Masters Pharm., Inc. v. Drug Enforcement Admin.

Citation861 F.3d 206
Decision Date30 June 2017
Docket NumberNo. 15-1335,15-1335
Parties MASTERS PHARMACEUTICAL, INC., Petitioner v. DRUG ENFORCEMENT ADMINISTRATION, Respondent
CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)

Richard T. Lauer argued the cause for petitioner. With him on the briefs were John A. Gilbert Jr., Karla L. Palmer, and Andrew J. Hull, Washington, DC.

Nicolas Riley, Attorney, U.S. Department of Justice, argued the cause for respondent. With him on the brief were Benjamin C. Mizer, Principal Deputy Assistant Attorney General, and Mark B. Stern, Attorney. Anita J. Gay and Lena D. Watkins, Attorneys, entered appearances.

Gregory G. Garre, Philip J. Perry, Andrew D. Prins, Alexandra Shechtel, Richard L. Frank, David L. Durkin, Washington, DC, and Donald L. Bell II were on the brief for amici curiae Healthcare Distribution Management Association and National Association of Chain Drug Stores in support of neither party.

Larry P. Cote, Washington, DC, was on the brief for amicus curiae Generic Pharmaceutical Association in support of neither party and in support of neither affirmance nor reversal.

Before: Srinivasan and Pillard, Circuit Judges, and Edwards, Senior Circuit Judge.

Pillard, Circuit Judge:

Breakthroughs in the development of prescription opioid painkillers have vastly increased their popularity. But that popularity has taken a toll. Opioids are heavily addictive and often lethal in high doses. The Drug Enforcement Administration (DEA or agency) has therefore listed opioids such as hydrocodone

and oxycodone as controlled substances so that DEA can monitor and restrict their sale. Over the past two decades, DEA has been battling a steep increase in prescription opioid abuse—a problem that DEA views as an "epidemic." U.S. Dep't of Justice, Drug Enf't Admin., Order to Show Cause (Aug. 9, 2013), J.A. 8-9. The Department of Health and Human Services (HHS), too, sees the rising abuse of prescription opioids as "a serious and challenging" public health issue. DEP'T OF HEALTH & HUMAN SERVS., OPIOID ABUSE IN THE U.S. AND HHS ACTIONS TO ADDRESS OPIOID-DRUG RELATED OVERDOSES AND DEATHS (2015). Since 1999, the number of deaths from prescription painkillers in the United States has more than quadrupled. CENTERS FOR DISEASE CONTROL AND PREVENTION , Opioid Overdose: Understanding the Epidemic , https://www.cdc.gov/drugoverdose/epidemic/index.html (last visited June 12, 2017). Prescription opioids now kill an average of 44 Americans per day. U.S. DEP'T OF HEALTH & HUMAN SERVS. , About the Epidemic , https://www.hhs.gov/opioids/about-the-epidemic (last visited June 12, 2017).

Masters Pharmaceuticals, Inc., (Masters) supplies prescription medications in bulk to pharmacies across the United States. Before this litigation began, Masters was registered with DEA as a vendor of controlled substances, including opioids. As a registrant, Masters had an obligation to report to DEA suspicious orders for controlled substances and to take other precautions to ensure that those medications would not be diverted into illegal channels.

This case challenges DEA's 2014 decision to revoke Masters' certificate of registration, without which Masters cannot sell controlled substances. The revocation order turned on DEA's conclusion that Masters had shirked its legal obligation to report suspicious orders for controlled substances. Masters challenges the factual basis of DEA's revocation decision, and claims it exceeded DEA's authority under its existing regulations, effectively broadening them in a manner that was inconsistent with the Administrative Procedure Act (APA). In addition, Masters suggests, DEA improperly relied on arguments and evidence that were not presented during the administrative trial, in violation of the Due Process Clause. Because we see no prejudicial error in DEA's decision, we deny Masters' petition for review.

I.
A.

The Controlled Substances Act authorizes commercial distribution of certain controlled substances for therapeutic use, but requires all distributors to register with DEA. See 21 U.S.C. § 823(b), (e) ; 28 C.F.R. § 0.100. The Administrator of DEA (the Administrator) closely observes registered distributors to ensure that their operations are "[ ]consistent with the public interest." 21 U.S.C. § 824(a)(4) ; see also 28 C.F.R. § 0.100 ; 21 C.F.R. § 1301.71. In evaluating a distributor's operations, the Administrator considers: (1) whether the distributor has maintained "effective control[s] against diversion of particular controlled substances into other than legitimate medical, scientific, and industrial channels"; (2) whether the distributor has complied with applicable state and local laws; (3) whether the distributor has previously been convicted under federal or state laws for a crime related to the sale of controlled substances; (4) the distributor's past experience with controlled substances; and (5) "such other factors as may be relevant to and consistent with the public health and safety." 21 U.S.C. § 823(b), (e). The Administrator is "not required to make findings as to all of the[se] factors," and "may give each factor the weight he deems appropriate." Morall v. DEA , 412 F.3d 165, 173-74 (D.C. Cir. 2005) (internal quotation marks omitted). If the distributor's operations fail to live up to the public-interest standard, the Administrator may "suspend[ ] or revoke [ ]" the distributor's certificate. 21 U.S.C. § 824(a)(4).

Where, as here, the Administrator considers the first factor—the maintenance of "effective controls" against the "diversion" of controlled substances—the Administrator must determine whether the registrant complied with DEA's "security requirements." 21 C.F.R. § 1301.71(a). The "security requirement" at the heart of this case mandates that distributors "design and operate a system" to identify "suspicious orders of controlled substances" and report those orders to DEA (the Reporting Requirement). 21 C.F.R. § 1301.74(b). The Reporting Requirement is a relatively modest one: It requires only that a distributor provide basic information about certain orders to DEA, so that DEA "investigators in the field" can aggregate reports from every point along the legally regulated supply chain and use the information to ferret out "potential illegal activity." Southwood Pharm., Inc. , 72 Fed. Reg. 36,487, 36,501 (Drug Enf't Admin. July 3, 2007). Once a distributor has reported a suspicious order, it must make one of two choices: decline to ship the order, or conduct some "due diligence" and—if it is able to determine that the order is not likely to be diverted into illegal channels—ship the order (the Shipping Requirement). See id. at 36,500.

B.

On October 17, 2008, a DEA Deputy Assistant Administrator issued an order to show cause why DEA should not revoke Masters' certificate of registration (the 2008 Order to Show Cause, or 2008 Order). U.S. Dep't of Justice, Drug Enf't Admin., Order to Show Cause (Oct. 17, 2008). That Order alleged that Masters had "failed to maintain effective controls against diversion" of hydrocodone, a powerful opioid. Id. ; see also Masters Pharm., Inc ., 80 Fed. Reg. 55,418, 55,421 (Drug Enf't Admin. Sept. 15, 2015). "Throughout 2007 and 2008," Masters violated the Reporting Requirement by failing to notify DEA when "rogue Internet pharmacies" placed suspicious hydrocodone orders. 80 Fed. Reg. at 55,421 -22. In addition, Masters allegedly filled those hydrocodone orders without performing adequate due diligence, in violation of the Shipping Requirement. See 80 Fed. Reg. at 55,421 -22.

On April 1, 2009, DEA and Masters agreed to settle the charges in the 2008 Order. The settlement agreement required Masters to pay $500,000 to the agency and bring the company into compliance with DEA regulations by implementing a compliance system "to detect suspicious orders" for controlled substances and "prevent diversion of controlled substances" into illegal channels. Settlement and Release Agreement and Administrative Memorandum of Agreement at 2 (Apr. 1, 2009), J.A. 899. Masters further promised that orders "identified as suspicious" by the compliance system would "be reported to ... DEA." Id.

To fulfill its obligations under the settlement agreement, Masters created a compliance system called the "Suspicious Order Monitoring System" or "SOMS," consisting of a computer program (the Computer Program) and a protocol for Masters' employees (the Compliance Protocol, or Protocol). The Computer Program was designed to identify any order for controlled substances that "me[t] or exceed[ed]" the criteria for suspicious orders set out in 21 C.F.R. § 1301.74(b). J.A. 1436. In other words, the computer program was designed to identify orders of an unusual "size," "frequency," or "pattern." 21 C.F.R. § 1301.74(b). Thus, for each of the controlled medications that Masters sold, the Computer Program tracked the number of doses that Masters' customers ordered over the preceding six calendar months. Each customer's highest monthly total would then be treated as the customer's "Controlled Substance Limit." 80 Fed. Reg. at 55,423 n.12 ; see also J.A. 1395-96. If a customer ordered enough doses in any 30-day period to exceed its Controlled Substance Limit, the Computer Program would hold the customer's most recent order for the medication so it could be reviewed by Masters' staff. The Computer Program also held the most recent order placed by a customer if the customer submitted more order forms in a 30-day period than it had in any of the prior six calendar months, or if the timing of the order did not comport with the customer's general ordering pattern over those six months. J.A. 1397.

Once an order was held, Masters' staff would implement the SOMS Protocol, which required Masters' staff to take specified steps to investigate the order and determine whether it was legitimate. The SOMS Protocol required Masters' staff to initiate the investigation by "call[ing] the customer" that placed the...

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