City of N.Y. v. FedEx Ground Package Sys., Inc., 14 Civ. 8985 (ER)

175 F.Supp.3d 351

The City of New York and the People of the State of New York, Plaintiffs,

v.Fedex Ground Package System, Inc., Defendant.

14 Civ. 8985 (ER)

United States District Court, S.D. New York.

Signed March 31, 2016

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

Joel Cohen, Elizabeth C. Carter, Michele Lee Pahmer, Stroock & Stroock & Lavan LLP, New York, NY, Christopher Keys, Kenneth D. Sansom, Spotswood Sansom & Sansbury LLC, Birmingham, AL, Michael W. Higginbotham, Federal Express Corporation, Memphis, TN, Paula J. Allan, Fedex Ground Package System, Inc., Moon Township, PA, for Defendant.

OPINION AND ORDER

Ramos, District Judge.

The City of New York (“City”) and The People of the State of New York (“State,” and collectively, “Plaintiffs”) bring this action against FedEx Ground Package System, Inc. (“FedEx”), alleging that it knowingly delivered unstamped cigarettes throughout the country, including New York City and State, between 2005 and the present. 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”); 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 Executive Law (“N.Y. Exec. Law”) § 63(12) and New York State Public Health Law (“NYPHL”) § 1399–ll ; and penalties under the Assurance of Compliance that FedEx entered into with the Attorney General of the State of New York (“AG”) in 2006. Before the Court is FedEx Ground's motion to dismiss Plaintiffs' Amended Complaint. (Doc. 32).¹ For the reasons set forth below, FedEx's motion is GRANTED in part and DENIED in part.

I. BACKGROUND

Plaintiffs each impose an excise tax on the sale of cigarettes. Amended Complaint (“Compl.”) (Doc. 23) ¶ 22.² The excise taxes are pre-paid by licensed cigarette stamping agents through their purchases of tax stamps, which they must then affix to every package of cigarettes sold in the City and/or State. Id. at ¶¶ 23–25. 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. New York State mandates that stamping agents serve as the only entry point for cigarettes into New York's steam of commerce. Id. at ¶ 23.

A. FedEx's Assurance of Compliance with the AG

In 2004, the New York Attorney General began investigating FedEx and other common carriers for violating NYPHL § 1399–ll, which prohibits the delivery of cigarettes to residences. Id. at ¶ 27. Section 1399–ll (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. at ¶ 28. Section 1399–ll (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) ]....

In February 2006, FedEx entered into an Assurance of Compliance (“AOC”) with the AG, in which it agreed, inter alia , to “at all times comply with Pub. Health L. 1399-ll ,” terminate relationships with shippers that unlawfully attempt to use FedEx to ship cigarettes to residential addresses, and report those shippers to the AG's Office. Id. at ¶ 29. 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. at ¶ 30. FedEx further agreed that it would pay the AG $1,000 for every violation of the AOC. Id. at ¶ 31.

B. The Cigarette Selling Enterprises

Plaintiffs allege that from 2005 to the present, FedEx has knowingly made shipments of tens of thousands of cartons of cigarettes,³ including thousands of cartons of unstamped cigarettes, to New York State and New York City on behalf of twenty-one cigarette sellers (collectively, “Cigarette Sellers”). Id. at ¶¶ 32–34.⁴ Plaintiffs specifically claim that, until at least 2015, FedEx transported and distributed thousands of cartons of unstamped cigarettes for some of the Cigarette Sellers to entities that were unlicensed to deal in cigarettes or tobacco products in New York State. Id. at ¶¶ 51–52.⁵ At all times relevant to the Complaint, Plaintiffs allege that each of the Cigarette Sellers utilized FedEx and other delivery services to ship unstamped cigarettes directly to residents of New York City and State. Id. at ¶ 87.

C. FedEx's Role in the Cigarette Selling Enterprises

Plaintiffs allege that FedEx had full knowledge that the Cigarette Sellers were shipping unstamped cigarettes to individual residences in New York City and State, in violation of the AOC and state and federal law. Id. at ¶ 32.

The 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. at ¶¶ 75–78.⁶ FedEx is alleged to have been associated with the enterprises by providing them with delivery services, package tracking services, customer relations services, software and hardware services, business advice, and generally facilitating the enterprises' deliveries of contraband cigarettes. Id. at ¶ 81. Specifically, the Complaint alleges that FedEx communicated on a regular basis with employees of the Cigarette Sellers regarding their business trends, volume, and needs. Id. at ¶ 40. For example, FedEx employees communicated with Cigarette-Seller employees regarding lost, stolen, or delayed shipments. Id. at ¶ 43. The Complaint also alleges that FedEx knew from internal notifications that Cigarette Sellers were shipping cigarettes to individual customers at residential addresses. Id. at ¶ 45. Plaintiffs further claim that some of the Cigarette Sellers' websites informed customers that their orders would be shipped by FedEx. Id. at ¶ 46.

Plaintiffs allege that FedEx participated in the management and operation of the Cigarette Sellers by controlling the pick-up and delivery of unstamped cigarettes and delivering those cigarettes nationwide, 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 FedEx's package-tracking system; and (d) providing Cigarette Sellers with general logistics, marketing, and delivery-support services. Id. at ¶ 83. In sum, the Complaint alleges that the Cigarette Sellers would not have been able to service the unstamped-cigarette market without FedEx's purposefully close involvement in the enterprises. Id.

D. Injury to the City and State

Plaintiffs claim that FedEx's shipments of unstamped cigarettes caused them injury in the form of lost tax revenue amounting to $15 per carton delivered to the City, and ranging from $15 to $43.50 per carton delivered to the State. Id. at ¶¶ 14, 26.⁷ Furthermore, Plaintiffs allege that large-scale cigarette tax evasion undercuts the salutary effects of high cigarette prices, increasing use inside New York and endangering the public health of those citizens. Id. at ¶¶ 4–10.

E. Procedural Background

These same parties are currently litigating a previously-filed, related action before this Court, involving substantially similar claims in relation to four cigarette sellers expressly carved out from the instant case. See City of New York v. FedEx Ground Package Sys ., No. 13 Civ. 9173 (S.D.N.Y.) (“FedEx I ”). On March 9, 2015, the Court granted in part and denied in part FedEx's motion to dismiss the complaint filed in FedEx I . City of New York v. FedEx Ground Package Sys., Inc. , 91 F.Supp.3d 512 (S.D.N.Y.2015). Specifically, the Court dismissed Plaintiffs' claim for civil penalties under the NYPHL, holding that the statute did not authorize Plaintiffs to seek civil penalties prior to 2013. Id. at 527–29. The Court also dismissed Plaintiffs' public nuisance claim. Id. at 530. The Court denied FedEx's motion with respect to claims under the CCTA and RICO. Id. at 520–27. Plaintiffs did not assert a claim under N.Y. Exec. Law § 63 in FedEx I .

As of this date, the parties are in the process of discovery, which is due to be completed by October 20, 2016. (13-cv-9173, Doc. 161). Also pending is Plaintiffs' motion to consolidate this case (“FedEx II ”) and FedEx I , which was filed on January 29, 2016. (Doc. 62).

FedEx filed the instant motion on July 16, 2015. (Doc. 32).

II. STANDARD OF REVIEW

When ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. Nielsen v. Rabin , 746 F.3d 58, 62 (2d Cir.2014). The Court is not, however, required to credit “mere conclusory statements” or “threadbare recitals of the elements of a cause of action.” Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173...