serving in 
this role,'' id. at 103, the ALJ's conclusion that it ``still does not 
seem to understand that it is working in a highly regulated industry 
when it actually handles SLC products,'' ALJ at 92, condemns it based 
on ``the mere expression of interest in a legal option.'' Resp. 
Exceptions at 103.
    Respondent is correct that because it never actually entered the 
scheme, there is no basis for concluding that its actions related to 
the scheme demonstrate that it failed to comply with applicable laws. 
See 21 U.S.C. 823(h)(2). The scope of factor five is, however, 
considerably broader than factor two, and encompasses ``such other 
factors as are relevant to and consistent with the public health and 
safety.'' Id. 823(h)(5).
    Respondent's assertion that it merely expressed interest in a legal 
option mischaracterizes the record. Respondent's actions were not 
limited

[[Page 52703]]

to merely thinking about a legal option or seeking legal advice about 
the scheme. Rather, it affirmatively sought out one of its suppliers 
and attempted to induce it to enter the scheme only to be rebuffed by 
the supplier.
    While Respondent maintains that it was pursuing a legal option 
because an agent is not required to be registered, it ignores that this 
exception applies only if the ``agent * * * is acting in the usual 
course of [its] business.'' 21 U.S.C. 822(c)(1); 21 CFR 1309.24(a). The 
usual course of Respondent's business with respect to SLCs did not, 
however, involve acting as a sales agent for another registrant. 
Rather, the usual course of its business was distributing SLCs for its 
own account. More significantly, I further hold that an entity does not 
act in the usual course of business when it engages in distribution-
related activities that it has previously been prohibited from doing 
pursuant to an order suspending or revoking its registration. It would 
fundamentally undermine the CSA's purpose of protecting against 
diversion to allow an entity whose registration has been suspended or 
revoked to subsequently engage in the same or related activities as an 
agent.
    Respondent's attempt to circumvent the suspension order--and the 
admission of one its executives at the hearing that it was still 
exploring this option--reflects adversely on its fitness to engage in 
the distribution of SLCs. I thus conclude that this factor also 
supports the conclusion that Respondent's registration would be 
``inconsistent with the public interest.'' 21 U.S.C. 823(h)(5).\54\
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    \54\ As explained above at n. 5, the issue of whether there is a 
legitimate medical need for over-the-counter ephedrine products, see 
ALJ at 94-95, is for the FDA to decide. The issue in this proceeding 
is whether Respondent's registration is consistent with the public 
interest.
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Sanction

    Under DEA precedent, the Agency considers all of the facts and 
circumstances in determining the appropriate sanction. See Martha 
Hernandez, M.D., 62 FR 61,145 (1997). While the ALJ found that factors 
one and two supported revocation, and that ``Respondent's actions 
appeared to blatantly disobey a DEA directive,'' she further reasoned 
that except for this letter, ``Respondent has not been given an 
opportunity to remedy the flaws identified * * * in this action.'' ALJ 
at 100. Based on what she characterized as its ``history of compliance, 
as evidenced by'' the Agency's continuing its registration, as well as 
``its financial commitment to compliance, as evidenced by its rework of 
its hand-held computer system to better track inventory,'' the ALJ 
reasoned that revocation ``does not seem consistent with prior agency 
action concerning this Respondent.'' ALJ at 100-101. Based on this view 
of the record, the ALJ further opined ``that this is a case where 
teamwork between the DEA and this major distributor would facilitate 
the public interest.'' Id. at 101. The ALJ thus recommended that I 
continue Respondent's registration while imposing compliance 
conditions.
    Were the evidence limited to Respondent's recordkeeping problems, 
imposing compliance conditions might well protect the public interest. 
But it is not. I acknowledge that the evidence points to some measures 
which Respondent voluntarily undertook such as reprogramming its 
computer system,\55\ providing its customers with materials on the CMEA 
and its self-certification requirement, logbooks, and plexiglass 
cabinets. Its customers could not, however, legally sell its products 
without self-certifying and maintaining logbooks. Moreover, these 
measures do not address the serious problems with its distribution 
practices that are established by the record, and which were either 
ignored, or discounted by the ALJ.
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    \55\ It is, however, unclear whether the reprogramming has 
rectified the problems identified with the salespersons' entry of 
product codes.
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    First, for more than three and a half years, Respondent disregarded 
a DEA letter specifically warning it that its use of the 150-180 self-
storage units to store and distribute SLCs violated Federal law. 
Moreover, Respondent continued to violate Federal law up until its 
registration was suspended. As explained above, these are not technical 
violations, but rather transgressions of one of the CSA's fundamental 
provisions. Respondent's disregard of the letter and continuation of 
its practices for some forty-four months makes its conduct especially 
egregious. Given the sustained nature of the violations and 
Respondent's failure to voluntarily cease its misconduct, its assertion 
that it is now willing to ``modify[] its existing system of 
distribution,'' Resp. Exc. 90, is not persuasive. Cf. ALRA 
Laboratories, Inc., v. DEA, 54 F.3d 450, 452 (7th Cir. 1995) (``[a]n 
agency rationally may conclude that past performance is the best 
predictor of future performance''); Southwood Pharmaceuticals, Inc., 72 
FR 36487, 36503 (2007) (rejecting company's claims of reform in light 
of the scope and duration of its misconduct and failure to heed 
information that its activities were contributing to diversion).
    Second, while Respondent asserted that it imposed sales limits on 
how much of each product a store could buy in a service cycle, and that 
it monitored the purchases of each product at each store throughout the 
week to determine whether a store was purchasing excessive quantities, 
investigated if it was, and cutoff sales to those store which were 
purchasing excessive amounts, it is clear that these policies were 
frequently ignored. Putting aside the effectiveness of the one case per 
product, per service cycle policy,\56\ the credited testimony 
establishes that its sales force violated the policy some 85 times in 
the six months preceding the July 2007 inspection. Moreover, Respondent 
only started issuing warning letters to its sales force in August 
2007--a month after the warrant was executed--with one of its 
executives offering the lame excuse that he had not received the 
reports until then because of a computer ``glitch.''
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    \56\ As explained above, the policy's limit was imposed on a 
per-product and per-service cycle basis. Most stores were serviced 
every two weeks and some were serviced weekly. Moreover, Respondent 
sold ten different products. Accordingly, a store being serviced 
weekly could buy up to forty cases every four weeks.
---------------------------------------------------------------------------

    Notably, Respondent's CEO testified that if a customer obtained 
more than a case of a product in a service cycle, he ``would cut them 
off, [and] stop the sale of product to them.'' Tr.159. Respondent, 
however, produced no evidence that it had ever entirely cut off a 
customer.
    Indeed, Respondent's own evidence with respect to store BPM55--a 
store at which five persons purchased quantities that are grossly 
inconsistent with use of the products to treat asthma and are 
consistent with diversion--amply demonstrates the disingenuousness of 
its claim that it monitors its customers' purchases and cuts off sales 
if a store is acquiring excessive amounts. Notwithstanding that it had 
previously developed concerns regarding this store's excessive 
purchases, in the three months prior to the suspension order, 
Respondent sold to it products with a monthly average retail value of 
more than $7300, an amount more than eleven times its average 
customer's purchase.\57\ Respondent's sales to this store amply 
demonstrate that its policy of monitoring ``unusual sales activity'' 
and cutting off sales if such purchases

[[Page 52704]]

continue, RX 10, at 1, is a sham and not a legitimate effort to control 
diversion.
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    \57\ As found above, the record also shows numerous other stores 
to which Respondent repeatedly sold quantities that exceeded its 
average customer's purchases by a wide margin.
---------------------------------------------------------------------------

    Respondent's failure to enforce its own policies provides reason 
alone to conclude that it cannot be trusted to adhere to compliance 
conditions. This conclusion is further supported by Respondent's 
sustained and flagrant violations of Federal law, as well as its 
attempt to circumvent the suspension order. Indeed, as Respondent's 
history amply demonstrates, its professed commitment to ``teamwork'' 
and ``to become a compliance model for the entire industry,'' Resp. Ex. 
at 139, cannot be taken seriously.\58\ I therefore conclude that 
imposing compliance conditions would not adequately protect the public 
interest, and reject the ALJ's recommendation.\59\
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    \58\ For the same reasons, I find unpersuasive the August 13, 
2008 letter from Respondent's President.
    \59\ Respondent raises a plethora of claims that the Agency or 
its personnel have violated its rights under the First and Fifth 
Amendments, as well as statutory provisions including the 
Administrative Procedure Act, the Data Quality Act, and 21 U.S.C. 
880. See Resp. Br. at 114-39. For example, Respondent asserts that 
the DIs violated its First Amendment rights and engaged in a prior 
restraint because they refused to allow its executives to videotape 
them as they reviewed Respondent's records. See id. at 116. It also 
alleges that a DI committed an assault and battery during the 
inspection when he grabbed a video recorder from the hands of one of 
its executives who was attempting to set up the camera in order to 
tape the investigators while they reviewed Respondent's records.
    While in my order denying Respondent's interlocutory appeal, I 
adhered to settled Agency precedent that the exclusionary rule does 
not apply in these proceedings, ALJ Ex. 13, at 3; Respondent now 
contends that I should discount the testimony of two DIs who 
participated in the inspection to deter future violations. Indeed, 
Respondent even contends that I should discount the testimony of 
these DIs based on the alleged assault and battery of the third DI, 
who did not testify at the hearing.
    Having considered the legal and factual bases for each of 
Respondent's claims, I conclude that none of them presents a 
substantial question as to the fundamental fairness of this 
proceeding and none warrants further discussion.
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Order

    Pursuant to the authority vested in me by 21 U.S.C. 823(h) & 
824(a), as well as 28 CFR 0.100(b) & 0.104, I order that DEA 
Certificate of Registration, 003563NSY, issued to Novelty Distributors, 
D/B/A/ Greenfield Labs, be, and it hereby is, revoked. I further order 
that any pending application of Novelty Distributors, D/B/A Greenfield 
Labs, for renewal of its registration, be, and it hereby is, denied. 
This order is effective immediately.

    Dated: September 3, 2008.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. E8-21035 Filed 9-9-08; 8:45 am]
BILLING CODE 4410-09-P