Penick Corp., Inc. v. Drug Enforcement Admin.

• Decision Date: 26 June 2007
• Docket Number: No. 06-1105.,06-1105.
• Citation: 491 F.3d 483
• Parties: PENICK CORPORATION, INC., Petitioner v. DRUG ENFORCEMENT ADMINISTRATION, Respondent. Chattem Chemicals, Inc. and Mallinckrodt, Inc., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

491 F.3d 483

PENICK CORPORATION, INC., Petitioner v. DRUG ENFORCEMENT ADMINISTRATION, Respondent Chattem Chemicals, Inc. and Mallinckrodt, Inc., Intervenors.

No. 06-1105.

United States Court of Appeals, District of Columbia Circuit.

Argued April 17, 2007.

Decided June 26, 2007.

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

Wayne H. Matelski argued the cause for the petitioner. Julia C. Tierney was on brief.

Steven J. Poplawski and Scott M. Badami were on brief for intervenor Mallinckrodt, Inc. in support of the petitioner.

Brian M. Tomney, Attorney, United States Department of Justice, argued the cause for the respondent. Teresa A. Wallbaum, Attorney, was on brief.

Douglas J. Behr was on brief for intervenor Chattem Chemicals, Inc. in support of the respondent.

Before: SENTELLE, HENDERSON and RANDOLPH, Circuit Judges.

Opinion for the court filed by Circuit Judge HENDERSON.

KAREN LeCRAFT HENDERSON, Circuit Judge:

Chattem Chemicals, Inc. (Chattem) applied to the Drug Enforcement Administration (DEA) for registration as an importer of narcotic raw materials (NRMs) pursuant to the Controlled Substances Act, 21 U.S.C. §§ 801 et seq., and the Controlled Substances Import and Export Act, 21 U.S.C. §§ 952 and 958 (collectively referred to as CSA). Penick Corp. (Penick) opposed the application and requested a hearing before the DEA, arguing that Chattem's registration as a NRM importer would increase the danger of NRM diversion to illicit use and thereby undermine the public interest. The Deputy Administrator of the DEA granted the application, concluding that Chattem "met its burden of proof to show that it is in the public interest . . . to grant its application to be registered as an importer of NRMs." Chattem Chems., Inc., 71 Fed.Reg. 9834, 9839 (Feb. 27, 2006). Penick petitions for review of the Deputy Administrator's decision and, as detailed below, we deny the petition.

I.

The CSA requires that the importation of NRMs and the manufacture of their alkaloids—the most prominent of which are morphine and codeine—remain tightly controlled in order to prevent their diversion to illicit use. Accordingly, the CSA prohibits the importation of NRMs into the United States unless the importing company is registered by the DEA, 21 U.S.C. §§ 952(a), 958(a), and importation is limited to "such amounts of [NRMs] . . . as the Attorney General finds to be necessary to provide for medical, scientific, or other legitimate purposes," id. § 952(a)(1).¹ The Attorney General "register[s] an applicant to import or export [NRMs] if he determines that such registration is consistent with the public interest and with United States obligations under international treaties, conventions, or protocols." Id. § 958(a). In determining whether registration is consistent with the public interest, the Attorney General must consider the factors enumerated in section 823(a) of Title 21, see id., which include:

(1) maintenance of effective controls against diversion of particular controlled substances . . . into other than legitimate medical, scientific, research, or industrial channels, by limiting the importation and bulk manufacture of such controlled substances to a number of establishments which can produce an adequate and uninterrupted supply of these substances under adequately competitive conditions for legitimate . . . purposes;

(2) compliance with applicable State and local law;

(3) promotion of technical advances in the art of manufacturing these substances and the development of new substances;

(4) prior conviction record of applicant under Federal and State laws relating to the manufacture, distribution, or dispensing of such substances;

(5) past experience in the manufacture of controlled substances, and the existence in the establishment of effective control against diversion; and

(6) such other factors as may be relevant to and consistent with the public health and safety.

Id. § 823(a). Pursuant to these provisions, on February 9, 2001, Chattem applied to the DEA for registration as an importer of NRMs and bulk manufacturer of their alkaloids.

On December 18, 2001, the DEA approved Chattem's application for registration as a bulk manufacturer. Its concurrent application to import NRMs was opposed, however, by Penick, Noramco of Delaware, Inc. (Noramco) and Mallinckrodt, Inc. (Mallinckrodt), all of which requested a hearing on Chattem's application under 21 C.F.R. § 1301.34(a).² At the time of Chattem's application, Noramco and Mallinckrodt were the only registered importers of NRMs, a group that Penick joined in 2004.³ Because of these potential competitors' opposition, then, the administrative law judge (ALJ) conducted hearings on Chattem's application in September and October 2002 at which all parties—as well as the government—"called witnesses to testify and introduced documentary evidence" relating to the impact on the public interest of Chattem's registration. Chattem Chems., Inc., 71 Fed.Reg. at 9835. The ALJ ultimately recommended that Chattem's application be granted. See id.

On February 17, 2006, the Deputy Administrator heeded that recommendation and decided "to grant [Chattem's] application to be registered as an importer of NRMs." Id. at 9839. The Deputy Administrator, applying 21 U.S.C. § 958(a), first determined that Chattem's registration would not violate any international obligations of the United States because the registration "would not likely cause significant increased diversion" and thus it was not "`essential' to deny Chattem's application" in order to prevent global diversion of NRMs. Id. at 9836. The Deputy Administrator then moved on to consider the public interest factors outlined in 21 U.S.C. § 823(a). Regarding Chattem's potential impact on diversion, the Deputy Administrator recognized that diversion "at the retail level has greatly increased in recent years, and is an extremely serious problem," id. at 9836, but nonetheless concluded that "Chattem ha[d] met its burden of proof in showing that its registration as an importer of NRMs will not significantly interfere with the maintenance of effective controls against diversion," id. at 9838. The Deputy Administrator noted the unchallenged adequacy of Chattem's internal security measures to prevent diversion of narcotics to illicit use, the complete lack of "documented cases of diversion of NRMs imported into the United States," the "DEA['s] continued . . . regist[ration of] bulk manufacturers" during the pendency of Chattem's application and the fact that the DEA already conducts regular inspections of Chattem as a registered bulk manufacturer of alkaloids. Id. at 9836-37. Accordingly, the Deputy Administrator found that the first factor under 21 U.S.C. § 823(a) supported Chattem's registration. See id. at 9838.

The Deputy Administrator further determined that all but one of the remaining public interest factors weighed in favor of registration. She found that "[t]here is no significant evidence that Chattem has failed to comply with applicable State and local law" or violated state or federal narcotics regulations. Id. She also determined that "the evidence showed that Chattem possesses sufficient technology to process NRMs with efficiency" because "Chattem introduced credible evidence . . . that the processing of NRMs is not complicated, and that Chattem has sufficient facilities to carry out the process," facilities already approved by the DEA for bulk manufacture of NRM alkaloids. Id. at 9838-39.⁴ In light of these considerations the Deputy Administrator concluded that "Chattem . . . met its burden of proof to show that it is in the public interest . . . to grant its application to be registered as an importer of NRMs." Id. at 9839. Penick now petitions for review.⁵

II.

The Deputy Administrator's findings of fact are conclusive "if supported by substantial evidence," 21 U.S.C. § 877, viewing "the record in its entirety," Universal Camera Corp. v. NLRB, 340 U.S. 474, 488, 71 S.Ct. 456, 95 L.Ed. 456 (1951). And although the DEA's reasoning, as distinguished from its factfinding, may be set aside if the action is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," Tourus Records, Inc. v. DEA, 259 F.3d 731, 736 (D.C.Cir. 2001) (quoting 5 U.S.C. § 706(2)(A)), that review is narrow and "we will uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned," Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 286, 95 S.Ct. 438, 42 L.Ed.2d 447 (1974). "At a minimum," however, the arbitrary or capricious "standard requires the agency to `examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.'" Tourus Records, 259 F.3d at 736 (quoting Motor Vehicle Mfrs. Ass'n of United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983) (internal quotation omitted)). Our statutory interpretation is governed by the deferential two-step analysis of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). See Noramco of Del., Inc. v. DEA, 375 F.3d 1148, 1152 (D.C.Cir.2004).

Penick raises two primary challenges to the DEA's approval of Chattem's registration application: (1) the DEA misconstrued its obligations under 21 U.S.C. § 823(a)(1) by ignoring "the systemic impact of [Chattem's] registration" on diversion "throughout the chain of distribution," Pet'r's Br. at 12; and (2) the DEA acted arbitrarily and capriciously by "improperly shifting the burden of proof from Chattem to the objectors," id. at 15. We find neither ground meritorious.

A.

Section 823(a)(1) requires the Deputy Administrator to consider "maintenance of effective controls against diversion of particular controlled substances . . . into...