Seventh Circuit Questions Equity of CSA Civil Monetary Penalty Involving Pseudoephedrine SalesNovember 8, 2007
The U.S. Court of Appeals for the Seventh Circuit, in its recent opinion in United States v. Global Distributors, Inc., remanded for reconsideration to the U.S. District Court for the Northern District of Illinois (Eastern Division) the imposition of the maximum allowable monetary penalties under the Controlled Substances Act (“CSA”). In this case, the federal government brought a civil action against Global Distributors, Inc. (“Global”) for allegedly failing to demand proof of identity from four customers in connection with eight large sales of a cold medicine containing pseudoephedrine.
Pseudoephedrine is commonly used as a decongestant in drug products, but can be “cooked up” to produce the illegal psychostimulant and sympathomimetic drug methamphetamine (popularly known as “meth” or “ice”). The Combat Methamphetamine Epidemic Act of 2005 banned over-the-counter sales of cold medicines containing pseudoephedrine and limited the sale of such drug products to “behind the counter” status.
The pseudoephedrine contained in some of the drug products sold by Global was allegedly converted into methamphetamine worth almost $500,000. According to an investigation conducted by the Drug Enforcement Administration (“DEA”), much of the cold medicine was diverted for illicit uses by a clerk employed by one of the four customers involved in these transactions. The U.S. District Court for the Northern District of Illinois (Eastern Division) granted summary judgment in the government’s favor and assessed jointly against Global and John Asoofi, Global’s owner and sole shareholder, the maximum $25,000 fine per each of the eight violations.
The Seventh Circuit affirmed the district court’s holdings that Global and Mr. Asoofi violated the CSA and its implementing regulations by failing to:
(1) verify the identities or registration statuses of their customers at the time the eight orders were placed;
(2) verify the existence and apparent validity of business entities ordering a listed chemical;
(3) verify the agency status claimed of the representative when it is entering a transaction with a new representative of a firm;
(4) obtain one of the customer’s signature and two forms of identification for cash sales; and
(5) establish, for customers who are not an individual or cash customer, the identity of the authorized purchasing agent and have on file that person’s signature, electronic password, or other identification.
The Court of Appeals agreed with the district court that the defendants presented either no evidence, or insufficient evidence for purposes of defeating summary judgment, that they complied with these regulatory requirements.
The Seventh Circuit, however, found that the trial court abused its discretion in imposing the maximum allowable monetary penalties under the CSA. Both courts considered the following four factors in assessing a civil penalty: (1) the defendants’ level of culpability; (2) the public harm that the violations caused; (3) the amount of profits defendants made from the violations; and (4) the defendants’ ability to pay a penalty. The Seventh Circuit agreed with the lower court’s analysis of the first, second, and fourth factors. As to the third factor, however, the appellate court was struck by the disparity between the $200,000 fine and Global’s profit ($11,000 according to the government; $2,000 according to defendants).
The Seventh Circuit reasoned that “civil penalties ought to bear some relation to the conduct being punished” and observed that although the product Global sold resulted in methamphetamine worth $500,000, none of the methamphetamine actually reached the public. Given these circumstances, the Court opined that “it is more appropriate in this case to focus on the defendants’ profits, rather than the public harm caused by their actions, which was minimal in non-monetary terms. This would suggest that a lower fine would be adequate.” Accordingly, the Seventh Circuit remanded the case for reconsideration of the amount of penalties assessed against the defendants.
- An MP3 file of the February 2007 oral argument before the Seventh Circuit is available here.
- FDA information on the legal requirements for the sale and purchase of drug products containing pseudoephedrine is available here.