[00:00:01] Speaker 02: Case number 15-1335, Masters Pharmaceutical, Inc. [00:00:05] Speaker 02: Petitioner versus Drug Enforcement Administration. [00:00:08] Speaker 02: Mr. Lauer for the petitioner, Mr. Riley for the respondent. [00:01:29] Speaker 01: Good morning. [00:01:30] Speaker 01: May it please the Court, my name is Rick Lauer, I represent the Petitioner Master's Pharmaceutical. [00:01:35] Speaker 01: The DEA Administrator's final order in this matter violates the Administrative Procedures Act by imposing new substantive duties which are binding on all controlled substance distributors without first going through the formal notice and comment rulemaking procedure. [00:01:54] Speaker 01: It violates Master's due process rights by adjudicating claims that were never asserted at the hearing [00:01:59] Speaker 01: It arbitrarily rejects the ALJ's factual findings and credibility determinations while at the same time ignoring substantial undisputed evidence which was favorable to my client. [00:02:12] Speaker 01: And it violates Master's contractual rights by imposing liability for conduct for which Master's had obtained a complete release of claims. [00:02:21] Speaker 01: Any one of these violations would be sufficient grounds for this court to reject the final order. [00:02:27] Speaker 01: Taken together, they present a compelling case in petitioner's favor. [00:02:33] Speaker 01: With respect to the first issue, the violation of the Administrative Procedures Act, there really can be no dispute as both the petitioner and the amici in this case have established in the briefs that the final order imposes new substantive legally binding duties on all controlled substance distributors. [00:02:53] Speaker 01: Section 553 of the APA requires that agencies provide notice and permit interested parties to comment before imposing such duties. [00:03:02] Speaker 01: Here, the final order imposes numerous duties, including the duty to conduct due diligence on all customers, the duty to not ship orders deemed to be suspicious, the duty to identify and report orders placed by customers that exhibit so-called red flags of diversion, [00:03:19] Speaker 01: the duty to obtain utilization reports from pharmacy customers and identify allegedly suspicious dispensing patterns, the duty to investigate physicians that have prescriptions filled with pharmacy customers, the duty to perform and document results of site visits and verify information gathered during those visits, the duty to document due diligence activities, the duty to investigate the nature of a customer's business, and the duty to determine if a customer is filling [00:03:46] Speaker 01: legitimate prescriptions, all of those duties, all of which are substantive and none of which are required by either the Controlled Substances Act or the regulation. [00:03:56] Speaker 04: Do you agree that there was a duty in place already to disclose suspicious orders? [00:04:03] Speaker 01: There is a duty to identify and report suspicious orders. [00:04:07] Speaker 01: Yes, Your Honor. [00:04:07] Speaker 04: Right. [00:04:08] Speaker 04: And so a lot of the things that you ticked off sound like they're just commensurate with the duty to identify and report suspicious orders. [00:04:16] Speaker 04: There's just things that you would normally do to identify and report suspicious orders. [00:04:21] Speaker 04: Due diligence. [00:04:22] Speaker 04: You have to do some diligence to find out if an order is suspicious. [00:04:26] Speaker 01: Well, Your Honor, the regulation identifies suspicious orders as those being of an unusual size, pattern, or frequency. [00:04:34] Speaker 01: It refers specifically to the characteristics of the order itself. [00:04:39] Speaker 01: It does not refer to characteristics of the pharmacy placing the order. [00:04:43] Speaker 01: And if you look at the final order, what the administrator does is he crafts an entirely new definition of suspicious orders, which has to do with the pharmacy placing the order. [00:04:56] Speaker 01: And it is simply not a reasonable type of order. [00:04:59] Speaker 04: Well, I mean, I guess I'm not entirely following what you're saying, because the size of the order has to be by reference to something. [00:05:05] Speaker 04: So it has to be by reference to some pharmacy. [00:05:07] Speaker 04: I take it. [00:05:07] Speaker 01: The size of the order could certainly be with reference to orders placed with that distributor by other pharmacies. [00:05:14] Speaker 01: It does not necessarily have to be in reference to the size of the pharmacy itself placed. [00:05:22] Speaker 01: But it could be both. [00:05:23] Speaker 04: Yeah, no, I'm sorry. [00:05:23] Speaker 04: I wasn't talking about the size of the pharmacy. [00:05:25] Speaker 04: I was just talking about the size of the order placed by a pharmacy. [00:05:28] Speaker 04: So you're necessarily comparing an order by pharmacy X against the subsequent order by pharmacy X in order to determine whether it's a strange sized order. [00:05:39] Speaker 04: I would agree with that. [00:05:41] Speaker 04: So that's bound up in the background duty that you agree exists, which is the duty to make sure orders aren't suspicious. [00:05:48] Speaker 01: there's a duty to look at the orders that the distributor receives and determine which are unusually large and therefore suspicious. [00:05:58] Speaker 01: That's correct. [00:05:59] Speaker 04: Yeah, and what's the extra is? [00:06:01] Speaker 01: Well, Your Honor, there are numerous things. [00:06:04] Speaker 01: First and foremost is the alleged duty to determine whether the dispensing practices of the pharmacy are suspicious. [00:06:12] Speaker 01: And this appears throughout not only the final order, but the briefs from the government in this case, that a distributor has a duty to evaluate [00:06:21] Speaker 01: the way in which the pharmacy is dispensing. [00:06:24] Speaker 01: And that is an entirely different issue than the orders that pharmacies placing with a distributor, especially a distributor like my client, which is a secondary wholesaler, which is not providing a regular and continuous supply of the same products to these pharmacies. [00:06:39] Speaker 01: And there's a wealth of evidence about that in the record, about the tertiary nature of a secondary wholesaler's business and how supply and demand that my client sees is affected by things like price and availability of the products in the market and a whole host of other things. [00:06:58] Speaker 01: So to your point, I mean, the final order is replete. [00:07:04] Speaker 01: with alleged duties that go well beyond just comparing one order to the next or one order to other orders received by that by that wholesaler. [00:07:14] Speaker 02: But that the regulation on that, um, I think you're talking about 0.74 B. Yes, suspicious orders include [00:07:29] Speaker 02: Orders of unusual size, or is deviating substantially from the normal pattern. [00:07:32] Speaker 02: And so I think the challenge for you is, A, the question that Judge Shinravasan asked, which was, aren't these sort of subsidiary activities to discovering whether an order is of unusual size or deviates substantially? [00:07:47] Speaker 02: But also, the second challenge for you is that the regulation is not written as if that's the only, those are the only indicia of suspiciousness. [00:07:59] Speaker 01: I would say a couple things in response to that. [00:08:00] Speaker 01: The first is that under section 1301.71A, the regulation makes clear that the only factors the administrator can examine when determining whether a wholesaler has maintained effective controls against diversion are those set forth in 1301.72 through 1301.76, which does include the duty to identify and report suspicious orders. [00:08:28] Speaker 01: But there is not a catch-all provision within that that would allow the examination of other factors, as there is, for example, in 1301.34C, which applies to other cases. [00:08:38] Speaker 02: But that's not entirely responsive to the notion that [00:08:42] Speaker 02: 0.74b itself is more capacious than the way you're reading it. [00:08:48] Speaker 01: And Your Honor, the way the final order, it takes that position that there are other factors about an order which may make it suspicious, not just its size, pattern, and frequency. [00:09:00] Speaker 01: And our position is that it's a completely unreasonable interpretation or review of that statute. [00:09:09] Speaker 01: And the reason is [00:09:11] Speaker 01: Just there are many examples of this. [00:09:13] Speaker 01: For one reason, under the, and again, we don't believe this is really an interpretation of the statute. [00:09:18] Speaker 01: We believe it's a new substantive rule that requires notice of conduct. [00:09:21] Speaker 01: But if you want to claim it's an interpretation, it's completely unreasonable because a suspicious order is an order that needs to be identified and reported. [00:09:32] Speaker 01: Under this alleged interpretation, [00:09:36] Speaker 01: A distributor has a duty to investigate every client, every customer, regardless of the size, pattern, or frequency of the order, because under the final order, there's a duty to report something if a distributor determines that there are suspicious circumstances surrounding the pharmacy. [00:09:55] Speaker 01: And there are many cases, Your Honor, where a distributor would learn information that might cause it to be suspicious about a pharmacy customer that have no relation to the order itself. [00:10:06] Speaker 01: but yet under the final order, we would have a duty to report something. [00:10:09] Speaker 01: And this is something that the government has struggled with throughout this case. [00:10:13] Speaker 01: If you look at the record that took place in the hearing, the government's original theory about this duty was that once my client had determined that there was something suspicious about the pharmacy, it had a duty to go back in some undefined period of time to orders that had already been shipped and placed and report those orders as suspicious. [00:10:36] Speaker 01: That theory was rejected by the ALJ and rejected by the administrator. [00:10:41] Speaker 01: And the administrator never identifies, never clarifies this obvious misinterpretation by identifying what a distributor is required to do when it learns suspicious information. [00:10:56] Speaker 01: But there's no order that's the cause of that. [00:11:00] Speaker 01: And what I think that tells the court is that [00:11:03] Speaker 01: That's not what this regulation was intended to require. [00:11:08] Speaker 01: The other thing you can look at here. [00:11:10] Speaker 02: So the position that you're taking is the order should be the cause of the suspicion and then everything else, then the due diligence kicks in. [00:11:20] Speaker 01: Our position is that the only duty is to identify orders of unusual size, pattern, or frequency, and that is something that the distributor can do [00:11:30] Speaker 01: within the four walls of its building, it can look at those orders and say this one is suspicious, this one is not. [00:11:36] Speaker 01: And if it identifies those orders as suspicious, it must be reported. [00:11:40] Speaker 01: And the other reason I think you can see that our interpretation is correct is because the regulation does require the distributor to do one thing with respect to its customers. [00:11:51] Speaker 01: It requires a distributor to make a good faith effort to determine whether the customer has the appropriate state and federal licensure. [00:11:58] Speaker 01: It is not reasonable to believe that a regulation that requires only a good faith effort to document proper licensure also requires extensive due diligence of the pharmacy, including but not limited to figuring out what its business model is, figuring out what its dispensing practices are, figuring out who it's filling prescriptions for and whether those doctors are operating legitimately. [00:12:21] Speaker 01: And on and on and on. [00:12:23] Speaker 04: If your client looks at an order and says that order seems out of whack in terms of numbers with prior orders. [00:12:33] Speaker 04: So it's an order potentially of unusual size. [00:12:37] Speaker 04: And then your client decides nonetheless not to report the order. [00:12:42] Speaker 04: Say you don't report the order because you just fill an order that's of a lower quantity, or you just delete the order and don't respond to it at all. [00:12:52] Speaker 04: at that doesn't with the reporting obligation apply with respect to that order. [00:12:56] Speaker 01: I'd say say two things I believe it would and I would say that that is not what occurred in this case and there's no evidence of that in this case. [00:13:03] Speaker 01: If a registrant determines that an order is suspicious due to its unusual size, pattern, and frequency, it has a duty to report that order to the DEA. [00:13:13] Speaker 01: Now they have claimed [00:13:14] Speaker 01: that a registrant has another duty, which is to not ship that order. [00:13:19] Speaker 01: And if you look at the 2006, 2007 guidance letters, it's really what they're talking about. [00:13:24] Speaker 01: They're talking about the decision that a registrant has to make when it identifies a suspicious order. [00:13:29] Speaker 01: There's no question it has to be reported to the DEA. [00:13:32] Speaker 01: The next question the registrant has to answer is, can I ship the order anyway? [00:13:37] Speaker 01: And all that a registrant has to do in that case to comply with this guidance is not ship the order. [00:13:43] Speaker 04: The DEA's guidance was... The order, the administrator's order here talked about failure of reporting, right? [00:13:50] Speaker 04: It wasn't the... They identified situations in which your client got an order and then you responded by deleting the order, not filling it at all, or filling some lower amount. [00:14:06] Speaker 04: And that seems like a situation in which the order was suspicious and therefore should have been reported, but it was not. [00:14:12] Speaker 01: Did that not happen? [00:14:13] Speaker 01: It did not happen, Your Honor. [00:14:15] Speaker 01: It never happened. [00:14:15] Speaker 01: It's absolutely a misinterpretation of the record that occurs for the first time in the final order. [00:14:20] Speaker 04: Did the administrator at least find that that happened? [00:14:23] Speaker 01: The administrator found that, starting with an obvious misinterpretation of the policies and procedures in place at my client, [00:14:33] Speaker 01: the administrator held that any order that was was held by our Psalm system, our suspicious order monitoring system, which is an electronic system, any order that was held by that system and then not fully investigated was ipso facto a suspicious order and had to be reported. [00:14:52] Speaker 01: That is not the way the policy and procedure reads and certainly not the way the [00:14:58] Speaker 01: the statute region, the regulation reads and your honor, that is not a claim that was ever made at the hearing. [00:15:05] Speaker 01: That this analysis that the administrator goes through in the final order occurred for the first and only time in the final order. [00:15:13] Speaker 01: That was not the claim that was made at the here. [00:15:16] Speaker 01: So that's really a due process violation that we talk about in our briefing, and it's substantial. [00:15:22] Speaker 01: We've never had the opportunity to explain, for example, why certain orders were edited or deleted. [00:15:29] Speaker 01: There is evidence of that in the record, Your Honor, and the only evidence in the record was the orders were edited and deleted for reasons having nothing to do with compliance, and that there was never a case where a suspicious order [00:15:44] Speaker 01: was edited or deleted for the purpose of avoiding the reporting. [00:15:49] Speaker 01: Quite to the contrary. [00:15:50] Speaker 02: Whether or not it's for the purpose of avoiding the reporting requirement, isn't there a problem if it does fail to meet the reporting requirement? [00:15:58] Speaker 01: Well, Your Honor, I think in a hypothetical situation where a distributor was deleting orders rather than reporting, where the distributor had determined an order to be suspicious in fact, and instead of reporting it, deleted the order, I do agree that would be a problem. [00:16:13] Speaker 01: But again, that is not what happened in this case. [00:16:15] Speaker 01: The only way that the administrator reaches this conclusion that we're discussing is by misinterpreting what the SOM system is designed to do. [00:16:23] Speaker 01: The SOM system holds any order that varies in any respect [00:16:28] Speaker 01: from the patterns that are set forth by the prior orders, as little as one pill. [00:16:35] Speaker 01: The SOM system was also used to make sure that the compliance department could keep a closer eye on customers and see what they were ordering. [00:16:45] Speaker 01: So in those cases, orders that were held were objectively not suspicious. [00:16:52] Speaker 02: And ultimately- Or they were not shown to be in violation, but isn't the purpose of the SOM system to alert so that follow-up can be made? [00:17:03] Speaker 01: The purpose of the SOM system was to allow the people in the compliance department to look at the order, look at the customer, to take the knowledge they had of that customer and its business model, its practices, et cetera, and determine whether the order was in fact suspicious. [00:17:21] Speaker 02: So and if they find one way or the other, there's no duty to keep any kind of record on that. [00:17:29] Speaker 01: Your honor, if they find the order suspicious, there's a duty to report and that was done, but they find not. [00:17:36] Speaker 02: There's no duty to keep a record on that. [00:17:38] Speaker 01: There is no duty in the statute of the regulation that requires any specific record keeping. [00:17:46] Speaker 01: Now our compliance files were voluminous and there was a lot of information in those files, and much of what occurred in the final order is simply misinterpretations of computerized notes and other things that, again, were never presented at the hearing, so we never had a chance to respond to. [00:18:01] Speaker 01: in the very few cases during the hearing where the diversion investigator attempted to interpret notes from the file and things that nature was shown that he was misinterpreting them. [00:18:11] Speaker 01: So the purpose, the evidence in the case was that every order that the compliance department determined to be suspicious [00:18:22] Speaker 01: was reported to the DEA, was not shipped, and no further controlled substance business was done with that customer. [00:18:29] Speaker 01: That is undisputed. [00:18:29] Speaker 02: I think that's non-responsive to one of what I understand to be the administrator's concerns, which was before a yay or nay decision is made by the compliance office for what masters contends were independent business reasons, the order was changed and deleted. [00:18:49] Speaker 01: I don't believe that's the fact, Your Honor. [00:18:52] Speaker 01: When orders were changed and deleted, that was done by the compliance department. [00:18:57] Speaker 02: But before they made any suspicious, followed up on any suspiciousness question. [00:19:03] Speaker 02: So there's a kind of end run around a duty to investigate, or end run about, just to put it in a non-legally conclusory way. [00:19:12] Speaker 02: In that situation, the investigation, because the deletion might happen before the investigation, no investigation would take place. [00:19:19] Speaker 01: we are, I would just I think that's their argument. [00:19:24] Speaker 01: I think it frankly doesn't comport with the facts. [00:19:26] Speaker 01: But nonetheless, I would just say there is no duty to go out and examine the dispensing practices [00:19:33] Speaker 01: of the pharmacy, and regardless of what our policies and procedures may say, there is no legal duty to obtain a utilization report every time an order is held, or to call the customer and find out why it was that they placed a particular order. [00:19:46] Speaker 01: That duty simply does not exist. [00:19:48] Speaker 01: So, Your Honor, I would just disagree. [00:19:52] Speaker 01: I disagree with the findings of the final order. [00:19:53] Speaker 04: I guess the question is this. [00:19:55] Speaker 04: That duty may or may not exist, and let's just assume for purposes of argument that it doesn't exist, as you say. [00:20:01] Speaker 04: I thought a large part of what was going on in the administrator's order is that there was a failure of reporting. [00:20:09] Speaker 04: And so if there's a deviation in quantity, then a concern arises because there's been a deviation in quantity vis-a-vis the pattern of ordering from that pharmacy. [00:20:20] Speaker 04: And then it may be that that deviation is totally explainable. [00:20:23] Speaker 04: It may be that you do some work and you realize, you know, actually, we did some diligence and we figure out that's totally fine. [00:20:31] Speaker 04: For your own purposes, you can fill the order. [00:20:33] Speaker 04: But that doesn't mean that there's not an obligation to report it anyway because there's been a deviation in the quantity. [00:20:41] Speaker 04: Now, if you don't do any diligence, then it just bolsters the notion that there should have been a reporting. [00:20:47] Speaker 04: Because then how can you know that there is an explanation for the deviation pattern? [00:20:54] Speaker 04: And what was going on was that there would be a quantity bump, and for some reason that quantity bump was never reported. [00:21:05] Speaker 04: And then the arguments that were being made about how due diligence wasn't done were to show that you could have done due diligence to explain why that quantity bump was totally understandable. [00:21:21] Speaker 04: But that due diligence wasn't done, and so what you're left with is a quantity bump without an explanation and therefore a breach of the obligation to report it to the DEA. [00:21:31] Speaker 01: I'd say two things about that. [00:21:32] Speaker 01: First of all, I'm not sure that's what the administrator actually did. [00:21:35] Speaker 01: What the administrator actually did in the final order was to say that any order that was held, and oftentimes that would be the result of a change in quantity, but that any order that was held is automatically suspicious unless it's investigated. [00:21:49] Speaker 01: So it certainly could be the case that it was an order that the customer ordered five bottles in January and six bottles in February. [00:21:58] Speaker 01: And that order would be held. [00:22:00] Speaker 01: Your question presupposes that an order like that, five in one month and six in the next, would have to be investigated before it could be shipped because that jump in quantity would make it suspicious. [00:22:11] Speaker 01: The evidence, with respect to my client, however, Your Honor, is that there are wide fluctuations. [00:22:16] Speaker 01: in the quantity of product that are ordered. [00:22:20] Speaker 01: And our customers do not order every month. [00:22:22] Speaker 01: We're a secondary wholesaler. [00:22:24] Speaker 01: And they respond in terms of price and market availability and all sorts of other factors. [00:22:29] Speaker 01: So there is extensive evidence in the record about that. [00:22:33] Speaker 01: So it is not simply the case to say that, well, any time there's a change in quantity, [00:22:37] Speaker 01: from order 1 to order 2, that that triggers some duty to either report the order or do due diligence. [00:22:43] Speaker 01: That just is not what the regulation means. [00:22:46] Speaker 01: I think you have to read the regulation in terms of [00:22:49] Speaker 01: You know, what are its purposes? [00:22:51] Speaker 01: You know, you're trying to to to advise the D. A. Of potential unlawful activity. [00:22:57] Speaker 01: And the fact that somebody orders from us in January five bottles and orders in June six bottles is just simply not suspicious. [00:23:04] Speaker 01: But under this new substantive rule, among many others announced in this final order, there would be a full duty to investigate not just that, your honor, [00:23:13] Speaker 01: Every single one. [00:23:14] Speaker 01: In fact, there's no limit. [00:23:15] Speaker 02: I'm still not sure why you say it's a new substantive rule, given that the criteria are not all inclusive, that they're disjunctive, that there was the letter from the DEA in 2007, making that absolutely explicit. [00:23:33] Speaker 02: I mean, I thought that sort of bolstered your other argument. [00:23:37] Speaker 02: Because the other regulation you're relying on doesn't have this including language. [00:23:43] Speaker 02: But here, I haven't really heard you respond to that. [00:23:46] Speaker 01: We're afraid if I understand what you're saying, I mean, we believe that it's a substantive rule that is not encompassed with the language in the in the final order is this due diligence rule is encompassed within the text. [00:23:59] Speaker 01: And I simply disagree with that. [00:24:01] Speaker 01: The question I think that Judge Edwards posed in the case having to do with the flight attendants is are the registry are the registrants free to ignore this rule? [00:24:12] Speaker 01: And the answer is clearly not. [00:24:14] Speaker 01: We're clearly not free to ignore. [00:24:16] Speaker 01: And in fact, the DEA has already asserted in another case that the rules coming from the final order in the master's case are binding on them. [00:24:26] Speaker 01: So if it's a rule that has legal effect and is binding, it is a substantive rule. [00:24:33] Speaker 01: It amends a rule that was adopted through notice and comment rulemaking and therefore can only be promulgated through notice and comment. [00:24:42] Speaker 02: All right, if you're, I'm using one more follow-up question, because I'm just trying to understand your position on that point. [00:24:47] Speaker 02: If your client had actual knowledge that a pharmacy is engaged in illegal practices, but it continues in lockstep to order small and regular amounts that do not change from order to order, no duty to investigate. [00:25:08] Speaker 01: Well, Your Honor, that is essentially what happened in the Southwood case and the way that the DEA analyzed that case. [00:25:15] Speaker 01: And again, it's certainly not the case here. [00:25:18] Speaker 01: In this case, there was no evidence whatsoever that any of these pharmacies were engaged in illegal activities. [00:25:24] Speaker 01: These were not internet pharmacies that by virtue of their very business model were engaging in illegal activity, as was the case in Southwood. [00:25:32] Speaker 01: But taking the hypothetical that you gave, I think it could be argued that the general duty to maintain effective controls against diversion would prevent the shipment of an order to a customer that the distributor had actual knowledge was engaged in diversion, no matter what the size was. [00:25:53] Speaker 01: I'm not sure what you might report there. [00:25:56] Speaker 01: If there's actual knowledge of criminality, certainly Southwood says there's a general duty to not provide more controlled substances to that pharmacy. [00:26:06] Speaker 01: But again, that is not the case with this in our case. [00:26:10] Speaker 01: And these pharmacies were brick and mortar pharmacies that were filling legitimate prescriptions. [00:26:16] Speaker 01: Thank you. [00:26:16] Speaker 01: Thank you. [00:26:34] Speaker 03: Good morning, and may it please the court, Nicholas Reilly for the DEA. [00:26:40] Speaker 03: Just to begin, and it sounds like the panel's questions were going in this direction anyway, to be absolutely clear, the administrative decision in this case was based on Masters' repeated failure to report orders that were suspicious. [00:26:54] Speaker 03: I think it's telling that of all these extra, what Masters and Amiki refer to as due diligence duties, [00:27:02] Speaker 03: obtaining URs, looking at a pharmacy's dispensing practices, they haven't identified a single order that the DEA deemed, that the administrator deemed suspicious based solely on master's failure to conduct those particular duties. [00:27:17] Speaker 03: In every instance, the baseline for deeming the order suspicious was the fact that the order deviated from the customer's ordinary size, pattern, or practice of ordering. [00:27:28] Speaker 02: As they describe it, [00:27:31] Speaker 02: basically every order deviates because nothing's regular. [00:27:36] Speaker 02: So every order they get in is being alerted under SOMS. [00:27:42] Speaker 03: Right. [00:27:42] Speaker 03: I mean, I think that mischaracterizes the administrator's analysis as a practical matter. [00:27:49] Speaker 03: I think it's useful just to look at. [00:28:03] Speaker 03: I mean, if you look at, we highlighted some of these examples in our brief, but [00:28:07] Speaker 03: I think Englewood provides a few clear-cut examples, particularly the orders that were placed in May of 2010. [00:28:14] Speaker 03: At that point, Englewood had a monthly limit of, I think, around $50,000. [00:28:19] Speaker 03: I forget the exact limit, but what we know is that they ordered, in the middle of the month, 70,000 dosage units of OxyContin 30. [00:28:26] Speaker 03: Master's own compliance records indicate at that time for that month that the normal pattern and frequency for Englewood's orders was about 500 a month, 500 bottles, which would be about 50,000 dosage units. [00:28:42] Speaker 03: And Master's then edited that order from 70,000 to 50,000, which suggests that Master's itself thought the order was suspicious. [00:28:50] Speaker 03: Only less than two weeks later, Master's is then filling more orders for OxyCode and 30 [00:28:56] Speaker 02: They say it doesn't show that they thought it was suspicious. [00:28:58] Speaker 02: They say they're rationing supply. [00:29:02] Speaker 03: Right, but they haven't actually. [00:29:03] Speaker 03: That's not contained in the compliance records. [00:29:05] Speaker 03: And again, if we look at the May 2010 order and provide a citation, this is at [00:29:13] Speaker 03: This is Master's own notes for that order. [00:29:19] Speaker 03: Don't say anything about rationing the supply. [00:29:21] Speaker 03: What they say is that they reduced the order, quote, due to its pattern and size. [00:29:27] Speaker 03: And it also says that the, quote, pattern and size was always 500 in the middle of the month. [00:29:33] Speaker 03: So reducing the order there based on some abstract idea that there is a need to ration the supply is not consistent with the evidence in this case. [00:29:42] Speaker 03: And again, we're here on substantial evidence review. [00:29:45] Speaker 03: I think it's plain from master's own compliance notes that in this instance, it's a fair inference to draw that the reason they reduced the order was because they found it unusually large. [00:29:55] Speaker 02: Their view is you retroactively change the standard. [00:29:59] Speaker 02: Of course, they would have put in a lot of information contextualizing and explaining why they refer to pattern and size when they're talking about rationing as opposed to suspicious orders. [00:30:09] Speaker 02: But what's your view on whether they had a fair opportunity and were on notice what the full range of their duties was? [00:30:16] Speaker 03: Yeah, I mean, I think in this case, it's very clear that masters had ample notice as to what their duties were, not just because they received both the 2006 and 2007 guidance letters, but also because they received an individualized meeting with DEA's investigators at the August 2009 compliance review, a review during which DEA's own investigators specifically highlighted [00:30:39] Speaker 03: three of the pharmacies at issue here as having ordering trends that were potentially problematic. [00:30:46] Speaker 03: On top of that, the order to show cause that was issued against Masters specifically identifies these seven pharmacies by name and time periods and product types. [00:30:58] Speaker 03: It says that the focus is on oxycodone. [00:31:01] Speaker 03: Going even beyond that, then during the administrative hearing itself, prior to the administrative hearing, the government turned over lists of specific orders. [00:31:10] Speaker 03: Again, orders of oxycodone from these seven pharmacies and testimony of one of its investigators highlighting specific orders, dozens of specific orders, as being suspicious. [00:31:21] Speaker 03: I don't think there can be any reasonable claim here. [00:31:23] Speaker 03: Oh, I'm sorry, and the government also then, after the hearing and its proposed findings of facts and conclusions of law submitted to the ALJ, cites these documents listing these orders repeatedly. [00:31:33] Speaker 03: I don't think there can be any claim that Masters was surprised that the administrator relied on this. [00:31:38] Speaker 03: I think if you really take their due process claim and you boil it down, what it appears to be is a complaint that the administrator was too meticulous here, that this evidence was all in the record and that he's going through order by order and that they were somehow caught unawares. [00:31:52] Speaker 03: These orders are in Masters' own compliance records. [00:31:55] Speaker 03: Again, we just went through some of the compliance notes, even without going through the notes. [00:31:58] Speaker 03: The orders, size and patterns and frequency, this is all documented. [00:32:03] Speaker 03: Masters has this information. [00:32:04] Speaker 03: And again, the government also specifically relied on it repeatedly throughout the hearing. [00:32:08] Speaker 03: So I don't think there can be any reasonable claim that they were surprised. [00:32:10] Speaker 04: Is the violation that the administrator should be focusing on is a failure of reporting? [00:32:17] Speaker 03: Yes, and in fact, that is what the administrator is focused on here. [00:32:20] Speaker 03: I know Masters and Amici have complained about extra, these other additional duties. [00:32:25] Speaker 03: I think it's difficult to sort, I mean, I think you need to plus- Those other things are discussed in the order. [00:32:30] Speaker 03: They are absolutely discussed in the order, but they are not the basis for liability here. [00:32:33] Speaker 03: I think it's very clear when you look at the order that the reason they're being discussed in many instances [00:32:37] Speaker 03: is either because these are duties that MASTERS imposed on itself explicitly in its own SOMS program, or because in many instances, so let's take this supposed duty to, you know, not fill certain orders. [00:32:50] Speaker 03: In those instances where the Administrator is discussing it, that's relevant because it indicates that MASTERS, as we discussed earlier, believe some of these orders were suspicious. [00:32:58] Speaker 04: So again, it's... And therefore should have been reported. [00:33:00] Speaker 03: And therefore should have been reported, exactly. [00:33:01] Speaker 04: On the question of bringing them up because it's a breach of masters' own procedures, so the failure to abide by a company's own procedures itself isn't a violation of a regulation or statute. [00:33:16] Speaker 03: No, that's right. [00:33:16] Speaker 03: And that's not the basis of this decision. [00:33:19] Speaker 03: The reason it matters here is because Masters itself sought to invoke its own compliance program and say that we comply with it as a defense in this instance. [00:33:27] Speaker 03: It's also, just to be clear, what the administration is relying on is not just the fact that Masters failed to comply with its own policies, but the fact that it failed in many instances, as I think Judge Pillard noted, to undertake any kind of follow-up whatsoever. [00:33:40] Speaker 03: Now, that failure is even more egregious in light of the fact that MASTERS, at its 2009 compliance review, when it first created this new SOM system, represented to DEA that it was going to abide by these particular practices. [00:33:54] Speaker 03: That's, I think, plainly relevant here because the regulation, under the regulation, the administrator has discretion to [00:34:02] Speaker 03: deemed a given distributor as having substantially complied with the regulation. [00:34:07] Speaker 03: I think it's important to recognize that in this instance, because MASTERS was failing to undertake any kind of follow-up, and particularly failing to undertake the specific, to comply with the specific policies that it imposed on itself, that that does go towards the Administrator's finding that it violated this regulation. [00:34:24] Speaker 03: The other reason why [00:34:25] Speaker 03: the filling information, the orders being filled or not filled is relevant here to the suspicious order question is because, again, in many instances, the filling of the order is indicates, is where we can get the information that Masters edited the order before filling it. [00:34:43] Speaker 03: And again, that goes towards an indication that Masters itself found these orders suspicious. [00:34:48] Speaker 04: It's interesting because the way the Administrator phrases a lot of the order is to tick off the ways in which Masters didn't get a utilization review, didn't do due diligence, didn't comply with the Psalms, and then the concluding sentence will be something like, and also failed to report, or moreover failed to report. [00:35:10] Speaker 04: And when it seems like I don't need to be critiquing [00:35:14] Speaker 04: presentation, but it seems like the correct analytical framework is there's a failure to report a suspicious order, and then there were things that could have been done in theory to show that what appeared to be a suspicious order in fact wasn't suspicious, but those things weren't done, which fortifies the notion that it should have been reported. [00:35:33] Speaker 03: Sure, and I mean, I actually read the order as concluding with these orders were suspicious and should have been reported as being based on everything that preceded it. [00:35:41] Speaker 03: So I think all the paragraphs that you're referring to. [00:35:43] Speaker 04: So you think that's the load bearing phrase is it should have been reported? [00:35:47] Speaker 03: I think absolutely. [00:35:48] Speaker 03: And I think also if you look at the headings in the administrator's order itself, that's quite clear. [00:35:52] Speaker 03: He's saying, masters, [00:35:53] Speaker 03: failure to report suspicious orders. [00:35:55] Speaker 03: He's not saying master's failure to comply with its own policies or master's failure to obtain dispensing reports or utilization reports. [00:36:03] Speaker 03: The focus at all times, I think, is on the failure to report suspicious orders. [00:36:09] Speaker 03: I'm happy to address other further questions that this panel has. [00:36:13] Speaker 02: I just would like to hear your view, Amanda, you briefed us, but why the [00:36:20] Speaker 02: standards for and controls necessary to prevent diversion isn't as narrow as Masters claims it is. [00:36:29] Speaker 02: They point to the fact that it doesn't say including and that the administrator shall use the security requirements set forth in point 72, point 76 as standards for physical security. [00:36:43] Speaker 02: Did the administrator rely on more than that and if so, how is that consistent with the regulation? [00:36:49] Speaker 03: Right. [00:36:49] Speaker 03: Well, I think in this case, to your last question, the administrators not rely on more than that. [00:36:54] Speaker 03: Because again, the basis for the decision here was master's reporting failures. [00:36:59] Speaker 03: And that duty to report suspicious orders is, I think, squarely embedded in 1301.74b, which is one of the regulations referenced in 1301.71. [00:37:10] Speaker 03: So I don't think the administrator went beyond that at all in this case. [00:37:13] Speaker 03: And I think, frankly, the court's inquiry can end right there. [00:37:17] Speaker 00: There's an awful lot in the decision suggesting that the failure to maintain effective controls against diversion is what the administrator was focusing on. [00:37:28] Speaker 00: I mean, you're making it sound pretty straightforward and simple. [00:37:31] Speaker 00: All I have to do is report and then they're off the hook. [00:37:34] Speaker 00: But if that's it, there's an awful lot of additional language in there that seems to be superfluous. [00:37:41] Speaker 03: It talks about major duties beyond that. [00:37:44] Speaker 03: Sure, again, we'll just take that piece by piece. [00:37:46] Speaker 03: I think first, the duty to maintain effective controls against diversion, which comes from the CSA and the statute, is the statutory requirement that these regulations are implementing. [00:37:59] Speaker 03: So I think there is consistency there that the duty to report, detect and report suspicious orders is part of that. [00:38:05] Speaker 00: Yeah, but as the ALJ found, you've got a much harder case [00:38:09] Speaker 00: to win if that's what you're really focusing on, the failure to maintain controls to avoid diversion. [00:38:18] Speaker 03: Right, again, there's nothing, DEA has never construed, if I understand your honor's question, this is the portion of the ALJ's order and her conclusion that DEA would need to produce evidence of likely actual diversion in order to prove violations. [00:38:33] Speaker 03: That's never been the standard that DEA has followed. [00:38:36] Speaker 03: And in fact, it's contrary to the standards and guidelines that DEA set forth in its prior letters and in its prior decisions. [00:38:45] Speaker 03: But again, even setting that aside, I think in this case, all of these pharmacies we do know as a practical matter had major problems. [00:38:53] Speaker 03: And it's not, I think, due to a dearth of evidence that these pharmacies were engaged in diversion, that the evidence wasn't there. [00:38:59] Speaker 03: It's because that's not the standard. [00:39:01] Speaker 03: So the government didn't put on that evidence. [00:39:03] Speaker 03: I think the administrator rightfully corrected that by saying that, again, the standard is, did this particular distributor [00:39:12] Speaker 03: fulfill its duty to detect and report suspicious orders. [00:39:15] Speaker 03: And again, here I think the record is very clear that Masters did not do that. [00:39:19] Speaker 04: How is a company like the DEA may know whether pharmacies are suspicious because the DEA has a bunch of information at its disposal pursuant to investigations and whatnot that particular pharmacies are engaging in suspicious conduct. [00:39:32] Speaker 04: But that's not necessarily the case with a company that's distributing substances to those pharmacies, right? [00:39:38] Speaker 03: I mean, I think that's right, that obviously an individual distributor has much less information than the DEA would at large. [00:39:45] Speaker 03: But again, that's why the requirement doesn't mandate these specific, I mean, the duties that, the due diligence duties that Masters and Meek are identifying about going and looking at every pharmacy's dispensing practices and things like that. [00:39:59] Speaker 03: That's not what the regulation is requiring. [00:40:02] Speaker 03: What they're requiring is that if you receive an order that's suspicious based on its deviation from the normal size, pattern, or frequency from that customer, that you report that. [00:40:12] Speaker 04: Because then the DEA may have a bunch of other information at its disposal that it can bring to bear on the question. [00:40:19] Speaker 04: And it can say, well, I've got information, this slice of information from this distributor, a different slice of information from a different distributor. [00:40:25] Speaker 04: I'm putting it all together. [00:40:26] Speaker 04: I'm realizing this pharmacy is engaging in suspicious conduct. [00:40:28] Speaker 03: That's exactly right, and that's why the reporting requirement is so important. [00:40:31] Speaker 02: I was just going to say, is it not the case that the administrator relied on a duty to refrain from shipping in the face of suspicious information? [00:40:41] Speaker 03: I think in this case, it's quite clear that the Administrator did not rely on that. [00:40:45] Speaker 03: Again, I think the Administrator refers, and I think Judge Edwards alluded to this too, to the fact that, in this case, Masters was filling many of these orders. [00:40:53] Speaker 03: But the reason that's relevant, again, is because it shows, particularly in instances where it edited the order before filling it, [00:40:59] Speaker 03: that masters itself had reason to believe these orders were suspicious. [00:41:03] Speaker 03: It also shows just the sheer volume in many of these instances of the orders that are being filled that the amount that masters is filling in these orders in a given month is often exceeding [00:41:15] Speaker 03: the monthly limit that Masters itself had set as being a basis for determining whether an order itself was suspicious. [00:41:22] Speaker 03: And so again, I think Judge Edwards is absolutely right that, and you were also absolutely right, that the Administrator does discuss the filling or not filling practices, but it's again all going towards this question of whether these orders were suspicious and whether Masters had a duty to report them. [00:41:36] Speaker 03: I can see that my time is up. [00:41:37] Speaker 02: Did the DEA end up completing the 220-day compliance review that was contemplated by the settlement agreement? [00:41:47] Speaker 03: I think it was the 180-day review. [00:41:50] Speaker 03: Yeah, they met two DEA investigators, did in fact go to Master's facility in Ohio, and met with them over the course of, I think, two days, at least two days, and went through. [00:42:00] Speaker 03: Their master's at that point was creating a new SOMS program, and the DEA investigators went through and looked at it [00:42:05] Speaker 03: and gave master's feedback. [00:42:07] Speaker 03: They also, again, it's that review where they identified some of the very pharmacies that issue in this case as having recent problematic ordering trends. [00:42:14] Speaker 03: So yes, DEA did perform that review in August of 2009. [00:42:17] Speaker 03: There are no further questions. [00:42:21] Speaker 03: Thank you. [00:42:31] Speaker 04: We'll give you two minutes back for rebuttal too. [00:42:33] Speaker 01: Thank you, Your Honor. [00:42:33] Speaker 01: Let me start by picking up on the last comment that was made. [00:42:39] Speaker 01: The settlement agreement and the compliance review that took place in August 2009 required the DEA specifically to identify in writing any pharmacy that had placed suspicious orders with masters at any time prior to that, and any pharmacy that did not have a legitimate need that were controlled substances. [00:42:58] Speaker 01: That compliance review took place [00:43:00] Speaker 01: and the diversion investigator who performed it testified the hearing, and he testified unequivocally. [00:43:06] Speaker 01: I did not tell Masters that any customer, including the three that are now the subject of this case, had placed suspicious orders, and I did not tell them that they did not have a legitimate need to order controlled substances. [00:43:18] Speaker 01: They had a duty, even if he had said something like that. [00:43:22] Speaker 01: And there's some testimony about he winked at people, something along those lines. [00:43:27] Speaker 01: Even if he had said something at the time, they had a duty to put that information in writing. [00:43:34] Speaker 01: The administrator takes that evidence and relying on evidence that occurred prior to the settlement of April 1, 2009 and concludes without any basis whatsoever that Masters was in fact suspicious of each of these pharmacies. [00:43:48] Speaker 01: That is absolutely contrary to the record. [00:43:50] Speaker 01: Masters was not suspicious of these pharmacies. [00:43:52] Speaker 01: The Masters had done extensive investigation of each of these pharmacies, including multiple site visits by a former DEA investigator, and concluded that each of them had reasonable justifications for the types of products they were ordering, the types of products they were dispensing. [00:44:08] Speaker 02: You said that you shouldn't have to show a basis for a stopple to rely on. [00:44:13] Speaker 02: What should you have to show? [00:44:14] Speaker 02: I mean, you are sort of proffering it as a stopple-like defense. [00:44:20] Speaker 02: Their position could be we'll go in the middle of an investigation. [00:44:23] Speaker 02: I'm not going to spill the beans on it. [00:44:25] Speaker 02: There's a place and a time for that. [00:44:28] Speaker 02: But you say, no, they led us to believe we had a clean bill of health. [00:44:32] Speaker 02: Isn't a stop all the right way to look at that? [00:44:34] Speaker 01: Well, Your Honor, if it is, we think we've satisfied it because this is a perfect situation where you have clearly inequitable results. [00:44:44] Speaker 01: You have the exact same agency coming back two years later and saying, well, we should have told you in 2009 that these were bad pharmacies, but oh, well, we forgot. [00:44:54] Speaker 01: We think it's waiver. [00:44:55] Speaker 01: We think that's a better argument. [00:44:56] Speaker 01: But beyond that, Your Honor, beyond the legal arguments, the administrator ignored the facts. [00:45:02] Speaker 01: And the fact is when you're a distributor and the DEA says we're gonna tell you in writing if any of your pharmacies are placing suspicious orders, we tell you in writing if any of your pharmacies don't have a legitimate need for these products and they don't, it's reasonable for the distributor to assume they do have legitimate needs for those products and they have not placed suspicious orders. [00:45:22] Speaker 01: So I have to disagree with the argument that [00:45:31] Speaker 01: This is a case where the administrator found, this was all about failure to report. [00:45:37] Speaker 01: The administrator redefined suspicious order, and he says explicitly, an order of normal size, pattern, and frequency can nonetheless be suspicious by virtue of characteristics of the pharmacy. [00:45:53] Speaker 01: And what that means is regardless of whether it's a little bit larger or smaller, it varies, [00:45:59] Speaker 01: A distributor in my client's position and every other distributor in the country has a duty to investigate every single customer without regard to any orders and determine whether that customer is engaged in suspicious conduct because it no longer has anything to do with the size, pattern, and frequency of the order. [00:46:17] Speaker 01: It has to do with the pharmacy. [00:46:18] Speaker 01: You've now taken a suspicious order regulation and turn it into a suspicious pharmacy regulation. [00:46:24] Speaker 01: And that is clearly new. [00:46:25] Speaker 01: It's clearly substantive. [00:46:27] Speaker 01: I'm not saying the DEA doesn't have the power at some point to adopt the rules along those lines, but they have to do it through notice and comment rulemaking. [00:46:33] Speaker 01: You can't do it through adjudication. [00:46:37] Speaker 04: Thank you, counsel. [00:46:39] Speaker 04: The case is submitted.