City of New York v. Smokes-Spirits.Com, Inc.

• Decision Date: 02 September 2008
• Docket Number: Docket No. 06-1694-cv(CON).,Docket No. 06-1693-cv(CON).,Docket No. 06-1665-cv(L).,Docket No. 06-1695-cv(CON).
• Citation: 541 F.3d 425
• Parties: CITY OF NEW YORK, Plaintiff-Appellant, v. SMOKES-SPIRITS.COM, INC., Michael Klee, www.smokincheap.com, C4LESS, LLC, John Does 1-100, Vincent Klee III, Jeff Marc LeBlanc, National Wholesale, LLC and Natalie Saalfeld, Defendants-Appellees, and Joyce E. Houle, doing business as Indiancreektobacco.com, Kerry Varline, doing business as Keweenaw Bay Outfitters & Trading Post, Laurie Patterson, Cigarette Outlet, Inc., Walid Enterprises, Inc., A.E. Sales LLC, Marilyn Samuelson, Allen Edmo, Tonna Edmo, Allen Smith, VJ Inc., A1 Enterprises, Inc., Davdi Ray, doing business as Discount Cigarettes, Gerald A. Fow, doing business as Dannystobacco.Com, Esmokes, Inc., ESM Holdings, Inc., PA Resources, Inc., doing business as Tobacco123.Com, Wayne Stull, Paul Rainburd, doing business as Silver Cloud Smoke Shop, Terry Kilgore, Gary E. Kirschner and Scott Welker, Defendants. City of New York, Plaintiff-Appellant, v. Scot Herring, doing business as Nccigarettes.com, Jeff Reinhardt, Xfire Software LLC and NCCigarettes.Com, Defendants-Appellees, and Joyce E. Houle, doing business as Indiancreektobacco.com, Kerry Varline, doing business as Keweenaw Bay Outfitters & Trading Post, Jerry Magnant, doing business as Keweenaw Bay Outfitters & Trading Post, Laurie Patterson, Cigarette Outlet, Inc., Walid Enterprises, Inc., A.E. Sales LLC, Marilyn Samuelson, Allen Edmo, Tonna Edmo, Allen Smith, VJ InC., A1 Enterprises, Inc., David Ray, doing business as Discount Cigarettes, Gerald A. Fow, doing business as Dannystobacco.com, Defendants. City of New York, Plaintiff-Appellant, v. Theresa Justice, doing business as Eztobacco.com and Theresa Trivett, Defendants-Appellees, and Esmokes, Inc., ESM Holdings, Inc., PA Resources, Inc., doing business as Tobacco123.com, Wayne Stull, Paul Rainburd, doing business as Silver Cloud Smoke Shop, Terry Kilgore, Gary E. Kirschner and Scott Welker, Defendants. City of New York, Plaintiff-Appellant, v. Nexicon, Inc., f/k/a Cyco. Net, Inc., Richard A. Urrea, Fred Teutenberg, Brent Wolford, Daniel R. Urrea, Hemi Group, LLC., Brian Pereyra, D.C., Inc., Michael E. Smith d/b/a Paylesscigs, Domains for Sale, Hooray's Inc., Stephen F. Knopp, Burt Newman, Dmitriy Zilberman, S4L Distributing, Inc., William C. Baker III, Double B Distributing, d/b/a Discount Tobacco Store, Kai Gachupin, Dirtcheapcigs.com, Inc, and William J. Bevins, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

541 F.3d 425

CITY OF NEW YORK, Plaintiff-Appellant, v. SMOKES-SPIRITS.COM, INC., Michael Klee, www.smokincheap.com, C4LESS, LLC, John Does 1-100, Vincent Klee III, Jeff Marc LeBlanc, National Wholesale, LLC and Natalie Saalfeld, Defendants-Appellees, and Joyce E. Houle, doing business as Indiancreektobacco.com, Kerry Varline, doing business as Keweenaw Bay Outfitters & Trading Post, Laurie Patterson, Cigarette Outlet, Inc., Walid Enterprises, Inc., A.E. Sales LLC, Marilyn Samuelson, Allen Edmo, Tonna Edmo, Allen Smith, VJ Inc., A1 Enterprises, Inc., Davdi Ray, doing business as Discount Cigarettes, Gerald A. Fow, doing business as Dannystobacco.Com, Esmokes, Inc., ESM Holdings, Inc., PA Resources, Inc., doing business as Tobacco123.Com, Wayne Stull, Paul Rainburd, doing business as Silver Cloud Smoke Shop, Terry Kilgore, Gary E. Kirschner and Scott Welker, Defendants.

City of New York, Plaintiff-Appellant, v. Scot Herring, doing business as Nccigarettes.com, Jeff Reinhardt, Xfire Software LLC and NCCigarettes.Com, Defendants-Appellees, and Joyce E. Houle, doing business as Indiancreektobacco.com, Kerry Varline, doing business as Keweenaw Bay Outfitters & Trading Post, Jerry Magnant, doing business as Keweenaw Bay Outfitters & Trading Post, Laurie Patterson, Cigarette Outlet, Inc., Walid Enterprises, Inc., A.E. Sales LLC, Marilyn Samuelson, Allen Edmo, Tonna Edmo, Allen Smith, VJ InC., A1 Enterprises, Inc., David Ray, doing business as Discount Cigarettes, Gerald A. Fow, doing business as Dannystobacco.com, Defendants.

City of New York, Plaintiff-Appellant, v. Theresa Justice, doing business as Eztobacco.com and Theresa Trivett, Defendants-Appellees, and Esmokes, Inc., ESM Holdings, Inc., PA Resources, Inc., doing business as Tobacco123.com, Wayne Stull, Paul Rainburd, doing business as Silver Cloud Smoke Shop, Terry Kilgore, Gary E. Kirschner and Scott Welker, Defendants.

City of New York, Plaintiff-Appellant, v. Nexicon, Inc., f/k/a Cyco. Net, Inc., Richard A. Urrea, Fred Teutenberg, Brent Wolford, Daniel R. Urrea, Hemi Group, LLC., Brian Pereyra, D.C., Inc., Michael E. Smith d/b/a Paylesscigs, Domains for Sale, Hooray's Inc., Stephen F. Knopp, Burt Newman, Dmitriy Zilberman, S4L Distributing, Inc., William C. Baker III, Double B Distributing, d/b/a Discount Tobacco Store, Kai Gachupin, Dirtcheapcigs.com, Inc, and William J. Bevins, Defendants-Appellees.

Docket No. 06-1665-cv(L).

Docket No. 06-1693-cv(CON).

Docket No. 06-1694-cv(CON).

Docket No. 06-1695-cv(CON).

United States Court of Appeals, Second Circuit.

Argued: January 7, 2008.

Decided: September 2, 2008.

Elizabeth S. Natrella, of counsel (Leonard Koerner, Eric Proshansky, of counsel; Michael A. Cardozo, Corporation Counsel of the City of New York, on the brief) New York, NY, for Plaintiff-Appellant.

Michael B. Powers, Phillips Lytle, LLP, Buffalo, N.Y. (Preston L. Zarlock, Michael S. Cerrone, William H. Baaki, Phillips Lytle, LLP, Buffalo, NY, on the brief; Rachel L. Mitchell, Gowanda, NY, on the brief), for Defendant-Appellant Smokes & Spirits, LLC.¹

Randolph H. Barnhouse, Luebben Johnson & Barnhouse LLP, Albuquerque, NM, for Defendants-Appellants Hemi Group, LLC and Kai Gachupin.

David K. Heasley, Silverbery Goldman & Bikoff LLP (Toby M.J. Butterfield, Cowan DeBaets, Abrahams & Sheppard LLP, New York, NY, on the brief; James L. Bikoff, Silverbery Goldman & Bikoff LLP, Washington DC, of counsel), for Defendants-Appellants Scott Herring, Teresa Trivett, and Nexicon, Inc., et al.²

Before: WINTER, STRAUB and SOTOMAYOR, Circuit Judges.

Judge WINTER dissents in part and concurs in part in a separate opinion.

STRAUB, Circuit Judge:

In these four consolidated cases, the Plaintiff-Appellant City of New York ("City") appeals from the judgments of the United States District Court for the Southern District of New York (Deborah A. Batts, Judge), dismissing its civil claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-68 ("RICO"); claims of common law fraud; claims under New York's consumer protection statute, as codified at § 349 of the New York General Business Law ("GBL § 349"); and claims of common law public nuisance.³ We vacate and remand in part with respect to the RICO claims; affirm in part with respect to the state law claims; and sever and retain jurisdiction over other of the state law claims and certify two questions to the New York Court of Appeals.

FACTS AND PROCEDURAL HISTORY

This case concerns allegations that out-of-state cigarette retailers are liable for failing to report purchases by New York City residents to New York State. In our review, we take as true the facts as alleged in the complaints and as supplemented by the City's RICO Statements, submitted pursuant to the District Court's rules. See McLaughlin v. Anderson, 962 F.2d 187, 189 (2d Cir.1992).

New York State imposes a tax on all cigarettes used or sold in the State. See N.Y. Tax Law §§ 471, 471-a. New York State law also authorizes the City of New York to impose its own tax on cigarettes. See N.Y. Unconsol. Law § 9436(1). Pursuant to this authority, the City imposes a tax on all cigarettes possessed in the City for sale or use.⁴ See N.Y.C. Admin. Code § 11-1302. In-state, these taxes are collected through the sale of tax stamps to in-state vendors. See N.Y. Tax Law § 471. Out-of-state cigarette sellers, however, are not responsible for collecting or paying New York State and City sales taxes on cigarettes.

Due to interstate taxing discrepancies, cigarettes can be sold for apparently lower prices outside New York State. In part to offset the loss of state taxes caused by the interstate taxing discrepancies, Congress, in 1949, enacted the Jenkins Act, 15 U.S.C. §§ 375-78, to require out-of-state cigarette sellers to file a report with the tobacco tax administrator of each state into which the seller ships cigarettes to non-distributors, identifying the name, address, and quantity of cigarettes purchased by the non-distributor state residents. 15 U.S.C. § 376; see also S.Rep. No. 84-1147 (1955), reprinted in 1955 U.S.C.C.A.N. 2883, 2883-84 (explaining that the Jenkins Act "was enacted for three major reasons: (1) The large and increasing loss of revenue to the States caused by the evasion of sales and use taxes on cigarettes shipped in interstate commerce to consumers; (2) The discrimination caused by this evasion against sellers of cigarettes in States having a higher tax than the tax of the seller States; and (3) The fact that this evasion was accomplished through the use of the United States mail." (quoting from the report of the Committee on Ways and Means)). As amended in 1955, the Jenkins Act also requires the seller of cigarettes in interstate commerce to register with the tobacco tax officials of states where she advertises or into which she ships cigarettes. 15 U.S.C. § 376(a).⁵ The information provided by out-of-state cigarette sellers to state taxing authorities under the Jenkins Act provides states the information necessary to collect the payment of cigarette taxes directly from the purchasers.

As pled by the City, although the Jenkins Act requires out-of-state cigarette merchants to report only to state taxing authorities, New York State and New York City have entered into various agreements for the administration and collection of cigarette taxes.⁶ In light of the agreements, the City alleges that "with respect to the collection of cigarette taxes New York City will be `fully and promptly' informed by the New York State Department of Taxation and Finance of any information relevant to the collection of cigarette taxes, including Jenkins Act reports."

The City thus alleges that defendants (1) advertise their cigarettes over the Internet to its residents, (2) ship the orders by common carrier or the United States Postal Service into New York City, and (3) do not comply with the Jenkins Act registration or reporting requirements. According to the allegations, defendants' failure to comply with the Jenkins Act is an essential part of their business model because the savings that customers obtain from buying the cigarettes online are almost entirely due to the fact that the New York State and City taxes are not being charged or paid. As alleged, all of the defendants fail to inform customers of the use tax obligations, and most of the defendants, to varying degrees, make false representations to customers concerning the tax.⁷ Specifically, in Smokes-Spirits and EZTobacco, the City alleges that defendants instruct their employees to inform inquiring customers that defendants are prohibited from disseminating customer information to taxing authorities. In Nexicon, the City contends that defendants affirmatively advertise their cigarettes as "tax-free" and assure customers that sales would not be reported to the New York State tax authorities. The City also alleges that Nexicon defendants attempt to prevent the City from accessing their sales records in order to maintain their customers' trust.

The City claims that it has lost "tens[,] if not hundreds[,] of millions of dollars a year in cigarette excise tax revenue" due to the combination of defendants' withholding of sales information, failure to register as cigarette sellers, and the individual taxpayers' failure to voluntarily pay use taxes to the City.⁸ As relief, the City seeks to: (1) recover from defendants three times the amount of the tax revenue lost as a result of defendants' violations; (2) require defendants prospectively to comply with the Jenkins Act; (3) require defendants to inform their customers that taxes are owed on purchases from defendants' websites and to inform customers that defendants file Jenkins Act reports; and (4) pay attorneys' fees.

I. Allegations Specific to the RICO Claims

As explained further below, RICO makes it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect,...