City of N.Y. v. FedEx Ground Package Sys., Inc.

Decision Date09 March 2015
Docket NumberNo. 13 Civ. 9173ER.,13 Civ. 9173ER.
Citation91 F.Supp.3d 512
PartiesThe CITY OF NEW YORK and the People of the State of New York, Plaintiffs, v. FEDEX GROUND PACKAGE SYSTEM, INC. and Federal Express Corp., Defendants.
CourtU.S. District Court — Southern District of New York

Eric Proshansky, Leonard Matthew Braman, New York City Law Department, Joshua Seth Sprague, Sandra Elizabeth Pullman, Dana Hope Biberman, New York State Office of the Attorney General, New York, NY, for Plaintiffs.

Joel Cohen, Elizabeth C. Carter, Michele Lee Pahmer, Stroock & Stroock & Lavan LLP, New York, NY, Kenneth D. Sansom, Spotswood Sansom & Sansbury LLC, Birmingham, AL, for Defendants.

OPINION AND ORDER

RAMOS, District Judge:

Plaintiffs The City of New York (City) and The People of the State of New York (“State”) (collectively, Plaintiffs) bring this action against FedEx Ground Package System, Inc. (“FedEx Ground” or Defendant), alleging that it knowingly delivered unstamped cigarettes throughout the country, including New York City and State, between 2005 and 2012.1 Plaintiffs seek the appointment of a special master, damages, and penalties under the Contraband Cigarette Trafficking Act, 18 U.S.C. § 2341 et seq. (“CCTA”) and the Prevent All Cigarette Trafficking Act, 15 U.S.C. § 375 et seq. (“PACT Act); treble damages and attorney's fees under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (RICO); an injunction and penalties under New York State Public Health Law § 1399ll ; abatement of a public nuisance; and penalties under the Assurance of Compliance that FedEx entered into with the Attorney General of the State of New York in 2006. Pending before the Court is FedEx Ground's motion to dismiss the CCTA, RICO, N.Y. Public Health Law (“PHL”), and public nuisance claims. Doc. 28. For the reasons discussed below, Defendant's motion to dismiss is GRANTED in part and DENIED in part.

I. Background

Plaintiffs each impose an excise tax on the sale of cigarettes. Am. Compl. ¶ 26.2 The excise taxes are pre-paid by licensed cigarette stamping agents, who must affix a tax stamp to every package of cigarettes sold in the State and/or City. Id. ¶¶ 27, 28. By law, stamping agents are required to incorporate the amount of the tax into the price of the cigarettes, thereby ultimately passing the tax along to the consumer. Id. ¶ 29. New York State mandates that stamping agents serve as the only entry point for cigarettes into New York's steam of commerce. Id. ¶ 27.

FedEx's Assurance of Compliance with the NYAG

In 2004, the New York Attorney General investigated FedEx for violating N.Y. PHL § 1399ll , which prohibits the delivery of cigarettes to residences. Id. ¶ 59. Section 1399ll (1) states that, in New York State, cigarettes may be shipped only to (a) licensed cigarette tax agents, licensed wholesale dealers, or registered retail dealers, (b) export warehouse proprietors or customs bonded warehouse operators, or (c) agents of the federal or state governments.Id. ¶ 60. Section 1399ll (2) provides, in turn:

It shall be unlawful for any common or contract carrier to knowingly transport cigarettes to any person in this state reasonably believed by such carrier to be other than a person described in [1399–ll (1) ]. For purposes of the preceding sentence, if cigarettes are transported to a home or residence, it shall be presumed that the common or contract carrier knew that such person was not a person described in [1399–ll (1) ]....

Id.

In February 2006, FedEx entered into an Assurance of Compliance (“AOC”) with the Attorney General, in which it agreed, inter alia, to “at all times comply with Pub. Health L. 1399ll ,” terminate relationships with shippers that unlawfully attempted to use FedEx to ship cigarettes to residential addresses, and report those shippers to the Attorney General's Office. Id. ¶ 61. FedEx also agreed to monitor and investigate its own shipments to assure compliance with the AOC. Id. FedEx later agreed to give nationwide effect to the AOC. Id.

The AOC also required FedEx to implement a policy prohibiting the shipment and delivery of cigarettes to individual consumers, and to revise its internal policies to ensure their compatibility with the terms of the AOC. Id. ¶ 62. FedEx further agreed that it would pay the Attorney General $1,000 for every violation of the AOC. Id. ¶ 63.

The Cigarette Selling Enterprises

Plaintiffs allege that between 2005 and 2012, FedEx made shipments of unstamped cigarettes on behalf of Shinnecock Smoke Shop (“Shinnecock”), Native Made Tobacco (“Native Made”), FOW Enterprises, Inc. (“FOW”), and Cigarettes Direct To You (“CD2U”) (collectively, “Cigarette Sellers”). Plaintiffs allege that at all times relevant to the Amended Complaint, each of the Cigarette Sellers utilized FedEx and other delivery services to ship unstamped cigarettes directly to residents of New York State, and that three of the Cigarette Sellers—Shinnecock, Native Made, and FOW—shipped unstamped cigarettes directly to residents of New York City.

Shinnecock, which is owned and operated by Jonathan Smith, is located on the Shinnecock Indian reservation in Southampton, New York. Id. ¶ 31. At all times relevant to the Amended Complaint, neither Shinnecock nor Smith was licensed or otherwise permitted to distribute or ship unstamped cigarettes in New York State or City. Id. ¶ 36. Between 2005 and 2012, FedEx shipped approximately 55,000 cartons of unstamped cigarettes in 9,900 separate deliveries from Shinnecock to New York City residents, representing a tax loss to the City of approximately $825,000. Id. ¶¶ 65, 67. Between 2007 and 2012, FedEx shipped approximately 121,000 cartons of unstamped cigarettes in 20,000 separate deliveries from Shinnecock to New York State residents, representing a tax loss to the State of approximately $3,495,000. Id. ¶¶ 66, 67.

Native Made, which is owned and operated by Rhonda Gasaway, is located in Palm Springs, California. Id. ¶ 40. At all times relevant to the Amended Complaint, Native Made was not licensed or otherwise permitted to distribute or ship unstamped cigarettes in New York State or City. Id. ¶ 42. Between 2007 and 2012, FedEx shipped approximately 7,850 cartons of unstamped cigarettes in 900 separate deliveries from Native Made to New York State residents, representing a tax loss to the State of approximately $202,000. Id. ¶¶ 68, 69.

FOW was a corporation owned and operated by Earl Fow, and located in Elizabethtown, Kentucky. Id. ¶ 46. At all times relevant to the Amended Complaint, FOW was not licensed or otherwise permitted to distribute or ship unstamped cigarettes in New York State or City. Id. ¶ 48. Between 2006 and 2012, FedEx shipped approximately 3,220 cartons of unstamped cigarettes in 600 separate deliveries from FOW to New York State residents, representing a tax loss to the State of approximately $136,000. Id. ¶¶ 70, 71.

Chavez, Inc. was a corporation doing business as Cigarettes Direct To You, or CD2U. Id. ¶ 51. CD2U, which was owned and operated by Israel Chavez, was located in Louisville, Kentucky. Id. At all times relevant to the Amended Complaint, CD2U was not licensed or otherwise permitted to distribute or ship unstamped cigarettes in New York State. Id. ¶ 53. Between 2006 and 2009, FedEx shipped approximately 260,000 cartons of unstamped cigarettes in 10,500 separate deliveries from CD2U to New York State residents, representing a tax loss to the State of approximately $6,147,000. Id. ¶¶ 72, 73.3

In total, the Amended Complaint alleges that FedEx knowingly shipped nearly 400,000 cartons of unstamped cigarettes from the Cigarette Sellers to individual residences in New York State. Id. ¶ 76.

FedEx's Role in the Cigarette Selling Enterprises

Plaintiffs allege that at least as of 2005, FedEx had written agreements with each of the Cigarette Sellers that provided preferential shipping rates in exchange for maintaining a high volume of shipments. Id. ¶ 74. These agreements were in effect for several years. Id. FedEx allegedly had full knowledge that the Cigarette Sellers were shipping unstamped cigarettes to individual residences in New York City and New York State, in violation of the AOC and state and federal law. Id. ¶ 79.

The Amended Complaint alleges that each of the Cigarette Sellers constituted a RICO enterprise, which was conducted through a pattern of racketeering activity, consisting principally of thousands of instances of contraband cigarette trafficking. Id. ¶¶ 101–04, 108.4 FedEx is alleged to have been associated with the enterprises by providing them with delivery services, package tracking services, customer relations services, and generally facilitating the enterprises' deliveries of contraband cigarettes. Id. ¶ 106. Specifically, the Amended Complaint alleges that FedEx communicated on a regular basis with employees of the Cigarette Sellers regarding the Cigarette Sellers' business trends, volume, and needs. Id. ¶¶ 81–84. For example, FedEx employees communicated with CD2U employees regarding lost, stolen, or delayed shipments. Id. ¶ 84(b). The Amended Complaint also alleges that FedEx knew from internal notifications that CD2U was shipping cigarettes to individual customers at residential addresses. Id. ¶ 84(c). Plaintiffs further claim that CD2U's websites informed customers, inter alia, that their orders would be shipped by FedEx or Priority Mail. Id. ¶ 84(d).

Plaintiffs allege that FedEx participated in the management and operation of the Cigarette Sellers by controlling the pick-up and delivery of unstamped cigarettes dealt by them and delivering those cigarettes nationwide, and specifically by (a) receiving unstamped cigarettes from the Cigarette Sellers for ultimate distribution to consumers; (b) subject to FedEx's own methods and means, and at FedEx's discretion, using information provided to FedEx by the Cigarette Sellers to transport and distribute the cigarettes to their customers; (c) allowing the Cigarette Sellers and their customers access to...

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  • City of N.Y. v. FedEx Ground Package Sys., Inc.
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    ...March 9, 2015, the Court dismissed Plaintiffs' N.Y. P.H.L. § 1399-ll and public nuisance claims. See City of New York v. FedEx Ground Package Sys. , 91 F.Supp.3d 512, 529–30 (S.D.N.Y. 2015). Plaintiffs later conceded their PACT claims. See Doc. 103 at 3 n.1.Plaintiffs filed another lawsuit ......
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