SINJIL INC v. DEPARTMENT OF HEALTH AND HUMAN SERVICES (2020)

ORDER

Sinjil, Inc. (“Sinjil”) petitions for review of an order of the Departmental Appeals Board, Appellate Division (“Board”) of the United States Department of Health and Human Services (“HHS”), which imposed a thirty-day “No-Tobacco-Sale Order” (“NTSO”) for Sinjil's repeated violations of federal regulations governing the sale and distribution of tobacco products—specifically, selling tobacco products to minors and failing to verify the age of a purchaser of tobacco products by means of photo identification. The parties have waived oral argument, and this panel unanimously agrees that oral argument is not needed. See Fed. R. App. P. 34(a).

Legal Background. In 2009, Congress passed the Family Smoking Prevention and Tobacco Control Act (“TCA”), Pub. L. No. 111-31, 123 Stat. 1776 (2009), giving the United States Food and Drug Administration (“FDA”) “broad regulatory authority over tobacco products.” Sottera, Inc. v. FDA, 627 F.3d 891, 898 (D.C. Cir. 2010); see 21 U.S.C. § 387a. Congress instructed the HHS Secretary to “establish within the [FDA] the Center for Tobacco Products [(“CTP”)], which shall ․ be responsible for the implementation of this subchapter and related matters assigned by the [FDA] Commissioner.” 21 U.S.C. § 387a(e). The TCA authorized the Secretary to issue regulations requiring “restrictions on the sale and distribution of a tobacco product, including restrictions on the access to, and the advertising and promotion of, the tobacco product.” Id. § 387f(d)(1). The FDA then promulgated regulations to “establish restrictions on the sale, distribution, and use of ․ covered tobacco products in order to reduce the number of children and adolescents who use these products, and to reduce the life-threatening consequences associated with tobacco use.” 21 C.F.R. § 1140.2.

These regulations prohibit cigarette and smokeless tobacco retailers from selling such products “to any person younger than 18 years of age,” 21 C.F.R. § 1140.14(a)(1), and require retailers to “verify by means of photographic identification containing the bearer's date of birth that no person purchasing the product is younger than 18 years of age,” id. § 1140.14(a)(2)(i).

The TCA also instructed the FDA to issue guidance providing for “timely and effective notice ․ to the retailer of each alleged violation at a particular retail outlet prior to conducting a follow[-]up compliance check” and “providing that a person may not be charged with a violation at a particular retail outlet unless the Secretary has provided notice to the retailer of all previous violations at that outlet.” § 103(q)(1)(B), (D), 123 Stat. at 1838-39. The FDA has published guidance documents that explain its enforcement of the TCA and its implementing regulations, which include the following: “Civil Money Penalties and No-Tobacco-Sale Orders for Tobacco Retailers” and a related “Responses to Frequently Asked Questions.” See Ctr. for Tobacco Prods., FDA, U.S. Dep't of Health & Human Servs., Civil Money Penalties & No-Tobacco-Sale Orders for Tobacco Retailers: Guidance for Industry (Dec. 2016), https://www.fda.gov/media/80888/download (“CMP Guidance”); Civil Money Penalties & No-Tobacco-Sale Orders for Tobacco Retailers, Responses to Frequently Asked Questions (Dec. 2016), https://www.fda.gov/media/92558/download (“FAQs”); Determination of the Period Covered by a No-Tobacco-Sale Order & Compliance With an Order (Aug. 2015), https://www.fda.gov/media/93328/download (“NTSO Guidance”). As explained in these guidance documents, the CTP, in order to ensure compliance with the age and photo identification requirements, conducts undercover buy inspections in which minors—supervised by FDA-commissioned state inspectors—attempt to purchase tobacco products. See FAQs at 11. During the inspections, which are usually without notice to the retailer, the inspector collects evidence and records the inspection results. Id. at 11-12. Potential violations are then reported to the CTP for review. Id. at 11.

The FDA is authorized to pursue administrative enforcement proceedings and to assess a civil monetary penalty (“CMP”) or, in the case of “repeated violations,” impose an NTSO against retailers that violate these statutory and regulatory requirements. See 21 U.S.C. § 333(f)(8), (9)(A). “Repeated violation” means “at least 5 violations of particular requirements over a 36-month period at a particular retail outlet.” TCA § 103(q)(1)(A), 123 Stat. at 1838. Prior to issuing any such order, “the Secretary shall give written notice to the person to be assessed a [CMP], or upon whom a[n NTSO] is to be imposed ․ and provide such person an opportunity for a hearing on the order.” 21 U.S.C. § 333(f)(5)(A); see id. § 333(f)(8). The practices and procedures for these hearings are set forth in 21 C.F.R. pt. 17. In determining the amount of a CMP or the duration of an NTSO, the Secretary must consider “the nature, circumstances, extent, and gravity of the violation or violations and, with respect to the violator, ability to pay, effect on ability to continue to do business, any history of prior such violations, the degree of culpability, and such other matters as justice may require.” 21 U.S.C. § 333(f)(5)(B). The statute does not establish specific periods for NTSOs, but it does contemplate NTSOs of an indefinite duration. See id. In guidance documents, the FDA has set forth the maximum periods of time that it would seek when imposing an NTSO on a retailer, periods that are based on the number of NTSOs previously imposed on a retailer. See NTSO Guidance at 3-4. For a first NTSO, the maximum period of time that the FDA would seek is thirty calendar days. Id. at 4. But the NTSO Guidance makes clear that, “[i]n general, FDA intends to file a complaint seeking the maximum time period.” Id. at 3.

Factual Background. On March 9, 2013, November 2, 2013, and December 5, 2014, CTP conducted undercover-buy inspections at a Sunoco store owned and operated by Sinjil. During each of these three inspections, the store clerk sold tobacco products to a minor and failed to verify a tobacco purchaser's age through means of photo identification, in violation of 21 C.F.R. § 1140.14(a)(1) and (2). After the March 9, 2013, inspection, CTP issued a Warning Letter to Sinjil, notifying it of the violations revealed in the inspection and stating that failure to correct the violations could lead to federal enforcement actions, including monetary penalties. These violations were the subject of two CMP cases brought by the FDA for violations of the tobacco regulations. In the first CMP action, Sinjil was found liable for the March 9, 2013, and November 2, 2013, violations, and in the second CMP action, Sinjil admitted the December 5, 2014, violations.

On February 13, 2016, a CTP inspector conducted another undercover-buy inspection at the Sunoco store. During the inspection, an employee sold a package of cigarettes to a minor and failed to verify the age of the person by means of photographic identification. CTP subsequently issued a Notice of Compliance Check Inspection that was delivered to the Sunoco store on February 26, 2016. In the Notice, CTP informed Sinjil that an inspection had been conducted on February 13, 2016, and that, during the inspection, a minor was able to purchase a tobacco product. The Notice advised Sinjil that if, after review of the evidence, CTP determined that there was a violation of federal law, it would issue a warning letter or notice indicating that the FDA was seeking a fine, the amount of the fine, and the federal laws that were violated, and explaining how to respond.

In January 2017, CTP filed an administrative complaint in the HHS Civil Remedies Division seeking a thirty-day NTSO against Sinjil, doing business as Sunoco, for its repeated violations of the FDA's tobacco regulations. The January 2017 administrative complaint alleged that a total of six violations in a thirty-six-month period—from November 2, 2013 to February 13, 2016—rendered Sinjil subject to an NTSO, pursuant to 21 U.S.C. § 333(f)(8).

An administrative law judge (“ALJ”) conducted a hearing and found that Sinjil committed six repeated violations of FDA tobacco regulations in a thirty-six-month period. The ALJ credited, however, the unrebutted testimony of Rafata Iwies—the owner of Sinjil—that he was unable to confirm or deny that a Sinjil employee sold tobacco to a minor on February 13, 2016, because he did not receive the Notice of Compliance Check Inspection in a timely manner. Iwies testified that the Notice had been signed for at delivery by an individual named “ELI,” but that “ELI” is neither the owner nor a registered agent of Sinjil and that there had never been an employee by the name of ELI. Iwies also testified that he had been unable to preserve the videotapes from its surveillance system due to the thirteen-day delay in service of the Notice. The ALJ found that CTP's “ineffective service of process” prejudiced Sinjil's ability to defend the claim and reduced the proposed thirty-day NTSO to two days and imposed a $7,500 CMP.

CTP appealed to the Board, arguing that the ALJ erred in reducing the NTSO by twenty-eight days based on alleged prejudice due to improper notice. CTP argued that “[t]he ALJ committed an error of law in applying a regulation governing only service of complaints for administrative penalties to find that CTP failed to properly serve [Sinjil] with a Notice of Compliance Check Inspection.” Sinjil did not appeal the ALJ's decision.

The Board first concluded that, because Sinjil did not appeal, the ALJ's determination that Sinjil was liable for the six violations and the imposition of an NTSO as a penalty (but not the duration) were final and binding. See 21 C.F.R. § 17.45(d). Next, the Board concluded that “the ALJ erred as a matter of law in concluding that CTP did not properly serve the [Notice of Compliance Check Inspection] and thereby prejudiced [Sinjil]” because there is no legal requirement that CTP serve a Notice of Compliance Check Inspection on a retailer. The Board explained that, “but for the ALJ's applying a ‘mitigating factor’ that we find legally insupportable, the ALJ's discussion of the regulatory factors provides no apparent basis for his reduction of the NTSO period.” Finding that a thirty-day NTSO was supported by the ALJ's discussion of the statutory factors considered in determining the duration of the NTSO, see 21 U.S.C. § 333(f)(5)(B), and its own review of the evidence relating to those factors, the Board reversed the two-day NTSO and imposed the thirty-day NTSO originally sought by CTP.¹

In its petition for review, Sinjil argues that (1) the Board exceeded its jurisdiction under 21 C.F.R. § 17.48, (2) the Board failed to address the unrebutted mitigating factors when increasing the NTSO from two days to thirty days, and (3) the Board's decision was arbitrary and capricious because it disregarded CTP guidance concerning the issuance of a Notice of Compliance Check Inspection but deferred to CTP guidance on the NTSO duration.

Analysis. We review the Board's decision in accordance with the Administrative Procedures Act (“APA”). See 5 U.S.C. § 706(2)(A), (E). Under the APA, we review an agency's determination under the arbitrary-and-capricious standard. Ky. Waterways All. v. Johnson, 540 F.3d 466, 473 (6th Cir. 2008). An administrative decision will be set aside if it was “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.” Id. (quoting 5 U.S.C. § 706(2)(A)). We will accept the “agency's factual findings if [they] ․ are supported by substantial evidence on the record as a whole.” Id. (quoting Arkansas v. Oklahoma, 503 U.S. 91, 113, 112 S.Ct. 1046, 117 L.Ed.2d 239 (1992)). An agency's decision is arbitrary and capricious when it has

relied on factors which Congress had not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

Id. at 474 (quoting Nat'l Ass'n of Home Builders v. Defs. of Wildlife, 551 U.S. 644, 658, 127 S.Ct. 2518, 168 L.Ed.2d 467 (2007)).

Sinjil first argues that the Board exceeded its jurisdiction when it reversed the two-day NTSO imposed by the ALJ. Sinjil points to the regulations governing CMP hearings, specifically the provision setting forth the harmless error standard on appeal, which states:

No error in either the admission or the exclusion of evidence, and no error or defect in any ruling or order or in any act done or omitted by the presiding officer or by any of the parties is grounds for vacating, modifying, or otherwise disturbing an otherwise appropriate ruling or order or act, unless refusal to take such action appears to the presiding officer or the Commissioner of Food and Drugs or other entity deciding the appeal (currently the DAB) to be inconsistent with substantial justice. The presiding officer and the entity deciding the appeal at every stage of the proceeding will disregard any error or defect in the proceeding that does not affect the substantial rights of the parties.

21 C.F.R. § 17.48. Noting that the statute concerning NTSOs does not mandate a specific duration for such orders, see 21 U.S.C. § 333(f)(8), Sinjil argues that the Board exceeded its authority because a two-day NTSO was not “inconsistent with substantial justice.”

The Board did not exceed its jurisdiction in reversing the ALJ's NTSO order. The regulations allow the CTP to appeal an ALJ's decision to the Board, 21 C.F.R. § 17.47(a), and the Board is authorized to “decline to review the case, affirm the initial decision ․ or reverse the initial decision ․ or increase, reduce, reverse, or remand any civil money penalty [or NTSO] determined by the presiding officer in the initial decision,” id. § 17.47(j). See 21 U.S.C. § 333(f)(8). “The standard of review on a disputed issue of law is whether the initial decision is erroneous.” 21 C.F.R. § 17.47(k). The Board cannot disturb an initial ruling or order for harmless error. See 21 C.F.R. § 17.48.

Here, the Board found that the ALJ erred as a matter of law by relying on alleged defects in the service of the Notice of Compliance Check Inspection and resulting prejudice to Sinjil and that such error was not harmless. The Board explained, “[B]ut for the ALJ's applying a ‘mitigating factor’ that we find legally insupportable, the ALJ's discussion of the regulatory factors provides no apparent basis for his reduction of the NTSO period.” Thus, the Board necessarily concluded that the error was not harmless because it affected the CTP's substantial rights to enforce tobacco-sales regulations.

Next, Sinjil argues that the Board failed to address “the un-rebutted mitigating factors”—Iwies's testimony concerning the impact of the delay in service of the Notice of Compliance Check Inspection—when increasing the NTSO from two days to thirty days. But the Board explained why it did not address whether there was support in the record for the mitigating factors cited by Sinjil: “Since we reverse this conclusion on legal grounds, we need not discuss whether the record provides any factual support for the alleged improper service or alleged prejudice.” The Board therefore did, in fact, acknowledge Sinjil's mitigation argument but found that it did not support the ALJ's decision. To the extent Sinjil argues that the ALJ and the Board failed to consider other mitigating factors, such as the termination of the employee believed to have sold tobacco to a minor and the education of the Sunoco employees with regard to identification and non-sale of tobacco to minors, Sinjil did not raise these factors in its post-hearing brief to the ALJ in support of its mitigation argument or in its brief on appeal to the Board. The ALJ and the Board therefore limited their consideration of mitigation factors to Iwies's testimony concerning the impact of the delay in service of the Notice of Compliance Check Inspection and evidence of the installation of a Verifone system at the store to ensure accuracy in checking identification for tobacco sales.

Finally, Sinjil challenges the merits of the Board's legal conclusion that CTP is not required to timely serve a Notice of Compliance Check Inspection. In determining the penalty for Sinjil's violations, the ALJ considered the factors set forth in 18 U.S.C. § 333(f)(5)(B), concluding that Sinjil's “repeated inability ․ to comply with federal tobacco regulations [wa]s serious in nature”; that Sinjil failed to establish what impact an NTSO would have on its business; that Sinjil's “history of noncompliance demonstrates its inability to comply with the federal tobacco regulations”; and that Sinjil was “fully culpable for six ․ repeated violations of the [TCA] and its implementing regulations.” Despite these findings, the ALJ reduced the NTSO from thirty days (as requested by the CTP) to two days based on a finding that Sinjil was “substantially prejudiced by not receiving proper service of the February 13, 2016 Notice of Compliance Check Inspection.”

As noted above, with respect to notice to retailers, the TCA requires “timely and effective notice ․ to the retailer of each alleged violation at a particular retail outlet prior to conducting a follow[-]up compliance check” and “notice to the retailer of all previous violations at that outlet” prior to charging a person. § 103(q)(1)(B), (D), 123 Stat. at 1838-39. Neither the statutes nor the regulations mandate the issuance of a Notice of Compliance Check Inspection. In the guidance FAQs, however, CTP states, “Shortly after any inspection in which a retailer sells tobacco products to a minor, CTP issues a Notice of Compliance Check Inspection informing the retailer of the sale and explaining that CTP will make a final determination regarding whether there has been a violation of federal law.” FAQs at 12. CTP sent this letter to Sinjil thirteen days after the February 2016 inspection.

In finding that CTP effectuated “ineffective service of process” of the Notice of Compliance Check Inspection, the ALJ explained that 21 C.F.R. § 17.7 requires service to be made by certified or registered mail or similar mail delivery service with a return receipt record or delivery in person to an individual respondent or to an officer or managing agent of the respondent business, and proof of service. The ALJ explained that “[n]othing in the regulations require[s] me to assume that a UPS Delivery Notification proves that the parcel delivered to [Sinjil] contained the complaint and not any other printed or non-printed matter handled by the carrier or nothing at all.” The ALJ also emphasized that CTP did not rebut Iwies's testimony that “ELI”—who signed for the delivery of the Notice—is neither an owner or agent of Sinjil and that Sinjil has never employed anyone by the name of “ELI.” The ALJ explained that Sinjil had waived any challenge to liability based on ineffective service of process by failing to expressly deny the allegations in the complaint but noted that it could be considered in mitigation of the penalty. In evaluating the penalty, the ALJ concluded that Sinjil was prejudiced by the ineffective service, stating, “Had an objection to service of process been raised as a preliminary objection to service and jurisdiction, we may have reached a different conclusion.”

The Board correctly determined that the premise of the ALJ's decision to reduce the duration of the NTSO—ineffective service of process—was legally unsound. The ALJ looked to § 17.7 of the applicable regulations to determine that the Notice of Compliance Check Inspection was not properly served, but § 17.7 concerns service of a complaint to initiate an administrative proceeding. There is no dispute that the FDA properly served its complaint on Sinjil in accordance with § 17.7. The Notice of Compliance Check Inspection is not a complaint. As explained, the Notice of Compliance Check Inspection is not required by statute or regulation. Although CTP has incorporated such notice into its enforcement procedures as set forth in the guidance FAQs, neither the FAQs nor any other guidance document states that such notice is required or sets forth any requirements for how such notice must be sent to retailers. Moreover, the FAQs expressly state, “This guidance represents the current thinking of the [FDA] on this topic. It does not establish any rights for any person and is not binding on the FDA or the public.” FAQs at 1. Thus, CTP was not required to send a Notice of Compliance Check Inspection to Sinjil, let alone serve it on Sinjil in accordance with § 17.7. Because ineffective service of this notice was the sole basis for the ALJ's decision to reduce the NTSO to two days and the ALJ found that all the § 333(f)(5)(B) factors weighed in favor of the thirty-day NTSO, the Board reasonably concluded that, but for the legally insupportable mitigation finding, there was “no apparent basis for [the ALJ's] reduction of the NTSO period.” And its decision to reverse the two-day NTSO and impose a thirty-day NTSO was not arbitrary and capricious.

Accordingly, we DENY Sinjil's petition for review.

FOOTNOTES

1.   The Board remanded the matter to the ALJ for further proceedings with respect to the CMP, but that aspect of the ruling is not at issue in this appeal.