United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 10, 2007 Decided December 11, 2007

No. 06-1156

WEDGEWOOD VILLAGE PHARMACY,

PETITIONER

v.

DRUG ENFORCEMENT ADMINISTRATION,

RESPONDENT

Consolidated with

06-1196

On Petitions for Review of Orders of the

United States Drug Enforcement Agency

Derek L. Shaffer argued the cause for the petitioner.

Michael W. Kirk and Charles J. Cooper were on brief.

Lena D. Watkins, Attorney, United States Department of

Justice, argued the cause for the respondent. Teresa A.

Wallbaum and Stephen A. Sola, Attorneys, United States

Department of Justice, were on brief.

Before: HENDERSON, RANDOLPH and BROWN, Circuit

Judges.

Opinion for the court filed by Circuit Judge HENDERSON.
2

KAREN LECRAFT HENDERSON, Circuit Judge: Wedgewood

Village Pharmacy (Wedgewood) challenges the decision of the

United States Drug Enforcement Administration (DEA) to

revoke its registration as a “practitioner” within the meaning of

21 U.S.C. § 823(f). Before the revocation of its registration,

Wedgewood’s business focused primarily on supplying equine

veterinarians with specially formulated medications. Following

an investigation of Wedgewood’s Sewell, New Jersey facility,

DEA determined that Wedgewood was operating outside the

scope of its registration. Specifically, DEA objected to

Wedgewood’s practice of preparing large amounts of

“compounded” controlled substances and then delivering the

medications to veterinarians and physicians instead of directly

to their patients. DEA viewed these practices as

“manufacturing” and “distributing” controlled substances as

defined by the Comprehensive Drug Abuse Prevention and

Control Act of 1970, Pub. L. No. 91-513, 84 Stat. 1236 (codified

as amended at 21 U.S.C. § 801 et seq.) (CSA or Act). Under

Wedgewood’s DEA registration as a “practitioner,” however, it

is authorized only to “compound” and “dispense” controlled

substances. For the reasons that follow, we vacate the

revocation of Wedgewood’s registration and remand to the

agency for further proceedings.

I.

A. Statutory/Regulatory Background

The Congress enacted the CSA in 1970 to reduce drug abuse

by preventing the diversion of controlled substances. See

Gonzales v. Oregon, 546 U.S. 243, 250 (2006) (discussing

legislative history of CSA). A central feature of the CSA is its

“closed system” of distribution in which all persons in the

“legitimate distribution chain” of controlled substances must
3

1

The CSA requires manufacturers, distributors and dispensers to

register with the Attorney General, 21 U.S.C. § 822(b); the Attorney

General, in turn, has delegated the registration authority to DEA. See

28 C.F.R. § 0.100(b).

register with DEA.1 H.R. Rep. No. 91-1444 (1970), as reprinted

in 1970 U.S.C.C.A.N. 4566, 4572. In its closed distribution

system, the CSA created three categories of registrants:

“manufacturer,” “distributor” and “practitioner”—each with

distinct requirements for registration. See 21 U.S.C. § 823(a)

(criteria for “manufacturer” registration), 823(b) (criteria for

“distributor” registration), 823(f) (criteria for “practitioner”

registration). A “manufacturer” is authorized to engage in “[t]he

production, preparation, propagation, compounding, or

processing of a drug.” Id. § 802(15) (emphasis added). A

“distributor” is authorized to “deliver (other than by

administering or dispensing) a controlled substance.” Id.

§ 802(11) (emphasis added). The CSA describes a

“practitioner” as a “physician, dentist, veterinarian, . . . [or]

pharmacy” registered to “distribute, dispense, . . . [or] administer

. . . a controlled substance in the course of professional

practice.” Id. § 802(21) (emphasis added). The CSA explains

that “dispens[ing],” as used in the definition of “practitioner,” is

the “deliver[y of] a controlled substance to an ultimate user . . . ,

including . . . compounding necessary to prepare the substance

for such delivery.” Id. § 802(10) (emphases added). “Delivery”

includes “the actual, constructive, or attempted transfer of a

controlled substance.” Id. § 802(8) (emphasis added). In

addition, the CSA specifies that “the preparation [or]

compounding . . . of a drug . . . by a practitioner as an incident

to his administration or dispensing of [the] drug” does not
4

2

DEA regulations governing each category of registrant vary

accordingly. For example, a manufacturer has strict storage and

security requirements. Compare 21 C.F.R. § 1301.72 (storage and

security requirements for “non-practitioner”) with 21 C.F.R. § 1301.75

(security requirements for practitioner). Similarly, both a

manufacturer and a distributor have more stringent record-keeping

requirements than a practitioner, compare id. § 1304.22(a) (recordkeeping requirements for manufacturer), and id. § 1304.22(b) (recordkeeping requirements for distributor) with id. § 1304.22(c) (recordkeeping requirements for “dispenser,” i.e., practitioner), and must

renew their registrations more often. Compare 21 U.S.C. § 822(a)(1)

(annual registration for manufacturer and distributor) with 21 U.S.C.

§ 822(a)(2) (registration for practitioner every one to three years).

constitute “manufacturing.”2 Id. § 802(15) (emphases added).

The CSA does not define “compounding.”

The scope of the terms “manufacture,” “compound,”

“distribute” and “dispense” as used in the CSA remains

unsettled. Beginning in the 1990s, the United States Food and

Drug Administration (FDA), along with other government

agencies, grew concerned that some pharmacies were using their

compounding authorization under 21 U.S.C. § 801(10) and (21)

to, in effect, manufacture controlled substances without FDA

approval. In response to their concern, the Congress enacted

the Food and Drug Administration Modernization Act of 1997

(FDAMA), Pub. L. No. 105-115, 111 Stat. 2296. According to

the legislative history of the FDAMA, its “intent [was] to ensure

continued availability of compounded drug products as a

component of individualized therapy, while limiting the scope

of compounding so as to prevent manufacturing under the guise

of compounding.” H.R. Conf. Rep. No. 105-399, at 94, as

reprinted in 1997 U.S.C.C.A.N. 2880, 2884.

The FDAMA contained a definition of “compounding” that

required a prescription therefor to be unsolicited by a retail

pharmacy and prohibited the pharmacy from advertising the
5

3

In Thompson, the Court described “compounding” as “a process

by which a pharmacist or doctor combines,mixes, or altersingredients

to create a medication tailored to the needs of an individual patient.

Compounding is typically used to prepare medications that are not

commercially available.” Thompson, 535 U.S. at 361.

compounding of a particular drug. Pub. L. No. 105-115 § 127

(codified at 21 U.S.C. § 353a(a), (c)). Several pharmacies with

large compounding practices, including Wedgewood, challenged

these provisions as violative of the First Amendment. See

Thompson v. W. States Med. Ctr., 535 U.S. 357, 360 (2002).

The Supreme Court agreed, holding that the FDAMA

improperly restricted solicitation and advertising, both

legitimate forms of commercial speech. Id. Accordingly, its

holding invalidating the language left DEA—and

pharmacies—without a statutory definition of compounding.3

B. Agency Proceedings Against Wedgewood

In early 2003, DEA began investigating Wedgewood after

receiving reports that Wedgewood was ordering controlled

substances in unusually large quantities. See In re Wedgewood

Vill. Pharmacy, Docket No. 04-08, at 4–5 (Mar. 4, 2005) (JA

935–36) (ALJ Dec.) (describing reports). DEA obtained an

administrative inspection warrant to search Wedgewood’s

Sewell, New Jersey facility. DEA executed the warrant between

March 12–14, 2003 and collected evidence that it believed

demonstrated that Wedgewood was both “manufacturing” and

“distributing” controlled substances. See Order to Show Cause

1–5 (JA 67–71) (describing evidence). For example, according

to DEA and FDA investigators, Wedgewood had “large

quantities of bulk drug substances to manufacture large

quantities of unapproved drug products” as well as large scale

equipment, neither of which, they concluded, was “consistent
6

4

For example, the investigation revealed that Wedgewood

received 131 kilograms of phenylpropanolamine (PPA) between

November 27, 2000 and October 29, 2002. See Report of

Investigation 13 (JA 768). DEA claimed that during this time

Wedgewood manufactured over 750,000 PPA tablets. Order to Show

Cause 3 (JA 69). PPA is often diverted to the illicit manufacture of

amphetamines. Id. According to DEA, “true compounding

pharmacies . . . received PPA in minimal quantities.” Id; see also ALJ

Dec. 37 (JA 968) (explaining that typical retail pharmacy is expected

to handle between 25 and 1,000 grams of PPA during same time

period). DEA charged that Wedgewood’s handling this volume of

PPA violated 21 C.F.R. § 1310.04 and other regulations. See Order

to Show Cause 3 (JA 69) (citing, e.g., 21 C.F.R. § 1310.04 (imposing

stricter record-keeping requirements on registrant with sales of more

than 2.5 kilograms of PPA per month)).

5

Wedgewood’s Log of Scripts referred to all entries as

“prescriptions” even though those listing the “doctor” and the

“patient” as the same person did not comply with DEA regulations

governing prescriptions. See 21 C.F.R. § 1306.05(a) (“All

prescriptions for controlled substances . . . shall bear the full name and

address of the patient, the drug name, strength, dosage form, quantity

prescribed, directions for use and the name, address and registration

number of the practitioner.”).

with traditional retail pharmacy activities.”4 Report of

Investigation 2, 7 (JA 757, 762). The inspectors also examined

Wedgewood’s “Log of Scripts.” The Log, which contained a

record of all controlled substances sold by Wedgewood between

January 1, 2002 and December 31, 2002, indicated that

Wedgewood routinely delivered controlled substances to another

practitioner rather than directly to the ultimate user, using

“prescriptions” that listed the same person as both prescribing

“doctor” and “patient.”5 See Log of Scripts (JA 349–446); see

also Wedgewood Vill. Pharmacy; Revocation of Registration,

71 Fed. Reg. 16,593, 16,594 (DEA Apr. 3, 2006) (JA 976)

(“Over 95% of [Wedgewood’s] sales were to physicians or
7

6

21 U.S.C. § 824(a)(4) authorizes DEA to revoke a registration if

the registrant “has committed such acts as would render his

registration . . . inconsistent with the public interest.”

veterinarians documented by what the pharmacy called

prescriptions which contained the name of the physician or

veterinarian as the patient.”). Under DEA’s reading of the CSA,

a retail pharmacy may dispense controlled substances only to the

ultimate user and not to another practitioner. See id. at 16,596

(JA 979); see also 21 U.S.C. § 802(10) (“[D]ispense means to

deliver a controlled substance to an ultimate user . . . .”); id.

§ 802(27) (“[U]ltimate user means a person who has lawfully

obtained . . . a controlled substance for his own use . . . or for an

animal owned by him . . . .”).

Following the inspection, DEA informed Wedgewood by

letter that Wedgewood was “not configured as a typical retail

pharmacy, but [rather] as a drug manufacturing and distribution

facility,” and that Wedgewood was “operating in a manner . . .

outside the scope of [its] registration as a [practitioner].” DEA

Letter, Aug. 21, 2003, at 1 (JA 79). DEA ordered Wedgewood

to “immediately cease and desist manufacturing and distributing

activities outside the scope of its registration” or risk revocation

of its registration pursuant to 21 U.S.C. § 824.6

 Id. Despite the

cease and desist order, Wedgewood continued to compound

controlled substances for approximately two months as

Wedgewood challenged DEA’s decision. Wedgewood Vill.

Pharmacy, 71 Fed. Reg. at 16,594 (JA 975). It eventually

ceased operation after it moved to a new facility in Swedesboro,

New Jersey and DEA declined to allow it to modify its

registration to reflect its new address pursuant to 21 C.F.R.

§ 1301.51. See ALJ Hr’g Tr. 35–41 (JA 12–18) (discussing

Wedgewood’s inability to handle controlled substances
8

7

Wedgewood unsuccessfully sought a temporary restraining order

and a preliminary injunction to require DEA to approve the

modification. Wedgewood Vill. Pharmacy, Inc. v. Ashcroft, 293 F.

Supp. 2d 462, 477 (D. N.J. 2003).

following DEA’s denial of Wedgewood’s requested

modification). Id.7

On September 8, 2003, DEA began proceedings to revoke

Wedgewood’s registration as a retail pharmacy by issuing an

order to show cause (Order). See Order to Show Cause 1 (JA

67). The Order charged, inter alia, that Wedgewood was

“manufacturing” controlled substances in violation of

Wedgewood’s registration as a “retail pharmacy.” See id. at 1–2

(JA 67–68). The Order explained that “[a]ll compounding of

drugs must be patient specific, and dispensed only by the

compounder to that patient identified in the order.” Id. at 1

(emphasis added). By “compounding” multi-dosage batches of

controlled substances pursuant to orders which did not identify

a specific patient, Wedgewood exceeded its registration. See id.

at 4 (JA 70) (noting most of Wedgewood’s sales were made

pursuant to orders listing prescribing veterinarian or physician

as patient). The Order also explained that “[a] drug compound

prepared . . . for distribution to practitioners . . . is considered to

be a manufacturing activity under . . . the Controlled Substances

Act.” Id. at 1 (JA 67). Because Wedgewood delivered

controlled substances to other practitioners (i.e., veterinarians

and physicians), the controlled substances were “manufactured”

and not “compounded.” See id. at 4 (JA 70) (noting that

Wedgewood routinely distributed “office stock” to other

practitioners). Accordingly, DEA informed Wedgewood that it

intended to revoke Wedgewood’s registration if Wedgewood did

not request a hearing within thirty days. See id. at 1, 6 (JA 67,

72).
9

8

The five factors are:

(1) The recommendation of the appropriate State

licensing board or professional disciplinary authority.

(2) The applicant’s experience in dispensing, or

conducting research with respect to controlled

substances.

(3) The applicant’s conviction record under Federal

or State laws relating to the manufacture, distribution,

or dispensing of controlled substances.

(4) Compliance with applicable State, Federal, or

local laws relating to controlled substances.

(5) Such other conduct which may threaten the public

health and safety.

21 U.S.C. § 823(f).

9

The ALJ acknowledged that factors (1) and (3) did not support

revocation. See ALJ Dec. 25–26, 30 (JA 956–57, 961).

Wedgewood timely requested a hearing which was held

before a DEA Administrative Law Judge (ALJ) on January

26–28, 2004. Approximately one year after the hearing, the ALJ

issued her decision, concluding that Wedgewood had

“manufactured and distributed controlled substances . . . without

a valid DEA registration authorizing such activities.” ALJ Dec.

39 (JA 970). The ALJ further determined that Wedgewood’s

continued registration “would not be in the public’s interest.”

Id. As a framework for her analysis, the ALJ used the fivefactor “public interest” test set forth in 21 U.S.C. § 823(f). Id.

at 24–25 (JA 955–56).8 She determined that three of the five

factors weighed in favor of revoking Wedgewood’s

registration.9

First, regarding factor two—Wedgewood’s experience

dispensing controlled substances—the ALJ found that
10

10A physician or a veterinarian who uses a prescription to obtain

controlled substances “for the purpose of general dispensing . . . to . . .

patients” violates DEA regulations. See 21 C.F.R. § 1307.11(a)

(2005); see also DEA Pharmacist’s Manual 41 (JA 250) (use of “a

prescription written for office stock or ‘medical bag’ use” is

prohibited). 

Wedgewood had violated two DEA regulations. Under 21

C.F.R. § 1306.04(b), “[a] prescription may not be issued in order

for [an] individual practitioner to obtain controlled substances

for supplying the individual practitioner [i.e., a veterinarian or

physician] for the purpose of general dispensing to patients.”

The ALJ noted the testimony of Wedgewood’s owner, George

Malmberg, before the New Jersey Pharmacy Board, to the effect

that the majority of the controlled substances dispensed by

Wedgewood “ ‘would be used by physicians and veterinarians

for office use in their practice, rather than by an individual

patient seeking medications . . . for [his] own ingestion.’ ”10 Id.

at 21 (JA 952). The ALJ also focused on the so-called “5%

Rule.” Id. at 28–29 (JA 959–60). Under 21 C.F.R. § 1307.11,

a practitioner “may dispense controlled substances to another

registered entity, provided the total number of dosage units thus

dispensed does not exceed 5% of the total number of controlled

substances dispensed by that registrant [during the calendar

year].” ALJ Dec. 28 (JA 959) (citing 21 C.F.R. § 1307.11(a)(4)).

Relying on the entries in Wedgewood’s Log of Scripts, the ALJ

determined that during the calendar year 2002, Wedgewood

“dispensed 7,445 prescriptions which accounted for a total of

1,083,154 dosage units of controlled substances. Of this number

1,017,392 dosage units were distributed pursuant to

prescriptions written by a physician, with the named patient also

being the physician.” ALJ Dec. 29 (JA 960). Based on the Log,

the ALJ concluded that Wedgewood had plainly violated the 5%

Rule. Id. at 29 (JA 960).
11

Regarding factor four—compliance with state and federal

law—the ALJ considered, inter alia, whether Wedgewood was

“manufacturing” or “compounding” controlled substances. The

ALJ noted that, although the CSA defines “manufacturing,” it

does not define “compounding.” Id. at 31 (JA 962).

Consequently, the ALJ “look[ed] to” the FDA’s regulations for

guidance in defining “compounding.” Id. According to FDA

guidelines, “compounding” is the preparation of “a customized

medication for an individual patient in response to a licensed

practitioner’s prescription.” Id. (quoting FDA’s Compliance

Policy Guide) (emphases added). The ALJ concluded that

Wedgewood was routinely filling orders for veterinary

medicines in bulk rather than “pursuant to a prescription from a

licensed physician for a specifically identified patient’s use” and

therefore Wedgewood was manufacturing, not compounding,

controlled substances. Id. at 32 (JA 963).

Finally, with regard to factor five—other conduct that may

threaten the public health and safety—the ALJ noted that

Wedgewood “did not keep records of regulated transactions,” it

“had overages and shortages” of controlled substances, it had

been “untruthful” during the DEA investigation and that it had

“challenged the DEA’s authority to regulate [its] activities.” Id.

at 37–38 (JA 968–69). The ALJ concluded that “the

Government ha[d] clearly met its burden of proof” and

recommended revocation of Wedgewood’s registration as a

practitioner. Id. at 39 (JA 970).

On April 3, 2006, over one year after the ALJ’s decision,

DEA’s Deputy Administrator (DA) issued the agency’s final

decision, which adopted in full the ALJ’s findings and

recommendations. Wedgewood Vill. Pharmacy, 71 Fed. Reg.

at 16,593 (JA 975). The DA’s decision characterized the central

issue as whether Wedgewood “was compounding as an adjunct

to dispensing controlled substances in the course of retail

pharmacy practice or manufacturing and distributing controlled
12

substances as those terms are defined in the Controlled

Substances Act.” Id. at 16,594–95 (JA 976–77). The DA

concluded that Wedgewood’s actions constituted

“manufacturing” and “distributing” for two reasons. First,

Wedgewood’s practice of “not preparing or compounding

medications . . . on an individualized patient basis” was

inconsistent with the traditional view of “compounding.” Id. at

16,955 (JA 978). Using the Supreme Court’s description of

“compounding” in Thompson v. Western States MedicalCenter,

see supra note 3, the DA explained that

to be exempt from the definition of manufacturer

under the CSA a DEA practitioner registrant

must be engaged in compounding controlled

substances on an individual patient basis. That

is, a pharmacy must receive a prescription for a

specific patient from a physician or other

individual practitioner . . . . Since the evidence

in this case clearly demonstrates that

[Wedgewood] is not preparing or compounding

medications containing controlled substances on

an individualized patient basis, [Wedgewood’s]

activities constitute manufacturing under the

CSA and it must be registered as a manufacturer

to conduct such activity.

Id. (emphases added). Second, the DA reasoned that under the

CSA definition of “dispensing,” a practitioner may deliver

controlled substances only to an “ultimate user.” Because “[a]

physician or [a veterinarian] who receives controlled

substances . . . is not the ultimate user, but another DEA

practitioner registrant,” Wedgewood’s practice of delivering

controlled substances to other practitioners for the latter’s

administering to their respective patients constituted

“distribution” and not “dispensing.” Id. Accordingly, the DA
13

11In revoking Wedgewood’s registration, the DA specifically

referenced Wedgewood’s decision to continue operations “even when

advised by the agency in writing that its activities were in violation of

the [CSA].” Wedgewood Vill. Pharmacy, 71 Fed. Reg. at 16,597 (JA

980). The DA’s annoyance with Wedgewood’s decision to challenge

DEA’s interpretation of the CSA rings throughout the decision. See

id. at 16,596 (JA 978–980) (Wedgewood “appears to dispute [DEA’s]

reading of the CSA and has refused to comply with the August 21,

2003, letter from DEA advising that it is in violation of the statute.”);

id. (Wedgewood “has been on notice by both the FDA and DEA that

their [sic] activities were manufacturing and distribution, but has

chosen to contest the position of the agencies.”).

adopted the ALJ’s recommendation to revoke Wedgewood’s

registration.11

Wedgewood timely petitioned for reconsideration. Recons.

Letter, Apr. 18, 2006, at 1 (JA 989). In its request, Wedgewood

advanced the new argument that “standard procedures for

veterinary medicine practice (which is approximately 95% of

Wedgewood’s controlled substance sales) are different than the

protocol for human health care.” Id. Wedgewood explained

that “[u]nlike human health care physicians, equine veterinarians

usually do not treat animals on an individual basis.” Id. at 3 (JA

991). Instead, “[v]eterinarians, particularly those with an equine

practice, travel to their patients, examine and diagnose them, and

administer the appropriate medicines on site, a procedure that

requires them to have a variety of medicines at their immediate

disposal.” Id. According to Wedgewood, DEA’s interpretation

of dispensing threatened to “severely handicap[]” the practice of

equine veterinary medicine by making it difficult for a

veterinarian to administer controlled substances to horses at the

stables. Id. at 2 (JA 990). Furthermore, the requirement that a

“practitioner” must dispense controlled substances directly to

the “ultimate user” (i.e., the animal’s owner) runs counter to the

goal of the CSA because “it is a considerably more secure
14

12In its request for reconsideration Wedgewood also argued that

DEA’s interpretation of the CSA was inconsistent with the Supreme

Court’s holding in Gonzales v. Oregon, 546 U.S. 243 (2006). In

Gonzales the Court considered a challenge to the Attorney General’s

interpretation of the CSA to prohibit the use of controlled substances

in physician-assisted suicide—a practice legal in Oregon under the

Oregon Death With Dignity Act. Id. at 249. The Court held that the

Attorney General’s reliance on the CSA was mistaken because the

CSA “manifests no intent to regulate the practice of medicine

generally.” Id. at 270. The DA distinguished Gonzales, concluding

that “DEA registration of Wedgewood Pharmacy does not involve the

regulation of the practice of medicine, veterinary or otherwise, but the

regulation of the manufacture, distribution and dispensing of

controlled substances. These matters are clearly within the purview

of the DEA and do not require deference to state law.” Recons. Letter

Jun. 7, 2006, at 2 (JA 995).

procedure and provides better protection against drug diversion

for a licensed veterinarian to possess and be responsible for the

controlled substances rather than to send medications for each

animal to the farm or stable where any worker has access to

them.”12 Id. at 3 (JA 991).

On June 7, 2006 the DA denied Wedgewood’s request for

reconsideration, giving two reasons therefor. Recons. Letter

Jun. 7, 2006, at 1 (JA 994). The DA first noted that section

802(21) of the CSA makes no distinction among physicians,

veterinarians, dentists and researchers as practitioners. Id.

Second, the DA concluded that, in any event, a veterinary

exception was unnecessary because “the law and regulations

provide an adequate mechanism for any practitioner, including

a veterinarian, to obtain controlled substancesfor general office

use . . . [e.g.] obtaining controlled substances to be dispensed to

a herd or a large group of animals as opposed to a specific

animal.” Id. A practitioner, “including a veterinarian, may
15

obtain controlled substances for general dispensing from any

properly registered manufacturer, distributor or pharmacy

[subject to the 5% Rule].” Id. Therefore, the DA concluded, no

exception was necessary to accommodate the needs of

veterinary practice.

Wedgewood timely petitioned this court for review of the

DA’s revocation decision (06-1156) as well as the denial of

Wedgewood’s petition for reconsideration (06-1196). We

consolidated the two petitions for briefing and argument. Order

Granting Mot. to Consolidate, June 13, 2006.

II.

We review the DA’s decisions, insofar as they interpret

statutes, under the standard articulated by the Supreme Court in

Chevron U.S.A.Inc. v.NaturalResources Defense Council, Inc.,

467 U.S. 837 (1984). Under Chevron, we do not set aside an

agency’s statutory interpretation unless the interpretation is

“arbitrary, capricious, or manifestly contrary to the statute.” Id.

at 844. “ ‘[A]n agency [decision is] arbitrary and capricious if

the agency . . . entirely failed to consider an important aspect of

the problem, offered an explanation for its decision that runs

counter to the evidence before the agency, or is so implausible

that it could not be ascribed to a difference in view or the

product of agency expertise.’ ” Morall v. DEA, 412 F.3d 165,

177 (D.C. Cir. 2005) (interpreting Administrative Procedure

Act, 5 U.S.C. § 706(2)(A) and quoting Motor Vehicle Mfrs.

Ass’n of the United States, Inc. v. State Farm Mut. Auto. Ins.

Co., 463 U.S. 29, 43 (1983)) (alterations in original). Having

reviewed the DA’s decisions, we cannot help but conclude that

the DA’s decision “entirely failed to consider an important

aspect of the problem” before her. Id.

Wedgewood argues before us, as it did during the

administrative proceedings, that the CSA does not limit

dispensing to a “direct” transfer of controlled substances to a
16

patient. Rather, Wedgewood argues, the CSA permits a

pharmacy to “constructively” dispense controlled substances to

a patient by delivering the controlled substances to an

intermediary such as a veterinarian. Wedgewood relies on the

express language of section 802 of the CSA. As noted earlier,

the CSA authorizes a practitioner like Wedgewood to

“distribute, dispense [or] administer . . . a controlled substance

in the course of professional practice.” 21 U.S.C. § 802(21)

(emphasis added). The CSA defines “dispensing” as the

“deliver[y of] a controlled substance to an ultimate user . . .

including . . . [any] compounding necessary to prepare the

substance for such delivery.” Id. § 802(10) (emphases added).

And “delivery” expressly includes “the actual, constructive, or

attempted transfer of a controlled substance.” Id. § 802(8)

(emphasis added).

According to Wedgewood, “constructive” in the definition

of “delivery” is critical. By allowing a “constructive” transfer,

the CSA recognizes that a pharmacy is not limited to dispensing

controlled substances directly to the ultimate user. Instead,

Wedgewood argues, dispensing controlled substances to a

veterinarian for later administration to his animal patients is a

“paradigmatic” example of a constructive transfer. See

Petitioner’s Reply Br. 5. Therefore, Wedgewood argues, DEA’s

conclusion that Wedgewood distributed controlled substances

because Wedgewood did not deliver them “ ‘directly to specific

patients’ ” is incorrect because DEA failed to consider delivery

by “constructive” transfer. See Petitioner’s Br. 32 (quoting

Recons. Letter Jun. 7, 2006, at 2 (JA 995)) (emphasis in

original).

Although neither the ALJ nor the DA addressed

Wedgewood’s “constructive transfer” argument, DEA now

posits that Wedgewood’s view of “constructive transfer” is too

broad. According to DEA, “constructive” must be defined

narrowly to maintain a meaningful distinction among the three
17

13Of course, its argument comestoo late. “[A] reviewing court, in

dealing with a determination or judgment which an administrative

agency alone is authorized to make, must judge the propriety of such

action solely by the grounds invoked by the agency. If those grounds

are inadequate or improper, the court is powerless to affirm the

administrative action by substituting what it considers to be a more

adequate or proper basis.” SEC v. Chenery Corp., 332 U.S. 194, 196

(1947); see also Owner-Operator Indep. Drivers Ass’n, Inc. v. Fed.

Motor Carrier Safety Admin., 494 F.3d 188, 204 n.4 (D.C. Cir. 2007)

(“[W]e cannot affirm [the agency decision] on the basis of a post-hoc

explanation by agency counsel.”).

classes of registrants recognized by the CSA. Wedgewood’s

interpretation of constructive transfer, DEA claims, would

“eviscerate[] the distinction between a distributor and a

dispenser [by] allow[ing] any practitioner to become a

distributor of controlled substances, under the guise that the

drugs were delivered ‘constructively’ to the ultimate user.”

Respondent’s Br. 30–31.

In addition—and despite its silence during its own

proceedings—DEA now offers its interpretation of this

language.13 According to DEA, a constructive transfer is limited

to circumstances in which no “actual” transfer of controlled

substances takes place. See id. at 31. Specifically, DEA claims

that other courts have

limited [constructive transfers] to situations in

which controlled substances were not actually

delivered, but rather were constructively

delivered by virtue of a person illegally

distributing prescriptions, which in turn could be

used by the recipient to obtain the controlled

drugs from a pharmacy.
18

14United States v. Roya, 574 F.2d 386 (7th Cir. 1978), involved a

physician, Roya, who wrote prescriptions at the request of his

“patients” without asking any questions about the patients’ medical

histories or conducting any type of physical examination. The

government charged the physician with dispensing and attempted

dispensing of a Schedule II controlled substance in violation of 21

U.S.C. §§ 841(a)(1) and 846. Id. at 388–89. Roya argued that he did

not in fact dispense controlled substances. The court rejected this

argument, holding that “ ‘dispens[ing]’includes constructive transfers

which encompass. . . issuing written prescriptionsto patients entitling

them to purchase the substances from a pharmacist.” Id. at 393.

United States v. Tighe, 551 F.2d 18 (3d Cir. 1977), involved a

physician, Tighe, who gave an undercover DEA agent 18 prescriptions

for a Schedule II controlled substance. The government charged

Tighe with violating 21 U.S.C. § 841(a)(1). The court affirmed

Tighe’s conviction, holding that his transfer of invalid prescriptions

constituted “constructive” dispensing. Id. at 20.

Id. at 31–32 (citing United States v. Roya, 574 F.2d 386, 393

(7th Cir. 1978); United States v. Tighe, 551 F.2d 18, 20 (3d Cir.

1977)).14 DEA argues that its interpretation is reasonable

because it maintains a meaningful distinction among the three

categories of DEA registrants. See id. at 30. Nevertheless, the

definition of “constructive transfer” DEA now offers—namely,

the fact that at least one “actual” transfer of controlled

substances to another person or entity (be it a postal carrier,

authorized agent or other intermediary) has occurred necessarily

means there can be no “constructive” transfer—fails for at least

three reasons.

First, DEA’s interpretation does not tally with the ordinary

meaning of “constructive transfer.” Black’s Law Dictionary

defines “constructive transfer” as “[a] delivery of an item—esp.

a controlled substance—by someone other than the owner but at

the owner’s direction.” Black’s Law Dictionary 1503 (7th ed.

1999). Nothing in the definition precludes a “constructive”

transfer simply because an “actual” transfer has taken place.
19

Second, DEA’s view is not supported by the statutory

definition. To repeat, the CSA defines “delivery” as the “actual,

constructive, or attempted transfer of a controlled substance or

a listed chemical, whether or not there exists an agency

relationship.” 21 U.S.C. § 802(8) (emphases added). The

definition of “delivery” includes an “attempted” transfer as a

distinct term, presumably to cover circumstancesin which there

is no “actual” transfer. Moreover, the definition of “delivery”

expressly provides that delivery may, in some circumstances,

occur constructively through an agent. The CSA definition thus

appears to conflict with DEA’s assertion that “dispensing”

includes only the direct transfer of a controlled substance to the

ultimate user.

Finally, DEA’s narrow interpretation of “constructive

transfer” also appears to conflict with at least one of DEA’s

regulations interpreting the CSA. DEA’s regulation defining

“prescription” provides that a prescription is “an order for

medication which is dispensed to or for an ultimate user.” 21

C.F.R. § 1300.01(b)(35) (emphasis added). That a prescription

may be dispensed “for” the ultimate user suggests a definition

of “constructive” transfer broader than DEA set forth in its brief.

At oral argument, DEA retreated from the definition set out

in its brief. When asked to clarify her understanding of the term,

DEA counsel offered a new explanation—one in which an

“actual” transfer does not preclude a “constructive” transfer.

She explained that under the CSA’s constructive transfer

language, “the patient or even the ultimate user does not have to

be the person that actually picks up the prescription, but the

transferrequiresthat the pharmacy identifywho that patient is.”

Recording of 9/10/07 Oral Argument at 30:50 (emphasis added).

DEA counsel’s amended definition of “constructive transfer”

suggests that DEA’s primary concern may not be with the

practice of dispensing controlled substances through an

intermediary but instead with the practice of “compounding”
20

15In itsJanuary 3, 2006 settlement offer, Wedgewood proposed to

“dispense compounded medication pursuant to an individualized

lawful order issued by a licensed practitioner or veterinarian for a

clearly identified patient.” See Wedgewood Letter Jan. 3, 2005, at 2

(JA 982) (emphasis omitted). In her reconsideration denial letter, the

DA made note of the settlement offer but concluded that the matter

was better left to the Department ofJustice lawyersrepresenting DEA

in court. See Recons. Letter June 7, 2006, at 2 (JA 995) (“I have

reviewed your settlement proposal. Because a Notice of Appeal has

been filed, the matter is best left to the Department ofJustice attorneys

who will be representing DEA on the petition for review.”).

medications without an individualized prescription.15 This

statement may accurately reflect the DA’s concerns about

general dispensing. See, e.g., Wedgewood Vill. Pharmacy, 71

Fed. Reg. at 16,595 (“[A] pharmacy must receive a prescription

for a specific patient . . . .”); id. at 16,596 (“[Wedgewood] is

rarely dispensing controlled substances to specific patients . . .,

and, in the majority of cases, has no documentation of the

identity of the patients to whom the controlled substances will

ultimately be dispensed or administered.”). It does not, however,

explain why the DA prohibited practitioners from acting as

intermediaries on behalf of “ultimate user[s].” See, e.g., id. at

16,595 (“Sending controlled substances to another DEA

practitionerfor dispensing is distribution, not dispensing.”). We

note that requiring the identification of a specific patient for

delivery comports with the statutory scheme. See, e.g., 21

C.F.R. § 1306.04(b) (prohibiting using prescriptions “for the

purpose of general dispensing”); 21 C.F.R. § 1306.05 (“All

prescriptions . . . shall bear the full name . . . of the patient . . .

.”); 21 C.F.R. § 1307.11 (permitting practitioners to “distribute

(without being registered to distribute)” 5% oftotal dosage units

“for the purpose of general dispensing”). Moreover, requiring

individualized dispensing maintains the distinction between

“dispens[ing]” and “distribut[ing]” by preserving the “ultimate

user” requirement. See 21 U.S.C. § 802(10); § 802(27). When
21

a pharmacy dispenses controlled substances without identifying

a specific patient, as Wedgewood apparently did here, it is

unclear who the “ultimate user” is. Nonetheless, this

requirement still fails to explain why the DA prohibited any

registrant-to-registrant transfer, even one pursuant to an

individualized prescription.

DEA also ignored an important aspect of Wedgewood’s

practice. In its request for reconsideration, Wedgewood argued

that DEA’s ruling that “ ‘[a] pharmacy must receive a

prescription for a specific patient . . . and must deliver or

dispense that medication to the patient’ ” was “unworkable for

veterinary practice.” Recons. Letter Apr. 19, 2006, at 3 (JA

991) (quoting Wedgewood Vill. Pharmacy, 71 Fed. Reg. at

16,595 (emphasis and ellipsis in original)). Wedgewood

explained that

[v]eterinarians, particularly those with an equine

practice, travel to their patients, examine and

diagnose them, and administer the appropriate

medicines on site, a procedure that requiresthem

to have a variety of medicines at their immediate

disposal. The veterinarian will not know the

name or names of an animal to be treated until

she examines the animal and makes a diagnosis

whether and which treatment is required.

Id. DEA knew from the beginning of its investigation that the

bulk of Wedgewood’s business was with veterinarians. In

addition, it had information before it indicating that animal

medicine operates differently from human medicine. See, e.g.,

ALJ Op. ¶ 59 (JA 948–49) (discussing FDA Compliance Policy

Guide No. 7125.40—Compounding of Drugs for Use in

Animals). DEA did not consider this difference in its original

decision and it failed to address the difference again when it

denied reconsideration. The DA explained that “[t]he CSA itself

makes no distinction between physicians, dentists, researchers,
22

and veterinarians.” Recons. Letter Jun. 7, 2006, at 1 (JA 994).

Furthermore, the DA said that no distinction between veterinary

medicine and human medicine is required because, under the

existing law and regulations, a veterinarian has a means of

obtaining controlled substances to treat animals on-site by

ordering the controlled substances for “general office use”

through a manufacturer or distributor—or a pharmacy pursuant

to the 5% rule. Id.

We believe DEA’s analysis is inadequate. The scope of

activities allowed under “general office use” is unclear from the

DA’s letter. Apparently DEA believes that a veterinarian can

adequately treat animals on-site by ordering controlled

substancesfor “general office use” but it reached that conclusion

without defining what “general office use” encompasses.

Further, it appearsthat the term is not defined anywhere in DEA

regulations. DEA also failed to explain how a veterinarian

would be able to obtain enough compounded medicine for

general office use, using only the 5% a pharmacy can lawfully

provide.

For the foregoing reasons, we vacate DEA’s revocation of

Wedgewood’s registration and remand the case for further

proceedings consistent with this opinion. On remand, DEA

should address the scope of “constructive transfer” as that term

is used in 21 U.S.C. § 802(8). DEA should also clarify its

interpretation of “general office use,” “order” and “prescription”

as used in the CSA, the FDAMA and relevant regulations.

Finally, in reexamining these issues, DEA should explain how
23

16Because of ourremand, we do notreach Wedgewood claimsthat

DEA’s interpretation of relevant CSA provisions intrudes on state

regulation of veterinary medicine, that DEA’s findings are not

supported by substantial evidence and that revocation constitutes

excessive punishment.

the difference, if any, between the practices of human and

veterinary medicine might affect its analysis.16

So ordered.