Lone Star Enterprises, Inc. d/b/a Payless Smokes, DAB TB8474 (2024)

INITIAL DECISION

The Center for Tobacco Products (CTP), of the United States Food and Drug Administration (FDA), seeks a civil money penalty (CMP) against Respondent, Lone Star Enterprises, Inc. d/b/a Payless Smokes, for receiving in interstate commerce an electronic nicotine delivery system (ENDS) product that lacks the premarketing authorization required under the Federal Food, Drug, and Cosmetic Act (Act) and offering such product for sale, in violation of 21 U.S.C. § 331(c). Therefore, CTP seeks a $19,192 CMP against Respondent.

For the reasons discussed below, I find that Respondent violated 21 U.S.C. § 331(c), and, based on mitigating circumstances, a reduced CMP of $12,500 against Respondent is appropriate.

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I. Background

CTP began this matter by serving an Administrative Complaint on Respondent at 901 Southwest Fairlawn Road, Suite 161, Topeka, Kansas 66606 by United States Postal Service (USPS), and by filing a copy of the Complaint with the FDA’s Division of Dockets Management. Civil Remedies Division (CRD) Docket (Dkt.) Entry Nos. 1 (Complaint), 1b (Delivery Notification). In its Answer, the Respondent admitted the allegations, raised a defense, and challenged the appropriateness of the CMP sought by CTP as too high. CRD Dkt. Entry No. 6 (Answer).

In accordance with my Acknowledgment and Pre-Hearing Order (APHO), both CTP and Respondent timely filed their respective pre-hearing exchanges. CRD Dkt. Entry Nos. 7 (APHO); 10-10i (Informal Brief of Complainant, Complainant’s List of Proposed Witnesses and Exhibits, and proffered exhibits 1-8); 11-24 (Informal Brief of Respondent, Respondent’s List of Proposed Witnesses and Exhibits, and proffered exhibits 1-12).

On May 14, 2024, I held a telephone pre-hearing conference (PHC) in this case. During the PHC, absent objection from either party, I admitted CTP’s proffered exhibits into the record as CTP Exs. 1-8 and Respondent’s proffered exhibits into the record as R. Exs. 1-12. See CRD Dkt. Entry No. 26 (Summary of Pre-Hearing Conference and Order Establishing Deadlines for Final Briefs) at 1-2. I also explained the issues before me, and the parties’ respective burdens of proof.

Respondent’s counsel confirmed that Respondent conceded liability but contested the appropriateness of the penalty amount. Id. at 2. Neither party wished to cross-examine the opposing party’s witnesses; therefore, I found a hearing to be unnecessary and stated that this case would be decided on the written record. Id. Parties were given until June 6, 2024, to file final briefs. Id. On June 3, 2024, Respondent filed a notice indicating Respondent’s desire to rest on the pleadings submitted. CRD Dkt. Entry No. 27. On June 6, 2024, CTP submitted a notice indicating its waiver of a final brief. CRD Dkt. Entry No. 28.

Accordingly, the record is now closed, and I will decide this case based on the evidence in the administrative record. 21 C.F.R. §§ 17.41, 17.45(c); see also id. §§ 17.19(b)(11), (17).

II. Issues

Because the Respondent concedes that it received in interstate commerce an ENDS product that lacked premarketing authorization, specifically an Elfbar Rainbow Cloudz ENDS product, and delivered or proffered delivery of the product for pay or otherwise on August 14, 2023, in violation of the Act, as alleged by CTP, the only issue I must decide

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is whether the $19,192 CMP is appropriate, considering any mitigating or aggravating factors that I find in this case. See 21 C.F.R. § 17.21(c)(1).

III. Findings of Fact and Conclusions of Law

The FDA has the authority to seek civil money penalties from any person who violates any Act requirement that relates to tobacco products. 21 U.S.C. § 333(f)(9)(A). The term “person” is defined to include individuals, partnerships, corporations, and associations. 21 U.S.C. § 321(e). Any person who violates a requirement of the Act that relates to tobacco products may incur a CMP up to the maximum amounts provided for by law, which, at the time of the violation, was $19,192 for each such violation, and not to exceed $1,279,448 for all violations adjudicated in a single proceeding. 21 U.S.C. § 333(f)(9)(A); 21 C.F.R. § 17.2; 45 C.F.R. § 102.3 (2022); 87 Fed. Reg. 15,100, 15,104 (March 17, 2022).

CTP seeks to impose a CMP against Respondent pursuant to the authority conferred by the Act and implementing regulations at Part 21 of the Code of Federal Regulations. CTP has the burden to prove the Respondent’s liability and the appropriateness of the penalty by a preponderance of the evidence. 21 C.F.R. § 17.33(b).

Based upon Respondent’s admission that it violated the Act as alleged by CTP, I find that Respondent violated the prohibition against receiving and offering for sale a new tobacco product that was adulterated and misbranded. CRD Dkt. Entry No. 11 (Informal Brief of Respondent) at 1 (“Respondent stipulated to the allegations contained in section II 1-4 of the Informal Brief of Complainant.”); R. Ex. 12, ¶3 (sworn statement of Respondent’s proprietor admitting liability). Having found that Respondent violated the prohibition against receiving and offering for sale a new tobacco product that was adulterated and misbranded, I further find that Respondent is liable for a CMP not to exceed the amounts listed in FDA’s CMP regulations.

When determining the appropriate amount of a CMP, I must consider any aggravating or mitigating circumstances and the factors listed in the Act. 21 C.F.R. § 17.34(a)-(b). Specifically, I am required to consider “the nature, circumstances, extent and gravity of the 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).

In its Answer, Respondent contends that the CMP sought by CTP is too high because the requested fine is exorbitant and would be disproportionate to the violation. CRD Dkt. Entry No. 6 (Answer) at 2. Respondent requested a $500 fine and explained that it removed the products immediately after receiving the complaint. Id. Respondent went on to state that it warned other business owners and distributers that these products were

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not legal to sell and, although acknowledging it is not a defense to liability, denied having received a warning letter from CTP. Id.

For the reasons explained below, I find that Respondent has established mitigating circumstances by a preponderance of the evidence and conclude that a reduced CMP of $12,500 is appropriate. 21 C.F.R. §§ 17.33(a), (c); 17.34(a)-(c).

A. Nature, Circumstances, Extent and Gravity of the Violations

The Family Smoking Prevention and Tobacco Control Act (Tobacco Control Act) was enacted for the purpose of authorizing regulation of tobacco products for the “protection of the public health.” 21 U.S.C. § 387f(d). Retailers, like the Respondent, who choose to engage in the business of selling tobacco products, because they are dangerous and highly addictive products, bear a heavy burden to assure that they make their sales in the compliance with the law. See 21 U.S.C. § 387 note (Findings and Purpose). As such, the Respondent’s violation in this case is serious.

CTP contends that Respondent’s violation is particularly serious because it occurred despite a previous warning for the same violation. CRD Dkt. Entry No. 10 (Informal Brief of Complainant) at 8-9. Specifically, CTP cites to its warning letter, issued on May 25, 2023, informing the Respondent that it was in violation of the law for offering for sale a new tobacco product that lacked the required premarketing authorization. Id. at 9 (citing Ex. 7). CTP states that the warning letter notified Respondent that future violations may lead to enforcement action, including, but not limited to, civil money penalties, seizure, and/or injunction by FDA, and further advised Respondent that all new tobacco products on the market without statutorily required premarket authorization are marketed unlawfully and subject to enforcement. Id. at 9. CTP further states that the warning letter also provided Respondent with resources to help tobacco retailers understand and comply with FDA tobacco laws and regulations. Id. CTP states that the Respondent’s repeated violation therefore supports a penalty “in order for Respondent to grasp the seriousness and importance of the requirements governing the sale of tobacco products.” Id.

Respondent counters that the penalty should be reduced because it did not receive the warning letter on which CTP relies. In support of this contention, the Respondent’s proprietor submits a sworn declaration stating that he did not personally receive the warning letter. R. Ex. 12 at 1, ¶ 4. In response to CTP’s evidence that shows delivery of the warning letter to the Respondent’s address by United Parcel Service and receipt by “HASAN” and a signature resembling “AAY,” Respondent states that it does not employ an individual with those initials. Id., ¶ 5. Respondent further states that it immediately removed the products from the store and revised its policies and procedures to ensure the violation would not occur again. Id., ¶¶ 7-8. Respondent also states that it notified other business establishments and distributors that the products were illegal and asked them not

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to sell the products. Id., ¶ 9. Finally, Respondent states none of its customers have made it aware of specific adverse health effects associated with the sales of these products. Id., ¶ 10; see also CRD Dkt. Entry No. 11 (Informal Brief of Respondent) at 2 (stating CTP has not offered any proof of any particular harm caused by the sale of the products at issue, relying instead on a general possibility of harm based on a lack of FDA approval).

Respondent suggests that a reduced penalty of $500, along with the thousands of dollars in litigation expenses it has incurred, is appropriate to deter it from engaging in similar conduct in the future and to hold it accountable for violations of the Act. R. Ex. 12, ¶ 11; see also CRD Dkt. Entry No. 11 (Informal Brief of Respondent) at 3-4. CTP was given an opportunity to cross-examine Respondent’s witness, but chose not to, which leaves the witness’s testimony unrebutted. CRD Dkt. Entry No. 26 (Summary of Pre-Hearing Conference and Order Establishing Deadlines for Final Briefs) at 1-2. Similarly, CTP was provided an opportunity to file a final brief but did not to do so. CRD Dkt. Entry No. 28 (Notice of Waiver of Final Brief).

I find the Respondent’s unrebutted testimony, that he was not made aware of the violations prior to the inspection, credible because it has been consistent throughout these proceedings. I acknowledge CTP’s evidence that demonstrates that the warning letter was delivered to the Respondent’s retail establishment, and have further considered that, as the proprietor of the retail establishment, the Respondent is responsible for conducting its business, which reasonably includes the receipt and review of mail. In this regard, I also note that CTP is not required to warn the Respondent of a violation before imposing a penalty.

To be clear, I do not find the lack of warning is an affirmative defense. Instead, I address the issue in response to CTP’s arguments that this Respondent’s violations were particularly serious because they were repeated despite previous warnings. And based on the administrative record, I find the Respondent has established by a preponderance of the evidence that he was unaware of the violations at issue prior to the inspection results. Therefore, Respondent was not, as CTP argues, demonstrating an unwillingness or inability to comply with the law, which might support the maximum CMP that CTP seeks in this case.

To the contrary, Respondent has shown that it took remedial action upon learning of the violation by the inspection results. According to the Respondent’s unrebutted testimony, he “acted immediately to remove the products from my store.” R. Ex. 12, ¶ 7. I acknowledge the Respondent’s statement in its Answer that it removed the products after receiving the complaint it not wholly consistent with its declaration that it removed the products after the inspection. CRD Dkt. Entry No. 6 (Answer) at 2. However, based on its statement recalling the events surrounding the receipt of the complaint, Respondent explains that “all ELF BAR products” were removed and disposed. See R. Ex. 1 (emphasis added). While I find this statement less credible because it was made based on

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past recollection and includes the incorrect date of receipt of the complaint, it does provide an explanation for the discrepancy. Based on the evidence provided by the Respondent, which CTP has not challenged or even addressed, I find that Respondent took some remedial action after receipt of the inspection results and also after receipt of the complaint.

In addition to removal, Respondent has provided evidence that it contacted other retailers and distributors to not sell the illegal products. Id., ¶ 9; R. Exs. 1, 3-9. While the Respondent’s statements that it is unaware of adverse health effects associated with the sales of these products demonstrates an underappreciation of the dangerous nature of these products, it is clear that the Respondent understands its legal responsibility and has taken serious, effective efforts to comply with the law. See also R. Ex. 2 (employee policy regarding the selling of tobacco and vape products). Thus, I find the CMP amount should be accordingly reduced.

B. Respondent’s Ability to Pay and Effect on Ability to Do Business

Respondent has offered no evidence that it is unable to pay the penalty sought by CTP. Nor does the Respondent argue an inability to pay the CMP; rather, Respondent states that I am under no obligation to take violators to the edge of insolvency to make a penalty “appropriate.” Id. at 3 (Informal Brief of Respondent).

Similarly, Respondent offers no evidence or argument that paying the sought after CMP would affect its ability to do business. Respondent proffers that I should not require advance proof that Respondent’s business would be destroyed to secure an appropriate penalty amount but instead the amount should be tied to the facts of this particular case.

I agree with Respondent that a CMP should not put a retailer out of business or threaten its viability. The purpose of the CMP is to promote compliance and deter future violations by penalizing retailers for non-compliance. See 21 U.S.C. § 387 note (explaining that one of the purposes of the Tobacco Control Act is “to continue to permit the sale of tobacco products to adults in conjunction with measures to ensure that they are not sold or accessible to underage purchasers”).

However, the burden is on Respondent to prove any mitigating factors by a preponderance of the evidence. See 21 C.F.R. § 17.33(c). Here, the Respondent has not proffered any evidence in the record that demonstrates (or even argue) that it is unable to pay the sought after CMP amount, that paying the amount would threaten its solvency or in any way effect its ability to do business. I acknowledge the Respondent’s statements regarding CTP’s settlement offer based on inability to pay; however, I am not bound by CTP’s offer. CRD Dkt. Entry No. (Informal Brief of Respondent) at 3 (stating that CTP’s offer during settlement negotiations based on the Respondent’s ability to pay was excessive). If Respondent wanted me to consider its ability to pay or to continue to do

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business as factors to reduce the proposed penalty amount, then the burden was on it to argue and provide evidence of the same. Therefore, I find neither of these factors weigh in favor of reducing the CMP amount sought by CTP.

C. History of Prior Violations

There is no indication in the record of any prior violations of section 331(c) resulting in a CMP. However, CTP argues that Respondent was notified in a warning letter that it was in violation of the Act by selling new tobacco products that lacked premarket authorization required under the Act. CRD Dkt. Entry No. 10 (Informal Brief of Complainant) at 10 (citing CTP Ex. 7). CTP argues that Respondent’s repeated violation supports the sought after CMP because the repeated violation demonstrates an unwillingness or inability to comply with federal tobacco laws and regulations. Id. at 10.

Respondent disputes having received the warning letter. CRD Dkt. Entry No. 11 (Informal Brief of Respondent) at 3-4; see also R. Ex. 12 at 1, ¶ 4. Respondent further testified that he first became aware of the violation after the inspection giving rise to the violation at issue. R. Ex. 12 at 2, ¶ 7. As previously stated, CTP chose not to cross-examine Respondent’s witness, leaving this testimony unrebutted.

I find the record evidence supports the Respondent’s contentions that it was unaware of previous violations. See supra III.A. Instead, the evidence shows that the Respondent took remedial actions, including removal of the products, upon notification of the inspection results and receipt of the complaint. See, e.g., R. Exs. 1, 12 at 2, ¶ 7; CRD Dkt. Entry No. 6 (Answer) at 2. Therefore, contrary to CTP’s arguments, I find the record does not demonstrate Respondent’s unwillingness or inability to comply with tobacco laws and regulations based on its history of violations. Instead, I find Respondent’s single violation is a mitigating factor and the CMP should be accordingly reduced.

D. Degree of Culpability

Based on Respondent’s admission to the violation alleged in the complaint, I hold the Respondent culpable for offering for sale new tobacco products that were adulterated and misbranded, in violation of the Act. I acknowledge the remedial actions Respondent took upon notice of non-compliance. I further acknowledge Respondent’s statements that the product at issue was widely available in competing retailers in the area and that Respondent relied on the distributors not to offer products that violated the Act. CRD Dkt. Entry No. 11 (Informal Brief of Respondent) at 4. Despite making these statements, the Respondent nevertheless takes responsibility for the violation. Id.

As the Respondent acknowledges, the Act places a heavy burden on retailers who choose to sell tobacco products; therefore, neither the Respondent’s remedial actions nor the

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actions of other retailers or distributors absolve the Respondent of its responsibility. See 21 U.S.C. § 387 note (Findings and Purpose).

E. Other Matters as Justice May Require

In determining the amount of the CMP, the Act gives me discretion to consider “other matters as justice may require.” 21 U.S.C. § 333(f)(5)(B).

Respondent proffers “that the range of statutory penalty, which varies . . . up to $19,192 is meant to vest the Hearing Officer with wide latitude to determine the appropriate penalty.” CRD Dkt. Entry No. 11 (Informal Brief of Respondent) at 2. Respondent goes on to argue that by “[r]equesting the maximum civil penalty in a case such as this betrays the spirit of the statutory scheme by equating the circumstances in this case with all other hypothetical worst-case violations of which one could conceive.” Id. Respondent states that the evidence in this case presents a single violation, which was quickly remedied by Respondent, does not warrant the maximum penalty, and instead suggests a $500 penalty. Id. at 3. Respondent states that coupled with the thousands of dollars in litigation expenses, a $500 penalty is “sufficient to deter him from engaging in similar conduct in the future and to hold him accountable for his violations of the act.” Id.

I find merit in Respondent’s argument. CTP seeks the maximum penalty amount against Respondent, a retailer that (as described by Respondent) naively relied on distributors to not sell unlawful products, for a single violation. 45 C.F.R. § 102.3 (2022); 87 Fed. Reg. 15,100, 15,104 (March 17, 2022). This is the same amount CTP seeks against manufacturers of new tobacco products who have or should have actual knowledge of which of its products do not have the required authorizations, but who nevertheless continue to manufacture and sell those products. See, e.g., Kokomo Pure Vapors, LLC d/b/a Kokomo Pure Vapors, DAB TB8280 (2024). While CTP is within its discretion to do so, considering the wide scope of the violations, I find that justice requires me to consider this when determining the appropriate penalty amount in this case.

I also agree with Respondent that the purpose of the CMP is to promote compliance and deter future violations by penalizing retailers for non-compliance. Thus, a CMP should be significant, but not be overly punitive, put a retailer out of business or threaten its viability. While the Respondent suggests a $500 penalty coupled with thousands of dollars in litigation expenses would accomplish this purpose, the Respondent does not provide more specific information or documentation of its litigation expenses. Therefore, Respondent has not provided sufficient evidence for me to determine the appropriateness of the suggested amount. See 21 C.F.R. § 17.33(c).

In sum, in determining an appropriate penalty for the violation in this case, I considered all the statutory factors in this case, three of which support reduction of the CMP. I find that Respondent has shown an understanding of the gravity of the violation and is serious

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about preventing future violations. The Respondent took remedial actions to remove the products when it learned that they violated the Act and encouraged other retailers and distributors to do the same. In addition, Respondent implemented an employee training and policy program. Finally, the record evidence further supports Respondent does not have a history of violations.

Based on the foregoing, I find that a reduced penalty amount of $12,500 is appropriate under 21 U.S.C. §§ 333(f)(5)(B) and 333(f)(9).

IV. Conclusion

Pursuant to 21 C.F.R. § 17.45, I impose a reduced CMP of $12,500 against Respondent, Lone Star Enterprises, Inc. d/b/a Payless Smokes, for receiving in interstate commerce ENDS products that lack the premarketing authorization required under the Act, and offering such products for sale.