M & N Distributors; Dismissal of Proceeding, 28063-28068 [2010-11951]

Agencies

• Drug Enforcement Administration
• Department of Justice

[Federal Register Volume 75, Number 96 (Wednesday, May 19, 2010)]
[Notices]
[Pages 28063-28068]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-11951]


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DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket No. 06-55]


M & N Distributors; Dismissal of Proceeding

    On March 16, 2006, the Deputy Assistant Administrator, Office of 
Diversion Control, Drug Enforcement Administration, issued an Order to 
Show Cause to M & N Distributors (Respondent), of Springfield, 
Tennessee. The Order to Show Cause proposed the revocation of 
Respondent's DEA Certificate of Registration as a distributor of list I 
chemicals on the ground that its continued registration ``is 
inconsistent with the public interest, as that term is used in 21 
U.S.C. 823(h).'' Order to Show Cause at 1.
    More specifically, the Show Cause Order made three major 
allegations against Respondent. First, it alleged that on November 22, 
2005, Agency Investigators performed an accountability audit of 
Respondent's handling of three listed-chemical products and found an 
overage of ``732 bottles (more than five cases) of one 36-count 
combination ephedrine product.'' Id. at 2. Next, the Show Cause Order 
alleged that in June 2003, Respondent ``reported a loss of a case of 
144 bottles of ephedrine, which [Respondent] indicated fell out the 
back door of his truck'' and that ``this product was never recovered.'' 
Id.
    Finally, the Show Cause Order alleged that between 2001 and 2005, 
DEA retained an expert ``in the field of retail marketing and 
statistics'' ``to analyze national sales data for over-the-counter non-
prescription drugs'' and that based on his ``study of hundreds of 
Tennessee retailers,'' the expert had concluded ``that these retail 
stores had made purchases of listed chemical products far in excess of 
amounts of product that could be reasonably sold for legitimate 
purposes in stores of these [sic] kind in Tennessee.'' Id. at 3. The 
Order further alleged that ``DEA has observed that many smaller or non-
traditional stores, such as * * * gas stations [ ] and some small 
markets, purchase inordinate amounts of these products and become 
conduits for the diversion of listed chemical[s] into illicit drug 
manufacturing.'' Id. Because Respondent's owner ``told investigators 
that he had approximately 120 convenience store and gas station 
customers located in Tennessee and Kentucky,'' id. at 2, the Order 
implied, without ever expressly alleging, that Respondent sold listed 
chemical products ``far in excess of amounts of product that could be 
reasonably sold for legitimate purposes.'' Id. at 3.\1\
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    \1\ In her Decision, the Administrative Law Judge (ALJ) 
formulated the issue as ``whether the Respondent sold quantities of 
listed chemical product which it knew, or should have known, 
exceeded quantities that could be sold by its customers for 
legitimate use.'' ALJ at 31 (citing Gov't Br. at 9).
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    On April 5, 2006, Respondent's owner, Charles Ramsey, requested a 
hearing on the allegations and the matter was placed on the docket of 
the Agency's Administrative Law Judges (ALJ). ALJ Ex. 2. Thereafter, on 
June 5, 2006, Counsel for Respondent entered his appearance, ALJ Ex. 3, 
and following pre-hearing procedures, a hearing was held before an ALJ 
in Nashville, Tennessee on August 23 and 24, 2006. At the hearing, both 
parties called witnesses to testify and introduced documentary 
evidence. After the hearing, both parties filed briefs containing their 
proposed findings, conclusions of law, and argument.
    On December 16, 2008, the ALJ issued her Recommended Decision. 
Therein, the ALJ concluded that the Government had not proved that the 
continuation of

[[Page 28064]]

Respondent's registration would be inconsistent with the public 
interest. ALJ at 42. With respect to factor one--the maintenance of 
effective controls against diversion--the ALJ found that Respondent 
provided adequate security for the listed chemical products it 
distributed, and that while Respondent had once lost a case of a 
product (three years earlier), he had reported the loss and taken 
corrective action to prevent a reoccurrence. Id. at 29. With respect to 
Respondent's recordkeeping, the ALJ found unproven the Government's 
contention that its audit of Respondent's handling of three products 
had found that it had an overage of 732 bottles of one product. Id. at 
30. The ALJ further found, however, that Respondent's ``perpetual 
inventory logs * * * are difficult to decipher'' and ``that at least 
one of the log pages does not include the name of the product it 
purports to track.'' Id. at 29-30. The ALJ nonetheless concluded that 
Respondent maintains effective controls against diversion and that this 
factor supported its continued registration. Id. at 30.
    As to factor two--Respondent's compliance with applicable Federal, 
State and local law--the ALJ noted that the record contained no direct 
evidence of violations of such laws. Id. Similarly, as to factor 
three--Respondent's record of convictions for offenses related to 
controlled substance or listed chemicals--the ALJ noted that neither 
Respondent, nor its owner, has been convicted of a crime related to the 
handling of listed chemical products. Id. at 31. The ALJ thus found 
that both factors two and three supported Respondent's continued 
registration. Id.
    As to factor four--Respondent's past experience in the distribution 
of listed chemicals--the ALJ framed the issue as whether Respondent had 
sold ``quantities of listed chemical products which it knew, or should 
have known, exceeded quantities that could be sold by its customers for 
legitimate use.'' Id. Noting that the Government's proof was based on 
two affidavits of an expert witness whose methodology was subsequently 
founding wanting (at least with respect to combination ephedrine 
products) in a subsequent case (Novelty Distributors, 73 FR 52689 
(2008)), ALJ at 33-34, and that these affidavits contained ``numerous 
opinions without stating the bases for those opinions,'' id. at 35, as 
well as inconsistencies between their conclusions, id. at 35-36, the 
ALJ found that the Government had not established a valid baseline for 
average monthly sales per store and therefore had not shown that 
``Respondent sold listed chemical products in amounts sufficient to 
support an inference of diversion.'' Id. at 38. The ALJ thus concluded 
that ``this factor does not weigh against the continuation of * * * 
Respondent's registration.'' Id. at 39.
    As to the final factor--other factors relevant to, and consistent 
with, the public health and safety--the ALJ noted that ``the Government 
has failed to prove by a preponderance of the evidence that Respondent 
engaged in excessive sales or created a serious risk of diversion in 
its handling of listed chemical products.'' Id. at 41. The ALJ further 
explained that ``Respondent's sales alone do not lead to the conclusion 
that continuing * * * Respondent's registration would create a 
substantial risk to the public health and safety.'' Id.
    The ALJ thus concluded that the Government had failed to meet ``its 
burden of proof in showing that the Respondent's continued registration 
would be against the public interest.'' Id. at 42. Nonetheless, while 
acknowledging that Respondent's perpetual inventory log ``exceeded the 
DEA's recordkeeping practices,'' because ``the incomplete and illegible 
nature of some of its logs render an accurate assessment of its 
accountability extremely difficult,'' the ALJ recommended that I 
``admonish * * * Respondent to improve its recordkeeping.'' Id. at 42-
43. The ALJ further recommended that Respondent's registration be 
continued subject to three conditions: (1) That it is only authorized 
to distribute soft gel products; (2) that it improve its recordkeeping 
so that its sales records are ``clearly legible,'' and that both ``the 
product sold'' and the customer are ``clearly identified''; and (3) 
that for a period of one year, Respondent consent to inspections 
``based on a Notice of Inspection rather than an Administrative 
Inspection Warrant.'' Id. at 43.
    Neither party filed exceptions to the ALJ's decision. Thereafter, 
the record was forwarded to me for final agency action.
    Having considered the entire record in this matter, I adopt the 
ALJ's conclusions of law with respect to each of the statutory factors 
except for the following: The final paragraph of her discussion of 
factor four, which suggests that a registrant cannot be charged with 
knowledge that its products were being diverted based on its sales 
levels unless the Agency publishes a regulation or provides ``other 
information'' to the registrant, as well as her discussion to the 
effect that the Government must show, through ``direct evidence * * * 
that methamphetamine has actually been made in an illicit 
methamphetamine laboratory from soft gel listed chemical products'' to 
sustain a finding that the continuation of a registration is 
inconsistent with the public interest. ALJ at 42. Finally, while I 
agree with the ALJ that the Government has not established that 
Respondent's continued registration is inconsistent with the public 
interest, id. at 43, I further conclude that the conditions she 
recommended are not supported by the record. Id. I make the following 
findings.

Findings

    Both pseudoephedrine and ephedrine are lawfully marketed as non-
prescription drug products under the Food, Drug and Cosmetic Act. GX 
13, at 3-4. Pseudoephedrine is approved for marketing as a 
decongestant; ephedrine (in combination with guaifenesin) is approved 
for marketing as a bronchodilator. Id. Both chemicals are, however, 
regulated as list I chemicals under the Controlled Substances Act (CSA) 
because they are precursor chemicals that are extractable from non-
prescription drug products and used in the illicit manufacture of 
methamphetamine, a schedule II controlled substance. Id. at 7-8; see 
also 21 U.S.C. 802(34)(C) & (K); 21 CFR 1308.12(d).
    Respondent is a wholesale distributor of items such as lighters, 
tobacco products, toys, sunglasses, hats, and list I chemical products 
which include pseudoephedrine and ephedrine. Tr. 310. Mr. Charles 
Ramsey has owned the business since 1980 and is its sole owner and 
employee.\2\ Id. at 309. Mr. Ramsey operates Respondent from his 
residence in Springfield, Tennessee, which is also its DEA-registered 
location. Id. at 316; GXs 23 & 24.
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    \2\ Mr. Ramsey has never been convicted of a crime under State 
or Federal law related to the handling of listed chemical products 
or controlled substances; nor has anyone residing in his residence 
been convicted of such a crime. Tr. 320.
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    Respondent has held a DEA registration to distribute list I 
chemicals since June 17, 1999. ALJ Ex. 12. Respondent's current 
certificate of registration was to expire on January 31, 2007. RX 6. 
However, on December 12, 2006, Respondent filed a renewal application. 
ALJ Ex. 12. In accordance with the Administrative Procedure Act and DEA 
regulations, I find that Respondent's registration has remained in 
effect pending the issuance of this Final Order. 5 U.S.C. 558(c); 21 
CFR 1309.45.
    As of the hearing, Respondent had approximately 120 customers, the 
majority of which were convenience stores and grocery stores. Tr. 311-
12, 398. Respondent carried single-dosage

[[Page 28065]]

packages of Dayquil Sinus, which contains pseudoephedrine, and six-
count and twelve-count boxes of Rapid Action, a product which combines 
25 milligrams of ephedrine with guaifenesin. Id. at 310-11. However, 
prior to passage of the Tennessee Meth Free Act (``the Act'') in 2005, 
Respondent distributed 36-count bottles of Rapid Action. Id. at 311. In 
addition, Respondent previously carried the ephedrine products 
BronchEze and Twin Tab. Id. Since the passage of the Act, Respondent 
has sold list I gel-cap, or ``liquid,'' products to its Tennessee 
customers in a twelve-count blister box or a six-counter blister pack. 
Id. at 311-12, 351-53; RX 1.
    List I chemical products represented less than ten percent of 
Respondent's gross sales in 2004; of its estimated gross sales of 
$300,000, approximately $20,000 to $25,000 came from sales of list I 
chemical products. Id. at 399. Subsequent to passage of the Act, 
Respondent's sales of ephedrine products decreased but remained its 
single largest selling product. Id. at 399-400.\3\
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    \3\ The ALJ found that the Government produced no evidence that 
any list I chemical products distributed by Respondent have been 
found at illicit methamphetamine laboratories or that the particular 
brands of soft-gel listed chemical products distributed by 
Respondent were either discovered at an illicit methamphetamine 
laboratory or successfully used to produce methamphetamine. ALJ at 
12 (citing Tr. 37, 46-48, 50 & 52); see also id. at 29 & 42. Related 
to the latter point, a DEA Special Agent testified that since 2005, 
law enforcement authorities have discovered more than 400 illicit 
methamphetamine laboratories in southeastern Tennessee alone and 
that gel-cap listed chemical products were found in very few of 
these labs, with the majority using tablet-form products. Tr. 46-48.
    That there is no evidence linking products sold by Respondent to 
illicit meth. labs does not, however, foreclose the Agency from 
evaluating the adequacy of its diversion controls, its compliance 
record, and other factors relevant in the public interest inquiry. 
As for the evidence regarding the use of gel caps, the hearing in 
this matter was held in August 2006. Given that tablet-form products 
were available in Tennessee until May of 2005, as well as in 
adjacent States until the passage of the Combat Methamphetamine 
Epidemic Act in 2006, it is possible that traffickers bought up as 
much tablet-form product as possible before this form was banned, 
and that those supplies were still being used.
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    On May 24, 2003, Respondent reported to DEA that three days 
earlier, he had lost a case (144 bottles) of sixty-count Max Brand Two 
Way, a combination ephedrine product. GX 24. Respondent submitted the 
report on the appropriate form and attached a separate letter which 
explained the circumstances of the loss,\4\ how he discovered it, and 
the efforts he had undertaken to find the lost product. Id. at 3. 
Respondent further explained the corrective action he had taken to 
prevent a reoccurrence. Id. at 1. Respondent also explained that he did 
not report the incident to the local sheriff because he did not believe 
that the products had been stolen.\5\ Id. at 3. Respondent had not 
experienced any further losses up through the date of the hearing. Tr. 
346; ALJ at 8.
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    \4\ Respondent explained that the product had been stored on the 
back of his truck and that the door to the truck's cargo area had 
become unlatched. GX 24.
    \5\ There is a factual dispute as to whether Mr. Ramsey provided 
oral notification of the loss to DEA. Compare Tr. 156 (testimony of 
DI that while he was not in the office then, he checked with his co-
workers and that none of them ``can remember a phone call being 
received from Mr. Ramsey''), with id. at 345 (Mr. Ramsey's testimony 
that he called DEA). The ALJ did not clearly resolve this factual 
dispute, which is material because DEA's regulation requires both an 
oral and written report. See ALJ at 7.
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    On November 22, 2005, two DEA Diversion Investigators (DIs) went to 
Respondent's registered location to conduct an inspection. Tr. 139-40. 
The DIs met with Mr. Ramsey and presented him with a Notice of 
Inspection. Id. at 141. The DIs questioned Mr. Ramsey about the nature 
of his business, inspected the physical security (which was clearly 
adequate \6\), and examined his records. Id. at 140-45. The DIs also 
told Mr. Ramsey that they would be doing an audit; the DIs thus took an 
inventory of the listed chemical products he had on hand (which Mr. 
Ramsey agreed with), which was to be used as the closing inventory. The 
DIs also obtained copies of his records which included his purchase 
invoices and a ``perpetual inventory''; the latter provided a running 
list of sales of each product by date, store, quantity, and invoice 
number. Id. at 141, 145-46, 149-53; GX 22; RX 4.
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    \6\ Mr. Ramsey stores his listed chemical inventory at his 
registered location in a separate, secure room with a locked door, 
which has an ADT security system monitor. Id. at 317-19; RX 2, at 1, 
6. Within that room, the listed chemical products are stored in a 
30-gauge steel cage with welded hinges and padlocks. Tr. 317-20. 
Only Mr. Ramsey has access to the keys to the cage, which he stores 
in a combination-locked safe. Id. at 319; RX 2, at 3. In Mr. 
Ramsey's twenty-seven year residence on the property, he has not 
experienced a single theft or break-in. Tr. 319. Finally, Mr. Ramsey 
does not stored listed chemical products on his delivery trucks 
overnight but instead returns them to the cage. Id. at 320.
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    To perform the audit, the DI used January 1, 2005 as the starting 
date; because Respondent did not then have any products on hand, he 
assigned a value of zero for each of the products. Tr. 151-52; GX 22, 
at 2. Based on his review of Respondent's invoices documenting its 
purchases from its suppliers, which was added to the zero opening 
inventory figure for each product, the DI calculated the total amount 
of each product for which Respondent was accountable and entered the 
figures on the Computation Chart.\7\ Tr. 152-54; GX 23. The DI also 
reviewed Respondent's perpetual inventory to calculate its sales of 
listed chemical products and added these figures to the closing 
inventory to calculate the total amount that Respondent could account 
for. Tr. 145, 153-54; RX 3.
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    \7\ According to the computation chart, credits and returns 
(presumably to suppliers) were to be counted in determining the 
total amount of product Respondent was accountable for. GX 23. For 
each product, the chart indicates that the amount of both the 
credits and returns was zero.
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    The DI then compared the figures for each of the three products. GX 
23. While the audit found that two of the products balanced, the audit 
found an overage of 732 bottles of the 36-count Rapid Action Ephedrine 
2-Way product. Id. According to the DI, ``in theory'' this suggests 
that Respondent had distributed 732 more bottles than it purchased. 
However, because this is not possible, such an overage could result 
from a delivery of product with no invoice from its supplier, a lost 
invoice, or mistaken documentation such as recording the sale of one 
product as a different product. Tr. 154-55.
    Mr. Ramsey disputed the accuracy of the audit. While he agreed with 
the DI's figures for Respondent's purchases of Rapid Action bottles and 
the closing inventory, Mr. Ramsey maintained that when he attempted to 
recreate the Government's audit, his results did not match. Tr. 326, 
334, 357, 367; see also GX 23. According to Mr. Ramsey, his total 
amount of the distributions during the audit period was 11,328 bottles 
and not the DI's figure of 12,048 bottles. Tr. 367-71. Moreover, his 
figure for the ``Total List I accounted for'' was just 12,240 bottles 
and not 12,972 as the DI had found. Tr. 328; see also GX 23.
    In his testimony, Mr. Respondent suggested several reasons for why 
the DI found the overage. Tr. 329-33. First, Mr. Ramsey claimed that 
the DI had apparently not accounted for a return of twelve bottles, 
which reduced the discrepancy in the results from 732 to just 720 
bottles. Id., see also RX 4, at 4 (invoice documenting return of twelve 
bottles). As for the remaining 720-bottle overage, Mr. Ramsey suggested 
two explanations. First, that the DI could have erroneously added in 
720 bottles of BronchEze to the total amount of the distributions. Tr. 
332; see also RX 3, at 25 (listing sales of BronchEze during July 
2005).\8\ Second, that the DI could have erroneously added in two other 
distributions it received (for 288

[[Page 28066]]

BronchEze and 432 Twin Tabs) to the total amount. Id. at 332-33; RX 3, 
at 39, 45.
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    \8\ It is undisputed that this document was among those taken by 
the Government. Tr. 331.
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    Although it bears the burden of proof, the Government offered no 
evidence (such as an accounting showing each distribution it included 
in calculating the overage) to rebut Mr. Ramsey's contentions.\9\ 
Moreover, having conducted my own review of Respondent's records, I 
agree with Mr. Ramsey's figure for the total amount of Rapid Action 
that he distributed. I further conclude that, at most (and even this is 
doubtful), twelve bottles are unaccounted for. Consequently, I agree 
with the ALJ that the Government failed to prove by a preponderance of 
the evidence that the audit revealed a 732-bottle overage for the Rapid 
Action product.
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    \9\ To make clear, in performing the audit, the Government used 
Respondent's perpetual inventory which documented each distribution 
it received from a supplier as well as each distribution it made to 
a customer.
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    As noted above, the Government also apparently alleged that 
Respondent was selling listed chemical products to convenience stores 
and gas stations in quantities that were ``far in excess of [the] 
amounts of product that could be reasonably sold for legitimate 
purposes.'' Show Cause Order at 3. In support of the allegation, the 
Government introduced two affidavits prepared by an expert witness for 
proceedings involving two different distributors. See GXs 20 & 27. The 
gist of these affidavits was that the normal expected retail sale of 
pseudoephedrine in a convenience store is between $10 and $30 a month, 
with an average of $20 per month, and that a sale of more $100 a month 
(to meet legitimate demand) could be expected to occur ``about once in 
a million raised to the tenth power.'' GX 20, at 8-9. The affidavit 
further asserts that the normal expected sales level of combination 
ephedrine products at ``a convenience store is about one quarter that 
of single ingredient products.'' Id. at 11.
    Subsequent to the closing of the record in this proceeding, I found 
that the expert's methodology was unreliable for several reasons. See 
Novelty Distributors, Inc., 73 FR 52689, 52693-94 (2008). I further 
concluded that the Expert's testimony as to the normal expected sales 
range of the products and statistical probability that various sales 
levels were consistent with legitimate demand did not constitute 
substantial evidence. Id. at 52694. As I have previously held, even 
when a Respondent has not raised similar challenges to the Expert's 
methodology, the Agency cannot ignore the ultimate finding in Novelty 
that the expert's conclusions as to the expected sales levels (and 
probabilities) do not satisfy the substantial evidence test. See CBS 
Wholesale, 74 FR 36746, 36748 (2009); Gregg & Son Distributors, 74 FR 
17517, 17520 (2009).

Other Evidence

    Mr. Ramsey personally stocks his listed chemical products in 
plexiglass display cases, which he has provided to his customers at his 
own expense to prevent theft. Tr. 338-40, 407-08. According to Mr. 
Ramsey, the cases prevent the public from having direct access to the 
product. Id. at 338. Mr. Ramsey further testified that he had provided 
the cases for more than ten years and had been doing so long before the 
2006 enactment of the Combat Methamphetamine Epidemic Act (CMEA), which 
made placement of the product behind-the-counter a Federal requirement. 
Id. at 339. He also posted signs on the cases indicating the amount of 
a product that can be sold on a daily basis and testified that he was 
then in the process of sending his customers a letter explaining what 
they needed to do to comply with the CMEA's logbook requirement. Id. at 
342.
    Mr. Ramsey further testified that following Tennessee's enactment 
of the Tennessee Meth Free Act, which prohibited his customers from 
selling tablet-forms of ephedrine, he has not sold any tablet-form 
products and instead is selling only soft-gel products in blister 
packs. Id. at 352-53. Moreover, he accepted returned tablets and sent 
them, along with his remaining inventory, to a reverse distributor for 
destruction. Id. at 351-52. He also retained records of the destroyed 
products. Id.; see also RX 3, at 14-15.

Discussion

    Section 304(a) of the Controlled Substances Act (CSA) 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.'' Id. Sec.  
823(h). In making the public interest determination, Congress directed 
that the following factors be considered:

    (1) Maintenance by the [registrant] of effective controls 
against diversion of listed chemicals into other than legitimate 
channels;
    (2) Compliance by the [registrant] with applicable Federal, 
State, and local law;
    (3) Any prior conviction record of the [registrant] under 
Federal or State laws relating to controlled substances or to 
chemicals controlled under Federal or State law;
    (4) Any past experience of the [registrant] 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.
    ``These factors are considered in the disjunctive.'' Gregg & Son 
Distributors, 74 FR 17517, 17520 (2009); see also Joy's Ideas, 70 FR 
33195, 33197 (2005). I may rely on any one or a combination of factors, 
and I may give each factor the weight I deem appropriate in determining 
whether to revoke an existing registration or to deny an application 
for renewal of a registration. Gregg & Son, 74 FR at 17520; Energy 
Outlet, 64 FR 14269 (1999). Moreover, I am not required to make 
findings as to all of the factors. Volkman v. DEA, 567 F.3d 215, 222 
(6th Cir. 2009); Morall v. DEA, 412 F.3d 165, 173-74 (DC Cir. 2005).
    The Government, however, bears the burden of proof. 21 CFR 1309.54. 
Having considered all of the factors, I conclude that the Government 
has failed to prove that Respondent's continued registration is 
inconsistent with the public interest. While I have also considered the 
ALJ's recommendation that I impose several compliance conditions on 
Respondent's registration, I conclude that the record does not support 
doing so. Accordingly, the Order to Show Cause will be dismissed.
    As noted above, the Government's case was based primarily on 
Respondent's putative failure to maintain effective controls against 
diversion. More specifically, the Government alleged that: (1) 
Respondent had once lost a case of ephedrine, and that he failed to 
timely report the loss, (2) that Respondent was selling list I products 
in quantities which were ``far in excess'' of legitimate demand, and 
(3) that an audit found an overage of 732 bottles of one product. Show 
Cause Order at 2-3.
    As explained in numerous cases, maintaining proper security for 
list I chemicals is a highly important consideration under factor one. 
Here, however, there is no dispute that Respondent maintains proper 
security of the products at its registered location. Rather, the 
Government relies on a single incident, which had occurred

[[Page 28067]]

nearly three years before the Show Cause Order was even filed, in which 
Respondent lost a case of product out the back of its truck.
    It is undisputed that upon discovering the loss, Mr. Ramsey 
attempted to find the product. He reported the loss in writing to DEA 
within three days. See 21 U.S.C. 830(b)(1)(C). He also took corrective 
action to prevent a reoccurrence and there is no evidence that there 
has been one.
    The Government nonetheless asserts that Respondent violated Federal 
law because it ``failed to timely report'' the loss ``pursuant to 21 
CFR 1310.05(a)(3) and (b).'' Gov. Br. at 9. The Government does not 
explain, however, whether it relies on the provision of the regulation 
which requires that ``whenever possible,'' an oral report shall be made 
``at the earliest practicable opportunity,'' or the provision which 
requires that a written report be filed ``within 15 days after the 
regulated person becomes aware of the circumstances of the event.'' 21 
CFR 1310.05(b); see also Gov. Br. 9.
    What is clear is that Respondent's written report complied with the 
regulation. Moreover, it is not the role of those who perform quasi-
judicial functions to make the Government's argument for it. Because 
the Government did not advance the argument that its allegation is 
based on Respondent's failure to give oral notification, I do not 
consider it. Accordingly, I reject the allegation that Respondent 
violated Federal law by failing to timely report the 2003 loss of 
listed chemicals.
    I am also compelled to reject the allegation that Respondent was 
selling excessive quantities of listed chemicals. As noted above, 
because the Government Expert's methodology is unreliable, his findings 
as to both the monthly expected sales range and the statistical 
improbability of certain sales levels of ephedrine products in 
legitimate commerce at convenience stores are not supported by 
substantial evidence.\10\ Novelty Distributors, 73 FR at 52693-94; see 
also CBS Wholesale, 74 FR at 36746.
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    \10\ While the Government has the burden of proof, it also 
failed to produce any analysis of Respondent's sales data to show 
what its average monthly sale was. See also Resp. Br. 22 (arguing 
that the Government ``presented no evidence that [the Expert] review 
any information concerning [its] business practices or its List I 
sales''). Accordingly, even if its Expert's methodology had not been 
subsequently shown to be invalid, I would still be compelled to 
reject the allegation.
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    Finally, the Government alleged that its audit of Respondent found 
an overage of 732 bottles of 36-count Rapid Action combination 
ephedrine tablets. Here again, the Government failed to meet its 
evidentiary burden. As noted above, the primary dispute over the audit 
involved the amount of Respondent's distributions to its customers. The 
Government did not, however, document how it arrived at its figure by 
showing what invoices (or transactions \11\) it included. Moreover, 
Respondent's evidence (which included the purchase invoices and the 
perpetual inventories Mr. Ramsey maintained) establishes that Mr. 
Ramsey's testimony accurately reflects the amount of the product he had 
distributed to the stores during the audit period. Finally, the 
Government failed to rebut this evidence. I thus reject the allegation 
as unsupported by substantial evidence.
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    \11\ The Government did not use Respondent's sales invoices, but 
rather, the perpetual inventories it maintained for each lot of 
product it obtained from a distributor.
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    While the ALJ found this allegation unproven, and further noted 
that Respondent's ``perpetual inventory'' records ``exceeded the DEA's 
requirements to some extent,'' she nonetheless found that the logs 
submitted into evidence were ``difficult to decipher, which makes a 
proper evaluation of their accuracy nearly impossible.'' ALJ at 29. The 
ALJ therefore recommended that as a condition of continuing his 
registration, I require that ``Respondent shall improve and maintain 
its records of listed chemical product sales such that they are (a) 
clearly legible, (b) the product sold is clearly identified, and (c) 
the customer to whom products are sold is clearly identified such that 
all of its sales can be accounted for.'' \12\ Id. at 43 (footnotes 
omitted).
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    \12\ The ALJ suggested that Respondent could improve the 
legibility of his records by either ``typing or carefully 
handwriting the logs.'' ALJ at 43 n.15.
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    Neither Federal law nor Agency regulations require that a list I 
chemical distributor maintain a perpetual inventory.\13\ See 21 CFR 
1310.03(a). And even assuming that the Agency has authority to impose 
conditions based on a registrant's maintenance of a record he has no 
obligation under the law to maintain, I conclude that the ALJ's 
conditions are unwarranted for several reasons.
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    \13\ Nor is there a requirement that a registrant who handles 
controlled substances maintain a perpetual inventory. See 21 CFR 
1304.21(a).
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    First, the records are copies, and as such, do not necessarily 
establish that the originals are illegible. Second, the legibility of a 
person's handwriting is like beauty--it is in the eyes of the beholder. 
Having reviewed the records, I find that they are legible enough to 
understand. Third, the records were compiled from the invoices 
Respondent created for each store and transaction. In the event an 
entry was unreadable--and the Government does not maintain that any of 
the entries were--the original invoice could have been reviewed. Yet 
none of Respondent's sales invoices are in the record, and thus, it is 
not possible to assess whether they were being properly maintained and 
were legible.\14\ Accordingly, there is no basis to support the ALJ's 
conclusion that Respondent's records ``render an accurate assessment of 
its accountability extremely difficult.'' ALJ at 42. The evidence 
therefore supports neither ``admonish[ing] the Respondent to improve 
its recordkeeping,'' nor the imposition of the ALJ's proposed 
condition. Id.
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    \14\ In light of the fact that Combat Methamphetamine Epidemic 
Act eliminated the thresholds for combination ephedrine products 
such that all ``transactions, regardless of size, are subject to 
recordkeeping and reporting requirements as set forth in'' 21 CFR 
1310, 21 CFR 1310.04(g), Respondent should ensure that its 
recordkeeping complies with the regulations.
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    The ALJ also recommended that I impose the condition that 
``Respondent is only authorized to handle soft gel listed chemical 
products.'' Id. at 43. As I have previously explained, conditions on a 
registration ``must be related to what the Government has alleged \15\ 
and proved in any case.'' Janet L. Thornton, 73 FR 50354, 50356 (2008). 
In her decision, the ALJ noted that there is ``no evidence that the 
Respondent has violated the [Tennessee] Meth Act,'' and that ``the 
record demonstrates that the Respondent is effectively adhering to the 
[Tennessee] Meth Act and has limited the sales to its customers 
strictly to gel-form ephedrine.'' ALJ at 41. Likewise, there is no 
evidence that Respondent had violated the then newly enacted Combat 
Methamphetamine Epidemic Act.
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    \15\ To make clear, conditions can be imposed based on any 
allegation which the Government provides adequate notice of in 
accordance with the Due Process Clause and Administrative Procedure 
Act (and DEA regulations) and which it proves at a hearing.
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    This being so, there is no basis for imposing this condition. The 
purpose of conditions is not simply to replicate what is already 
required by State or Federal law. Cf. Joseph Gaudio, 74 FR 10083, 10095 
(2009) (rejecting ALJ's recommendation to continue a registration on 
the condition that a registrant refrain from illegal activity, noting 
that there were numerous State and Federal laws which already 
prohibited the activity). Rather, the purpose is to remedy identified 
and proven deficiencies in a registrant's policies and practices where 
those deficiencies are not so serious or

[[Page 28068]]

extensive as to warrant revocation of a registration but which 
nonetheless threaten the public interest. Because there is no evidence 
that Respondent has sold forms of list I products in violation of 
either State or Federal law, there is no basis to impose the 
condition.\16\
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    \16\ For the same reason, there is no basis to impose the ALJ's 
third condition.
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    In conclusion, the Government has not established that Respondent 
has committed any acts which either render its registration 
inconsistent with the public interest or which would support the 
imposition of conditions on its registration. Accordingly, the Order to 
Show Cause will be dismissed.

Order

    Pursuant to the authority vested in me by 21 U.S.C. 823(h) and 
824(a), as well as 28 CFR 0.100(b) and 0.104, I order that the 
application of M & N 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 M & N Distributors be, and it hereby is, 
dismissed. This order is effective immediately.

    Dated: May 6, 2010.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. 2010-11951 Filed 5-18-10; 8:45 am]
BILLING CODE 4410-09-P