Masters Pharmaceutical, Inc. v. Drug Enforcement Administration, 861 F.3d 206

Background

Masters Pharmaceuticals was a DEA-registered distributor of controlled substances that agreed in 2009 to implement a Suspicious Order Monitoring System (SOMS) after a 2008 settlement with DEA.
SOMS consisted of a computer program that held orders that met criteria in 21 C.F.R. § 1301.74(b) (unusual size, pattern, frequency) and a Compliance Protocol requiring investigation, documentation (utilization reports, calls, site visits), reporting to DEA if suspicion remained, or declining to ship.
DEA issued a 2013 Order to Show Cause alleging Masters repeatedly failed to report or properly investigate suspicious oxycodone orders (hundreds of instances involving several pharmacies), and that employees edited/deleted held orders or shipped them with only cursory or undocumented inquiries.
An ALJ found Masters had substantially complied with reporting and shipping requirements, viewing an order as "suspicious" only if it was more likely than not to be diverted; the DEA Administrator reversed, holding the regulatory suspicion standard is lower and that Masters repeatedly violated the Reporting Requirement, warranting revocation.
Masters challenged the Administrator’s decision on substantial-evidence grounds, APA notice-and-comment/adjudication limits, breach/estoppel under the 2009 Settlement Agreement, due process (reliance on evidence/arguments not presented at hearing), and that the Administrator punished Masters for refusal to accept responsibility.

Issues

Issue	Plaintiff's Argument (Masters)	Defendant's Argument (DEA)	Held
1. Whether orders held by SOMS were "suspicious" under 21 C.F.R. § 1301.74(b) unless investigated and cleared	SOMS initially holds many orders that are not "suspicious"; an order is only "suspicious" after an employee investigates and affirmatively deems it so	The regulation lists illustrative indicia (unusual size/pattern/frequency); SOMS held orders that met those indicia, so they are "suspicious" absent dispelling investigation	Administrator reasonably interpreted §1301.74(b) to treat SOMS-held orders as suspicious; substantial evidence supports this view.
2. Whether DEA’s factual findings (failure to investigate/report) were supported by substantial evidence	Masters: record shows some investigation; testimony (chief compliance officer) that SOMS investigations occurred; ALJ found substantial compliance	DEA: files show frequent deletions/edits of held orders, lack of documentation, perfunctory or unverifying calls, filling with "reservations" instead of reporting—ample evidence of systemic failures	Court defers to Administrator under substantial-evidence standard and affirms findings of widespread failure to conduct meaningful investigations or report.
3. Whether the Administrator unlawfully amended DEA rules via adjudication (violating APA notice-and-comment)	Masters: Administrator expanded §1301.74(b) and §1301.71(a) by adding new, detailed obligations (e.g., mandatory use of utilization reports, documentation, scope of due diligence) without rulemaking	DEA: Administrator applied existing Reporting and security requirements, explained permissible interpretive details for how a SOMS must function if a registrant chooses to investigate rather than report, not creating new rules	Court: No prejudicial rulemaking problem—the Administrator relied on existing regulations and reasonably explained what meaningful investigation entails; even if Shipping-Requirement elaboration occurred, final revocation rested on Reporting Requirement violations.
4. Whether Masters was unfairly deprived of contractual or due-process protections (Settlement Agreement reliance; reliance on excluded evidence; punished for not admitting fault)	Masters: DEA failed to provide promised written notice from 2009 review and thus Masters reasonably relied; Administrator cited excluded evidence and pre-2009 conduct; revocation penalized refusal to accept responsibility	DEA: Compliance Review occurred too soon after SOMS adoption; agreement reserved DEA rights to use pre-2009 evidence for evidentiary purposes; excluded evidence was not outcome-determinative; registrant must present mitigating evidence when Government proves regulatory violations	Court: Settlement did not bar use of pre-2009 evidence to show Masters’ knowledge; estoppel/reliance fails (no reasonable detrimental reliance or affirmative government misconduct); Administrator erred in citing some excluded post-settlement evidence but that error was harmless because abundant admissible post-review evidence independently supported revocation; refusal to accept responsibility was not dispositive.

Key Cases Cited

Auer v. Robbins, 519 U.S. 452 (1997) (courts defer to an agency’s reasonable interpretation of its own regulations)
Morall v. DEA, 412 F.3d 165 (D.C. Cir. 2005) (Administrator may weigh public-interest factors and need not make findings on every factor)
POM Wonderful, LLC v. FTC, 777 F.3d 478 (D.C. Cir. 2015) (agency’s choice between rulemaking and adjudication is generally discretionary)
Marseilles Land & Water Co. v. FERC, 345 F.3d 916 (D.C. Cir. 2003) (limits on agency’s power to amend rules by adjudication)
Katz v. SEC, 647 F.3d 1156 (D.C. Cir. 2011) (regulated party had fair notice to defend against certain allegations where evidence was litigated)
SEC v. Whittemore, 659 F.3d 1 (D.C. Cir. 2011) (erroneous evidentiary rulings need not require reversal absent prejudice)
Morris Commc’ns, Inc. v. FCC, 566 F.3d 184 (D.C. Cir. 2009) (elements required to estop the government)
Dantran, Inc. v. U.S. Dep’t of Labor, 171 F.3d 58 (1st Cir. 1999) (agency not equitably estopped by prior inspections)
New Valley Corp. v. Gilliam, 192 F.3d 150 (D.C. Cir. 1999) (appellate review of agency factfinding under substantial-evidence standard)
Cumberland Coal Res., LP v. Fed. Mine Safety & Health Review Comm’n, 717 F.3d 1020 (D.C. Cir. 2013) (appellate courts must accept agency factual findings so long as supported by substantial evidence)