[Federal Register Volume 74, Number 141 (Friday, July 24, 2009)]
[Notices]
[Pages 36746-36751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-17688]


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

DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket No. 07-14]


CBS Wholesale Distributors; Grant of Renewal Application and 
Dismissal of Proceeding

    On January 5, 2007, the Deputy Assistant Administrator, Office of 
Diversion Control, Drug Enforcement Administration, issued an Order to 
Show Cause to CBS Wholesale Distributors (Respondent), of Hephzibah, 
Georgia. The Show Cause Order proposed the revocation of Respondent's 
DEA Certificate of Registration which authorizes it to distribute List 
I chemicals, and the denial of any pending applications to renew or 
modify the registration, on the ground that his ``registration is 
inconsistent with the public interest.'' Show Cause Order at 1.
    More specifically, the Show Cause Order alleged that Respondent is 
``currently registered to distribute the List I chemicals 
pseudoephedrine and ephedrine,'' id. at 2, and that both chemicals are 
``commonly used to illegally manufacture methamphetamine, a schedule II 
controlled substance.'' Id. at 1. The Show Cause Order alleged that 
``there exists a `gray market' in which certain pseudoephedrine and 
ephedrine products are distributed only to convenience stores and gas 
stations, from where they have a high incidence of diversion,'' and 
that these establishments ``continue to be the primary source for 
precursors to be diverted to illicit methamphetamine laboratory 
operations in many states.'' Id. at 1-2.
    Next, the Show Cause Order alleged that DEA had retained ``an 
expert in the field of retail marketing and statistics to analyze 
national sales data for over-the-counter non-prescription drugs.'' Id. 
at 2. The Order alleged that the expert had determined that ``the 
average small store could expect to sell monthly only about $10.00 to 
$30.00 worth of pseudoephedrine products,'' and ``that the potential 
for sales of combination ephedrine products [was] only about one-fourth 
of those sales levels.'' Id.
    The Show Cause Order further alleged that Respondent's list I 
customers ``are almost exclusively convenience stores and gas stations, 
which are part of the gray market for diversion'' of these products, 
id. at 2, and that Respondent's ``sales of combination ephedrine 
products are inconsistent with the known legitimate market and known 
end-user demand for products of this type.'' Id. at 3. The Order 
further alleged that Respondent is ``serving an illegitimate market and 
[that its] continued registration would likely lead to increased 
diversion of List I chemicals.'' Id.\1\
---------------------------------------------------------------------------

    \1\ The Show Cause Order also alleged that Respondent had 
``assisted * * * a former DEA registrant, in maintaining his 
customer base [of convenience stores and gas stations] for 
combination ephedrine products, after he surrendered his * * * 
registration for cause.'' Show Cause Order at 2. The Government, 
however, offered no evidence in support of this allegation.
---------------------------------------------------------------------------

    Respondent timely requested a hearing on the allegations. The 
matter was placed on the docket of the Agency's Administrative Law 
Judges (ALJ), and an ALJ conducted a hearing in Savannah, Georgia on 
December 4-5, 2007. At the hearing, both the Government and Respondent 
elicited the testimony of witnesses and submitted documentary evidence. 
Following the hearing, both parties filed briefs containing their 
proposed findings of fact, conclusions of law, and arguments.
    On June 10, 2008, the ALJ issued her recommended decision (ALJ). In 
her decision, the ALJ found persuasive the expert testimony of the 
Agency's expert witness that the average monthly sale of ephedrine 
products to meet legitimate demand is $14.39 and that Respondent's 
customers were purchasing between five to eighty times this amount. ALJ 
at 33. The ALJ thus concluded that Respondent's sales of ephedrine 
products ``to gray market entities are so grossly excessive that there 
is a high probability that these products are being diverted for 
illicit purposes, and that this fact alone outweighs'' the evidence 
that Respondent provided adequate physical security for the products, 
maintained adequate records, and was selling only to customers who had 
obtained the required certification under the Combat Methamphetamine 
Epidemic Act. Id. at 34. The ALJ thus also concluded that 
``Respondent's continued registration would be inconsistent with the 
public interest,'' id. at 36, and recommended that its registration be 
revoked and that any pending applications to renew or

[[Page 36747]]

modify its registration be denied. Id. at 37.
    Respondent filed Exceptions to the ALJ's decision. Thereafter, the 
record was forwarded to me for final agency action.
    Having considered the record as a whole (including Respondent's 
exceptions), I hereby issue this Decision and Final Order. I conclude 
that the Government's allegation that Respondent's sales levels are so 
excessive as to warrant the conclusion that its products are being 
diverted is not proved by substantial evidence. I further hold that 
because the Government failed to provide notice to Respondent in either 
the Show Cause Order or its pre-hearing statement that it intended to 
put in issue Respondent's sales of glass roses, an item which the 
Government alleges is used as drug paraphernalia, Respondent has not 
been provided with a full and fair opportunity to litigate the issue. 
Consistent with the requirements of the Due Process Clause, I conclude 
that this issue cannot be considered by the Agency. Accordingly, the 
Show Cause Order will be dismissed. I make the following findings.

Findings

    Respondent is a wholesale distributor of sundry items to 
convenience stores and gas stations which is owned and operated by 
Charles Marshall, Sr., and Charles Marshall, Jr. (a/k/a Bubba). Tr. 
199. Respondent is located in Hephzibah, Georgia. Id. at 199, 201-03; 
GX 1. Among the items Respondent distributes are non-prescription drug 
products containing ephedrine, Tr. 202, a schedule listed chemical 
product under the Controlled Substances Act. 21 U.S.C. 802(45); see 
also id. section 802(34).
    Respondent has held a DEA Certificate of Registration authorizing 
it to distribute listed chemicals since 1999. GX 2. While the 
expiration date of Respondent's registration certificate is August 23, 
2006, Respondent applied for a renewal of its registration prior to its 
expiration date and it is undisputed that its registration has remained 
in effecting pending the issuance of this Order. GX 2; see also 5 
U.S.C. 558(c).
    Ephedrine (in combination with guaifenesin) is currently approved 
under the Food, Drug and Cosmetic Act for marketing as a bronchodilator 
for use in treating asthma. GX 7, at 3-4. Ephedrine is, however, 
regulated as a List I chemical under the Controlled Substances Act 
because it is extractable from non-prescription drug products and 
frequently diverted into the illicit manufacture of methamphetamine, a 
schedule II controlled substance. 21 CFR 1308.12(d).
    Methamphetamine ``is a powerful and addictive central nervous 
system stimulant.'' T. Young Associates, Inc., 71 FR 60567 (2006). As 
noted in numerous Agency decisions, the illegal manufacture and abuse 
of methamphetamine pose a grave threat to this Nation. See, e.g., id. 
Methamphetamine abuse has destroyed numerous lives and families, and 
has had a devastating impact on many communities. Id. Moreover, because 
of the toxic nature of the chemicals used in making the drug, illicit 
methamphetamine laboratories create serious environmental harms. Id.

The Investigation of Respondent

    On March 5, 2005, a DEA Diversion Investigator visited Respondent 
to conduct a regulatory investigation. Tr. 138-39. The DI met with 
Charles Marshall, Sr., and Bubba Marshall. Id. at 149-50. During the 
inspection, the DI determined that Respondent was selling combination 
ephedrine products, which included a brand that is ``notoriously 
popular [with] methamphetamine traffickers.'' Compare GX 4 with GX 6 at 
12; see also Tr. 24. The DI also obtained from Respondent a customer 
list which indicated that it was selling the products to gas stations, 
convenience stores, and small markets. Tr. 135 & GX 5.
    During the inspection, the DI concluded that Respondent did not 
provide adequate physical security for the products. Tr. 149. More 
specifically, the DI found that the products were being left overnight 
on Respondent's truck and were not being returned to its storage 
warehouse. Id. at 152. Moreover, the DI also noted that Respondent was 
storing the products in what she described as ``a shed,'' that the shed 
had a window, and that anyone who knew ``what they were looking for 
could see the product.'' Id. at 156. The DI ``recommended'' to the 
Marshalls that they cover the windows so that a person could not see 
the product. Id. at 156.
    It is undisputed, however, that the Marshalls promptly complied 
with her recommendation regarding the storage facility.\2\ Id. at 156-
57, 212. It is also undisputed that following the inspection, 
Respondent ceased its practice of leaving the products on its truck and 
now returns them to its storage facility each night. Id. at 211.
---------------------------------------------------------------------------

    \2\ It is also undisputed that in 2003, Respondent had moved to 
its current location. Tr. 204. At that time, Respondent sought a 
modification of its registration; a DEA Investigator visited 
Respondent, inspected its storage facility, and found it 
satisfactory. Id.
---------------------------------------------------------------------------

    At the hearing, the DI also testified that Respondent's 
recordkeeping was inadequate because the invoices ``were not complete'' 
and ``[i]t was very hard to determine * * * who they sold [the 
products] to, the addresses where the people were located, [and] how 
much they sold.'' Id. at 153. The Government did not, however, offer 
into evidence any of the invoices the DI reviewed at the time of the 
inspection. Moreover, in support of its allegation that Respondent 
sells excessive quantities of the products, the Government introduced 
into evidence numerous invoices for the period January through March 
2007. See GX 11. Yet the Government does not point to any of these 
invoices as evidence that Respondent's recordkeeping practices remain 
deficient. See generally Gov. Proposed Findings of Fact and Conclusions 
of Law [hereinafter, Gov. Br.]
    In support of the principal allegation of its case in chief, the 
Government called Jonathan Robbin to testify as an expert witness and 
introduced several exhibits which were prepared by him. See GX 8, 9, 
14-18. The thrust of Mr. Robbin's presentation was that the 
overwhelming majority of the commerce in non-prescription drugs takes 
place at pharmacies, supermarkets, large discount stores, and 
electronic shopping/mail order retailers, and that convenience stores 
and gas stations account for only ``a very small percentage of the 
sales of '' these products. See GX 9, at 4. Mr. Robbin further 
testified that using various data sources such as the U.S. Economic 
Census, the National Association of Convenience Stores' 2007 State of 
the Industry Survey, the Mediamark Research, Inc. (MRI) survey of 
consumers, and scanner data, he determined that the ``expected retail 
sale of ephedrine * * * tablets in a convenience store ranges between 
$0 and $29, with an average of $14.39 and a standard deviation of 
$5.76.'' Id. at 8. Mr. Robbin further opined that ``[a] monthly retail 
sale of $60 of ephedrine/guaifenesin (Hcl) tablets would be expected to 
occur about once in a million times in random sampling.'' Id.
    Both Mr. Robbin's declaration and his testimony failed to 
adequately explain how he arrived at his estimates. While Mr. Robbin 
apparently used NACS Survey's data which indicates that convenience 
stores sold a total of $ 292 million of cough and cold remedies 
nationwide, and asserted under oath that in calculating the average 
sales per store figure he used the number of stores which actually sell 
non-prescription

[[Page 36748]]

drug products, Tr. 107; in another proceeding, it was shown that in 
calculating the same average sales per store figure, he had used the 
total number of stores selling any item in the Health and Beauty Care 
(HABC) line and not the smaller number of stores which sold non-
prescription drugs. See Novelty Distributors, 73 FR 52689, 52693 
(2008).
    Moreover, when questioned in this proceeding as to how he 
determined that sales of combination ephedrine products constitute 
eight percent of the sales of cough and cold products, Mr. Robbin did 
not submit the documentation to support this figure and acknowledged 
that it was ``a missing link in this presentation.'' Tr. 104. While Mr. 
Robbin maintained ``that this eight percent is an accurate number as 
reflected by'' the MRI Survey of 50,000 consumers, id. at 105, as I 
also found in Novelty, the MRI Survey does not ask questions which are 
sufficient to establish the extent to which consumers purchase and use 
ephedrine products.\4\ See 73 FR 52693-94. Accordingly, as in Novelty, 
I conclude that the Government's estimated sales range to meet 
legitimate demand for combination ephedrine products is not supported 
by substantial evidence. I am therefore also compelled to reject Mr. 
Robbin's testimony regarding the statistical probability that 
Respondent's ephedrine sales were to meet legitimate demand and that 
Respondent sold ``combination ephedrine * * * products in extraordinary 
excess of normal or traditional demand.'' GX 9 at 13; see also Tr. at 
90-92.
    To be sure, the estimated retail sales of some of Respondent's 
ephedrine customers were several times the average sales for cough and 
cold products as reported by the NACS Survey. See GX 10, at 62 
(indicating that in 2005, the average store sold $2,556, and in 2006, 
the average store sold $2,040 of the products). It appears, however, 
that the Survey's average sales figure was computed by dividing the 
total volume of cough and cold product sales ($292 million nationwide) 
by the total number of convenience stores, regardless of whether the 
stores sell non-prescription drug products. See GX 10, at 4 (indicating 
that there are a total of 145,119 convenience stores (including both 
stores that sell and do not sell gasoline) in the US). The average 
sales of stores actually selling the products is thus likely several 
times higher than the figure reported by NACS; and in any event, the 
NACS Survey not report any of the information necessary (such as the 
median and standard deviation) necessary to determine the statistical 
probability of various sales levels. The evidence is therefore 
insufficient to support the Government's allegation that Respondent's 
``sales of combination ephedrine products are inconsistent with the 
known legitimate market and known end-user demand for products of this 
type.'' Show Cause Order at 3.
---------------------------------------------------------------------------

    \4\ For example, the survey asks ``[h]ow may times in'' 
different time periods a person has used one of numerous products. 
72 FR at 52694. While the survey lists a variety of non-prescription 
cold, sinus, and allergy products, none of the products contains 
ephedrine. Id. Indeed, an ephedrine product is not listed anywhere 
in the survey.
    The survey also 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. The survey does not, however, ask any further 
questions regarding the use of non-prescription drugs to treat 
asthma. Id.
     It may well be the case that the use of ephedrine products to 
treat asthma has become so minimal that the designers of the MRI 
Survey consider the product to be inconsequential. But even if this 
is so, the Government still has the burden of adequately explaining 
how it determined that ephedrine sales constitute eight percent of 
cough and cold sales.
---------------------------------------------------------------------------

The Evidence Related to Respondent's Sales of Glass Roses

    The Government also questioned the DI as to whether Respondent sold 
``glass roses.'' \6\ Tr. 129. The DI answered ``yes''; the Government 
then asked what the items were used for. Id. Respondent's counsel 
promptly objected to the question. Id. More specifically, Respondent's 
counsel objected on two grounds: (1) That the Show Cause Order 
contained no allegation regarding Respondent's sale of this product, 
and (2) that the Government did not disclose in its Pre-Hearing 
Statement that it would elicit testimony from the DI regarding 
Respondent's sales of the item and its use as drug paraphernalia. Id. 
at 129-31.
---------------------------------------------------------------------------

    \6\ In the pleadings, this item was also referred to a love 
rose. Both terms are therefore used in this decision.
---------------------------------------------------------------------------

    The ALJ overruled the objection. Id. at 133. The Government again 
asked the DI whether Respondent sold glass roses; the DI again answered 
that it did. Id.
    The Government again asked the DI what glass roses were used for, 
and once more, Respondent's counsel objected. Id. Before ruling on the 
objection, the ALJ asked ``what are glass roses?'' Id. The DI answered 
that the product is ``a thin glass container with a rose in it and 
typically what it's used for is somebody could come in and give a rose 
to a friend. But these have been known to be used for smoking dope. 
They take the rose out and use them to smoke dope.'' Id. at 133-34.
    The ALJ then stated she was ``going to provisionally allow this 
testimony,'' but that Respondent could ``move to strike it after * * * 
it's complete.'' Id. at 134. When the Government stated that the 
testimony was complete, Respondent moved to strike it. Id. The ALJ 
deferred ruling on the motion, stating that she was taking the matter 
``under advisement.'' Id. The record, however, contains no indication 
that the ALJ ever ruled on the motion.
    On cross-examination, Bubba Marshall admitted that his business 
sold glass roses. Id. at 215. The Government then asked Mr. Marshall 
when he found out that this item is ``being used for drug 
paraphernalia?'' Id. at 216. Mr. Marshall answered: ``I heard that 
they'd been used as drug paraphernalia, I've never witnessed it.'' Id . 
Under further questioning, Mr. Marshall stated that he had ``probably'' 
known this for ``over a year'' and that he had continued to sell this 
product. Id. at 216-17. Continuing, the Government asked Mr. Marshall 
whether he had acted responsibly in selling the product. Id. at 217. 
When Mr. Marshall reiterated that he had ``only heard they were used as 
drug paraphernalia,'' the Government asked him if he had investigated 
the product's misuse. Mr. Marshall answered ``no,'' and added ``how 
should I investigate it?'' Id.
    On re-direct examination, Respondent's counsel asked Mr. Marshall 
whether the glass roses had uses other than as drug paraphernalia. Id. 
at 223. Mr. Marshall answered: ``[i]t's a novelty.'' Id. He also 
maintained that he had never been told by any of his customers that the 
item was used as drug paraphernalia and that none of his customers had 
told him that the item was being purchased in conjunction with 
ephedrine products. Id. at 224.

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:


[[Page 36749]]


    (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. section 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 (D.C. Cir. 2005).
    The Government, however, bears the burden of proof. 21 CFR 
1301.44(d). Having considered the entire record in this matter, I 
conclude that Government has failed to establish that Respondent does 
not maintain effective controls against diversion. I also conclude that 
the allegation that Respondent was selling drug paraphernalia is not 
properly before the Agency. Accordingly, the Government has not 
established that Respondent has committed acts which render its 
registration ``inconsistent with the public interest.'' 21 U.S.C. 
823(h). The Order to Show Cause will therefore be dismissed.

Factor One--Maintenance of Effective Controls Against Diversion

    As established in several agency decisions, this factor encompasses 
a variety of considerations including, inter alia, the adequacy of 
physical security, the adequacy of recordkeeping, and whether a 
registrant is selling excessive quantities of the products. See 
Holloway Distributing, Inc., 72 FR 42118, 42123 (2007); Rick's Picks, 
L.L.C., 72 FR 18275, 18278 (2007); John J. Fotinopoulos, 72 FR 24602, 
24605 (2007). In the Order to Show Cause and its Pre-Hearing Statement, 
the Government provided notice that it would be litigating two issues 
that are relevant to this factor: (1) The adequacy of Respondent's 
recordkeeping as purportedly shown by the results of an audit conducted 
during the March 2005 inspection, and (2) that Respondent was selling 
volumes of listed chemicals products that are inconsistent with 
legitimate demand.\7\
---------------------------------------------------------------------------

    \7\ At the hearing, the DI also testified that during the March 
2005 inspection, Respondent's storage facility did not provide 
adequate physical security and that Respondent was storing products 
on its truck overnight and not returning them to its storage unit. 
While this issue was not raised in either the Order to Show Cause or 
the Government's Pre-Hearing Statement, Respondent did not object to 
the testimony. It is undisputed, however, that Respondent promptly 
complied with the DI's recommendation to improve the security of its 
storage facility and ceased its practice of leaving the products on 
its truck. It is thus undisputed that Respondent provides adequate 
physical security for its products.
---------------------------------------------------------------------------

    At the hearing, however, the Government did not introduce into 
evidence the audit results. Moreover, while a DI asserted in her 
testimony that Respondent's recordkeeping was inadequate because its 
invoices were incomplete, the Government did not offer any of the 
invoices to show why. Moreover, while the Government obtained numerous 
other invoices which it used to calculate Respondent's sales levels 
during the period of January through March 2007, here again, it does 
not cite any of these invoices as proof of its contention that 
Respondent's recordkeeping is inadequate. The allegation is thus 
rejected.
    As for the allegation that Respondent was selling excessive 
quantities of combination ephedrine products, even if only a small 
percentage of the commerce in non-prescription drugs occurs at non-
traditional retailers, neither the testimony nor the written 
declaration of the Government's expert adequately explains how he 
calculated the average monthly sales figure or the statistical 
probability that various sales levels were consistent with legitimate 
demand. Moreover, in his testimony, the expert acknowledged that there 
was ``a missing link in this presentation'' with respect to his 
determination that combination ephedrine products comprise eight 
percent of the sales of cough and cold products.
    In sum, the expert did not provide the underlying documentation 
necessary to support this critical component of his testimony. Not only 
did this deny Respondent a meaningful opportunity to challenge the 
expert's conclusion, see Resp. Proposed Findings of Fact and 
Conclusions of Law at 23; as I have previously held, it also precludes 
a finding that the expert's conclusions are supported by substantial 
and reliable evidence. See 5 U.S.C. 556(d); see also Novelty, 73 FR at 
52693-94. The Government's allegation that Respondent was selling 
excessive quantities of combination ephedrine products (as well as its 
contention that Respondent does not maintain effective controls against 
diversion) must therefore be rejected.

Factor Two--Respondent's Compliance With Applicable Laws

    At the hearing, the Government was allowed to elicit testimony--
over Respondent's objection--of the DI who performed the 2005 
inspection that Respondent sold love roses/glass roses, an item which 
the Government maintains is drug paraphernalia because it is used to 
smoke illicit drugs. Moreover, during its cross-examination of Bubba 
Marshall, the Government obtained his admissions that (1) he had heard 
that this item had been used as drug paraphernalia, and (2) that 
Respondent had continued to sell the product. Mr. Marshall also 
maintained, however, that the item had other legitimate uses, such as 
as a novelty item.
    The Government did not, however, allege in the Order to Show Cause 
that Respondent had sold these items and had violated either Federal or 
State law in selling them. The Government likewise did not disclose in 
its pre-hearing statement that Respondent's sales of this product would 
be at issue in this proceeding. Finally, the Government failed to 
disclose at any time prior to the hearing that it intended to put this 
conduct in issue. As explained below, consistent with fundamental 
principles of Due Process and the requirements of the Administrative 
Procedure Act, the Government's failure to provide any notice that this 
allegation would be litigated precludes the Agency's consideration of 
the issue.
    One of the fundamental tenets of Due Process is that Agency must 
provide a Respondent with notice of those acts which the Agency intends 
to rely on in seeking the revocation of its registration so as to 
provide a full and fair opportunity to challenge the factual and legal 
basis for the Agency's action. See NLRB v. I.W.G., Inc., 144 F.3d 685, 
688-89 (10th Cir. 1998); Pergament United Sales, Inc., v. NLRB, 920 
F.2d 130, 134 (2d Cir. 1990). See also 5 U.S.C. 554(b) (``Persons 
entitled to notice of an agency hearing shall be timely informed of * * 
* the matters of fact and law asserted.'').
    To be sure, `` `[p]leadings in administrative proceedings are not 
judged by the standards applied to an indictment at common law.' '' 
Citizens State Bank of Marshfield v. FDIC, 751 F.2d 209, 213 (8th Cir. 
1984) (quoting Aloha Airlines v. Civil Aeronautics Bd., 598 F.2d 250, 
262 (D.C. Cir. 1979)).

[[Page 36750]]

Thus, the failure of the Government to disclose an allegation in the 
Order to Show Cause is not dispositive and an issue can be litigated if 
the Government otherwise timely notifies a Respondent of its intent to 
litigate the issue.
    The Agency has recognized, however, that ``the parameters of the 
hearing are determined by the prehearing statements.'' Darrell Risner, 
D.M.D., 61 FR 728, 730 (1996). Accordingly, in Risner, the Agency held 
that where the Government has failed to disclose ``in its prehearing 
statements or indicate at any time prior to the hearing'' that an issue 
will be litigated, the issue cannot be the basis for a sanction. 61 FR 
at 730. See also Nicholas A. Sychak, d/b/a Medicap Pharmacy, 65 FR 
75959, 75961 (2000) (noting that the function of pre-hearing statements 
is to provide Due Process through ``adequate * * * disclosure of the 
issues and evidence to be submitted in * * * proceedings''); cf. John 
Stafford Noell, 59 FR 47359, 47361 (1994) (holding that notice was 
adequate where allegations were not included in Order to Show Cause but 
``were set forth in the Government's Prehearing Statement'').
    As noted above, the Show Cause Order contained no allegations 
pertaining to Respondent's sales of the love roses and this item's use 
as drug paraphernalia. Moreover, in its prehearing statement, the 
Government did not disclose that it intended to elicit testimony from 
the DI to this effect. The Government thus failed to provide adequate 
notice to Respondent that its sales of this product would be at issue 
in the proceeding and it was error for the ALJ to allow the testimony 
in the Government's case. See Risner, 61 FR at 730.
    Even if it was properly within the scope of cross examination (in 
light of Mr. Marshall's testimony as to what products Respondent sold) 
for the Government to question Mr. Marshall and obtain his admission 
that he sold love roses, the fundamental error remains. As explained 
above, the function of notice is to provide Respondent with a ``full 
and fair opportunity'' to litigate both the factual and legal basis of 
the Government's theory. While the issue of whether an allegation ``has 
been fully and fairly litigated is so peculiarly fact-bound as to make 
every case unique,'' Pergament, 920 F.2d at 136, ``the simple 
presentation of evidence important to an alternative [allegation] does 
not satisfy the requirement'' that Respondent be afforded with a full 
and fair opportunity to litigate the alternative allegation. I.W.G., 
144 F.3d at 688 (quoting NLRB v. Quality C.A.T.V., Inc., 824 F.2d 542, 
547 (7th Cir. 1987) (other citation omitted)). Moreover, it is settled 
that where the Government's case ``focus[es] on another issue and [the] 
evidence of [an] uncharged violation [is] `at most incidental,' '' the 
Government has not satisfied its constitutional obligation to provide a 
full and fair opportunity to litigate the issue and it cannot rely on 
the incidental issue as the basis for imposing a sanction. Pergament, 
920 F.2d at 136 (quoting NLRB v. Majestic Weaving Co., 355 F.2d 854, 
861-62 (2d Cir. 1966)).
    Significantly, while the Government contends in its post-hearing 
brief that ``Respondent has continued to sell drug paraphernalia even 
after he was told that the `love roses' he was selling were used to 
smoke drugs,'' Gov. Br. at 12, the Government does not cite either the 
Drug Paraphernalia statute, which sets forth both criteria for 
determining whether an item constitutes drug paraphernalia and lists 
numerous items which constitute per se drug paraphernalia, see 21 
U.S.C. 863(d) & (e), or Supreme Court precedent interpreting the 
statute and setting forth the legal standard for determining whether an 
item, which may have multiple uses, constitutes drug paraphernalia. See 
Posters `N' Things, Ltd., v. United States, 511 U.S. 513, 521 n.11 
(1994). Notably, in Posters `N' Things, the Supreme Court explained 
that the Drug Paraphernalia statute creates two categories of drug 
paraphernalia: those that are designed by the manufacturer for use with 
illicit drugs, id. at 518, and those items which are drug paraphernalia 
based on the item's ``likely use'' in the community. Id. at 521.
    The Government's brief offers no explanation as to whether it 
maintains that the item constitutes drug paraphernalia because it is 
included on the list of items constituting per se paraphernalia, 
whether it believes the item was designed by its manufacturer for use 
as paraphernalia, or whether it believes the item is paraphernalia 
because its ``likely use'' in the community is to ingest drugs. The 
Government's failure to set forth its legal theory indisputably denied 
Respondent a meaningful opportunity to present argument to the 
contrary.
    It is acknowledged that Respondent was able to present some 
evidence on the issue when Mr. Marshall testified on re-direct that the 
item had an alternate use as a novelty item and that none of his 
customers had ever told him that the item was being used for drug 
paraphernalia. Nonetheless, the Government's failure to raise this 
issue until the hearing itself denied Respondent the opportunity to 
present other evidence regarding the various factors which are relevant 
in the determination of whether an item constitutes drug paraphernalia. 
See 21 U.S.C. 863(e) (providing a non-exclusive list of eight factors 
to be considered including ``the existence and scope of legitimate uses 
of the item in the community,'' and ``expert testimony concerning its 
use'').
    Of further significance, the focus of the Government's case was 
Respondent's alleged excessive sales of ephedrine products and not its 
sales of the love roses. Indeed, in its brief, the Government does not 
argue that Respondent's sales of the love roses are themselves 
violations of Federal law which are properly considered in assessing 
its compliance with applicable laws. See generally Gov. Br. at 10-13; 
see also 21 U.S.C. 823(h)(2). Rather, the Government appears to argue 
that the evidence establishes that Respondent's owners are 
irresponsible. Gov. Br. at 12 (arguing that Respondent's sales of the 
love roses are ``a clear sign that [its] owners are indifferent to the 
methamphetamine problem in this country''). The issue was ``at most 
incidental'' to the Government's case. Pergament, 920 F.2d at 136 
(other citations omitted); see also Majestic Weaving, 355 F.2d at 861-
62. Respondent has therefore been denied a full and fair opportunity to 
litigate the issue; to consider the evidence as an independent ground 
to revoke Respondent's registration or impose even a lesser sanction 
would violate the Due Process Clause and the Administrative Procedure 
Act.
    In sum, the Government has failed to prove by substantial evidence 
its contention that Respondent does not maintain effective controls 
against diversion and was selling excessive quantities of ephedrine 
products. And because the Government failed to provide adequate and 
timely notice that Respondent's sales of love roses would also be at 
issue, there is no lawful basis for concluding that Respondent has 
committed acts which render its registration ``inconsistent with the 
public interest.'' 21 U.S.C. 824(a)(4). The Order to Show Cause must 
therefore be dismissed.

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 the 
application of CBS Wholesale Distributors for renewal of its DEA 
Certificate of Registration be, and it hereby is, granted. I further 
order that the Order to Show Cause issued to CBS

[[Page 36751]]

Wholesale Distributors be, and it hereby is, dismissed. This Order is 
effective immediately.

    Dated: July 16, 2009.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. E9-17688 Filed 7-23-09; 8:45 am]
BILLING CODE 4410-09-P