Bloomberg News

FedEx Fights U.S. Online-Pharmacy Probe After UPS Settles (1)

June 13, 2013

FedEx Fights U.S. in Online-Pharmacy Case After UPS Settlement

FedEx Corp. finds itself a target after decades of working with law enforcement agencies to combat attempts to use its network illegally. Photographer: Victor J. Blue/Bloomberg

The latest fight against a government investigation that might compromise customer privacy isn’t coming from a phone or Internet company. It’s coming from FedEx Corp. (FDX:US)

The operator of the world’s largest cargo airline vows to fight any charges that may result from a federal investigation into drug shipments by illegal online pharmacies -- bucking both government investigators and rival United Parcel Service Inc. (UPS:US), which settled similar allegations.

FedEx finds itself a target of a criminal probe after decades of working with law enforcement agencies to combat attempts to use its network illegally. An indictment or prosecution would threaten a basic tenet of the shipping business -- not opening customers’ packages to see what’s inside, FedEx said.

“Settlement is not an option because we haven’t done anything wrong,” said Patrick Fitzgerald, senior vice president of integrated marketing and communications. “The privacy of our customers is core to our business. To somehow suggest we have potential criminal responsibility for the contents of the packages we pick up and deliver every day would fundamentally change our business.”

Federal investigators have declined to share with Memphis, Tennessee-based FedEx the names of pharmacies believed to be operating illegally, so that the company could cut off service, Fitzgerald said in an interview.

Josh Eaton, a spokesman for the U.S. Attorney’s office in San Francisco, declined to comment on the investigation. Casey McEnry, a spokeswoman for the Drug Enforcement Administration in San Francisco, said she couldn’t confirm or deny the investigation.

Online Probe

Federal prosecutors in San Francisco charged nine people in 2010 with conspiracy to distribute controlled substances for operating online pharmacies that filled drug orders without requiring a valid prescription from a doctor. The pharmacies worked with doctors who approved orders after patients filled out brief online questionnaires, according to federal court filings.

FedEx disclosed in a July 2012 U.S. regulatory filing (FDX:US) that it received requests for information from federal prosecutors in Northern California investigating online pharmacies and responded in 2008 and 2009 to subpoenas from a federal grand jury. The shipping company initially worked with investigators without realizing it was a target of the probe, Fitzgerald said.

He declined to comment on whether FedEx employees have been called to testify before a grand jury. The company continues to provide information when requested, Fitzgerald said.

40-Year History

“We have a 40-year history of cooperation and support and working side-by-side with law enforcement, and we want to do that here,” Fitzgerald said. “For whatever reason, they are taking a different view of the matter.”

Shipping companies are addressing illicit pharmacies in their own ways and not coordinating on an industrywide level, said Mike Mullen, executive director of Express Association of America, a trade group created by UPS, FedEx, Deutsche Post AG (DPW)’s DHL and TNT Express NV. (TNTE) He declined to comment further.

FedEx rose 2.3 percent to $99.58 in New York trading today as UPS increased 1 percent to $86.32 and the Standard & Poor’s 500 Index climbed 1.5 percent. FedEx’s 8.6 percent gain this year lags UPS’s 17 percent and the S&P 500’s 15 percent.

UPS Deal

In a non-prosecution agreement with the U.S. Justice Department, UPS acknowledged doing business with online pharmacies even after it learned they were illegally distributing controlled substances without requiring valid prescriptions.

UPS agreed in March to forfeit $40 million in payments it received from illicit online pharmacies and to establish a compliance program designed to ensure pharmacies won’t be able to use its services to illegally distribute drugs.

“They are definitely taking completely different approaches to the situation,” said Logan Purk, an Edward Jones analyst in St. Louis. “FedEx says, ‘We’ve done nothing wrong, we just ship packages.’ I would like to see FedEx maybe go the way of UPS just to get this behind them. Saving $40 million is not worth the headache. Now this is done at UPS, it’s behind them and they’re going ahead.”

Kirstin Ault, the federal prosecutor who signed the UPS agreement, didn’t return a phone call seeking comment on it.

FedEx doesn’t break out revenue (FDX:US) from online pharmaceutical shipments and Fitzgerald said it’s “a very small percentage,” declining to be more specific. The company had $32.9 billion in revenue through the first nine months of its fiscal year.

Privacy Concerns

“It’s a small issue in terms of revenue for our company, but a major issue in terms of privacy concerns it raises for our customers,” Fitzgerald said.

Under the U.S. Controlled Substances Act, a shipping or freight company is allowed to possess and transport drugs “in the lawful and usual course of its business” without registering with drug enforcement authorities. The law regulates the manufacture and distribution of narcotics and certain other drugs and chemicals used in the illegal production of controlled substances.

Consumers are turning to online pharmacies because of the convenience and privacy of purchasing medicines online, and as insurance companies encourage home delivery for long-term medications, according to the U.S. Food and Drug Administration website.

10,000 Pharmacies

Only 3 percent of more than 10,000 online pharmacies reviewed by the National Association of Boards of Pharmacy comply with U.S. pharmacy laws and practice standards. More than 36 million U.S. consumers have bought medication online without a valid prescription, according to the National Association of Chain Drug Stores.

Prosecutors recently have turned their attention from “tens of thousands of website operators” to companies that provide essential services like ways to process payments and to ship and obtain drugs, said John Horton, founder and president of Portland, Oregon-based LegiScript. The company investigates online pharmacies to determine if they operate legally.

“It seems pretty clear that government expects intermediaries to take an active role in policing their own platforms for misuse by rogue Internet pharmacies,” Horton, who was associate deputy director at the White House Office of National Drug Control Policy from 2002 to 2007, said in a phone interview. “Whether one agrees with that or disagrees with it, that does seem to be the current reality.”

Google Deal

Google Inc. (GOOG:US), owner of the world’s most popular online search engine, agreed in August 2011 to pay $500 million to settle U.S. allegations that advertising for online Canadian pharmacies on its website allowed illegal imports of prescription drugs.

Google was aware as early as 2003 that the shipment of prescriptions to the U.S. from outside the country is illegal, the Justice Department said at the time. Under the non-prosecution agreement, the payment represents revenue that Google generated from the ads and that Canadian pharmacies reaped from online drug sales to U.S. consumers.

In the 2010 indictment against the operators of illegal online pharmacies filed in San Francisco, federal prosecutors said the defendants used FedEx Express, the company’s cargo airline, Atlanta-based UPS or DHL to ship controlled substances from 2004 to 2006. The shipping companies weren’t charged.

Attorneys for the defendants argued that prior to 2008, no federal law prohibited distributing controlled substances to patients who hadn’t undergone an in-person examination by a doctor. A federal jury in San Francisco convicted five defendants of conspiring to distribute controlled substances and another four pleaded guilty, according to prosecutors and court filings.

San Francisco Trial

Kevin Mullin, a Pennsylvania man who invested in an online pharmacy business, testified in a 2012 federal trial in San Francisco that FedEx was used because of its experience in handling medical shipments and its ability to track packages, according to a transcript of the proceeding. A DEA investigator testified that one online pharmacy was filling as many as 1,600 prescriptions a day and shipping them through UPS and FedEx, according to the transcript.

FedEx and UPS were identified in federal court filings in San Jose, California, as shippers for online business United Care Pharmacy, whose top three executives pleaded guilty to conspiring to distribute controlled substances in 2007 and 2008. The delivery companies weren’t charged in the case.

United Care

United Care was a UPS client (UPS:US) in 2005, according to the Justice Department’s settlement with the shipper. In that agreement, UPS acknowledged that from 2003 through 2010, the company knew that Internet pharmacies were using its services to illegally distribute controlled substances and medicines without valid prescriptions. UPS didn’t implement procedures to close those shipping accounts, the Justice Department said.

When FedEx suspects a customer’s shipments are illicit, it gives the information to law enforcement and cuts off service if an official investigation shows “there is clear illegal activity,” Fitzgerald said. Fitzgerald said he couldn’t specify whether the company has stopped handling shipments based only on its own information because each case is different.

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Karen Gullo in federal court in San Francisco at kgullo@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Michael Hytha at mhytha@bloomberg.net


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Companies Mentioned

  • FDX
    (FedEx Corp)
    • $135.55 USD
    • 1.80
    • 1.33%
  • UPS
    (United Parcel Service Inc)
    • $98.0 USD
    • 0.65
    • 0.66%
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