D.C. Circuit Court Of Appeals Affirms DEA’s Authority To Hold Opioids Supplier Accountable For Suspicious Orders

July 6, 2017

On June 30, 2017, the D.C. Circuit Court of Appeals upheld DEA’s authority to take prescription drug suppliers to task for failing to proactively investigate, stop, and report drug diversion activities.  The 38-page decision in Masters Pharmaceutical, Inc. v. Drug Enforcement Administration, No. 15-1335, 2017 U.S. App. LEXIS 11666 (D.C. Cir. 2017) marks a significant benchmark for DEA’s Diversion Control authority and falls in line with the agency’s continued push to require the registrant community to step up its efforts under existing regulations to protect against illegal drug diversion.

The decision comes at the end of a nine-year odyssey testing the limits of DEA’s authority to require registrants to implement compliance systems designed to detect suspicious orders and prevent drug diversion.  The odyssey started in late 2008, when DEA issued an Order to Show Cause (OTSC) against Masters Pharmaceutical, alleging the supplier had failed to maintain effective controls against the diversion of hydrocodone.  On April 1, 2009, DEA and Masters entered a settlement agreement, requiring the company to pay $500,000 and implement a compliance system for detecting suspicious orders and preventing drug diversion.  To fulfill its obligations, Masters implemented its “Suspicious Order Monitoring System” (SOMS), consisting of a computer program that would flag suspicious orders and a protocol for Masters’ employees to follow in investigating suspect orders and determining whether they passed muster.

Four years after the 2009 settlement agreement, DEA determined that Masters’ SOMS had fallen short and was failing to detect and report suspicious oxycodone orders.  On August 9, 2013, DEA issued a second OTSC, alleging the supplier had failed to effectively implement procedures to meet both its reporting and shipping requirements under the Controlled Substances Act (CSA).  Those allegations were tried before an Administrative Law Judge (ALJ). On June 19, 2014, the ALJ issued a decision in Masters’ favor, determining that the supplier had “substantially complied” with its reporting and shipping requirements.

The ALJ’s decision, in turn, was reversed by DEA’s Acting Administrator Chuck Rosenberg in an 83-page Decision and Order issued on September 15, 2015.  Among other things, the Acting Administrator determined that the ALJ’s analysis was flawed and that Masters had failed to execute a system that would effectively identify, investigate, and report suspicious orders.  Acting Administrator Rosenberg determined that Masters’ certificate of registration should be revoked, prompting Masters to file a Petition for Review with the D.C. Circuit Court of Appeals.

In its Petition, Masters challenged the Acting Administrator’s findings on several different grounds, all of which were rejected by the D.C. Circuit.  Following are some of the most significant takeaways for the registrant community:

  • The opening paragraph highlights the devastation of the opioids epidemic, which claims an average of 44 American lives every day.  It also points to the rising abuse of painkillers as a “serious and challenging” public health problem where the number of prescription overdose deaths has quadrupled since 1999.  Those realities provide a sobering backdrop for the opinion, and also illustrate how the court had the opioids epidemic in mind while assessing the extent of DEA’s regulatory authority to meet the crisis.
  • Masters challenged the Acting Administrator’s determination that orders flagged by the SOMS Computer Program were presumptively “suspicious” under 21 C.F.R. § 1301.74(b) (the regulation defining suspicious orders).  The supplier argued that the computer program was over-inclusive and further investigation by its employees was required before flagged orders could be classified as “suspicious,” triggering DEA’s reporting requirements.  The D.C. Circuit rejected the argument, concluding that the SOMS Computer Program was designed to flag suspicious orders that departed from 6 month trends as defined by the regulations.  Those flagged orders, in turn, were properly presumed “suspicious” unless and until Masters’ staff dispelled those suspicions.
  • Masters claimed there was insufficient evidence to support the Acting Administrator’s finding that the supplier repeatedly failed to report and reasonably investigate suspicious orders.  The appeals court rejected this position, finding that the evidence showed that Masters “routinely” failed to investigate flagged orders.  In many instances where its employees actually investigated, their efforts were deemed too pro forma or incomplete to reasonably dispel suspicions.  The court also pointed to evidence that Masters’ employees deleted some oxycodone orders, and edited others to put them more in line with “normal” sizes and patterns before filling them.  Not surprisingly, the panel determined that these practices, and others, squarely subverted the suppliers’ reporting obligations.
  • The supplier also argued that the Acting Administrator’s decision effectively amended two existing DEA regulations without going through the notice-and-comment process in violation of the Administrative Procedure Act (APA):
    • 21 C.F.R. § 1301.74(b) – Masters claimed this regulation’s definition of suspicious orders as “includ[ing] orders of unusual size, orders deviating substantially from a normal pattern, and orders of unusual frequency” effectively cabined DEA’s ability to look outside of those listed areas in determining whether an order qualified as “suspicious.”  The D.C. Circuit rejected that interpretation, finding that the rule merely highlighted exemplary characteristics, and that DEA could consider other non-listed factors in the suspicious orders analysis.
    • 21 C.F.R. § 1301.71(a) –  Masters argued that the written procedures in this and related regulations qualified as the only standards that DEA could use to measure the effectiveness of its diversion controls.  Thus, the supplier reasoned, the Acting Administrator’s reference to additional unlisted obligations, such as investigating to “dispel red flags indicative that a customer is engaged in diversion,” went beyond the allowed regulatory framework.  The court rejected this argument and first pointed out that a supplier, such as Masters, does not have a duty to investigate suspicious orders if it simply declines to fill them and reports the conduct to DEA.  However, once a distributor elects to shoulder the responsibility of investigating flagged orders and shipping those later deemed “nonsuspicious,” the distributer must then follow an established protocol (such as the SOMS) and conduct a reasonable investigation, all aimed at effectively dispelling suspicion.

Overall, the Masters decision is a feather in DEA’s regulatory authority cap and will undoubtedly serve as a springboard for the agency to push the envelope on holding registrants accountable for making sure medications are not diverted into illegal channels. Hancock Daniel Director and former DEA Chief of Staff Mike Gill believes that all registrants should familiarize themselves with the opinion and what it means for their responsibilities: “Masters illustrates how DEA is continuing to step up its oversight efforts and expects the entire registrant community to remain vigilant on diversion control issues, particularly when it comes to prescription opioids.”  While all required steps are not expressly written into the regulations, the registrants are expected to employ reasonable measures designed to identify and fairly investigate suspicious orders and requests. Establishing and following sound procedures to meet those obligations is critical for meeting those requirements and avoiding problems if the DEA microscope is turned on a registrant’s business or practice.

If you have questions regarding recent developments in this area or need assistance in assessing your procedures, please contact members of our Healthcare Regulatory Boards and White Collar & Government Investigations teams.

The information contained in this advisory is for general educational purposes only. It is presented with the understanding that neither the author nor Hancock, Daniel, Johnson & Nagle, PC, is offering any legal or other professional services. Since the law in many areas is complex and can change rapidly, this information may not apply to a given factual situation and can become outdated. Individuals desiring legal advice should consult legal counsel for up-to-date and fact-specific advice. Under no circumstances will the author or Hancock, Daniel, Johnson & Nagle, PC be liable for any direct, indirect, or consequential damages resulting from the use of this material.

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