[Federal Register Volume 72, Number 43 (Tuesday, March 6, 2007)]
[Notices]
[Pages 9972-9974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-3857]



[[Page 9972]]

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DEPARTMENT OF JUSTICE

Drug Enforcement Administration


MK Distributing, Inc.; Denial of Application

    On May 25, 2005, the Deputy Assistant Administrator, Office of 
Diversion Control, Drug Enforcement Administration, issued an Order to 
Show Cause to MK Distributing (Respondent) of Arvada, Colorado. The 
Show Cause Order proposed to deny Respondent's pending application for 
a DEA Certificate of Registration as a distributor of list I chemicals, 
on the ground that its registration would be inconsistent with the 
public interest. See Show Cause Order at 1 (citing 21 U.S.C. 823(h)).
    More specifically, the Show Cause Order alleged that on November 
18, 2003, Respondent's owner, Frederick H. Gates, had applied for a 
registration to distribute ephedrine and pseudoephedrine, which are 
precursor chemicals used in the illicit manufacture of methamphetamine. 
Id. at 1-2. The Show Cause Order alleged that Respondent's customer 
base ``is comprised primarily of gas stations, convenience stores, and 
independent grocers,'' and that these establishments are ``sources for 
the diversion of listed chemical products.'' Id. at 2.
    The Show Cause Order further alleged that on April 1, 2003, Mr. 
Gates had purchased Respondent and that between that date and October 
2003, Respondent had distributed 18,351 bottles and 3,720 packets of 
combination ephedrine (25 mg) products under the DEA registration of 
its previous owner. Id. at 2-3. The Show Cause Order alleged that Mr. 
Gates' use of the previous owner's registration violated DEA 
regulations that prohibit the assignment or transfer of a registration 
without the written consent of the Administrator. Id. at 3 (citing 21 
CFR 1309.63).
    The Show Cause Order also alleged that between May and October 
2003, Respondent sold 1,056 bottles and 672 packets of ephedrine to the 
Barn Store, a small independent grocer, and that these sales were ``far 
in excess of legitimate demand for these products.'' Id. Relatedly, the 
Show Cause Order alleged that during the same period, Respondent sold 
849 bottles and 312 packets of ephedrine products to a combination gas 
station/convenience store, and that these sales were also ``far in 
excess of legitimate demand for these products.'' Id. The Show Cause 
Order thus concluded by alleging that all of Respondent's customers are 
part of the non-traditional market for list I chemical products, that 
its sale of these products ``is inconsistent with the known legitimate 
market and * * * end-user demand for [these] products,'' and that 
granting its application ``would likely lead to increased diversion of 
list I chemicals.'' Id. at 4.
    On June 6, 2005, the Show Cause Order, which also notified 
Respondent of its right to request a hearing, was served by certified 
mail, return receipt requested, as evidenced by the signed return 
receipt card. Since that time, neither Respondent, nor anyone 
purporting to represent it, has responded. Because (1) more than thirty 
days have passed since service of the Show Cause Order, and (2) no 
request for a hearing has been received, I conclude that Respondent has 
waived its right to a hearing. See 21 CFR 1309.53(c). I therefore enter 
this final order without a hearing based on relevant material contained 
in the investigative file and make the following findings.

Findings

Methamphetamine and the List I Chemical Market

    Both ephedrine (in combination with guaifenesin) and 
pseudoephedrine currently have therapeutic uses and are generally 
available as non-prescription products.\1\ See Tri-County Bait 
Distributors, 71 FR 52160, 521612 (2006). Both chemicals are, however, 
regulated under the Controlled Substances Act because they are easily 
extracted from non-prescription products and used in the illicit 
manufacture of methamphetamine, a schedule II controlled substance. See 
21 U.S.C. 802(34); 21 CFR 1308.12(d).
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    \1\ Combination ephedrine-guaifenesin products are currently 
approved for use as a bronchodilator for the treatment of asthma. 
The FDA is, however, currently proposing to remove these products 
from its over-the-counter (OTC) drug monograph and to declare them 
not safe and effective for OTC use. See 70 FR 40232 (2005).
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    Methamphetamine is a powerful and addictive central nervous system 
stimulant. See Gregg Brothers Wholesale Co., 71 FR 59830 (2006). The 
illegal manufacture and abuse of methamphetamine pose a grave threat to 
this country. Methamphetamine abuse has destroyed numerous lives and 
families and ravaged communities. Moreover, because of the toxic nature 
of the chemicals used to make the drug, its manufacture causes serious 
environment harms.\2\ Id.
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    \2\ According to the investigative file, in 2002, law 
enforcement agencies seized 452 illicit methamphetamine laboratories 
in Colorado.
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    In numerous cases, DEA has shown through expert testimony that only 
a small percentage of pseudoephedrine sales occur at gas stations and 
convenience stores and that these stores constitute a non-traditional 
market for the legitimate commerce in these products. See, e.g., T. 
Young Associates, Inc., 71 FR 60567, 60568 (2006); D & S Sales, 71 FR 
37607, 37608-09 (2006); Branex, Inc., 69 FR 8682, 8690-92 (2004). DEA 
has further established that the monthly expected sales of combination 
ephedrine products by non-traditional retailers such as convenience 
stores and gas stations to meet legitimate demand, i.e., the purchase 
of the products for their medically approved use as a bronchodilator to 
treat asthma, is between $0 and $25, with an average of $12.58. See, 
e.g., T. Young Associates, Inc., 71 FR at 60567 n.2 & 60568 (2006); 
Tri-County Bait Distributors, 71 FR 52160, 52161-62 (2006); D & S 
Sales, 71 FR 37607, 37608-09 (2006). DEA has also shown that a monthly 
retail sale of $60 to meet legitimate consumer demand for ephedrine 
products ``would occur about once in a million times in random 
sampling.'' T. Young, 71 FR at 60568 (int. quotations and citations 
omitted).

Findings Pertinent to Respondent

    Respondent is a Colorado corporation which is located at 6150 W. 
55th Avenue, Arvada, Colorado. On November 18, 2003, Respondent's 
owner, Mr. Frederick H. Gates, submitted an application for a 
registration to distribute the list I chemicals ephedrine and 
pseudoephedrine. Respondent is a wholesaler of pornographic magazines, 
DVDs, videos, toys and novelty items in the Colorado Springs area. 
Respondent's customer base is largely comprised of non-traditional 
retailers of list I chemical products. See, e.g., T. Young Associates, 
Inc., 71 FR at 60568.
    Respondent was previously owned by Mike and Jane Kleppen, who 
incorporated the firm in November 2001; this entity held a DEA 
registration to distribute list I chemicals which was last renewed on 
December 9, 2002. According to the investigative file, on April 1, 
2003, the Kleppens sold the business to either Mr. Gates or another 
firm owned by him. The Kleppens did not, however, surrender MK 
Distributing's DEA registration.
    Between April 1, 2003, and October 8, 2003, Respondent continued to 
distribute large quantities of combination ephedrine products using the 
registration issued to MK Distributing under its previous owners. On 
the latter date, two DEA Diversion Investigators (DIs) went to MK

[[Page 9973]]

Distributing's warehouse and met with Jane Kleppen. The DIs questioned 
Ms. Kleppen as whether the new owners had obtained a DEA registration. 
Ms. Kleppen advised the DIs that on April 1, 2003, MK Distributing had 
been purchased by a firm called ``Pleasures,'' and that the latter firm 
had not applied for a DEA registration because of its inability to 
obtain a tax identification number.
    The DIs informed Ms. Kleppen that the new company was not 
authorized to use the registration. One of the DIs then asked Ms. 
Kleppen to voluntarily surrender the DEA registration; Ms. Kleppen 
agreed and signed a voluntary surrender form. Ms. Kleppen then 
surrendered the list I products that were in Respondent's warehouse.
    Ms. Kleppen told the DIs that the original certificate of 
registration was at her residence and that there were additional list I 
products on Respondent's four delivery vans. Accordingly, the following 
day, the DIs returned to Respondent and obtained the original 
certificate from Ms. Kleppen. Ms. Kleppen then turned over to the DIs 
additional list I products, which were subsequently returned to the 
supplier.
    As stated above, on November 18, 2003, Mr. Gates (Respondent's new 
owner) applied for a registration. On July 1, 2004, the same two DIs 
returned to Respondent's warehouse to conduct a pre-registration 
investigation. During this visit, Mr. Gates told the DIs that he 
expected that list I products would be approximately ten percent of 
Respondent's total sales. When asked what ephedrine was used for, Mr. 
Gates told the DIs that it was used by truck drivers to stay alert, for 
weight loss, and methamphetamine.
    As part of the application process, Respondent was required to 
complete a questionnaire. On this questionnaire, Mr. Gates stated that 
``[t]he new owners of MK Distributing, LLC[,] have sold 18,351 bottles 
of Ephedrine 25 mg, and 3,720 packets of ephedrine 25 mg before DEA 
investigators * * * pulled'' the registration. Mr. Gates also provided 
a list of the monthly purchases of list I products by Respondent's 
customers from May through October 2003.
    A representative sampling of this information shows that Respondent 
was selling massive amounts of combination ephedrine products to its 
gas station/convenience store customers.\3\ Between May and September, 
Respondent sold 720 bottles (for a monthly average of 144) to the Kwik-
Way Dublin, 960 bottles (for a monthly average of 192) to the Corner 
Store, and 654 bottles (for a monthly average of 130.8) to Lil T Foods. 
During the same period, Respondent sold 1147 bottles (for a monthly 
average of 229.4) to the Broken Wheel, 1200 bottles (for a monthly 
average of 240) to PHA, and 692 bottles (for a monthly average of 
138.40) to Centron. Finally, Respondent sold 828 bottles (for a monthly 
average of 165.60) to R & S, 768 bottles (for a monthly average of 
153.6) to the South Circle Station, and 993 bottles (for a monthly 
average of 198.6) to the Conoco Union gas station.
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    \3\ All of the data used in the sampling were for sixty-count 
bottles. Respondent also sold ephedrine packets to several of these 
entities.
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    According to the investigative file, the DIs were told by an 
employee at one store that the retail price of the sixty-count bottles 
was $7.99. This figure is consistent with other information that DEA 
has obtained during investigations in Colorado. See Wild West 
Wholesale, 72 FR 4042, 4043 (2007) (finding that retail price was $5.99 
for 48-count combination ephedrine product).
    At an average retail price of $7.99 per bottle, the monthly average 
sales of the above stores were: Kwik-Way Dublin, $1151; Corner Store, 
$1534; LiL T Foods, $1045; Broken Wheel, $1833; PHA, $1918; Centron, 
$1106; R & S, $1323; South Circle, $1227; and Conoco Union, $1587.\4\ 
The average monthly sale for all of these stores was $1414. As 
explained above, through expert testimony, DEA has established that the 
monthly expected sales range of combination ephedrine products at a 
non-traditional retailer to meet legitimate consumer demand is between 
$0 and $25, with an average of $12.58; a monthly retail sale of $60 to 
meet legitimate consumer demand at a non-traditional retailer would 
occur about once in a million times in random sampling.
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    \4\ These figures were either rounded up or down to the nearest 
dollar.
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    Because these sales so greatly exceed the monthly expected sales 
range to meet legitimate demand, I further find that most of 
Respondent's products were diverted into the illicit manufacture of 
methamphetamine. Moreover, even if these stores sold Respondent's 
products at a lower retail price (such as the price found in Wild West 
Wholesale for a smaller quantity), I would still find that Respondent's 
sales were so excessive that its products were diverted.

Discussion

    Under 21 U.S.C. 823(h), an applicant to distribute list I chemicals 
is entitled to be registered unless the registration would be 
``inconsistent with the public interest.'' In making this 
determination, Congress directed that I consider the following factors:
    (1) Maintenance by the applicant of effective controls against 
diversion of listed chemicals into other than legitimate channels;
    (2) Compliance by the applicant with applicable Federal, State, and 
local law;
    (3) Any prior conviction record of the applicant under Federal or 
State laws relating to controlled substances or to chemicals controlled 
under Federal or State law;
    (4) Any past experience of the applicant in the manufacture and 
distribution of chemicals; and
    (5) Such other factors as are relevant to and consistent with the 
public health and safety.

Id.
    ``These factors are considered in the disjunctive.'' Joy's Ideas, 
70 FR 33195, 33197 (2005). I may rely on any one or a combination of 
factors, and may give each factor the weight I deem appropriate in 
determining whether an application for registration should be denied. 
See, e.g., David M. Starr, 71 FR 39367 (2006); Energy Outlet, 64 FR 
14269 (1999). Moreover, I am ``not required to make findings as to all 
of the factors.'' Hoxie v. DEA, 419 F.3d 477, 482 (6th Cir. 2005); 
Morall v. DEA, 412 F.3d 165, 173-74 (D.C. Cir. 2005).
    In this case, I conclude that an analysis of factors one, two, and 
three is not necessary. I hold that factors four (Respondent's 
experience) and five (Respondent's intent to distribute to the non-
traditional market) conclusively establish that granting Respondent's 
application would be inconsistent with the public interest.

Factors Four and Five--The Registrant's Past Experience in the 
Distribution of Chemicals and Other Factors Relevant To and Consistent 
With Public Health and Safety

    As found above, the illicit manufacture and abuse of 
methamphetamine have had pernicious effects on families and communities 
throughout the nation. Cutting off the supply source of methamphetamine 
traffickers is of critical importance in protecting the public from the 
devastation wreaked by this drug.
    While combination ephedrine products have a legitimate medical use 
as a bronchodilator to treat asthma, DEA orders have established that 
convenience stores and gas-stations constitute the non-traditional 
retail market for legitimate consumers of products containing 
ephedrine. See, e.g., Tri-County Bait Distributors, 71 FR

[[Page 9974]]

at 52161; D & S Sales, 71 FR at 37609; Branex, Inc., 69 FR at 8690-92. 
DEA has further found that there is a substantial risk of diversion of 
list I chemicals into the illicit manufacture of methamphetamine when 
these products are sold by non-traditional retailers. See, e.g., Joy's 
Ideas, 70 FR at 33199 (finding that the risk of diversion was ``real'' 
and ``substantial''); Jay Enterprises, Inc., 70 FR 24620, 24621 (2005) 
(noting ``heightened risk of diversion'' should application be 
granted).
    DEA orders thus recognize that the sale of combination ephedrine 
(and pseudoephedrine) products by non-traditional retailers is an area 
of particular concern in preventing diversion of these products into 
the illicit manufacture of methamphetamine. See, e.g., Joey 
Enterprises, Inc., 70 FR 76866, 76867 (2005). As Joey Enterprises 
explains, ``[w]hile there are no specific prohibitions under the 
Controlled Substances Act regarding the sale of listed chemical 
products to [gas stations and convenience stores], DEA has nevertheless 
found that [these entities] constitute sources for the diversion of 
listed chemical products.'' Id. See also TNT Distributors, 70 FR 12729, 
12730 (2005) (special agent testified that ``80 to 90 percent of 
ephedrine and pseudoephedrine being used [in Tennessee] to manufacture 
methamphetamine was being obtained from convenience stores'').\5\ Here, 
nearly all of Respondent's customers are convenience stores and gas 
stations, which are non-traditional retailers of list I chemical 
products; DEA has repeatedly found that these entities are conduits for 
the diversion of list I products into the illicit manufacture of 
methamphetamine.
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    \5\ See OTC Distribution Co., 68 FR 70538, 70541 (2003) (noting 
``over 20 different seizures of [gray market distributor's] 
pseudoephedrine product at clandestine sites,'' and that in eight-
month period distributor's product ``was seized at clandestine 
laboratories in eight states, with over 2 million dosage units 
seized in Oklahoma alone.''); MDI Pharmaceuticals, 68 FR 4233, 4236 
(2003) (finding that ``pseudoephedrine products distributed by [gray 
market distributor] have been uncovered at numerous clandestine 
methamphetamine settings throughout the United States and/or 
discovered in the possession of individuals apparently involved in 
the illicit manufacturer of methamphetamine'').
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    Relatedly, DEA has repeatedly revoked the registrations of list I 
chemical distributors who supplied the non-traditional market for 
selling quantities of products that clearly exceeded legitimate demand 
and were likely diverted into the illicit manufacture of 
methamphetamine. See T. Young Associates, Inc., 71 FR at 60572-73; D & 
S Sales, 71 FR at 37611-12; Joy's sIdeas, 70 FR at 33198-99; Branex, 
Inc., 69 FR at 8693-96. Most significantly, the investigative file 
establishes that Respondent distributed combination ephedrine products 
in quantities that far exceeded legitimate consumer demand for these 
products as an asthma treatment.
    The representative sampling of Respondent's customers showed that 
the lowest average estimated monthly retail sale per store was $ 1045; 
four of the stores had average monthly retail sales of more than $ 
1500. Moreover, the average estimated monthly sale for all stores in 
the sample was $ 1414. These figures grossly exceed the monthly 
expected sales range of $ 0 to $ 25 (with an average of $ 12.58) by 
convenience stores to meet legitimate demand for these products. See T. 
Young, 71 FR at 60568; D & S Sales, 71 FR at 37609.
    Indeed, as found above, a monthly retail sale of $ 60 of ephedrine 
products at a convenience store should ``occur about once in a million 
times in random sampling.'' T. Young, 71 FR at 60568. The $ 1414 
average monthly retail sale for all nine stores is more than twenty-
three times this amount. Moreover, this figure is an average for these 
stores over a five-month period. It is thus considerably more 
improbable than a one in a million probability that Respondent's 
products were being purchased to meet legitimate demand.
    I therefore conclude that the only plausible explanation for these 
extraordinary sales is that Respondent's products were being diverted 
into the illicit manufacture of methamphetamine. See T. Young, 71 FR at 
60572; D & S Sales, 71 FR at 37611 (finding diversion occurred 
``[g]iven the near impossibility that * * * sales were the result of 
legitimate demand''); Joy's Ideas, 70 FR at 33198 (finding diversion 
occurred in the absence of ``a plausible explanation in the record for 
this deviation from the expected norm''). Moreover, because the purpose 
of the CSA's registration provisions is to protect the public interest, 
it is irrelevant whether Respondent knew that its products were being 
diverted. T. Young, 71 FR at 60572.
    ``The diversion of list I chemicals into the illicit manufacture of 
methamphetamine poses the same threat to public health and safety 
whether a registrant sell the products knowing they will be diverted, 
sells them with a reckless disregard for the diversion, or sells them 
being totally unaware that the products were being diverted.'' Id. 
(citing D & S Sales, 71 FR at 37610-12, & Joy's Ideas, 70 FR at 33198). 
As I have previously noted (albeit in a revocation proceeding), the 
public interest standard does not require that the Government prove 
that a registrant acted with any particular mens rea in order to 
support a finding that diversion has occurred. T. Young, 71 FR at 
60572. The same rule applies to an applicant who has previously engaged 
in the distribution of list I products. Accordingly, where, as here, 
substantial quantities of products have been diverted, adverse findings 
are warranted under factors four and five even if Respondent's owner 
was unaware that its products were being diverted. I therefore hold 
that granting Respondent's application would be inconsistent with the 
public interest.

Order

    Accordingly, pursuant to the authority vested in me by 21 U.S.C. 
823(h), as well as 28 CFR 0.100(b) & 0.104, I order that the 
application of MK Distributing, Inc., for a DEA Certificate of 
Registration as a distributor of list I chemicals, be, and it hereby 
is, denied. This order is effective April 5, 2007.

    Dated: February 23, 2007.
Michele M. Leonhart,
Deputy Administrator.
 [FR Doc. E7-3857 Filed 3-5-07; 8:45 am]
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