## Facts

- Masters Pharmaceutical, Inc. was a DEA-registered wholesale distributor of controlled substances, including oxycodone and hydrocodone, to retail pharmacies nationwide.
- DEA initiated administrative revocation proceedings alleging Masters failed to maintain effective controls against diversion and failed to report “suspicious orders” as required by 21 C.F.R. § 1301.74(b).
- Masters used a computerized suspicious order monitoring system (SOMS) that “held” orders exceeding preset thresholds intended to detect unusual size, pattern, or frequency.
- DEA found Masters commonly responded to held orders by reducing quantities to fall below thresholds and then shipping, rather than conducting meaningful due diligence to resolve diversion-related red flags.
- DEA found Masters’ follow-up checks were often cursory and documentation sometimes contained false or questionable statements.
- DEA determined Masters distributed large quantities of opioids to multiple pharmacies displaying red flags (e.g., unusually high controlled-to-noncontrolled ratios and volumes inconsistent with the pharmacies’ circumstances).
- After an evidentiary hearing, the Acting DEA Administrator revoked Masters’ registration and denied renewal, concluding continued registration would be inconsistent with the public interest under 21 U.S.C. § 823(b), (e).
- Masters petitioned for review in the D.C. Circuit under 21 U.S.C. § 877, challenging DEA’s interpretation, evidentiary support, due process notice, and the sanction.

## Issues

1. Whether DEA reasonably interpreted 21 C.F.R. § 1301.74(b) to require distributors to investigate and report orders flagged as suspicious, including orders held by internal monitoring thresholds unless due diligence dispels suspicion.
2. Whether DEA’s findings that Masters failed to conduct adequate due diligence and failed to report suspicious orders were supported by substantial evidence and a reasoned explanation under arbitrary-and-capricious review.
3. Whether revocation violated due process because Masters lacked fair notice of DEA’s interpretation and enforcement approach.
4. Whether revocation was an unreasonable sanction under the statutory public-interest framework.

## Decision

- The D.C. Circuit denied the petition for review and upheld DEA’s revocation and denial of renewal.
- The court sustained DEA’s interpretation that the regulation imposes an affirmative obligation to operate an effective monitoring system, conduct meaningful due diligence when red flags arise, and report suspicious orders when discovered.
- The court agreed DEA could treat orders held by a distributor’s threshold-based monitoring system as presumptively suspicious unless the distributor’s investigation adequately resolves the concern.
- The court held substantial evidence supported DEA’s findings that Masters shipped opioids despite unresolved red flags, performed inadequate investigations, and failed to report suspicious orders.
- The court rejected Masters’ fair-notice challenge, concluding the regulation’s text and DEA’s prior pronouncements provided sufficient notice.
- The court upheld revocation as within DEA’s discretion based on the seriousness, duration, and volume of violations and Masters’ lack of responsibility-taking.

## Legal Principles

- Under 21 C.F.R. § 1301.74(b), distributors must design and operate a system to identify suspicious orders and must inform DEA when suspicious orders are discovered.
- Suspicious orders include orders of unusual size, orders substantially deviating from normal patterns, and orders of unusual frequency.
- A distributor’s internal monitoring thresholds may be used to operationalize the regulation; orders flagged or held by such a system may be treated as suspicious absent adequate due diligence that dispels the suspicion.
- “Effective controls against diversion” require more than mechanical threshold adjustments; a registrant must conduct meaningful investigation when red flags indicate potential diversion.
- Agency revocation decisions under the Controlled Substances Act are reviewed for reasoned decisionmaking and evidentiary support; sanctions are upheld when tied to statutory public-interest factors and supported by the record.
- Fair notice is satisfied where regulatory text and prior agency statements reasonably inform regulated parties of expected conduct.

## Conclusion

The D.C. Circuit upheld DEA’s revocation of a controlled-substance distributor’s registration, holding that the suspicious-order regulation reasonably requires active due diligence and reporting, and that shipping after merely reducing or minimally checking flagged orders can support a public-interest revocation.


Masters Pharm., Inc. v. Drug Enf't Admin., 861 F.3d 206 (D.C. Cir. 2017)