APA Notice-and-Comment Defects in FDA Drug-Shortage Delistings Require a Showing of Prejudice (and Tirzepatide’s Delisting Survives Arbitrary-and-Capricious Review)

1. Introduction

Outsourcing Facilities Association; North American Custom Laboratories, L.L.C. Partners, doing business as Farmakeio Custom Compounding (collectively, the “Compounders”) challenged the Food & Drug Administration’s (“FDA”) October 2024 and—after a voluntary remand—December 19, 2024 decision to remove (“delist”) the tirzepatide injection products Mounjaro and Zepbound (manufactured by Eli Lilly and Company, the intervenor-appellee) from the FDA’s drug shortage list.

The delisting mattered because, under the Federal Food, Drug, and Cosmetic Act (“FD&CA”), compounding restrictions are temporarily relaxed when an FDA-approved drug is on the drug shortage list; once the shortage is deemed “resolved,” most compounding of “essentially copies” becomes unlawful. The Compounders alleged two Administrative Procedure Act (“APA”) problems:

  • Procedure: the FDA allegedly had to use notice-and-comment rulemaking (APA § 553) to delist, rather than proceeding via a “Declaratory Order” (APA § 554(e)); and
  • Substance: the shortage determination was arbitrary and capricious (APA § 706(2)(A)).

The Fifth Circuit (per curiam, unpublished) affirmed judgment for the FDA and Eli Lilly, concluding that even assuming a notice-and-comment violation, the Compounders failed to show prejudice (harmless error). It also held the FDA’s shortage determination was not arbitrary or capricious.

2. Summary of the Opinion

  1. Notice-and-comment: The court assumed (without deciding) the FDA should have used notice-and-comment, but held any error was harmless because the Compounders did not carry their burden to show prejudice. The record showed widespread “actual notice” and a robust opportunity to submit information during the FDA’s reevaluation window, and the Compounders could not identify what additional evidence or argument would have been presented (or would have mattered) in a formal Federal Register process.
  2. Arbitrary-and-capricious review: The court upheld the FDA’s reliance on Eli Lilly’s supply/demand and inventory data (including cumulative and biweekly measures), the FDA’s choice of time horizon (year-to-date plus near-term projections), and the FDA’s treatment of contrary evidence (screenshots, surveys, media reports, compounded-drug sales) as limited or non-probative for statutory “shortage” purposes.

3. Analysis

3.1. Precedents Cited

A. Drug regulation and compounding background

  • FTC v. Actavis, Inc.: Cited for the proposition that FDA approval is a “long, comprehensive, and costly testing process.” The case supplies descriptive context for why the FD&CA generally privileges FDA-approved drugs over compounded substitutes and helps frame the policy stakes of allowing compounding during shortages.
  • Thompson v. W. States Med. Ctr.: Used to define compounding as a process where a pharmacist or doctor “combines, mixes, or alters ingredients to create a medication.” This anchors the statutory distinction between approved manufacturing and individualized compounding that the shortage-list regime temporarily relaxes.

B. Adjudication vs. rulemaking; deference to agency choice of procedure

  • Shell Offshore Inc. v. Babbitt and Hernandez v. Reno: Support de novo review of summary judgment in APA record cases.
  • Shell Offshore Inc. v. Babbitt and Phillips Petrol. Co. v. Johnson: Support de novo review of whether agency action is a “rule” for APA purposes—i.e., the classification question is statutory construction.
  • W & T Offshore, Inc. v. Bernhardt and Sierra Club v. Peterson: Provide the APA definitional framework distinguishing “rule,” “order,” and “adjudication,” reinforcing that adjudicative “orders” do not require notice and comment.
  • City of Arlington v. FCC, American Airlines, Inc. v. Dep’t of Transp., and Texas v. United States: These Fifth Circuit cases are central to the procedural dispute. Each recognized that a “Declaratory” action invoking 5 U.S.C. § 554(e) is typically treated as an informal adjudication, while also warning that an agency cannot evade APA § 553 simply by relabeling rulemaking as adjudication. The court relied on them to outline the governing test (agency’s characterization + “ultimate product”) and the standard of review for the agency’s choice of procedure (arbitrary/capricious).
  • Time Warner Ent. Co. v. FCC: Quoted in City of Arlington v. FCC for the proposition that agencies have “very broad discretion” to choose adjudication versus rulemaking absent a clear congressional directive.

C. Harmless error and the prejudice requirement for APA procedural claims

  • City of Arlington v. FCC and United States v. Johnson: Provide the Fifth Circuit’s articulation that APA defects can be harmless, and that the “touchstone” is whether the lack of notice and comment prejudiced the challenger.
  • U.S. Steel Corp. v. EPA: Supplies the core harmless-error formulation: an agency’s mistake is harmless if it “clearly had no bearing” on procedure used or substance reached.
  • Shinseki v. Sanders: Contributes a multi-factor approach to harmless-error analysis, including likelihood of a different result and effects on fairness and integrity.
  • Air Can. v. Dep’t of Transp.: Cited (through City of Arlington v. FCC) for the proposition that the party asserting error bears the burden to show prejudice.
  • Little Sisters of the Poor Saints Peter and Paul Home v. Pennsylvania, Long Island Care at Home, Ltd. v. Coke, and Chamber of Com. of U.S. v. SEC (with Tex. Off. of Pub. Util. Couns. v. FCC): These authorities frame what APA notice-and-comment typically requires (Federal Register notice, opportunity to participate, concise statement, 30-day effective-date rule), the “object” of fair notice, and that a 30-day comment period is generally sufficient. The court used them to measure whether the actual process here functionally met notice-and-comment goals—even if the formalities were absent.

D. Arbitrary-and-capricious review standards

  • Motor Vehicle Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co. and Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc.: Provide the canonical arbitrary-and-capricious framework: narrow review; no substitution of judicial judgment; require a rational connection between facts and decision and a cogent explanation.
  • Dep’t of Com. v. New York and Burlington Truck Lines, Inc. v. United States: Support the requirement that agencies “disclose the basis” of their actions to permit meaningful judicial review.
  • Delta Found., Inc v. United States: Used for the principle that courts do not “weigh the evidence pro and con,” but ask whether relevant factors were considered and whether there was a clear error of judgment.
  • Mexican Gulf Fishing Co. v. U.S. Dep’t of Com. and ExxonMobil Pipeline Co. v. U.S. Dep’t of Transp.: Emphasize the “rational connection” requirement between facts found and choice made.
  • Chamber of Com. of U.S. v. U.S. Dep’t of Lab.: Supports the proposition that “illogic and internal inconsistency” are hallmarks of arbitrary agency action.
  • Barr v. SEC and Tex. Tech Physicians Assocs. v. U.S. Dep’t of Health & Hum. Servs.: Provide the presumption of validity afforded to agency action.
  • Pension Benefit Guar. Corp. v. Wilson N. Jones Mem’l Hosp., Camp v. Pitts, and Phoenix Herpetological Soc’y, Inc. v. U.S. Fish & Wildlife Serv.: Support the “path may reasonably be discerned” principle and the permissibility of attributing common-sense judgments to agencies even where not spelled out perfectly.
  • Texas v. EPA: Cited for the general proposition that agencies may weigh evidence and credit some sources over others.
  • Deep v. Barr and Roy v. Ashcroft: Used to underscore that agencies need not address every contention in exhaustive detail; they must show they “heard and thought,” not merely reacted.

3.2. Legal Reasoning

A. The court sidestepped (but structured) the rulemaking vs. adjudication fight

The opinion carefully lays out the doctrinal test from City of Arlington v. FCC and American Airlines, Inc. v. Dep’t of Transp. (agency characterization + ultimate product), and recognizes that § 554(e) declaratory orders are often treated as informal adjudications. But rather than definitively classifying the Delisting Action as a “rule” or “adjudication,” the panel assumed the FDA should have used notice-and-comment and proceeded directly to harmless error.

This move matters: the court’s holding does not fully resolve the procedural classification question for FDA shortage determinations, but it nonetheless establishes a practical litigation gate—procedural error alone is not enough without prejudice.

B. Harmless error: “actual notice” plus failure to identify what would have changed

The court treated prejudice as the decisive issue. Several facts drove the harmless-error conclusion:

  • Actual notice: the Compounders themselves admitted awareness of FDA’s consideration of the shortage status.
  • Functional opportunity to be heard: the FDA publicly posted updates on its website, reopened consideration during the remand, and received submissions from “multiple interested parties.”
  • Time to participate: nearly 60 days between the October 22 posting and the December 19 action—roughly double the “minimum thirty-day comment period” discussed in Chamber of Com. of U.S. v. SEC.
  • No counterfactual showing: the Compounders did not identify additional evidence that would have been submitted (or likely changed the outcome) had a Federal Register notice issued or the period been extended.

The opinion also draws an important distinction: complaining that the FDA applied “idiosyncratic standards” to evidence is not itself a notice-and-comment prejudice showing; it is an arbitrary-and-capricious argument. On this record, even if APA § 553 applied, the failure to comply did not warrant setting aside the decision.

C. Arbitrary-and-capricious: the FDA’s supply/demand methodology and evidentiary triage were upheld

The court then validated the FDA’s substantive determination under the FD&CA’s definition of shortage (demand or projected demand exceeds supply) and the APA’s deferential standard:

(1) The “period of time” was sufficiently disclosed and “up-to-date”

The Compounders argued the FDA failed to disclose and justify its time horizon. The court disagreed, pointing to tables reflecting year-to-date (Jan–Nov 2024) and projections through March 2025, and held this matched the FD&CA’s “up-to-date” requirement and shortage definition.

(2) Eli Lilly’s data formats (biweekly snapshots; cumulative totals) were not irrational

The court approved the FDA’s reliance on biweekly inventory balances alongside monthly supply metrics, and it rejected objections to cumulative data as “illogical” because tirzepatide products can be stored and surplus in one month can satisfy demand in subsequent months. The court accepted that the FDA’s rationale was readily discernible even where not exhaustively spelled out.

(3) Alleged contradictions in the evidence did not show a “clear error of judgment”

The Compounders’ month-by-month “conversion” of cumulative data was rejected because it ignored carry-over supply. Comparisons between orders and shipments were also found flawed because they omitted beginning inventory and shipment timing lags.

(4) Discounting screenshots, surveys, and news reports was within the FDA’s discretion

The FDA reasonably treated wholesaler screenshots and patient surveys as having limitations (undated/unclear duration; self-reported, potentially duplicative, not necessarily tied to tirzepatide, not controlling for insurance/prescription barriers). Media accounts and generalized comments often referenced GLP-1 drugs broadly, lacked specificity, or were consistent with non-shortage barriers in the distribution chain. Under Texas v. EPA and the broader State Farm line, the agency could credit comprehensive manufacturer data over anecdotal or methodologically weak submissions.

(5) Compounded tirzepatide sales are not “demand for the drug” under the shortage definition

The court endorsed the FDA’s statutory interpretation that “demand” in the shortage definition refers to the FDA-approved “drug,” not compounded copies; otherwise, the statute would become self-defeating (compounding supply would end the shortage, which would end compounding, and so on). Still, the FDA reasonably considered compounding demand as a factor for projected future demand once compounding was curtailed.

3.3. Impact

A. Procedural challenges to FDA shortage-list decisions face a heightened practical hurdle

The most consequential doctrinal move is the court’s emphasis on prejudice. Even if an FDA shortage delisting were later deemed a “rule” requiring notice and comment, challengers must concretely explain:

  • what additional information would have been submitted in a proper § 553 process,
  • why that information was unavailable or unlikely to be submitted otherwise, and
  • how it could have changed the agency’s supply-demand determination.

In practice, where the FDA runs an open information-gathering process (even informally) and affected parties participate extensively, the harmless-error doctrine can preserve the agency action.

B. Substantive review signals deference to FDA’s quantitative, manufacturer-supported shortage determinations

The decision underscores that the FDA may reasonably prioritize manufacturer production, inventory, and distribution data over anecdotal indicators of localized unavailability. Future litigants challenging shortage delistings will likely need stronger methodological critiques (e.g., demonstrable data integrity flaws) or a clearer showing of nationwide supply-demand imbalance under the statutory definition.

C. Compounding market dynamics: shortage-list litigation becomes harder to win on generalized access stories

The court accepted the FDA’s distinction between true “shortage” and access barriers caused by insurance coverage, pharmacy practices, wholesaler allocation, and distribution routing—issues that may persist even when national supply meets national demand. That framing may limit the persuasive force of patient and pharmacy hardship evidence unless it can be tied to nationwide supply deficits.

4. Complex Concepts Simplified

  • “Drug shortage list”: A statutory list the FDA maintains of drugs where national demand (or projected demand) exceeds supply. Listing can temporarily permit compounding that would otherwise be illegal.
  • “Compounding”: Customized preparation of medication by mixing/altering ingredients. Compounded drugs are generally not FDA-approved and do not undergo the same premarket review as brand products.
  • Notice-and-comment rulemaking (APA § 553): The process of publishing a proposed rule, receiving public comments, and issuing a final rule with reasons—typically required for substantive rules with legal effect.
  • Adjudication / declaratory order (APA § 554(e)): An agency’s order resolving uncertainty or controversy as applied to facts; often not subject to notice-and-comment procedures.
  • Harmless error / prejudice: Even if an agency violated required procedure, courts may uphold the action unless the challenger shows the error likely mattered—i.e., that it caused real harm to participation or outcome.
  • Arbitrary and capricious (APA § 706(2)(A)): A deferential review asking whether the agency considered relevant factors and gave a rational explanation; courts do not redo the agency’s fact-finding.
  • Cumulative vs. monthly data: “Cumulative” totals add each month to prior months, capturing surplus carried forward—useful where inventory can be stored and used later, so month-to-month comparisons can mislead.

5. Conclusion

Outsourcing Facilities v. FDA reinforces two core administrative-law lessons in the specific context of FDA drug-shortage delistings:

  • Procedural claims require prejudice: Even assuming the FDA should have used notice-and-comment rulemaking, challengers must demonstrate concrete prejudice from the absence of formal procedures—especially where they had actual notice and participated extensively.
  • Substantive review remains highly deferential: The FDA’s determination that tirzepatide’s supply met or exceeded projected demand survived arbitrary-and-capricious review because the agency articulated a rational connection between detailed supply/demand evidence (primarily from the manufacturer) and its conclusion, and reasonably discounted less reliable contrary indicators.

Although unpublished, the opinion provides a clear roadmap for how the Fifth Circuit may evaluate future challenges to shortage listing/delisting actions: procedural objections will rise or fall on a developed prejudice showing, and substantive objections must confront the agency’s supply-demand analytics on their own terms.