City of New York and The People of the State of New York v. Federal Ground Package System Inc. and Federal Express Corp. Civil Action No. 13-cv-9173-ER (ongoing)
New York City and the State of New York filed have sued FedEx, alleging that FedEx unlawfully shipped contraband cigarettes in violation of state and federal laws. In their complaint plaintiffs allege that FedEx “knowingly delivered” over 140 tons of cigarettes to residential consumers ordered over the intent or by mail from cigarette traffickers, including the Shinnecock Smoke Shop located on the Shinnecock Indian reservation in South Hampton, New York (among others). These contraband cigarettes were delivered throughout the state. Plaintiffs seek penalties and damages under multiple federal and state laws including the Contraband Cigarette Trafficking Act (CCTA), the Prevent All Cigarette Trafficking Act (PACT Act), the Racketeer Influenced and Corrupt Organizations Act (RICO), New York Public Health Law, and Assurance of Compliance with the New York State Attorney General.
Prior to this lawsuit, FedEx entered into an “assurance of Compliance” (AOC) with the state’s Attorney General in 2006. The AOC required FedEx to comply with New York State law that prohibits the delivery of cigarettes to residences, ensure that controls were in place so these deliveries no longer took place, and established a $1,000 penalty per violation. Despite the AOC, the complaint alleges that FedEx continued these shipments in violation of the AOC, New York State law, and federal law since the cigarettes that were delivered did not have the required tax stamps reflecting New York cigarette taxes. The complaint also alleges that since there were multiple shipments of unstamped cigarettes FedEx engaged in a pattern of racketeering activity in violation of RICO, the federal anti-racketeering law. Further, shipments that took place after June 29, 2010 violated the PACT Act, which became effective on that date, because cigarettes shipped were not accompanied with a statement explaining that that federal law requires payment of all excise taxes and compliance with licensing and tax stamping obligations.
The relief sought by plaintiffs includes an injunction to stop any further deliveries into New York State and New York City, require FedEx tobacco deliveries be monitored to ensure compliance with federal and state law, and to recover damages and penalties under various federal laws, state law, and the AOC. The case is ongoing.
City of New York and The People of the State of New York v. United Parcel Service, Inc. Civil Action No. 15-cv-1136
In March 2017, a federal court ruled in favor of the New York City and the State of New York in their joint lawsuit against UPS. The court found that UPS had knowingly shipped thousands of cartons of cigarettes to non-commercial recipients in violation of state and federal law, as well as a 2005 settlement agreement (executed to resolve a prior investigation into shipments of untaxed cigarettes). In May, U.S. District Judge Katherine Forrest ordered UPS to pay $246 million to the city and state.
New York Public Health Law prohibits commercial carriers such as UPS to knowingly transport cigarettes to any in-state person except for identified parties involved in the cigarette business (e.g., licensed retailers and wholesalers, cigarette tax stamping agents, wholesale warehouses and certain state officials). The law specifies that “if cigarettes are transported to a home or residence, it shall be presumed that the . . . carrier knew that such person was not” an authorized recipient, and the shipment is therefore illegal. It is a separate crime in New York to engage in persistent fraudulence in the course of business. In 2004 the state investigated whether UPS was violating these laws, resulting in a 2005 settlement agreement wherein UPS agreed to stop conducting “business as usual” and take proactive steps to ensure it would no longer ship cigarettes in violation of the law.
In 2011 New York State Attorney General commenced an investigation of certain shippers near Potsdam, NY (referred to as the “Potsdam Shippers”) for potentially violating the state cigarette shipping law. After the investigation, state officials contacted UPS and requested that the company pay a penalty for violating the 2005 settlement agreement. While the State and UPS discussed the claims, New York City in 2013 began its own investigation of illegally shipped cigarettes to unauthorized persons in the city. Through the investigation, the city obtained records indicating more than 78,000 deliveries to residences potentially representing millions of packs of cigarettes that were delivered in New York from 2010-2014. City officials charged that UPS staff not only ignored the fact that recipient addresses were obviously not tobacco retailers, but also allowed dealers to receive price discounts for the unlawful shipments and permitted drivers to accept gifts from the dealers.
By 2015, the parties still could not resolve their differences, and a suit was filed in February 2015 alleging violations of the 2005 settlement agreement, New York State Public Health Law, New York State Executive Law, the federal Prevent All Cigarette Trafficking (PACT) Act, Contraband Cigarettes Trafficking Act (CCTA) and Racketeer Influenced and Corrupt Organizations Act (RICO) (later dismissed by the court).
In sum, the holding of the court is as follows:
2005 Settlement Agreement
The settlement agreement was designed to ensure UPS would take necessary steps to comply with both state and federal law applied to shipments of cigarettes. At the conclusion of the trial, the court held that UPS violated the agreement by:
- failing to comply with Public Health Law § 1399-ll;
- failing to audit shippers where there was a reasonable basis to believe they were shipping cigarettes to individual consumers in violation of the law;
- failing to discipline shippers of cigarettes;
- failing to train employees on the Tobacco policy and settlement agreement requirements; and
- knowingly transporting cigarettes to individual consumers.
New York Public Health Law § 1399-ll
New York prohibits the shipment of cigarettes to persons other than an enumerated few, such as licensed retailers and wholesalers, cigarette tax stamping agents, wholesale warehouses and certain state officials required to accept shipment in the course of their official duties. Judge Forrest found UPS violated New York public health law by knowingly transporting cigarettes to unauthorized persons. The court found that the list of registered agents and dealers is readily available from the state, and thus UPS is deemed to have knowledge of authorized recipients. Additionally, shipments to residential addresses are presumed to be shipments to unauthorized persons, and UPS maintains records of cigarette shipments to such addresses.
The PACT Act is intended to prevent tax evasion and illegal online cigarette sales to youth by (a) significantly regulating the use of the U.S. Postal Service and other common carriers to mail tobacco products, (b) requiring remote (internet- or mail-order) sellers to use shipping methods that verify the age of the person receiving tobacco products, and (c) requiring online vendors to ensure that all applicable state and local taxes are paid on the cigarettes they sell. The Act directs the Attorney General to maintain a list of non-compliant shippers and vendors (the non-compliant lists or NCLs) which is developed and disseminated by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). This list is not only publically available, but also specifically distributed to the common carriers (including UPS).
Despite UPS’s assertion that the NCL was received by a separate department and never shared with the company officials charged with tobacco policy compliance, the court held that UPS violated the PACT Act by delivering packages from sellers clearly identified on the NCL, as well as from other shippers closely associated with those on the list.
Contraband Cigarettes Trafficking Act (CCTA)
The CCTA is a federal statute designed to address illicit sales of cigarettes across borders of states with differing tax structures. The law makes it illegal for any person to knowingly ship or transport “contraband cigarettes” (i.e., untaxed cigarettes).
The court found that the cigarettes transported by UPS were required to have tax stamps, which they did not. Moreover, UPS failed to rebut the presumption that the transported cigarettes were taxable. Thus, Judge Forrester held that UPS violated the CCTA.
Plaintiffs sought compensatory damages for lost tax revenue associated with untaxed cigarettes, as well as monetary penalties for the violation of state and federal law. The court agreed that such damages and penalties were warranted, and in May ordered UPS to pay $165.8 million to New York State and $81.2 million to New York City. The “significant award” was necessary due to the public health hazard caused by and to deter future bad conduct by UPS, according to the judge. UPS indicated it would appeal the ruling.