Professionals and Patients for Customized Care v. Shalala, 94-20402

Decision Date15 June 1995
Docket NumberNo. 94-20402,94-20402
Citation56 F.3d 592
PartiesPROFESSIONALS AND PATIENTS FOR CUSTOMIZED CARE, Plaintiff-Appellant, v. Donna SHALALA, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

John M. Simpson, Kathleen Kauffman di Bene, Irwin Cohen, Fulbright & Jaworski, Washington DC, for appellant.

Jacqueline H. Eagle, Atty., Office of Consumer Litigation, U.S. Dept. of Justice, Washington DC, Daniel David Hu, Hays Jenkins, Jr., Asst. U.S. Attys., Gaynell Griffin Jones, U.S. Atty., Houston, TX, David Jay Horowitz, Asst. Chief Counsel for Enforcement, Food and Drug Admin., Rockville, MD, for appellees.

Appeal from the United States District Court For the Southern District of Texas.

Before WISDOM, WIENER and PARKER, Circuit Judges.

WIENER, Circuit Judge:

In this challenge brought pursuant to the Administrative Procedure Act (APA), 1 Plaintiff-Appellant Professionals and Patients for Customized Care (P2C2) contends that the district court erred in concluding that Food & Drug Administration (FDA) Compliance Policy Guide 7132.16 (CPG 7132.16) is not a substantive rule and thus is not subject to the APA's notice-and-comment requirement. Finding no reversible error, we affirm.

I FACTS AND PROCEEDINGS

In 1992, the FDA promulgated CPG 7132.16 to address what the agency perceived to be a burgeoning problem in the pharmaceutical industry--the manufacture of drugs by establishments with retail pharmacy licenses. Pharmacies have long engaged in the practice of traditional compounding, the process whereby a pharmacist combines ingredients pursuant to a physician's prescription to create a medication for an individual patient. This type of compounding is commonly used to prepare medications that are not commercially available, such as diluted doses for children and altered forms of medications for easier consumption.

Pharmacies that practice traditional compounding are regulated primarily by state law, 2 and the drugs that they blend are exempt from many federal misbranding provisions. 3 Drug manufacturers and their products, however, are subject to rigorous federal oversight.

By the 1990s, the FDA had become aware that many establishments with retail pharmacy licenses were purchasing large quantities of bulk drug substances; combining those substances into specific drug products before ever receiving any valid prescriptions; and then marketing those drug products to practitioners and patients. The FDA suspected that establishments engaged in this large-scale speculative "compounding" were doing so to circumvent those new drug, adulteration, and misbranding provisions of the Food, Drug, and Cosmetic Act (Act) 4 that regulate the manufacture of drugs.

To combat this perceived problem, the FDA issued CPG 7132.16, in an effort to establish the following "policy":

POLICY

FDA recognizes that a licensed pharmacist may compound drugs extemporaneously after receipt of a valid prescription for an individual patient....

Pharmacies that do not otherwise engage in practices that extend beyond the limits set forth in this CPG may prepare drugs in very limited quantities before receiving a valid prescription, provided they can document a history of receiving valid prescriptions that have been generated solely within an established professional practitioner-patient-pharmacy relationship and provided further that they maintain the prescription on file for all such products dispensed at the pharmacy as required by state law.

If a pharmacy compounds finished drugs from bulk active ingredient materials considered to be unapproved new drug substances, as defined in 21 CFR 310.3(g), such activity must be covered by an FDA-sanctioned investigational new drug application . . . . .

(IND) that is in effect in accordance with 21 U.S.C. Section 355(i) and 21 CFR 312.

Pharmacies may not, without losing their status as retail entities, compound, provide, and dispense drugs to third parties for resale to individual patients.

FDA will generally continue to defer to state and local officials (sic) regulation of the day-to-day practice of retail pharmacy and related activities....

FDA may, in the exercise of its enforcement discretion, initiate federal enforcement actions against entities and responsible persons when the scope and nature of a pharmacy's activity raises the kind of concerns normally associated with a manufacturer and that results in significant violations of the new drug, adulteration, or misbranding provisions of the Act.

This CPG goes on to identify nine factors that the FDA "will consider" in determining whether to initiate an enforcement action, but explains that the "list of factors is not intended to be exhaustive and other factors may be appropriate for consideration in a particular case."

The FDA issued CPG 7132.16 without complying with APA notice-and-comment procedures, 5 as the agency considered CPG 7132.16 to be for internal guidance. The FDA explains that CPG 7132.16 was intended to be used within the agency, primarily by FDA district offices, as an aid in identifying those pharmacies that manufacture drugs under the guise of traditional compounding. 6

P2C2, an organization comprising individuals and entities engaged in the practice of pharmacy, interprets CPG 7132.16 differently. Soon after CPG 7132.16 issued, the FDA notified some of the organization's members that their activities were more consistent with drug manufacturing than with traditional compounding, and that they and their products were thus subject to the regulations applicable to drug manufacturers. On behalf of those and other members, P2C2 filed suit in federal district court, claiming that CPG 7132.16 is invalid because it is a substantive rule issued in violation of the APA's notice-and-comment requirement. The FDA responded that P2C2 lacked standing and that its claim was not ripe, but the district court disagreed. Both parties then filed cross motions for summary judgment, which the trial court denied, finding that there remained genuine issues of material fact. Following a two-day bench trial, the district court made extensive findings of fact and conclusions of law, and ruled that CPG 7132.16 is either an "interpretative rule" or "policy statement," but it is not a "substantive rule." Consequently, held the district court, the FDA was exempt from complying with the APA's notice-and-comment requirements, and CPG 7132.16 was validly promulgated.

P2C2 timely appealed, contending that the district court erred in concluding that CPG 7132.16 was not a substantive rule. The FDA responded that the district court had correctly held that CPG 7132.16 was not a substantive rule, and reurged its ripeness and standing arguments. 7

II ANALYSIS
A. STANDARD OF REVIEW

We review for clear error the district court's findings of fact. We consider de novo the court's conclusions of law, 8 which include the court's ruling that CPG 7132.16 is not a "substantive rule." 9

B. THE PROPER CHARACTERIZATION OF CPG 7132.16

All parties agree that under the APA, CPG 7132.16 is a "rule," and its promulgation constituted "rulemaking." 10 But the APA exempts from notice-and-comment procedures "interpretative rules, general statements of policy, [and] rules of agency organization, procedure, or practice." 11 In contrast, if a rule is "substantive," 12 the exemption is inapplicable, and the full panoply of notice-and-comment requirements must be adhered to scrupulously. The "APA's notice and comment exemptions must be narrowly construed." 13

If CPG 7132.16 were a substantive rule it would be unlawful, for it was promulgated without the requisite notice-and-comment. The pivotal issue in this case, therefore, is whether CPG 7132.16 is a substantive rule. Although the APA itself does not define "substantive rules," "interpretive rules," or "statements of policy," courts over the years have developed a body of jurisprudence that is helpful in drawing the necessary--but often illusory 14--distinctions among the three types of rules. It is that body of law, much of which comes from our colleagues of the District of Columbia Circuit, to which we now turn.

In Community Nutrition Institute v. Young, 15 the D.C. Circuit reiterated two "criteria" to which courts have looked to distinguish substantive rules from nonsubstantive rules:

First, courts have said that, unless a pronouncement acts prospectively, it is a binding norm. Thus ... a statement of policy may not have a present effect: "a 'general statement of policy' is one that does not impose any rights and obligations"....

The second criterion is whether a purported policy statement genuinely leaves the agency and its decisionmakers free to exercise discretion. 16

The court further explained that "binding effect, not the timing, ... is the essence of criterion one." 17 In analyzing these criteria, we are to give some deference, "albeit 'not overwhelming,' " to the agency's characterization of its own rule. 18 While mindful but suspicious of the agency's own characterization, we follow the D.C. Circuit's analysis in determining whether CPG 7132.16 is a substantive rule under the APA, focusing primarily on whether the rule has binding effect on agency discretion 19 or severely restricts it. 20 As we noted in Panhandle Producers & Royalty Owners Ass'n v. Economic Regulatory Administration 21.

"A properly adopted substantive rule establishes a standard of conduct which has the force of law. In subsequent administrative proceedings involving a substantive rule, the issues are whether the adjudicated facts conform to the rule and whether the rule should be waived or applied in that particular instance. The underlying policy embodied in the rule is not generally subject to challenge before the agency.

A general statement of policy, on the other hand, does not establish a 'binding norm.' It is not finally determinative of the issues or rights to which it is addressed. The agency cannot apply or rely upon...

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