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Novelty Distributors, Inc. v. Leonhart

June 17, 2008


The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge


Novelty Distributors, Inc. ("Novelty"), challenges the pre-hearing suspension by the Drug Enforcement Agency ("DEA") of Novelty's registration to distribute ephedrine and pseudoephedrine, both of which are list I chemicals subject to DEA regulation. It seeks a preliminary injunction enjoining the suspension pending a final decision by DEA. DEA contests jurisdiction in the district court, insisting that only the court of appeals can review its actions under the Controlled Substances Act ("CSA"), 21 U.S.C. § 801, et seq. (2008), and in the alternative, argues that a preliminary injunction is not warranted under the applicable standard. The Court finds that Novelty's challenge is properly presented in the district court, but it has not satisfied the standards for a preliminary injunction.


Both ephedrine and pseudoephedrine are list I chemicals which are often diverted for use in the clandestine manufacture of methamphetamine, a controlled substance.*fn1 In response, Congress passed the Chemical Diversion and Trafficking Act of 1988 ("CDTA"), Pub. L. 100-690; 102 Stat. 4312 (repealed in part 1992); the Domestic Chemical Diversion Control Act of 1993, Pub. L. 103-200; 107 Stat. 2333; and the Combat Methamphetamine Epidemic Act of 2005, Publ. L. 109-177; 120 Stat. 256 (2006), all of which have imposed upon distributors and sellers of list I chemicals various duties to control theft, loss, and other illegal diversions of list I chemicals to clandestine laboratories.

DEA regulates ephedrine and pseudoephedrine pursuant to the CSA, as amended by, inter alia, the CDTA. 21 U.S.C. § 802(34)(C), (K). Any individual or entity who wishes to import, export, or distribute list I chemicals must first register with DEA. 21 U.S.C. §§ 802(38), 843(a)(9); see also 21 C.F.R. § 1309.21. Collectively, these statutes require list I chemical distributors to take affirmative steps to prevent illegal diversion of their products by proper handling, storage, and tracking. 21 U.S.C. §§ 830(a), (b)(1), 823(h); see also 21 C.F.R. §§ 1310, 1310.05(a), 1309.71-73. DEA has the authority to conduct inspections of registrants' places of business where regulated persons lawfully distribute list I chemicals. 21 U.S.C. § 822(f); 21 C.F.R. § 1316.03.

DEA can revoke or suspend a party's registration for a variety of reasons. See 21 U.S.C. § 824(a) (articulating five grounds for revocation or suspension). Prior to suspending or revoking a party's registration, DEA must issue an order to show cause containing DEA's basis for the proceedings and it must provide an administrative hearing within 30 days. See id. § 824(c).

In cases where DEA has reason to believe that a registrant's continued operation would pose "an imminent danger to the public health or safety," DEA can suspend that party's registration immediately, prior to an administrative hearing. 21 U.S.C. § 824(d). As with suspensions under § 824(a), DEA must provide the basis for its immediate suspension under § 824(d) in an order to show cause, and the registrant is entitled to request an expedited administrative hearing. See id.; 21 C.F.R. §§ 1309.44(a), 1309.44(c). A suspension under § 824(d) remains in effect until: (1) DEA issues a final order ending it; (2) it is withdrawn by the Attorney General; or (3) it is dissolved by a "court of competent jurisdiction." Id. § 824(d).


As a distributor of ephedrine and pseudophedrine, Novelty must obtain a registration from DEA every year to distribute list I chemicals. In order to verify that distributors of controlled substances are complying with the various obligations imposed by statute and DEA regulations, DEA routinely conducts administrative inspection of distributors' facilities and records. Mot. to Dismiss, Barnhill Decl. ¶ 33 [Dkt. # 33-3]. Pursuant to this authority, DEA investigators went to Novelty's facility in Greenfield, Indiana, to execute an administrative search warrant on July 9, 2007. Id. Although Novelty allowed DEA investigators to use a conference room on their premises as a workspace, on July 11, 2007, while the investigators had vacated the workspace for lunch, Novelty installed a video-recorder on a tripod at the far end of the conference room to record their deliberations. See Pl.'s Mem. in Support of Mot. for Partial Summ. J. ("Pl.'s Mem.") at 3-4 [Dkt. # 30-3]. DEA agents unplugged the camera upon returning from lunch and thereafter refused to allow Novelty to videotape its deliberations.*fn2 Id. at 5.

The inspection went poorly. Novelty allegedly failed for three days to provide records it was legally required to maintain. See Mot. to Dismiss, Barnhill Decl. ¶ 35. The records that Novelty did produce were "coded," such that DEA investigators could not discern what products Novelty was distributing, or to whom it was distributing those products. Id. ¶ 36. Novelty representative Ryan Polk informed DEA investigators that it would need more time to produce "uncoded" records from which DEA could trace sales of particular chemicals from Novelty to specific retail customers, so Novelty and DEA agreed that Novelty would produce only records for the time between January 1 and July 9, 2007, rather than the entire two-year audit period. Id. The necessary records were not fully produced until July 18, 2007. Id. ¶ 38.

Based upon its investigation, DEA concluded that there was reason to believe that Novelty had committed several separate and independent statutory and regulatory violations. Defs.' Mem. in Support of Mot. to Dismiss at 6 [Dkt. # 33-2]. It also concluded that these practices posed a serious risk that list I controlled substances would be diverted to the illegal manufacture of methamphetamine. Id. And given the apparent failure of effective safeguards against diversion and the numerous unregistered sites from which Novelty allegedly distributed chemicals, DEA further concluded that Novelty's continued registration posed an imminent danger to the public health and safety. Id.

DEA suspended Novelty's registration by Order dated January 17, 2008, pursuant to 21 U.S.C. § 824(d). Id. Novelty requested an expedited administrative hearing which commenced on March 24, 2008 and continued intermittently for eight days, concluding on April 2, 2008. Mot. to Dismiss, Barber Decl. ¶ 3 [Dkt. # 33-4]. By decision dated May 21, 2008, a DEA Administrative Law Judge ("ALJ") recommended that DEA reinstate Novelty's registration. See In the Matter of Novelty Distribs., No. 08-33 (D.E.A. May 21, 2008) (the "DEA ALJ Decision") [Dkt. # 29-2 (redacted)]. DEA has not yet issued a final determination regarding Novelty's suspension.

In the meantime, on April 9, 2008, Novelty filed the instant complaint against DEA. See Dkt. # 1. It seeks declaratory and injunctive relief on the grounds (i) that DEA acted arbitrarily and capriciously in violation of the Administrative Procedure Act ("APA"), 5 U.S.C. ยง 706, and the CSA by suspending Novelty's registration without prior notice or an opportunity to be heard; (ii) that DEA's suspension unlawfully deprived Novelty of its property interest in its registration without due process of law in violation of the Fifth Amendment, U.S. Const. amend. V; and (iii) that DEA ...

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