Pdk Laboratories Inc. v. U.S. D.E.A.

• Decision Date: 26 March 2004
• Docket Number: No. 03-1008.,03-1008.
• Parties: PDK LABORATORIES INC., Petitioner, v. UNITED STATES DRUG ENFORCEMENT ADMINISTRATION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 786

362 F.3d 786

PDK LABORATORIES INC., Petitioner, v. UNITED STATES DRUG ENFORCEMENT ADMINISTRATION, Respondent.

No. 03-1008.

United States Court of Appeals, District of Columbia Circuit.

Argued November 7, 2003.

Decided March 26, 2004.

COPYRIGHT MATERIAL OMITTED

On Petition for Review of an Order of the United States Drug Enforcement Administration.

Saul Pilchen argued the cause for petitioner. With him on the briefs was Joseph L. Barloon.

Mark T. Quinlivan, Senior Trial Counsel, U.S. Department of Justice, argued the cause for respondent. With him on the brief was Roscoe C. Howard, Jr., U.S. Attorney.

Before: RANDOLPH and ROBERTS, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge RANDOLPH.

Opinion concurring in part and concurring in the judgment filed by Circuit Judge ROBERTS.

RANDOLPH, Circuit Judge:

Ephedrine is an active ingredient in over-the-counter medications for the treatment of asthma and nasal congestion. Ephedrine is also used in the illicit production of methamphetamine, a controlled substance. The government regulates ephedrine pursuant to the Controlled Substances Act, as amended by, inter alia, the Chemical Diversion and Trafficking Act of 1988, 21 U.S.C. § 801 et seq. The Act lists 20 chemicals, including ephedrine, used in the illicit production of controlled substances. 21 U.S.C. § 802(34). Companies and individuals wishing to import (or to export, manufacture or distribute) any of these "List I chemicals" must register with the Drug Enforcement Administration. 21 U.S.C. §§ 957(a), 822(a)(1)-(2). The "regulated person" must notify DEA no later than 15 days before bringing a listed chemical into the country. 21 U.S.C. § 971(a). DEA has the authority to forbid importation if "the chemical may be diverted to the clandestine manufacture of a controlled substance." 21 U.S.C. § 971(c)(1). This petition for judicial review challenges DEA's interpretation of "the chemical may be diverted" as it relates to the importation of ephedrine.

I.

PDK Laboratories, at its New York facilities, manufactures over-the-counter pharmaceuticals and vitamins, including pain relievers, decongestants, diet aids and nutritional supplements. Some of its products contain ephedrine in combination with other active ingredients. PDK purchases raw, bulk ephedrine from foreign companies, combines the chemical with other active agents, and produces a finished product in tablet form, packaged in bottles or blister packs, all with DEA's permission. PDK currently sells only to wholesale distributors, not to retailers or consumers, although in the past it had a retail mail order business.

Producers of illicit methamphetamine prefer using pure ephedrine. After the 1988 amendments to the Controlled Substances Act imposed record keeping and other controls on transactions involving pure ephedrine, criminals began substituting "single entity" ephedrine tablets — that is, tablets containing ephedrine as the only active medicinal ingredient — for pure ephedrine. When Congress amended the Act again in 1993 to remove the record keeping exemption for single entity ephedrine tablets, illicit methamphetamine producers switched to pseudoephedrine and combination ephedrine products, such as those PDK and its competitors produce. In order to obtain large quantities of this product, criminals shoplift the tablets from retail stores or, individually and in groups, make multiple purchases of the tablets from different stores — a process known in the drug trade as "smurfing."

PDK has cooperated with DEA in trying to prevent its products from winding up in the hands of methamphetamine producers. It has cut off sales to distributors suspected of selling its drug products in bulk; ended its mail order business; stopped shipping its products to California and Missouri in response to the number of methamphetamine laboratories found in those states; monitored sales to determine if a particular customer has been ordering an extraordinary quantity of its drugs; imposed monthly quotas on its customers; retained a former DEA official to review its compliance program; and altered its packaging to make its over-the-counter drugs less susceptible to illicit uses.

Two of PDK's foreign suppliers of bulk ephedrine are Indace, Inc. and Malladi, Inc., both of which are registered with DEA as importers of chemicals listed in the Act. Indace, in late 2000, and Malladi, in early 2001, notified DEA that they were about to ship ephedrine hydrochloride from India to PDK in New York. Each shipment was to consist of 3000 kilograms of the chemical in powdered form. In both instances DEA issued to the importer an "Order to Suspend Shipment," stating that it acted pursuant to § 971(c)(1) on the basis of information indicating that "the listed chemical may be diverted." By this DEA did not mean that the shipments would be hijacked or otherwise diverted from their intended destination. DEA meant instead that after PDK's finished products reached the shelves of retail stores, someone might buy (or steal) the ephedrine-containing pills and use them to make methamphetamine. In support of its judgment that "the chemical may be diverted," DEA described in the suspension orders four instances in 1994 and 1995 when PDK, by mail order, shipped large quantities of tablets containing ephedrine to individuals, some of whom were later arrested for manufacturing methamphetamine. The suspension orders also stated that PDK had exported its finished products to Canada without notifying DEA 15 days in advance, as the statute and regulations required; and that PDK products containing ephedrine and pseudoephedrine had been found at methamphetamine laboratories and "dumpsites," as reported in "warning letters" DEA sent to PDK. (DEA sometimes notifies manufacturers when their drug products are found at methamphetamine laboratories; these "warning letters" do not assign culpability to the manufacturer.)

PDK litigated the validity of the suspension orders before an Administrative Law Judge. After an evidentiary hearing, the ALJ ruled in PDK's favor, finding that there was no evidence that the shipments of ephedrine from Indace and Malladi might have been diverted to illegal uses. As to PDK's finished products — the pills sold over the counter in retail stores — the ALJ held that these were not "listed chemical[s]" within § 971's meaning even though they contained ephedrine. In the alternative, the ALJ held that DEA had not satisfied the "may be diverted" portion of § 971. The ALJ's reasoning was as follows. PDK is the largest manufacturer of generic List I chemical products sold in convenience stores. In 1998, for instance, PDK distributed approximately 10 million bottles of its combination ephedrine product; in the same year DEA warning letters indicated that 1,061 such bottles — about .01 percent of the total PDK distributed — had been seized at illicit sites. There was no evidence to show whether other manufacturers of ephedrine products had a lower or higher percentage. There was evidence that all ephedrine-containing medications, from whichever manufacturer, "may be diverted" in this manner. Even if retail stores limited a customer's purchases of these drugs, individuals could simply buy the drugs from many different stores or steal them.

On DEA's exceptions to the ALJ's decision, the DEA Deputy Administrator sustained the suspension orders, ruling that § 971(c)(1)'s reference to "the chemical" encompassed not only the chemical to be imported — here ephedrine — but also products manufactured from the chemical. 67 Fed. Reg. 77,805, 77,806 (Dec. 19, 2002). In support of this interpretation, the Deputy Administrator invoked the definition of "regulated transaction" in 21 U.S.C. § 802(39)(A)(iv); the opinion in United States v. Abdul Daas, 198 F.3d 1167, 1175 (9th Cir.1999); and a 1993 House Committee Report. 67 Fed. Reg. at 77,806. In finding that PDK's finished products "may be diverted," the Deputy Administrator recited warning letters given to PDK involving not only its combination ephedrine products but also its pseudoephedrine drugs, and other information contained in the suspension orders, but — agreeing with the ALJ — decided that PDK had not violated reporting requirements with respect to its mail order sales. Id. at 77,808-09.

The Deputy Administrator also relied on PDK's alleged export violations. Id. at 77,809. In 1994 and 1995 PDK sold ephedrine tablets to Sun Labs of Canada without notifying DEA in advance. The Deputy Administrator concluded that PDK thereby violated a regulation (21 C.F.R. § 1313.21) requiring exporters to give DEA notice 15 days in advance of each transaction in which a listed chemical is exported from the United States. Although the ALJ found that PDK had not exported the tablets, that it had sold the tablets and transferred ownership to Sun Labs in New York, and that there was no evidence the tablets were ever delivered to Canada, the Deputy Director ruled that PDK had failed to comply with the regulation because its president believed the tablets would eventually be shipped to Canada. 67 Fed. Reg. at 77,808.

The warning letters plus PDK's export violations led the Deputy Administrator, looking at what he called "the totality of the circumstances," to conclude that the suspension orders should be sustained despite evidence that PDK had made significant efforts to prevent its finished products from being used illegally. Id. at 77,809.

II.

There is no doubt that PDK suffered an injury when the shipments of ephedrine did not arrive; and that its injury could be redressed if we found the DEA orders invalid. While PDK thus has Article III standing to sue, see Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26, 38-39, 96 S.Ct. 1917, 1924-25, 48 L.Ed.2d 450 (1976), DEA argues that the company lacks prudential standing.

In deciding whether a litigant has prudential standing, the court...